China Consumer Discretionary 15 April 2016 Dongfeng Motor Group (489 HK) Target price: HKD10.60 (from HKD12.20) Share price (14 Apr): HKD9.30 | Up/downside: +13.9% Positive as a laggard play Kelvin Lau (852) 2848 4467 We revise down our 2016-17 EPS forecasts due to cautious guidance [email protected] However, we view valuations as undemanding Brian Lam (852) 2532 4341 Revising TP to HKD10.60 from HKD12.20, reiterating Outperform (2) [email protected] What's new: Following Dongfeng Motor’s (DFM) 2015 results and our Forecast revisions (%) recent discussions with management, we revise our assumptions and, in Year to 31 Dec 16E 17E 18E turn, our 2016-17E earnings and target price. We still view valuations as Revenue change 12.0 21.3 n.a. Net profit change (9.4) (7.4) n.a. attractive. Core EPS (FD) change (9.4) (7.4) n.a. Source: Daiwa forecasts What's the impact: DFM’s 2015 results were mostly in line with our expectations, though management’s guidance for 2016 was more cautious Share price performance than we had expected; it is looking for new car sales from DF Nissan and (HKD) (%) DF Honda to record only 4.9% YoY and 5.9% YoY increases, respectively, 14 105 whereas we had been forecasting increases of 17% YoY and 15% YoY, 12 95 11 85 respectively. A possible reason is a sharp decline in sales of current models 9 75 is likely to weigh on YoY growth from new models. 7 65 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Separately, management expects cooperation with PSA (not rated) to Dongfeng M (LHS) Relative to HSI (RHS) create synergies in terms of joint procurement and shared platforms (namely, the CMA platform), which should be operating by 2019. Dongfeng 12-month range 7.05-13.32 Getrag, a JV with GETRAG (not listed), has completed building its factory Market cap (USDbn) 10.33 and will soon start producing its own gearboxes, as per management. 3m avg daily turnover (USDm) 17.35 Shares outstanding (m) 8,616 Major shareholder Dongfeng Motor Corporation (66.9%) For DFM’s commercial vehicle (CV) sales, management expects flat YoY growth and aims to break even in terms of cash flow and the bottom line for Financial summary (CNY) 2016. It is targeting to maintain an average inventory level of 1.5 months for Year to 31 Dec 16E 17E 18E 2016 (currently 1.5-1.8 months). However, management expects its self- Revenue (m) 129,508 132,586 133,347 owned brand, JV with PSA (DPCA), and financing service to improve in Operating profit (m) 1,943 2,254 2,667 Net profit (m) 11,964 12,583 12,934 profitability YoY. We revise up our 2016-17E revenue by 12-21% Core EPS (fully-diluted) 1.389 1.460 1.501 considering the better-than-expected guidance on the self-owned brand, EPS change (%) 3.6 5.2 2.8 DF PV, for which we now forecast a 9% YoY increase in sales volume in Daiwa vs Cons. EPS (%) (6.2) (5.5) 1.1 PER (x) 5.6 5.3 5.2 2016 (previous: 2% YoY increase; management guides for 10.9% YoY). Dividend yield (%) 2.7 2.8 2.9 However, we revise down our 2016-17E EPS by 7-9% as we scale back DPS 0.208 0.219 0.225 our sales growth forecasts for DF Nissan and DF Honda to 2-6% YoY for PBR (x) 0.7 0.6 0.6 2016-17E (previous: flat to 17% YoY rise). As such, we cut our 12-month EV/EBITDA (x) 8.2 6.2 3.0 ROE (%) 13.3 12.5 11.6 TP to HKD10.70 (from HKD12.20) on an unchanged 2016E PER of 7x. Source: FactSet, Daiwa forecasts What we recommend: Although earnings growth for 2016-18E seems unexciting, valuations appear undemanding, with the stock trading at a 30% discount to peers on PER compared with an average discount of less than 24% over the past 3 years. We reiterate our Outperform (2) rating. The key risk: lower-than-expected sales units, especially for Dongfeng Honda and Dongfeng Nissan. How we differ: Our 2016-17E EPS are 6% below the Bloomberg consensus, as we are more cautious on the profit contributions from DF Nissan and DF Honda. See important disclosures, including any required research certifications, beginning on page 5 Dongfeng Motor Group (489 HK): 15 April 2016 Global auto manufacturers: valuation comparison Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 15-Apr-16 FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E China H-share listed Geely Automobile Holdings Lt * 175 HK HKD 3.92 Buy 8.6 7.3 1.3 1.1 3.1 2.2 1.5 1.7 16.0 16.2 BAIC Motor Corp Ltd-H * 1958 HK HKD 6.18 Sell 10.5 9.6 1.0 1.0 4.6 3.7 3.3 3.6 10.4 10.5 BYD Co Ltd-H * 1211 HK HKD 43.20 Outperform 34.1 22.9 2.0 1.8 10.9 9.1 n.a. n.a. 6.7 7.9 Great Wall Motor Company-H * 2333 HK HKD 6.54 Hold 7.0 6.8 1.2 1.0 4.6 4.4 4.4 4.6 17.6 16.1 Guangzhou Automobile Group-H * 2238 HK HKD 8.58 Hold 10.2 9.9 1.1 1.0 21.5 15.6 3.2 3.3 11.4 10.8 Dongfeng Motor Grp Co Ltd-H * 489 HK HKD 9.30 Outperform 5.6 5.3 0.7 0.6 8.2 6.3 2.7 2.8 13.3 12.5 Brilliance China Automotive * 1114 HK HKD 8.22 Buy 8.9 8.1 1.5 1.3 n.a. n.a. 1.7 1.9 18.0 17.2 China A-share listed Byd Co Ltd -A 002594 CH CNY 58.75 NR 42.2 29.3 4.2 3.7 13.9 11.7 0.0 0.0 11.1 13.5 Guangzhou Automobile Group-A 601238 CH CNY 21.64 NR 25.5 20.3 3.2 2.8 30.4 41.1 0.0 0.0 13.2 14.4 Great Wall Motor Co Ltd-A 601633 CH CNY 9.11 NR 9.3 8.6 1.8 1.6 5.8 5.4 0.0 0.0 20.7 19.7 Saic Motor Corp Ltd-A 600104 CH CNY 20.58 NR 7.1 6.9 1.2 1.1 11.1 10.0 0.1 0.1 17.0 16.5 Chongqing Changan Automobi-B 200625 CH HKD 13.81 NR 4.6 4.3 1.3 1.0 12.5 14.9 0.0 0.1 29.1 26.7 Faw Car Company Limited-A 000800 CH CNY 13.71 NR 403.2 548.4 2.4 2.3 17.2 17.5 n.a. n.a. 3.6 3.4 Anhui Jianghuai Auto Co-A 600418 CH CNY 12.40 NR 13.2 10.4 1.8 1.6 10.0 8.9 0.0 0.1 14.7 16.4 Jiangsu Yueda Investment C-A 600805 CH CNY 8.94 NR 11.4 9.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Tianjin Faw Xiali Automobi-A 000927 CH CNY 6.84 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Lifan Industry Group Co Lt-A 601777 CH CNY 11.76 NR 28.7 21.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Haima Automobile Group Co-A 000572 CH CNY 5.63 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Shenyang Jinbei Automotive-A 600609 CH CNY 4.93 NR 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 13.09 NR 6.6 6.4 1.5 1.3 3.1 3.0 0.0 0.0 25.6 22.1 General Motors Co GM US USD 30.72 NR 5.6 5.4 1.0 0.9 2.3 2.2 0.0 0.0 21.2 18.2 Europe Daimler Ag-Registered Shares DAI GR EUR 63.75 NR 7.4 7.2 1.2 1.1 2.4 2.3 0.1 0.1 17.1 15.9 Bayerische Motoren Werke AG BMW GR EUR 78.81 NR 8.2 7.9 1.1 1.0 6.8 6.6 0.0 0.0 14.4 13.5 Volkswagen AG VoW GR EUR 127.78 NR 7.4 6.2 0.7 0.6 1.4 1.3 0.0 0.0 9.3 9.3 Fiat Chrysler Automobiles NV FCA IM EUR 6.79 NR 5.2 4.0 0.6 0.6 1.4 1.3 0.0 0.0 12.5 14.8 Peugeot SA UG FP EUR 14.09 NR 8.3 7.4 1.0 0.9 1.7 1.7 0.0 0.0 13.4 13.5 Renault SA RNO FP EUR 88.10 NR 7.4 6.6 0.8 0.7 4.6 4.4 0.0 0.0 11.8 12.3 Japan Honda Motor Co Ltd *, ** 7267 JP JPY 3066.00 Hold 10.1 9.6 0.8 0.7 7.0 6.7 0.0 0.0 7.7 7.6 Nissan Motor Co Ltd *, ** 7201 JP JPY 1042.00 Hold 7.8 7.6 0.9 0.8 2.8 2.8 0.0 0.0 11.2 10.4 Toyota Motor Corp *, ** 7203 JP JPY 5806.00 Outperform 7.8 8.1 1.0 0.9 8.9 9.2 0.0 0.0 13.4 11.6 Korea Hyundai Motor Co * 005380 KS KRW 152000.00 Buy 5.7 5.2 0.5 0.4 4.8 4.1 3.0 3.3 10.8 10.9 Kia Motors Corp * 000270 KS KRW 48050.00 Buy 6.3 5.9 0.7 0.6 3.8 3.4 2.5 2.7 12.0 11.6 India Tata Motors Ltd ** TTMT IN INR 408.75 NR 11.8 9.2 1.8 1.5 4.4 3.7 0.0 0.0 16.8 17.9 Mahindra & Mahindra Ltd ** MM IN INR 1332.45 NR 22.2 17.6 2.9 2.6 13.1 10.7 0.0 0.0 12.8 14.0 Total Weighted average 11.1 10.6 1.2 1.1 6.6 6.4 0.4 0.4 14.2 13.4 High 403.2 548.4 4.2 3.7 30.4 41.1 7.0 8.0 29.1 26.7 Low 4.6 4.0 0.5 0.4 1.4 1.3 0.0 0.0 3.6 3.4 Median 8.2 7.6 1.2 1.0 5.3 4.9 0.0 0.0 13.4 14.0 Source: Bloomberg, *Daiwa forecasts Note: **Mar year-end 2 Dongfeng Motor Group (489 HK): 15 April 2016 Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E DF Nissan sales volume (units) 809,000 773,000 926,000 952,000 1,001,000 1,058,000 1,081,000 1,090,000 DF PSA sales volume (units) 404,000 440,000 550,000 704,000 711,000 713,000 719,000 716,000 DF Honda sales volume (units) 255,000 282,000 321,000 308,000 406,000 432,000 458,000 482,000 DF Nissan sales volume growth n.a.