Company report Mid Cap Autos abc

Equity – China Global Research

Dongfeng Motor (489 HK)

Neutral Downgrade to N: Entering the pit lane Target price (HKD) 15.40  New entry level models driving PSA market share gain Share price (HKD) 13.94 Forecast dividend yield (%) 1.9  High inventory level at Nissan could result in lower volume Potential return (%) 12.4 growth in 3Q14 Note: Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield  Downgrade to N from OW, but raise target price to HKD15.4 Dec 2013 a 2014 e 2015 e from HKD13.6, based on 8.7x PE (vs 8.2x previously) HSBC EPS 1.02 1.41 1.66 HSBC PE 10.8 7.9 6.7 Performance 1M 3M 12M New entry level models driving faster than expected PSA market share gain: The strong Absolute (%) 0.4 34.8 31.0 reception of entry level models such as compact sedan Peugeot 301 and Citroen Elysee and Relative^ (%) -6.7 18.6 13.9 sub-compact SUV Peugeot 2008 has driven DPCA’s better than expected 24% YoY volume Note: (V) = volatile (please see disclosure appendix) growth in 1H14. We believe the above models, together with Peugeot 408 and 308 (compact sedan) and Citroen C3-XR (compact SUV) to be launched in 2H14/2015, will drive volume growth in 2H14/2015. We lift our DPCA sales volume forecast to 703k units (+28% YoY), slightly higher than the company’s revised target of 700k units.

Improving competitiveness of Nissan’s SUV portfolio, but sedan products face rising competition: The better than expected reception of the X-trail has driven earnings revisions for Dongfeng in 1H14. The new Qashqai, with a similar look to the successful new X-trail, should be another boost to Nissan SUV sales in 2015. However, we believe Nissan’s sedan 1 August 2014 products are in a weaker product cycle compared with its competitors and face rising

Carson Ng* competition. Recent comments from Nissan CFO Joseph Peter on high inventory levels in Analyst China (c2.7 months as at 1H14) lead us to expect greater pressure on sales volumes in 3Q14. The Hongkong and Shanghai Banking Corporation Limited Upward earnings revisions to pause in 2H14: We raise our earnings by 9%/17% for 2014- +852 2996 6625 [email protected] 15e. 2014 consensus earnings have been lifted by 10% over the past three months, which we believe mostly factors in the strong X-trail sales and DPCA’s stronger than expected sales.

Since Nissan intends to reduce inventory at the dealer level in 3Q14 and the new model launch View HSBC Global Research at: http://www.research.hsbc.com of DF Nissan/Honda will be concentrated on the year-end, we think upward earnings revisions *Employed by a non-US affiliate of will pause in 2H14. We downgrade our rating to Neutral as we believe inventory HSBC Securities (USA) Inc, and is not rationalisation by DF Nissan could drive lower volume growth and add pressure to the share registered/qualified pursuant to FINRA regulations price in 3Q14, which could provide a better entry point to the stock. Issuer of report: The Hongkong and Shanghai Banking Downgrade to N; raise target to HKD15.4 from HKD13.6: Our ROE-based target price is Corporation Limited based on 8.7x 2014e PE. While the market has become more positive on the sales performance Disclaimer & of DPCA and Nissan X-trail, we see pressure on Nissan’s sedan products. We expect 1H14 Disclosures earnings to grow 9% YoY to RMB6,021m. We have not included the potential accounting This report must be read gain from the PSA investment in our forecast. Catalysts include monthly sales volumes and with the disclosures and interim results in late August. the analyst certifications in the Disclosure appendix, Index^ HSCEI Enterprise value (CNYm) 26711 and with the Disclaimer, Index level 11,119 Free float (%) 33 RIC 0489.HK Market cap (USDm) 15,559 which forms part of it Bloomberg 489 HK Market cap (HKDm) 120,580

Source: HSBC Source: HSBC Dongfeng Motor (489 HK) Autos abc 1 August 2014

Financials & valuation

Financial statements Valuation data Year to 12/2013a 12/2014e 12/2015e 12/2016e Year to 12/2013a 12/2014e 12/2015e 12/2016e Profit & loss summary (CNYm) EV/IC 4.3 2.5 1.3 0.2 Revenue 37,263 63,523 71,822 74,044 PE* 10.8 7.9 6.7 6.1 EBITDA -309 627 869 1,221 P/Book value 1.5 1.3 1.1 1.0 Depreciation & amortisation -782 -774 -871 -945 Dividend yield (%) 1.6 1.9 2.2 2.4 Operating profit/EBIT -1,091 -147 -1 276 Note: * = Based on HSBC EPS (fully diluted) Net interest 374 175 334 562 PBT 10,712 12,327 14,744 15,998 HSBC PBT 10,712 12,327 14,744 15,998 Price relative Taxation -109 -120 -132 -145 17 17 Net profit 10,528 12,118 14,319 15,598 16 16 HSBC net profit 8,768 12,118 14,319 15,598 15 15 14 14 Cash flow summary (CNYm) 13 13 Cash flow from operations -9,675 -558 1,544 -2,187 12 12 11 11 Capex -1,268 -1,555 -1,552 -1,585 10 10 Cash flow from investment 17,982 7,119 9,393 10,037 9 9 Dividends -1,521 -1,551 -1,818 -2,148 8 8 Change in net debt -2,661 -5,010 -9,120 -5,703 7 7 FCF equity -10,137 -1,569 827 -2,709 2012 2013 2014 2015 Dongfeng Motor Rel to HSCEI Balance sheet summary (CNYm) Source: HSBC Intangible fixed assets 4,019 4,372 4,775 5,238 Tangible fixed assets 18,454 19,549 20,588 21,603 Current assets 57,622 69,619 85,813 87,756 Note: price at close of 30 Jul 2014 Cash & others 24,282 35,948 45,068 50,771 Total assets 115,998 139,436 161,373 169,394 Operating liabilities 46,089 46,694 56,051 50,459 Gross debt 5,875 12,531 12,531 12,531 Net debt -18,407 -23,417 -32,537 -38,240 Shareholders funds 63,135 73,616 85,904 99,261 Invested capital 9,724 10,898 10,058 13,367

Ratio, growth and per share analysis Year to 12/2013a 12/2014e 12/2015e 12/2016e Y-o-y % change Revenue 511.9 70.5 13.1 3.1 EBITDA 38.6 40.4 Operating profit PBT 17.0 15.1 19.6 8.5 HSBC EPS -2.9 37.3 18.2 8.9 Ratios (%) Revenue/IC (x) 4.7 6.2 6.9 6.3 ROIC -12.9 0.3 1.9 4.3 ROE 13.9 16.5 16.7 15.7 ROA 12.1 9.8 10.0 9.9 EBITDA margin -0.8 1.0 1.2 1.6 Operating profit margin -2.9 -0.2 0.0 0.4 EBITDA/net interest (x) 0.8 Net debt/equity -29.2 -31.8 -37.9 -38.5 Net debt/EBITDA (x) 59.6 -37.3 -37.4 -31.3 CF from operations/net debt Per share data (CNY) EPS reported (fully diluted) 1.22 1.41 1.66 1.81 HSBC EPS (fully diluted) 1.02 1.41 1.66 1.81 DPS 0.18 0.21 0.25 0.27 Book value 7.33 8.54 9.97 11.52

2 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Entering the pit

 New entry level models driving PSA market share gain  High inventory level at Nissan could result in lower volume growth in 2H14; we expect upward earnings revisions to pause in 2H14  Downgrade to Neutral from OW, but raise target price to HKD15.4 from HKD13.6 based on 8.7x PE (vs 8.2x previously)

New compact models driving DPCA market share gain

DPCA sales volumes increased 24% YoY to 343k units in 1H14. The strong sales growth was driven by new compact models, including: 1) the launch of the new generation compact sedan Citroen Elysee in October 2013 (+72% YoY); 2) the ramp-up of compact SUV Peugeot 3008 (+37% YoY); 3) the release of the new compact sedan Peugeot 301 in November 2013; and 4) the release of the small SUV Peugeot 2008 in April 2014.

We believe the new model line-up in 2H14 should be an additional growth driver for DPCA. New models include the new generation of Peugeot 408 and 308 compact sedans to be released in August 2014 and late 2014, respectively, and the new compact SUV Citroen C3-XR to be launched in late 2014/ early 2015.

DPCA’s market share increased from 3.2% in 1H13 to 3.6% in 1H14. We expect DPCA’s sales volume to continue to grow at 32% YoY in 2H14 and total sales in FY14 to be 703k (+28% YoY) compared with the company's target of 700k units.

Sales volume ramp-up of Peugeot 301 Sales volume ramp-up of Citroen Elysee 8,000 12,000 Units Units 7,000 10,000 6,000 8,000 5,000 4,000 6,000 3,000 4,000 2,000 2,000 1,000 0 0 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jan-12 May-12Sep-12 Jan-13 May-13Sep-13 Jan-14 May-14 Peugeot 301 Citroën Elysée

Source: Company data, CAAM, HSBC Source: Company data, CAAM, HSBC

3 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Sales volume ramp-up of Peugeot 2008 Rising sales volume of Peugeot 3008 6,000 7,000 Units Units 5,000 6,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-1 Peugeot 2008 Peugeot 3008

Source: Company data, CAAM, HSBC Source: Company data, CAAM, HSBC

Sales volume growth of DPCA 70,000 100%

60,000 75%

50,000 50% 40,000 25% 30,000 0% 20,000

10,000 -25%

0 -50% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 DPCA YoY growth %

Source: Company data, CAAM, HSBC

Not an outright positive on DF Nissan

Dongfeng Nissan’s sales volumes increased 21% YoY to 477k units in 1H14, driven by: 1) strong sales of the new X-trail launched in March 2014 (+512% YoY); 2) the ramp-up of Sylphy (+29% YoY); and 3) the low base of Teana in 1H13 as there was almost no production of this model in 1Q13 (+34% YoY).

At Nissan’s 1QFY14 results announcement on 28 July 2014, CFO Joseph Peter said that Nissan’s inventory levels in China as of June 14 were “definitely higher than where we would like them to be”. He said that Nissan inventories were 880k units globally, excluding China, and would increase to about 1.06- 1.07m with China included. This suggests that Nissan’s inventories in China (dealer+OEM level) were around 180-190k units at June 2014, representing 2.6-2.7 months of average sales in 1H14.

Mr Peter said the company had already started to take action to bring inventories down and said the company did not want to get into a situation where it had to compete on price to achieve this, but would manage this in a structured way. He also said that July sales volumes would reflect the aim of cutting inventory levels in China.

4 Dongfeng Motor (489 HK) Autos abc 1 August 2014

In terms of models, X-trail had low inventory, while Teana LWB and Sylphy were at the high end of the appropriate range.

Weekly delivery data showed that, during the period 1-18 July, declined 34% YoY and 48% MoM after adjusting for working days. We believe the JV has started clearing the inventory at the dealer level and we may see pressure on sales volumes in 3Q14.

We lift our sales volume forecast for Dongfeng Nissan in FY14 by 2% to 1.07m (+16% YoY), slightly lower than the company’s sales target of 1.08m, and expect growth in 2H14 to slow to 13% YoY.

Sales volume ramp-up of Nissan X-Trail Sales volume ramp-up of Nissan Sylphy 14,000 35,000 Units Units 12,000 30,000 10,000 25,000 8,000 20,000 6,000 15,000 4,000 10,000 2,000 5,000 0 0 Jan-12 May-12Sep-12 Jan-13 May-13Sep-13 Jan-14 May-14 Jan-12 May-12Sep-12 Jan-13 May-13Sep-13 Jan-14 May-14 Nissan X-Trail Nissan SylphySlyphy

Source: Company data, CAAM, HSBC Source: Company data, CAAM, HSBC

Sales volume growth of Dongfeng Nissan 120,000 100%

100,000 75%

80,000 50%

60,000 25%

40,000 0%

20,000 -25%

0 -50% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Dongfeng Nissan YoY growth %

Source: Company data, CAAM, HSBC

5 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Brand new models to drive DF Honda growth in 2015e

Dongfeng Honda sales volumes increased 23% YoY to 172k units in 1H14, driven by the launch of Honda Jade in September 2013 and the solid performance of Honda CR-V (+11% YoY).

We expect the new product launches to support the growth of in 2015. New products include: 1) the sub-compact SUV model expected in December 2014; 2) the new generation of mid-size sedan Spirior to be launched in December 2014; and 3) a sub-compact sedan model expected in 2015.

Sales volume ramp-up of Honda CR-V Sales volume ramp-up of Honda Jade 25,000 8,000 Units Units 7,000 20,000 6,000 15,000 5,000 4,000 10,000 3,000 2,000 5,000 1,000 0 0 Jan-12 May-12Sep-12 Jan-13 May-13Sep-13 Jan-14 May-14 Aug-13 Dec-13 Apr-14 Honda CR-V Honda Jade

Source: Company data, CAAM, HSBC Source: Company data, CAAM, HSBC

Sales volume growth of Dongfeng Honda 40,000 100%

35,000 75% 30,000 50% 25,000

20,000 25%

15,000 0% 10,000 -25% 5,000

0 -50% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Dongfeng Honda YoY growth %

Source: Company data, CAAM, HSBC

6 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Sales volume and YoY growth of Dongfeng’s major entities 600,000 34.2%

500,000 476,803 395,338 23.9% 23.3% 400,000 20.6% 343,170 276,896 300,000

200,000 171,859 139,388 118,398 -2.9% 88,198 100,000 41,564 40,377

0 Dongfeng Nissan DPCA Dongfeng Honda Dongfeng Liuzhou Dongfeng PV 1H13 1H14 Yoy growth

Source: Company data, CAAM, HSBC

Discount level of DF Honda, DF Nissan and DPCA 0% -2% -4% -6% -8% -10% -12% -14% -16% -18% Jan-13 Feb-13Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14Mar-14 Apr-14 May-14 Dongfeng Honda Dongfeng Nissan DPCA

Source: CPCA, HSBC

7 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Key entities’ product portfolio (upcoming models highlighted in red) DF Nissan DF Honda DF Peugeot DF Citroen Sub-compact March, N/3Q10 TBC, N/2015 207 , N/1Q09 C2, N/4Q06 R30, N/3Q14 207 sedan, N/4Q08 Compact Livina, S/2Q13 Civic, S/4Q11 307 Hatchback, N/4Q04 Elysee, S/3Q13 Sylphy, S/2Q12 Ciimo, N/2Q12 307 sedan, N/3Q07 C4L, N/4Q12 Tiida, S/2Q11 308, N/4Q11 C-Quatre, S/1Q12 Sunny, S/1Q11 301, N/4Q13 Venucia D50, N/2Q12 408, N/1Q10 Venucia R50, N/3Q12 308, S/late 2014 Venucia R50X, N/3Q13 408, S/Aug-14 Mid-size Teana, S/1Q13 Spirior, N/4Q09 508, N/3Q11 C5, N/2012 Infiniti Q50L, N/Nov-14 Spirior, S/late14 508, F/1Q15 Sub-compact SUV Concept V, N/late 14 2008, N/Apr-14 Compact SUV Qashqai, N/1Q08 CR-V, S/1Q12 3008, N/1Q13 C3-XR, N/late 2014 Venucia SUV, N/2015 Qashqai, S/1Q15 Mid-size SUV X Trail, S/Mar-14 Murano, N/3Q11 Murano, S/2015 Infiniti QX50L, N/2015 MPV Elysion, N/2Q12 Jade, N/3Q13

Source: Company data, HSBC Note: N-brand new model, S-successor model, F-mid-cycle facelift

Sales volume revision

Sales volume revision of PV ______Revised ______Old / Revision % ____ 2013 2014e 2015e2016e 2014e 2015e Dongfeng Nissan 926,229 1,074,763 1,194,532 1,258,374 1,049,139 1,147,844 YoY% 16.0% 11.1% 5.3% 2.4% 4.1% Dongfeng Honda 321,409 366,026 423,894 445,428 359,770 410,686 YoY% 13.9% 15.8% 5.1% 1.7% 3.2% DPCA 550,007 702,841 826,690 853,260 620,402 665,880 YoY% 27.8% 17.6% 3.2% 13.3% 24.1% Dongfeng PV 80,077 84,571 168,698 168,698 87,153 108,868 YoY% 5.6% 99.5% 0.0% -3.0% 55.0% Dongfeng Liuzhou 180,189 238,242 252,849 252,849 186,388 199,453 YoY% 32.2% 6.1% 0.0% 27.8% 26.8% Zhengzhou Nissan 55,291 59,884 62,222 64,497 60,540 61,583 YoY% 8.3% 3.9% 3.7% -1.1% 1.0% Total passenger vehicles 2,113,202 2,526,326 2,928,886 3,043,106 2,363,392 2,594,314 YoY% 19.5% 15.9% 3.9% 6.9% 12.9%

Source: Company data, HSBC

8 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Weakness in domestic peers driving change in valuation

Forward PE chart of OEMs 20.0

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Brilliance Dongfeng GAC Geely Great Wall Mkt cap weight PE

Source: Bloomberg, Company data, HSBC Research

 Dongfeng valuation as measured by forward PE used to be in line with the market capitalisation weighted average of the auto sector from 2010 to 3Q12.

 As both Geely (175 HK, N, HKD3.08) and Great Wall Motors (2333 HK, N(V), HKD32.20) experienced strong volume growth post 3Q12, both stocks saw a re-rating from the trough of 4.3-5.2x forward PE in 2011 to the peak of 12.8-13.2x forward PE in 2013. Dongfeng then traded at a discount to the market-capital weighted average.

 As Great Wall and Geely are facing company-specific issues with structural challenges from both the SOEs’ domestic brands and lower end models of JVs, both of the stocks started to de-rate to the current level of 8x.

 In 4Q13, the valuation discount of Dongfeng was as much as 37% to the industry average. We believe Dongfeng’s valuation discount to the industry average will narrow again in the coming six months.

 Our valuation target implies 7.7x rolling forward PE, versus the current industry average of 8.5x. Potential gain on PSA investment

 Dongfeng invested EUR800m in the PSA reserved capital increase and rights issue in 1H14. The transaction was completed on 23 May 2014.

 The consideration paid by Dongfeng is below its share of net assets of PSA following the transaction. Depending on the final fair value adjustment for the acquisition, we believe Dongfeng could book a one-off accounting gain on negative goodwill of RMB6,010m, as illustrated in the table below.

 We have not included the potential accounting gain from PSA investment in our forecasts.

9 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Potential gain on negative goodwill from PSA investment No. of shares acquired Price per share (EUR) Total consideration (EURm) PSA Reserved Capital Increase 69,866,666 7.5 524 PSA Rights Issues 40,755,555 6.77 276 110,622,221 7.23 800

Consideration in HKD m 8,575 Consideration in RMB m 6,860

Potential gain on negative goodwill Units PSA net asset @ 31 Dec 2013 EUR m 7,791 Equity increase from Reserved Capital Increase EUR m 1,048 Total net asset EUR m 8,839 14.1% shareholding EUR m 1,246

Consideration EUR m 524

Potential gain on negative goodwill EUR m 722 Potential gain on negative goodwill RMB m 6,010

Source: Company data, HSBC estimates Note: Assumptions based on spot rate of RMB8.32/EUR

Earnings revisions

Earnings revisions in equity accounting ______Equity accounting Revised ______Proportionate consolidation Old

RMBm 2014e 2015e 2016e 2014e 2015e Revenue 63,523 71,822 74,044 194,194 213,124 Cost of sales (54,571) (61,886) (63,694) (158,257) (173,947) Gross Profit 8,952 9,935 10,350 35,937 39,177 Gross Profit margin % 14.1% 13.8% 14.0% 18.5% 18.4%

Other income/other gains and losses 559 599 618 1,822 1,822 Selling and distribution expenses (3,839) (4,144) (4,186) (10,412) (11,413) Administrative expenses (3,688) (3,981) (4,021) (6,104) (6,690) Other expenses (2,131) (2,410) (2,484) (5,960) (6,560) EBIT (147) (1) 276 15,284 16,336 EBIT Margin % -0.2% 0.0% 0.4% 7.9% 7.7%

Interest income 543 835 1,063 833 820 Finance costs (368) (501) (501) (276) (276)

Share of profit of JVs 12,238 13,481 14,079 - - Share of profit of associates 60 930 1,080 513 1,287

Profit before tax 12,327 14,744 15,998 16,353 18,166 Income tax (120) (132) (145) (3,960) (4,220) Net profit after tax 12,207 14,612 15,852 12,393 13,946

Attributable to Owner of company 12,118 14,319 15,598 11,154 12,273 Non-controlling interests 89 292 255 1,239 1,674

Revision in earnings attributable to 8.6% 16.7% shareholders

Source: Company data, HSBC estimates

 We adopt equity accounting to align with Dongfeng’s disclosure format as from 2013.

10 Dongfeng Motor (489 HK) Autos abc 1 August 2014

 We lift our NPAT forecast by 9%/17% in 2014-15e. In our 2015 and 2016 forecast, we have factored in a share of profits of RMB624m and RMB743m from the PSA investment based on the earnings forecast by our European Auto analyst Horst Schneider (see Peugeot: The French ‘lion’ keeps on fighting, 2 July 2014. [UG FP, OW(V), EUR11.24]).

 We expect NPAT to increase 15%/18%/9% in 2014-16e. 1H14 results preview

1H14 results preview RMBm 1H14e 1H13 YoY% 2H14 2014e % of FY14e Revenue 32,742 9,750 235.8% 30,781 63,523 51.5% Cost of sales (27,955) (8,523) 228.0% (26,616) (54,571) 51.2% Gross Profit 4,787 1,227 290.2% 4,165 8,952 53.5% Gross Profit margin % 14.6% 12.6% 13.5% 14.1%

Other income/other gains and losses 261 259 0.8% 298 559 46.7% Selling and distribution expenses (1,828) (696) 162.7% (2,011) (3,839) 47.6% Administrative expenses (1,756) (566) 210.3% (1,932) (3,688) 47.6% Other expenses (1,099) (523) 110.1% (1,033) (2,131) 51.5% EBIT 365 (299) -222.1% (512) (147) -248.7% EBIT Margin % 1.1% -3.1% -1.7% -0.2%

Interest income 283 277 2.0% 261 543 52.0% Finance costs (184) (82) 124.5% (184) (368) 50.0%

Share of profit of JVs 5,535 5,620 -1.5% 6,703 12,238 45.2% Share of profit of associates 124 113 10.0% (64) 60 206.9%

Profit before tax 6,123 5,629 8.8% 6,204 12,327 49.7% Income tax (60) (74) -19.0% (87) (120) 50.0% Net profit after tax 6,063 5,555 9.1% 6,117 12,207 49.7%

Attributable to Owner of company 6,021 5,538 8.7% 6,070 12,118 49.7% Non-controlling interests 42 17 148.4% 46 89 47.7%

Source: Company data, HSBC estimates

 We expect NPAT in 1H14 to increase 9% YoY to RMB6,021m.

 Excluding the one-off gain of RMB1,760m from the CV transaction in 1H13, we expect 1H14 earnings to increase 60% YoY to RMB6,021m, driven by the increased stake in the CV business, rising volume and utilisation of DF Nissan, DF Honda and DPCA.

11 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Valuation and risks

As the auto industry is cyclical and it is difficult to predict cash flows through cycles, we do not think DCF is the best metric by which to value auto makers. We use the following formula to derive our fair valuation of the company:

Target PE = (ROE – g) ÷ (ROE × [COE-g])

ROE 2014e 16.5% Cost of equity 12.1% Rf 3.5% Equity risk premium 6.5% Equity beta 1.33 g 2.0%

Source: HSBC estimates

 We raise our 2014 ROE forecast to 16.5% from 15.8% previously. We raised our long-term growth assumption from 1.5% to 2.0% to factor in the higher potential growth driven by the strong performance of DPCA. We cut beta from 1.4 to 1.33 and our COE assumption decreases from 12.5% to 12.1%.

 As a result, our ROE-based target PE increases to 8.7x from previously 8.2x.

 Based on our adjusted 2014e diluted EPS of RMB1.41 (previously RMB1.29), we derive a fair valuation of HKD15.4 (previously HKD13.6 with embedded RMB/HKD exchange rate spot rate of 1.26).

Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate of 9.5% for China stocks. Our target price implies a potential return of 12% (including the forecast dividend yield), within the Neutral band; therefore, we downgrade our rating to Neutral from Overweight. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.

Key upside risks Better than expected sales volume growth of DF Nissan: We expect DF Nissan to see lower YoY growth in 3Q14 driven by the de-stocking exercise. If inventory at the dealership level is cleared more rapidly than expected, DF Nissan sales volume growth could be stronger than we forecast.

Higher than expected operating leverage: All major JVs have seen decent volume growth YTD; operating leverage from the increasing volume, utilisation and procurement levels could provide upside risks to our forecasts.

Key downside risks CV business: Following the re-structuring of the CV business, earnings disclosure was distorted by the change in percentage of ownership. Given the industry growth in the commercial vehicle market is still under pressure, there is a risk that CV business profitability is lower than expected.

12 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Dongfeng forward PE band chart

20 Price (HKD) 11.4x 9.8x

18 8.2x 16

14 6.6x 12

10 5.1x 8

6

4 Jan/10 Apr/10 Jul/10 Oct/10 Jan/11 Apr/11 Jul/11 Oct/11 Jan/12 Apr/12 Jul/12 Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14

Source: Thomson Reuters Datastream, Company data, HSBC estimates

13 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Disclosure appendix

Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Carson Ng. Important disclosures Equities: Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice. Rating definitions for long-term investment opportunities Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

14 Dongfeng Motor (489 HK) Autos abc 1 August 2014

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. Rating distribution for long-term investment opportunities As of 31 July 2014, the distribution of all ratings published is as follows: Overweight (Buy) 44% (32% of these provided with Investment Banking Services) Neutral (Hold) 37% (31% of these provided with Investment Banking Services) Underweight (Sell) 19% (27% of these provided with Investment Banking Services)

Share price and rating changes for long-term investment opportunities

Dongfeng Motor (0489.HK) Share Price performance HKD Vs HSBC rating Recommendation & price target history history From To Date N/A Underweight (V) 17 February 2013 Underweight (V) Neutral 21 August 2013 19 Neutral Overweight 03 March 2014 17 Target Price Value Date 15 Price 1 11.10 17 February 2013 13 Price 2 11.40 04 June 2013 11 Price 3 13.60 03 March 2014 9 Source: HSBC 7 5 3 1 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Source: HSBC

HSBC & Analyst disclosures Disclosure checklist Company Ticker Recent price Price Date Disclosure DONGFENG MOTOR 0489.HK 13.88 31-Jul-2014 4, 5, 6, 7, 11 Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 30 June 2014 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 June 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 June 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 June 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

15 Dongfeng Motor (489 HK) Autos abc 1 August 2014

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. Additional disclosures 1 This report is dated as at 1 August 2014. 2 All market data included in this report are dated as at close 30 July 2014, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

16 Dongfeng Motor (489 HK) Autos abc 1 August 2014

Disclaimer

* Legal entities as at 30 May 2014 Issuer of report ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation The Hongkong and Shanghai Banking Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Corporation Limited Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; Level 19, 1 Queen’s Road Central ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Hong Kong SAR Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Telephone: +852 2843 9111 Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Telex: 75100 CAPEL HX Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Fax: +852 2596 0200 Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Website: www.research.hsbc.com México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong regulated business for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers; it is not intended for and should not be distributed to retail customers in Hong Kong. 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HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. 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Global Industrials Research Team

Industrials Yogesh Aggarwal Colin Gibson Analyst Global Sector Head, Industrials +91 22 2268 1246 [email protected] +44 20 7991 6592 [email protected] Transportation Sean McLoughlin Andrew Lobbenberg Analyst Analyst +44 20 7991 3464 [email protected] +44 20 7991 6816 [email protected] Michael Hagmann Joe Thomas Analyst Analyst +44 20 7991 2405 [email protected] +44 20 7992 3618 [email protected] Wei Sim Mark Webb Analyst Analyst +852 2996 6602 [email protected] +852 2996 6574 [email protected] Shishir Singh Parash Jain +852 2822 4292 [email protected] Analyst +852 2996 6717 [email protected] Achal Kumar Analyst Shishir Singh +91 80 3001 3722 [email protected] Analyst +852 2822 4292 [email protected] Rajani Khetan Analyst Walden Shing +852 3941 0830 [email protected] Analyst Jingyuan Zhai +852 2996 6751 [email protected] Associate Stephen Wan +852 3941 7009 [email protected] Analyst Aric Hui +852 2996 6566 [email protected] Associate Thomas Zhu, CFA +852 2822 3165 [email protected] Analyst Construction & Engineering +852 2822 4325 [email protected] Neel Sinha Carrie Liu Head of Equity Research, South East Asia Analyst +65 6658 0606 [email protected] + 8862 6631 2864 [email protected] Pierre Bosset Brian Cho Head of French Research Head of Research, Korea +33 1 56 52 43 10 [email protected] +822 3706 8750 [email protected] Tarun Bhatnagar Paul Choi Analyst Analyst +65 6658 0614 [email protected] +822 3706 8758 [email protected] John Fraser-Andrews Yeon Lee Analyst Analyst +44 20 7991 6732 [email protected] +822 3706 8778 [email protected] Jeffrey Davis Analyst Jena Han +44 207 991 6837 [email protected] Analyst +822 3706 8772 [email protected] Ivan Enriquez +52 55 5721 2397 [email protected] Sinyoung Park Analyst Claudia Navarrete +822 3706 8770 [email protected] Analyst +52 55 5721 2422 [email protected] Incheol Yu Associate Anderson Chow +822 3706 8756 [email protected] Analyst +852 2996 6669 [email protected] Thilan Wickramasinghe Analyst Lesley Liu +65 6658 0609 [email protected] Analyst +852 2822 4524 [email protected] Kristy Lee Raj Sinha Analyst Analyst +65 6658 0616 [email protected] + 971 4423 6932 [email protected] Puneet Gulati Levent Bayar Analyst Analyst +91 22 2268 1235 [email protected] +90 212 376 46 17 [email protected] Joerg-Andre Finke Ashutosh Narkar Analyst Analyst + 49 211 910 3722 [email protected] +91 22 2268 1474 [email protected] Richard Schramm Tobias Loskamp Analyst Analyst + 49 211 910 2837 [email protected] +49 211 910 2828 [email protected] Juergen Siebrecht Analyst Specialist Sales + 49 211 910 3350 [email protected] Rod Turnbull +44 20 7991 5363 [email protected] Autos Niels Fehre Oliver Magis Analyst +49 21 1910 4402 [email protected] +49 211 910 3426 [email protected] Billal Ismail Horst Schneider +44 20 7991 5362 [email protected] Analyst +49 211 910 3285 [email protected] Carson Ng Analyst +852 2822 4397 [email protected]