China Consumer Discretionary 25 May 2016 Guangzhou Automobile Group (2238 HK) Target price: HKD8.30 (from HKD7.00) Share price (24 May): HKD8.63 | Up/downside: -3.8% Strong Trumpchi sales look priced in Kelvin Lau (852) 2848 4467 YTD outperformance mainly driven by better-than-expected GS4 sales [email protected] Upbeat 1Q16 margin likely to trend down in 2H16 on strong competition Brian Lam (852) 2532 4341 Maintaining Hold (3) rating; raising TP to HKD8.3 on 7.9x PER [email protected] What's new: Following our meeting with GAC’s management on Monday, Forecast revisions (%) we are revising our forecasts. We attribute the stock’s outperformance YTD Year to 31 Dec 16E 17E 18E to better-than-expected sales volumes for its Trumpchi SUV GS4, which led Revenue change 4.2 (1.7) n.a. Net profit change 23.2 28.9 n.a. to a gross margin of 18% for 4Q15-1Q16 vs. 12% for 2015. But, we don’t Core EPS (FD) change 23.2 28.9 n.a. recommend chasing GAC at the current level as the positives look priced in. Source: Daiwa forecasts What's the impact: Upbeat 1Q16 margin, but likely to soften in 2H16E. Share price performance GAC’s gross margin saw a significant rise in 4Q15-1Q16, mainly on the (HKD) (%) back of scale economies for GS4 SUV. As its target segment is very price 9.5 160 sensitive (mostly CNY110,000-120,000), we believe that increasing 8.3 140 7.0 120 promotions and competing model launches (eg, GWM’s H6, Changan’s 5.8 100 CS75 and Geely’s Boyue) will have an immediate negative impact on the 4.5 80 GS4. Also, we think the 150,000-unit new capacity, due to start operations May-15 Aug-15 Nov-15 Feb-16 in 3Q16, will further weigh on GAC’s gross margin. Gzhou Auto (LHS) Relative to HSI (RHS) Foreign JVs should see steady growth, but limited upside volume 12-month range 4.88-9.17 surprise. GAC Honda and GAC Toyota have seen steady volume growth Market cap (USDbn) 7.14 YTD, mainly driven by new products, including the Honda City sedan, Vezel 3m avg daily turnover (USDm) 15.75 Shares outstanding (m) 6,435 SUV and Toyota Highlander. However, their sales volume will face a high Major shareholder GZ Auto Industry Grp (57.6%) base of comparison from 2Q16 as many models were launched in 2Q15. For 1-20 May, GAC Honda and GAC Toyota saw 5% YoY and 2% YoY rises Financial summary (CNY) in average daily sales, respectively, down from 14-18% rises in YTD April. Year to 31 Dec 16E 17E 18E New production capacity for Honda and Toyota should come on line from Revenue (m) 46,578 49,077 51,815 2018, and hence we see limited scope for an upside surprise in the 2 JVs’ Operating profit (m) 1,067 1,137 1,215 Net profit (m) 5,585 6,017 6,530 volumes. As for GAC Fiat, its Changsha plant, with a total capacity of Core EPS (fully-diluted) 0.868 0.935 1.015 140,000 units, has turned profitable (from losses in 2015), with the EPS change (%) 33.2 7.7 8.5 Cherokee selling more than 9,000 units for both March and April (utilisation Daiwa vs Cons. EPS (%) (7.9) (11.8) (12.2) PER (x) 8.4 7.8 7.2 rate of more than 80%). However, we think Fiat’s additional capacity of Dividend yield (%) 3.8 4.1 4.5 160,000 units in Guangzhou, which came on stream in 2Q16 (now 10-20% DPS 0.280 0.301 0.327 utilisation), will likely offset the profits from Changsha in 2016. PBR (x) 1.1 1.0 0.9 EV/EBITDA (x) 9.7 8.1 6.6 ROE (%) 13.7 13.4 13.2 What we recommend: We believe 2016 will be a strong year for GAC Source: FactSet, Daiwa forecasts given a low base for the first 4 months, and we raise EPS for 2016-17E by 23-29% on its better-than-expected gross margin. In turn, we lift our TP to HKD8.3 (from HKD7), set at a PER of 7.9x (previously 8.5x), a 10% premium to its peers’ average 2016E PER (ex. BYD [1211 HK, HKD42.95, Outperform (2)]). However, we maintain our Hold (3) rating as we think sentiment will deteriorate due to the higher comparison base going forward. The key risks: stronger/weaker-than-expected PV sales. How we differ: Our 2016-18E EPS are 8-12% below the consensus as we are more cautious on GAC’s volume growth for the rest of 2016. See important disclosures, including any required research certifications, beginning on page 5 Guangzhou Automobile Group (2238 HK): 25 May 2016 GAC: PER band (PER) 15 13 11 9 7 5 Jul-15 Jul-13 Jul-14 Jan-13 Jan-14 Jan-15 Jan-16 Mar-13 Mar-14 Mar-15 Mar-16 Nov-13 Nov-14 Nov-15 Sep-13 Sep-14 Sep-15 May-13 May-14 May-15 May-16 PER +1 SD Average PER -1 SD Source: Bloomberg, Daiwa Peer comparison – auto OEMs Name Bloomberg Trading Share price Market Cap Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 24-May-16 USD Mn FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E China H-share listed Geely Automobile Holdings Lt * 175 HK HKD 3.80 4306 Buy 8.4 7.2 1.2 1.1 3.0 2.1 1.5 1.7 16.0 16.2 BAIC Motor Corp Ltd-H * 1958 HK HKD 5.40 5280 Sell 9.2 8.4 0.9 0.8 4.1 3.3 3.8 4.1 10.4 10.5 BYD Co Ltd-H * 1211 HK HKD 42.95 19168 Outperform 34.2 23.0 2.0 1.8 10.9 9.1 n.a. n.a. 6.7 7.9 Great Wall Motor Company-H * 2333 HK HKD 5.54 9909 Hold 5.9 5.8 1.0 0.9 3.9 3.8 5.2 5.3 17.6 16.1 Guangzhou Automobile Group-H * 2238 HK HKD 8.63 17347 Hold 8.4 7.8 1.1 1.0 9.7 8.1 3.8 4.1 13.7 13.4 Dongfeng Motor Grp Co Ltd-H * 489 HK HKD 7.74 8585 Outperform 4.7 4.5 0.6 0.5 5.2 3.6 3.2 3.4 13.3 12.5 Brilliance China Automotive * 1114 HK HKD 7.09 4597 Buy 8.7 7.0 1.3 1.1 n.a. n.a. 1.4 1.7 16.2 17.4 China A-share listed Byd Co Ltd -A 002594 CH CNY 59.23 19168 NR 36.4 28.8 4.1 3.6 15.5 13.2 0.0 0.0 11.9 13.5 Guangzhou Automobile Group-A 601238 CH CNY 23.11 17347 NR 24.0 20.0 3.4 3.0 39.6 34.4 0.0 0.0 14.7 15.6 Great Wall Motor Co Ltd-A 601633 CH CNY 8.37 9909 NR 8.8 7.9 1.7 1.5 5.4 5.1 0.0 0.0 20.7 19.6 Saic Motor Corp Ltd-A 600104 CH CNY 19.77 33262 NR 7.0 6.6 1.2 1.1 10.0 9.0 0.1 0.1 17.1 16.9 Chongqing Changan Automobi-B 200625 CH HKD 10.77 9475 NR 3.7 3.5 1.0 0.8 23.8 9.2 0.1 0.1 29.3 25.9 Faw Car Company Limited-A 000800 CH CNY 12.94 3214 NR 380.6 562.6 2.3 2.3 n.a. n.a. n.a. n.a. 6.9 6.8 Anhui Jianghuai Auto Co-A 600418 CH CNY 11.11 2481 NR 13.3 10.6 1.6 1.4 n.a. n.a. 0.0 0.0 13.0 14.4 Jiangsu Yueda Investment C-A 600805 CH CNY 8.10 1052 NR 9.9 8.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Tianjin Faw Xiali Automobi-A 000927 CH CNY 6.67 1624 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 9.55 1831 NR 19.9 15.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Haima Automobile Group Co-A 000572 CH CNY 4.97 1247 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 4.68 780 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 13.29 52799 Hold 6.3 6.2 1.6 1.3 2.9 2.8 0.1 0.0 29.4 22.8 General Motors Co * GM US USD 31.05 47812 Outperform 5.5 5.3 1.1 0.9 2.5 2.4 0.0 0.0 22.0 18.5 Europe Daimler Ag-Registered Shares DAI GR EUR 58.26 69490 NR 7.2 6.8 1.1 1.0 2.3 2.1 0.1 0.1 15.6 15.3 Bayerische Motoren Werke AG BMW GR EUR 72.65 52614 NR 7.5 7.3 1.0 0.9 6.2 6.0 0.0 0.0 14.3 13.5 Volkswagen AG VoW GR EUR 137.46 75654 NR 7.8 6.6 0.7 0.7 1.7 1.5 0.0 0.0 9.9 10.2 Fiat Chrysler Automobiles NV FCA IM EUR 6.22 8933 NR 4.5 3.5 0.6 0.5 1.5 1.4 n.a.