EQUITY RESEARCH GAC (2238.HK) Good state is to continue 5 June 2017 Hong Kong | Automobile | Update Report Profits Doubled in the First Quarter Accumulate (maintain) In 2017, GAC Group recorded revenues of RMB16.885 billion, representing a quarter-on- CMP: HKD 12.60 quarter increase of 66%. The net profit attributable to shareholders stood at RMB3.833 (Closing price as at 1 June 2017) billion, rocketing by 99% on a quarter-on-quarter basis, which accounts for more than 60% TARGET: HKD 14.89 (+18%) of the net profit in last year. Earnings per share was RMB0.59. The figure was RMB0.3 in last year. With a number of best-selling vehicles, the profitability of self-owned brand and joint- COMPANY DATA venture brand in GAC Group remained robust, which is the driving force of such impressive O/S SHARES (MN) : 6451 growth. MARKET CAP (HKD MN) : 27888 52 - WK HI/LO (HKD): 14.1 / 8.76 Surprising Sales Volume of the First Quarter In the first quarter of 2017, the sales volume of the self-owned brand represented an increase of 67.5% to 122,000 units, the monthly sales of the main model GS4 amounted to nearly 30,000 units, which ranked in the second in the domestic SUV market and, at the SHARE HOLDING PATTERN, % same time, we are narrowing the gap with the No. 1 Haval H6. The large SUV with 7 seats, Guangzhou Automobile Industry Group 60.80 GAC GS8, was very popular after launching. The monthly sales reached more than 10,000 Co., Ltd units. The sales volume of SUV accounted for 95%, which, to the greatest extent, shared the dividend brought by the domestic consuming upsurge of SUV. PRICE VS. HSI The sales volume of GAC Toyota was 111,700 units, representing an increase of 12.8%, and GAC Honda 144,000 units, representing an increase of 17.7%. Among the high-end models, the sales volume of Accord (+73%) and Highlander (+32%) was impressive, while the proportion of the low-end models dropped significantly. Due to the contribution of both Renegade and Compass to sales, the sales volume of GAC Fiat Chrysler represented an increase of 75% to 50,000 units. And thanks to the strong sale of Outlander, GAC Mitsubishi recorded an increase of 430% on a quarter-on-quarter basis to 26,000 units. All the Financial Indicators Exceeded Expectation Source: Phillip Securities (HK) Research Thanks to the optimization of product structure and product capacity by the subsidiaries and associates, scale effect remained -- in the first quarter, the profit of major business recorded KEY FINANCIALS a quarter-on-quarter increase of 162% to 1.86 billion, and the investment yield of major CNY mn FY15 FY16 FY17E FY18E business reported a quarter-on-quarter increase of 75% to 2.32 billion. The gross margin Net Sales 29,418 49,418 68,257 80,785 rose by 3.3 percentage points to 23.82%, and ROE increased quarterly by 3.3percentage Net Profit 4,212 6,288 9,600 11,747 points to 7.99%. Both reached a new high. The net profit margin recorded an increase of 4.2 EPS, CNY 0.65 0.98 1.49 1.82 percentage point to 22.7%. P/E, x 16.1 11.6 7.6 6.3 Good Performance is Expected to Continue BVPS, CNY 6.01 6.81 7.79 9.08 P/BV, x 1.8 1.7 1.5 1.3 DPS (CNY) 0.20 0.31 0.47 0.57 Good state is to continue Div. Yield (%) 1.9% 2.7% 4.1% 5.0% The best-selling Trumpchi GS8 is the beginning of good performance of GAC Group. At Source: Company reports, Phillip Securities Est. present, good performance is to continue. Apart from best-selling vehicles GS4 and GS8, the company will launch new products in this year: GS3(small SUV oriented), GS7(medium SUV oriented), GA4, GM8, etc. As for the new energy vehicles, brand-new vehicles like Research Analyst GS4PHEV/EV, GE3 EV and GA6 PHEV are projected to be marketed in 2017, which will ZhangJing (+ 86 51699400-103) diversify product lines for new energy. Among the joint venture automobile companies, GAC [email protected] Toyota and Honda continue to enjoy the optimization of product structure brought by "Highlander + Avancier". With "Jeep + Outlander", GAC Fiat-Chrysler and GAC Mitsubishi are expected to restore their position in profit. Investment Thesis and Valuation We believe the good state of GAC is to continue for the rest of this year, and so we adjust the estimate of the company`s EPS to RMB 1.46/1.82 in 2017/2018, and target price to HKD 14.15, equivalent to 9/7.5x P/E ratio in2017/2018, and maintain the "accumulate" rating. (Closing price as at 1 June 2017) Page | 1 | PHILLIPCAPITAL HONGKONG RESEARCH GAC`s net profit by quarters (RMB mil) 4500 4000 3500 3000 2500 2000 1500 1000 500 -500 0 2011 -1000 Source: Company, Phillip Securities Hong Kong Research 2012 GAC Toyota monthly sales (units) 2013 Q1 Q2 Q3 Q4 50000 2014 45000 40000 2015 35000 30000 GAC 2016 25000 20000 15000 2017 10000 UPDATE REPORT 5000 0 Source: Company,Ju lPhillip-09 Securities Hong Kong Research J n- 0 GAC Honda monthly salesa 1(units) Jul-10 120000 Jan-11 100000 Jul-11 80000 Jan-12 60000 Jul-12 40000 Jan-13 20000 Jul-13 0 Jan-14 Source: Company,Jul Phillip-09 Securities Hong Kong Research Jul-14 Jan-10 Jan-15 Jul-10 Jul-15 Jan-16 Jan-11 Jul-11 Jul-16 Jan-12 Jan-17 Jul-12 Page | 2 | PHILLIPCAPITAL HONGKONG RESEARCH Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 GAC Mitsubishi monthly sales (units) 12000 10000 8000 6000 4000 2000 0 Dec-12 Source: Company, Phillip Securities Hong Kong Research Mar-13 GAC Fiat- Chrysler monthlyJun sales-13 (units) Sep-13 25000 Dec-13 Mar-14 20000 Jun-14 GAC 15000 Sep-14 Dec-14 10000 Mar-15 UPDATE REPORT Jun-15 5000 Sep-15 Dec-15 0 Mar-16 Source: Company,Sep- 1Phillip2 Securities Hong Kong Research Jun-16 Dec-12 Sep-16 Mar-13 Dec-16 GAC Self-brand monthly salesJ (units)un-13 Mar-17 Sep-13 50000 Dec-13 45000 Mar-14 40000 Jun-14 35000 30000 Sep-14 25000 Dec-14 20000 Mar-15 15000 10000 Jun-15 5 5000 Sep-1 Dec-15 0 Mar-16 Sep-12 Jun-16 Source: Company, Phillip Securities Hong Kong Research Jan-13 Sep-16 Dec-16 May-13 Peer Comparison Mar-17 Ticker Name Sep-13 600104 CH SAIC 9.4 Jan1.6-14 17.4% 000625 SZ Changan 6.6 2.3 26.4% May-14 489 HK Dongfeng 4.6 0.7 14.7% 2238 HK GAC 14.9 1.5 Se15.2%p-14 Source: Wind, Phillip Securities Hong Kong Research Jan-15 May-15 Page | 3 | PHILLIPCAPITAL HONGKONG RESEARCH Sep-15 Jan-16 P/E － 2017E May-16 Sep-16 Jan-17 P/B ROE GAC UPDATE REPORT Financials FYE DEC FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F Valuation Ratios P/E (X), adj. 14.7 57.5 24.0 20.0 16.1 11.6 7.6 6.3 P/B (X) 2.2 2.1 1.9 1.8 1.8 1.7 1.5 1.3 Dividend payout Yield (%) 28.8% 51.1% 38.8% 32.3% 30.6% 32.1% 31.8% 31.9% Dividend Yield (%) 2.0% 0.9% 1.6% 1.6% 1.9% 2.7% 4.1% 5.0% Per share data (RMB) EPS, reported 0.69 0.18 0.41 0.49 0.65 0.98 1.49 1.82 EPS, adj. 0.69 0.18 0.41 0.49 0.65 0.97 1.46 1.79 DPS 0.20 0.09 0.16 0.16 0.20 0.31 0.47 0.57 BVPS 4.75 4.84 5.18 5.50 6.01 6.81 7.79 9.08 Grow th & Margins (%) Grow th Revenue 25.6% 18.0% 45.2% 18.9% 31.5% 68.0% 38.1% 18.4% EBIT -27.5% -70.9% 134.6% 20.0% 39.8% 58.2% 51.0% 22.0% Net Income, adj. -0.5% -73.5% 133.9% 20.1% 32.2% 49.3% 52.7% 22.4% Margins Gross margin 3.9% 5.3% 10.6% 11.4% 11.7% 15.1% 16.9% 16.8% EBIT margin 37.3% 9.2% 14.9% 15.0% 16.0% 15.0% 16.4% 16.9% Net Profit Margin 38.9% 8.7% 14.1% 14.2% 14.3% 12.7% 14.1% 14.5% Key Ratios ROE (%) 15.6% 3.8% 8.2% 9.3% 11.4% 15.2% 20.4% 21.5% ROA (%) 10.3% 2.4% 4.9% 5.3% 6.5% 8.4% 11.0% 11.6% Income Statement (RMB mn) Revenue 10984 12964 18824 22376 29418.2 49417.7 68257 80785 Gross profit 424 690 1994 2547 3444 7456 11522 13564 EBIT 4098 1193 2798 3359 4696 7427 11216 13688 Profit before tax 4057 1000 2629 3053 4386 7050 10760 13175 Tax 110 65 -101 -126 -400 -754 -1139 -1398 Profit for the period 4167 1065 2529 2926 3986 6295 9621 11777 Minority interests -105 -69 -124 -259 -226.02 7.713 21 30 Total capital share 6148 6435 6435 6435 6435 6439 6457 6467 Net profit 4272 1134 2653 3185 4212 6288 9600 11747 Source: PSR (Financial figures as at 1 June 2017) Page | 4 | PHILLIPCAPITAL HONGKONG RESEARCH GAC UPDATE REPORT PHILLIP RESEARCH STOCK SELECTION SYSTEMS Total Return Recommendation Rating Remarks >+20% Buy 1 >20% upside from the current price +5% to +20% Accumulate 2 +5% to +20%upside from the current price -5% to +5% Neutral 3 Trade within ± 5% from the current price -5% to -20% Reduce 4 -5% to -20% downside from the current price <-20% Sell 5 >20%downside from the current price We do not base our recommendations entirely on the above quantitative return bands.