Global Research 6 July 2016 Geely Automobile Equities Driving into a fast lane China Automobile Manufacturers 12-month rating Buy Upgrade to Buy on better than expected sales of Boyue and Emgrand GS Prior: Neutral We upgrade our 16/17 earnings estimates for Geely by 24% to reflect faster than 12m price target HK$5.00 expected sales momentum of Boyue and Emgrand GS which sales have already reached Prior: HK$4.10 over 8k/4.6k units in June, higher than UBSe of 6k/ 4k units. We expect the current Price HK$4.30 strong industry SUV growth (45% in 5M) to continue in 2H 2016, thus we are less concerned about the competition from intensive product launches. We expect Boyue's RIC: 0175.HK BBG: 175 HK monthly sales to reach 20k units once Baoji factory commenced production in Oct. Trading data and key metrics Meanwhile, we also forecast the Emgrand GS's monthly sales to reach 10k units by end 52-wk range HK$4.46-2.51 of 2016 given its strong performance to price. Market cap. HK$37.8bn/US$4.88bn High earnings visibility in 2016; 2 more new models to be launched in 2H16 Shares o/s 8,801m (ORD) Besides from Boyue and Emgrand GS, Geely will also launch the new Yuanjing SUV Free float 60% (Compact SUV) in Aug with MSRP of Rmb80-100k and Emgrand GL (A-class sedan) in Avg. daily volume ('000) 44,376 Q4. We have concerns over the high procurement cost for Boyue, however we believe Avg. daily value (m) HK$178.1 economies of scale could offer some cost savings room thanks to faster than expected Common s/h equity (12/16E) Rmb22.6bn volume ramp-ups. Coupled with better product mix (more high-end Boyue were sold), P/BV (12/16E) 1.4x we revise up our GPM to 19.7% in 2016E from 18.2% in 2015. Therefore, we forecast Net debt / EBITDA (12/16E) NM Geely's earnings to grow 54% to Rmb3.5bn in 2016E, 12% higher than consensus. EPS (UBS, diluted) (Rmb) Upgrade risk: purchase tax cut expiration and CMA platform launches in 2017 From To % ch Cons. Geely is the biggest beneficiary of the purchase tax cut policy given its strong presence 12/16E 0.32 0.39 24 0.35 12/17E 0.38 0.47 24 0.43 in the small engine vehicle segment, therefore we believe it might experience the most 12/18E 0.43 0.52 22 0.51 severe negative impact if the tax cut is cancelled. Historically, Geely's new product cycle is short due to quality and brand image, thus we need to monitor its key models sales Yankun Hou carefully. Meanwhile, we think it is still too early to comment on whether the new Analyst [email protected] CMA platform will be successful, especially considering humongous upfront R&D +852-3712 4451 investment. However, we believe full-year contribution from existing new models should be able to outweigh these uncertainties. Tianlong Zou, CFA Analyst Valuation: Upgrade to Buy from Neutral; increase PT to HK$5.0 from HK$4.1 S1460512070001 [email protected] Our PT is DCF-based (WACC: 10.1%), implying 11x 16E PE and falls within the +86-105-832 8775 historical range of 7-15x from 11-16YTD. The stock is trading at 9.3x/7.8x 16/17E PE with earnings growth of 54%/19%, vs industry average of 7.7x/6.7x and 14%/14%. Mark Leung Associate Analyst [email protected] +852-2971 8636 Highlights (Rmbm) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Revenues 28,708 21,738 30,138 40,488 52,638 59,612 63,137 66,613 EBIT (UBS) 3,354 1,935 2,731 4,300 5,125 5,703 6,010 6,221 Net earnings (UBS) 2,663 1,431 2,261 3,471 4,123 4,593 4,856 5,052 EPS (UBS, diluted) (Rmb) 0.30 0.16 0.26 0.39 0.47 0.52 0.55 0.57 DPS (Rmb) 0.05 0.03 0.04 0.05 0.06 0.07 0.08 0.08 Net (debt) / cash 4,618 4,739 7,279 7,094 8,321 10,139 12,852 15,669 Profitability/valuation 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E EBIT margin % 11.7 8.9 9.1 10.6 9.7 9.6 9.5 9.3 ROIC (EBIT) % 29.9 16.6 23.9 35.2 34.3 33.2 31.6 30.3 EV/EBITDA (core) x 4.8 5.8 5.1 3.9 3.2 2.8 2.6 2.4 P/E (UBS, diluted) x 10.1 14.8 11.7 9.4 7.9 7.1 6.7 6.4 Equity FCF (UBS) yield % 7.0 (0.7) 13.7 0.7 5.3 7.3 10.1 10.4 Net dividend yield % 1.5 1.0 1.3 1.5 1.7 1.9 2.0 2.1 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of HK$4.30 on 06 Jul 2016 22:10 HKT www.ubs.com/investmentresearch This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 13. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Geely Automobile Buy (Price target HK$5.00) UBS Research THESIS MAP a guide to our thinking and what's where in this report OUR THESIS IN PICTURES PIVOTAL QUESTIONS Q: Will Boyue become a star SUV, following H6, Baojun 560, GS4, and CS75? Could be. We forecast Boyue sales will continue to ramp up thanks to its improved quality, rich configurations and aggressive pricing. Due to the continuous strong growth of the SUV market, we are less concerned about the competition from intensive product launches. We believe Boyue sales volume could reach 20,000 units a month once Baoji factory commences production in Oct. "Boyue SUV – is a new star born?" 5/27/2016 Q: Will Boyue and other new models be able to contribute significantly on its earning in 2016? Yes. We were cautious about the earnings contribution from the new models, especially Boyue, given high procurement cost. However, we believe economies of scale could offer some cost saving room thanks to faster than expected volume ramp-ups. Coupled with better product mix, we forecast Geely's earnings to grow 54%/19% in 2016/17E. "Boyue SUV – is a new star born?" 5/27/2016 UBS VIEW We upgrade Geely from Neutral to Buy. We believe its earnings will grow 54%/19% in 2016/17E thanks to approaching strong product cycles and better product mix. We believe the current share price still hasn't fully priced-in the potential strong sales of Boyue. In our financial forecast, we conservatively assume Boyue contributes monthly sales of 20k units by end of 2016 after capacity constraint relieve in Oct. However, given remained strong order situation and customers needing to wait more than 2 months to get the car, we believe there is further upside potential to our forecast. We have concerned over the high procurement cost for Boyue, however we believe economies of scale could offer cost saving room thanks to faster than expected volume ramp-ups. The risk to our upgrade is intensifying competition after the purchase tax cut expires and CMA platform launches in 2017. EVIDENCE In June, Boyue and Emgrand GS sales has already reached over 8k/4.6k units, ramped up from 6k/2.8k in May. After the production commencement of the new Baoji factory in Oct, the company guided the monthly production units for Boyue could reach 20k units. Currently, for both Boyue and Emgrand GS, buyers still need to wait more than 2 months to get car. WHAT'S PRICED IN? Our 2016/17E earnings are above consensus estimates by 12%/7%. We believe the market still hasn't fully priced in the potential strong sales and cost saving for the new models, especially for Boyue. Meanwhile, we are less concerned about Geely's new SUV models to be negatively impacted by the intensive SUV product launches in the market since we expect the current strong... more UPSIDE / DOWNSIDE 0175.HK Price HK$4.27 EPS (UBS) P/E (UBS) Upside to Downside (Rmb) Implied 2.1 to 1 SPECTRUM 7.00 6.50 6.00 6.50 = 0.49 x 11.3x Upside: +52% 5.50 5.00 5.00 = 0.39 x 10.9x Price Target: +17% 4.50 4.00 3.50 3.20 = Downside: -25% 3.00 0.30 x 9.1x 2.50 05 Jul +12 mo. 2.00 2014 2015 2016 2017 Value drivers in Boyue sales Overall sales volume OPM NPM Government 2016E volume (unit) growth (unit) subsidy (RMBm) HK$6.50 upside 109,069 710,502 11.9% 9.6% 847 HK$5.00 target 97,069 646,502 10.6% 8.6% 600 HK$3.20 downside 79,069 576,502 9.1% 7.4% 500 Source: UBS more COMPANY DESCRIPTION Geely Automobile Holdings, along with its subsidiaries, is principally engaged in the manufacturing and trading of automobiles, automobile parts and related automobile components...