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).