China / Hong Kong Industry Focus China Auto Sector DBS Group Research . Equity 6 February 2015 China / Hong Kong Industry Focus ... (881 HK) 56 Appendix 58. Industry Focus China Auto

www.dbsvickers.com

ed-JS / sa- AH

2015: Vehicle cycle compression Past & present government policies distorting vehicle

demand patterns; moderating growth cycle creates new implications for auto players

Our ranking: auto parts, auto dealerships and automakers

Challenges: over-capacity and sales restrictions impacting automakers

Opportunities: demand growth shifting inland; auto dealers demanding fairer terms from automakers

Picks: auto parts companies with global exposure and luxury auto dealers. Some over-sold automakers are also looking attractive

2015 outlook. The Chinese auto cycle is getting shorter, largely due to government policy. The high-low growth cycle is being compressed to about two years each. 2015 will be the start of moderating growth after two years of decent expansion. The passenger vehicle market is expected to expand by single-digit, compared to 10-15% in past two years. Furthermore, volume sales growth from inland is surpassing the coastal regions. While the impact from the anti-trust and anti-corruption drive start to fade, we do not expect sales of super-luxury cars to recover. On the other hand, the commercial vehicle market is expected to post a small rebound in 2015, as the new national IV fuel standard has commenced in Jan15 and depletion of CV inventory in 4Q.

Our strategy and stock picks. Our investment preference is auto parts companies, auto dealerships and lastly the automakers. We see opportunities in auto parts companies with a global presence, and auto dealerships that cater to changing consumer habits and have better negotiation power following the anti-trust exercise. The stocks that fit our 2015 theme of globalisation and consumerism are Minth, Xinchen (upgrade to Buy), Nexteer (initiate with Buy), ZhengTong and Dah Chong Hong. Over-sold automaker Dongfeng also offer value as it is trading at deep discounts. A-H market trading should result in a greater re-balancing of the auto stock portfolio. Besides, potential profit-taking ahead of the results season would provide attractive share price upside.

Challenges & opportunities. Apart from competition and pricing pressure, we believe there remains risk of over-capacity (hence rising inventory). Plant utilisation rate is probably at sub-80% level. Adding to the challenge is auto restriction, which is forcing automakers to move inland for less policy risk.

HSI: 24,555 ANALYST Rachel MIU +852 2863 8843 [email protected]

Recommendation & valuation

F Y 15Upside PE

HK $ HK $ % x US$m

A ut o manuf ac t urersBrilliance China(1114 HK)

13.98 15.10 8 Hold 10.4 9,063

Dongfeng Motor(489 HK)

11.32 15.70 39 Buy 5.7 12,582

Geely Auto(175 HK)

3.25 3.70 14 Buy 9.1 3,689

Great Wall Motor(2333 HK)

44.25 42.70 (4) Hold 10.5 17,365

Guangzhou Auto(2238 HK)

7.06 8.30 18 Buy 7.9 5,860

BAIC Motor(1958 HK)

8.49 n.a. n.a. NR 8.3 8,327

BYD(1211 HK)

28.30 n.a. n.a. NR 30.5 9,038

CQ Changan 'B'(200625 CH)

19.51 21.80 12 NR 7.2 11,735

SAIC Motor 'A'(600104 CH)

22.50 n.a. n.a. NR 7.7 39,643

A ut o dealers

China ZhengTong(1728 HK)

3.92 5.50 40 Buy 6.4 1,117

Dah Chong Hong(1828 HK)

4.55 5.05 11 Buy 7.2 1,075

ZhongSheng(881 HK)

6.86 8.80 28 Buy 7.1 1,900

A ut o part s & component s

Minth Group(425 HK)

16.10 19.10 19 Buy 11.2 2,279

Nexteer Automotive(1316 HK)

7.25 9.30 28 Buy 11.8 2,336

Xinchen China(1148 HK)

3.00 4.40 47 Buy 8.3 498

Xingda Int'l(1899 HK)^

2.43 n.a. n.a. NR 6.6 475

M k tCap

Company Pric e T argetPric e

Recom

#

# Fair value

Source: Thomson Reuters, DBS Vickers

Based on closing prices as at 3 Feb 2015

DBS Group Research . Equity 6 February 2015

China / Hong Kong Industry Focus

China Auto Sector Refer to important disclosures at the end of this report

Industry Focus

China Auto Sector

Page 2

Table of Contents

Investment summary 3

2015: Industry cycle being shortened 4

Our strategy 7

Top picks 18

2015 policy on fuel efficient and new energy cars 19

Industry risks 21

Peers valuation 23

Stock Profiles 26

Brilliance China (1114 HK) 26

China ZhengTong (1728 HK) 28

Dah Chong Hong (1828 HK) 30

Dongfeng Motor (489 HK) 32

Geely Automobile (175 HK) 34

Great Wall Motor (2333 HK) 36

Guangzhou Automobile (2238 HK) 38

Minth Group (425 HK) 40

Nexteer Automotive (1316 HK) 42

Xinchen China Power (1148 HK) 54

Zhongsheng (881 HK) 56

Appendix 58

Industry Focus

China Auto Sector

Page 3

Investment summary

Government auto policy shortening industry cycle. The Chinese vehicle market is largely driven by government policy. Since 2009, the Chinese auto industry growth cycle has been shortened to about two years each between the high and low points. This year, the policies on auto sales restrictions and fuel efficient cars (including the new energy vehicle subsidy scheme) will set the pace of market development. Although the green car policy will continue to draw attention, the government’s plans to gradually cut the amount of subsidies on new energy vehicle purchases (NEV) from now till 2020 may be a drag on overall NEV volume sales.

More cities may follow Shenzhen’s footsteps to implement auto sales restriction to regulate the growth in the number of cars. Last year, Hangzhou, Tianjin and Shenzhen followed other tier 1 cities to limit growth in autos. Currently, cities with more than 2m vehicles can restrict car sales, including Suzhou, Zhengzhou, Chengdu, and Chongqing. This year, the government has also adopted a more stringent fuel consumption standard, i.e. 6.9L per 100km requirement. The requirement will be further raised to 5.0L per 100 km by 2020. Hence, fuel efficient cars remain an important segment for automakers.

Total vehicle sales growth is expected to moderate this year to 7% to 25.2m units on two grounds; 1) auto sales restrictions in place and 2) high base effect. As such, passenger vehicle sales are projected to reach 21.3m units this year (+8% y-o-y), driven by the SUV and MPV segments. While the impact from the anti-trust investigation and anti-corruption drive start to fade, a strong turnaround in the super-luxury car market is unlikely to take place, as the economy is heading towards a moderate growth environment.

Mass market brand cars are expected to penetrate deeper into the inland regions, as important growth driver for automakers especially with more cities along the coastal markets implementing auto sales restriction policies. Shenzhen’s scheme restricts annual vehicle sales to no more than 100,000 units. More and more developed cities are likely to introduce such a policy to curb pollution and manage vehicle growth.

Strategy for 2015 – focus on auto players with global exposure. The auto sector was a laggard to the market in 2H14, due to news on slowing car sales and inventory build-up risks. Along the auto sector value chain, we prefer the auto parts sector, but stay neutral on auto makers (except to bottom fish stocks that offer value) and buy auto dealerships.

Overweight the auto parts suppliers as this segment has a more international customer base and is less exposed to single market risk, with the US, Europe and China being the three

major market pillars. Also, these companies stand to benefit from the emerging global trend on fuel efficient vehicles as demand for light weight parts and components will rise. The auto parts sector PE valuation is not demanding considering strong earnings outlook and lower risk profile.

Start accumulating auto dealerships, as the sector’s FY15 valuation should have discounted the low profit margin and high inventory concerns. Besides, auto dealerships are teaming together to extract better terms from the automakers, including more attractive financial support and lower sales quotas. The anti-trust drive aims to de-regulate the auto market and should hasten market liberalisation, opening up the after-sales industry in the long-term, especially sourcing of certified spare parts and accessories, and giving the auto dealers better negotiating power with the automakers.

We stay neutral on auto makers because of growing competition as markets along the coastal regions are becoming more saturated (auto sales restrictions would further limit growth potential). The anti-trust investigation has also resulted in consumers delaying their purchases for better bargains. We expect gross margins to be flat for the automakers, despite the low inflation environment because automakers are selling more low priced cars to penetrate into new markets. The automaker sector is trading at 10x FY15 PE, fair in our opinion. However, some automakers are trading at deep discount to sector, such as Dongfeng Motor.

Stock picks. We anticipate some profit-taking ahead of the results season, which is a good opportunity to accumulate. We like Minth and have upgraded Xinchen to BUY for its growing exposure to BMW domestic sales. Nexteer (initiate with Buy rating) is another interesting name benefiting from rising global demand for electric power steering systems, largely on fuel efficient cars development. On the auto dealerships, our picks are China ZhengTong and Dah Chong Hong.

Investment risks. Excess production capacity will put pressure on vehicle prices, leading to margin compression and inventory build-up (which puts pressure on funding cost). On average, new production capacity of over a million units per year was completed in the past few years and the rate of expansion is projected to remain at similar levels in 2015-2017, as these expansion programs were implemented during the boom years. The excess capacity is expected to hover around 20% in the coming few years. Therefore, automakers would have to give out more incentives to ensure the sustainability of the auto dealership industry, as their reliance on the dealerships would become even more crucial for the products to finally reach the end customers.

Industry Focus

China Auto Sector

Page 4

2015: Industry cycle being shortened

2014 wrap up – end of strong expansion. After a strong start in 1H14, vehicle sales growth slowed in 2H, due to the growing concern of the macro health as well as government’s anti-trust investigation into price manipulation. Total vehicle sales grew by 6.8% y-o-y in 2014, with the passenger vehicle (PV) market recording c.10% expansion, compared to a much stronger 15.7% in 2013. Negative news flow such as anti-trust and anti-corruption investigations weighed on car demand, especially the super luxury segment as consumers held back their purchases last year. On the other hand, the SUV remained a strong segment within the passenger vehicle category.

Commercial vehicle (CV) sales contracted by 6.8% y-o-y, due to slower economic expansion and implementation of the national IV fuel standard in 2015 that worked against the CV market.

2015 outlook – start of another cycle compression. The Chinese auto market is highly influenced by government policies. Past and present government policies have distorted the demand growth pattern, compressing the cycle to about two years for the high and low points since 2009. Therefore, even though the Chinese vehicle penetration rate is relatively low (especially for inland regions) and high consumption power should help support car demand, growth is expected to slow.

The shift in auto consumption is becoming more obvious in the inland cities which are generating the bulk of volume sales, while the coastal regions are taking a backstage since policy risk is also higher.

We forecast that total volume sales will grow 7.2% y-o-y to 25.2m units, which is largely in line with our 7% GDP expansion in China this year. Last year, total vehicle population stood at approximately 150m units. In five years’ time, China’s total vehicle annual sales would cross the 30m mark.

For the PV market, we forecast volumes will grow by 8% to 21.3m vehicles, and a slight rebound in the CV market following the implementation of the new national fuel standard and replacement of older commercial vehicles. The CV market is expected to registered growth of 3% y-o-y in 2015 compared to 6.8% contraction last year.

We project the PV market’s growth rate to be 7% - 8% for 2015-2016F, which is slower than the double-digit expansion in 2013-2014.

GDP vs auto sales (2000-2016F)

0 5 10 15 20 25 30 35 40 45 50

0

2

4

6

8

10

12

14

16

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

F20

16F

China real GDP growth (LHS)

China vehicle sales growth (RHS)

YoY, % YoY, %

Source: CEIC, DBS Bank, DBS Research, DBS Vickers

PV market driven by SUV and MPV segments. The pressure on vehicle ASP remains, especially for the high-end car makers. Localisation of models and production of entry models catering to car upgraders will become more common. Certain luxury auto brands such as Infiniti and Land Rover are producing some of their cars locally. As shown in the chart below, the price index for luxury cars fell by >3% last year.

Vehicle price index

50

60

70

80

90

100

110

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Luxury High class

Jan 2004 = 100

Source: CEIC

Industry Focus

China Auto Sector

Page 5

Monthly vehicle sales

'000 units Dec-13 Nov -14 Dec-14 YoY

growth(%)

MoMgrowth

(%)

2013 2014 2015F 2015 YoYgrowth

(%)

As a % oftotal PV

(2014)

China total v ehicle sales 2,134 2,091 2,410 12.9 15.3 21,993 23,489 25,180 7.2

Passenger Vehicles 1,777 1,775 2,061 16.0 16.1 17,928 19,700 21,300 8.1 100%

Sedan 1,176 1,074 1,263 7.4 17.6 12,008 12,374 12,560 1.5 63%

MPV 161 201 214 33.2 6.8 1,290 1,915 2,580 34.7 10%SUV 315 415 492 56.1 18.6 2,989 4,078 5,100 25.0 21%

Cross 125 86 92 (26.7) 7.5 1,641 1,332 1,060 (20.4) 7%

Commercial Vehicles 357 316 349 (2.3) 10.6 4,065 3,789 3,902 3.0Bus 54 50 63 17.3 27.1 477 527

Truck 217 196 220 1.6 12.3 2,738 2,436

Tow Truck 30 26 26 (13.3) 1.2 263 279

Unfinished Bus 7 7 7 (2.7) 4.4 80 77Unfinished Truck 50 38 33 (34.0) (12.6) 507 469

Source: CAAM, CEIC, DBS Vickers

Competition in SUV market intensifies. Following last year’s robust sales momentum, demand for SUVs and MPVs remain strong growth drivers this year. China Association of Automobile Manufacturers (CAAM) projects SUV and MPV sales to expand by 25% and 35% respectively for this year.

On this basis, we expect competition to intensify further in the SUV segment, as almost all automakers are launching various new models to ride on the SUV market trend. Hence, this will pose challenges for SUV market leader Great Wall Motor.

SUV market breakdown by country mix (2014)

Self-owned Brands45%

Japanese Brands19%

German Brands13%

American Brands10%

Korean Brands10%

French Brands

3%

Source: CAAM

The SUV market accounts for about 20%+ of the total PV market, hence its growing importance has been attracting more players in the last few years. This segment is still largely dominated by the Chinese players but the foreign brands are making a bigger impact with their localisation strategy.

Industry Focus

China Auto Sector

Page 6

SUV market breakdown by displacement (2014)

1L-1.6L31%

1.6L-2L48%

2L-2.5L16%

2.5L-3L4%

>3L1%

Source: CAAM

Vehicles with 1L to 2L engine capacities accounted for the bulk of the SUV volume sales last year. This percentage is expected to remain so in the coming few years, as compact SUVs start to roll out from the automakers’ factories.

Potential upswing factors. We have identified two potential upside risk to PV sales – 1) advanced purchases on fears of more auto sales restrictions and 2) robust A-share market creates new wealth effect. We believe part of the reason for strong PV sales in 2013 was due to advanced purchases, after Beijing and Guangzhou introduced measures to curb vehicle sales in 2011/12, which had triggered some panic buying then.

New energy vehicles remain a hot topic but minimal impact on earnings. The growing worries of the green house effects are weighing on central government’s agenda to push for new energy vehicle (NEV) market development. Under the 2016-2020 master plans, the government will continue to provide subsidies on purchase of new energy vehicles. Some local governments are also providing additional financial supports as well as free licence plates to car buyers.

We believe news of the central government’s push for NEV market development will drive interest in NEV companies such as BYD but not necessary having a substantial impact on earnings. In China, only certain approved models are entitled to the subsidies.

New energy vehicle unit sales

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2012 2013 2014

Pure electric Plug in hybrid Total

units

CAGR: 142%

Source: CAAM

Industry Focus

China Auto Sector

Page 7

Our strategy

Globalisation theme in 2015. This year, we recommend rotation into stocks with global exposure - largely the auto parts companies. Some auto stocks are also trading at attractive valuations due to negative sentiment following their weak earnings performance last year. In fact, some of these companies underwent major structural adjustments and transitions to strengthen their product lines and branding,

resulting in underperformance last year. We anticipate some catalysts ahead to re-rate these stocks.

The catalysts to inject a new lease of life into these auto companies include a rich new product pipeline to boost future growth, streamlining sales structure to create a more efficient and effective market network, new market branding for easy identification, and new JVs to create new market demand.

Inflexion points

St rongorder/product

pipeline

Streamlined salesnetwork

New marketbrand

New J V s New st rategicinv estor

Indust rypolicy

Auto partsXinchen xMinth x xNexteer x x

AutomakersDongfeng Motor x xGuangzhou Auto x xBYD xGeely x x x xGreat Wall Motor x

Auto dealersZhongsheng x xDah Chong Hong xZhengTong xYongda xBaoxin x

Source: DBS Vickers

The A-H trading in Shanghai already saw some investment interest skewed towards the A-share auto companies. This is also one of the reasons behind some of the HK-listed auto companies trading at lower PE valuation to the A-share auto companies, as funds exit from the HK counters to the A-share counters. We expect this rotation between counters to be more prominent as more institutional investors participate in the mutual market access trading.

Industry Focus

China Auto Sector

Page 8

Automakers PE comparison (2015)

0

5

10

15

20

25

30

35

Don

gfen

g M

otor

Cho

ngqi

ng

Cha

ngan

^

SAIC

Mot

or

'A'^

Gua

ngzh

ou

Aut

o

BAIC

Mot

or

^

Gee

ly A

uto

Brilli

ance

C

hina

Gre

at W

all

Mot

or

BYD

^

x

^ Consensus


Weightage on value chain

Auto parts Automakers Auto dealers

Recommendation Overweight (OW) Neutral (N) Slightly OW

Risks Margincompression

Over-capacity Margincompression

Sales restriction Inventory

Stock picks Minth Dongfeng Motor ZhengTong

Xinchen Geely Dah ChongHong

Nexteer

Key industrytrend

Light weight autoparts

Fuel efficientcars

Auto financingand autoinsurance

Source: DBS Vickers

Auto parts – riding on strong overseas markets

Overweight auto parts suppliers. For the longer-term, we like the auto parts suppliers, because these companies have a diversified customer and market base. While the US auto market is firm, auto sales in Europe have been recording growth in the past 15 consecutive months. Auto parts companies tend to supply to many customers with production bases spread across major auto markets. Therefore, auto parts suppliers that have exposure to the world’s three largest auto markets in the world (US, Europe & China) should continue to benefit from market growth.

US auto market volume sales

(10)

(5)

0

5

10

15

20

0 200 400 600 800

1,000 1,200 1,400 1,600 1,800

Jan/

13

Mar

/13

May

/13

Jul/1

3

Sep/

13

Nov

/13

Jan/

14

Mar

/14

May

/14

Jul/1

4

Sep/

14

Nov

/14

US auto market volume sales (LHS)YoY growth (RHS)

'000 units %

Source: CEIC

Industry Focus

China Auto Sector

Page 9

Eurozone auto market volume sales

(15)

(10)

(5)

0

5

10

15

0 200 400 600 800

1,000 1,200 1,400 1,600

Jan/

13

Mar

/13

May

/13

Jul/1

3

Sep/

13

Nov

/13

Jan/

14

Mar

/14

May

/14

Jul/1

4

Sep/

14

Nov

/14

Eurozone auto market volume sales (LHS)YoY growth (RHS)

'000 units %

Source: CEIC

China auto market volume sales

(20)

(10)

0

10

20

30

40

50

0

500

1,000

1,500

2,000

2,500

3,000

Jan-

13

Mar

-13

Ma y

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

Ma y

-14

Jul-1

4

Sep-

14

Nov

-14

China auto market volume sales (LHS)

YoY growth (RHS)

'000 units %

Source: CEIC

Minth revenue breakdown by geographical regions (1H14)

PRC64.1%

North America19.6%

Europe9.5%

Asia-Pac6.8%

Source: Company

Nexteer revenue breakdown by geographical regions (1H14)

North America

70%

Europe13%

China13%

Rest of World4%

Source: Company

The companies in the auto parts sector are trading at 7x to 12x FY15F PE. Given their differences in product and customer base, earnings growth outlook also varies at 16-54% for FY15F. Generally, the auto parts companies still have strong GP margins despite constant margin compression pressure, attributable to their ability to implement product upgrade within the value chain.

Industry Focus

China Auto Sector

Page 10

Auto parts supply – 3-month & YTD share price performance

(40)

(30)

(20)

(10)

0

10

20

30

Minth Group

Nexteer Xingda Int'l Xinyi Glass Xinchen China

3-month YTD

%

0%


Source: Thomson Reuters

Auto parts peers valuation (FY15 PE)

0

2

4

6

8

10

12

14

Xin

gda

Int'

l

Xin

chen

Chi

na

Wei

chai

Po

wer

Min

th G

roup

Nex

teer

x

^ Consensus


Auto parts peers valuation (FY15 PEG)

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

Xin

chen

Chi

na

Nex

teer

Wei

chai

Pow

er

Xin

gda

Int'

l

Min

th G

roup

x

^ Consensus


The key catalyst for auto parts players is that automakers are pushing out fuel efficient vehicles globally (especially with the stringent implementation of fuel standards starting this year in China), hence demand for light-weight auto parts is on a growth trend.

Industry Focus

China Auto Sector

Page 11

Auto dealership – ditching the old image

Bargaining power shifting towards auto dealerships; bigger bonuses from automakers. The sustainability of the auto dealership has been challenged in recent years (falling profit margins and rising funding pressure). The recent move by auto dealers to request for more financial support from automakers implies dealership operators are getting bolder in their approach to manage their businesses with greater autonomy.

As such, automakers have relented and are rewarding auto dealers with additional incentives and rebates to help deal with the cut-throat market competition. This also highlights one important point – automakers’ growing reliance on large auto dealerships to reach end customers.

The additional incentives should provide some buffer to auto dealers’ 2H GP margins but probably still slightly below 1H’s level. Going forward, we expect luxury auto dealers’ GP margin to hover between 4-5% from new car sales.

Auto dealership blended GP margins

0

2

4

6

8

10

12

14

China ZhengTong Dah Chong Hong Zhongsheng

2015F 2016F

%


Auto dealership – new car sales gross margins

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

China ZhengTong Dah Chong Hong Zhongsheng

2015F 2016F

%

Source: DBS Vickers

Liberalisation of the auto dealership industry with more government interventions. Since the start of the anti-trust investigation, several changes have taken place. The changes to registration of new dealerships should further liberalise the market. The government has changed the term from a “specified auto brand” dealership for new store registrations to a “general auto dealership” since Oct 2014. This aims to free the auto dealerships from being unfairly controlled by the automakers. However, new store authorisations still have to be granted by the automakers.

Another aspect of the amendment to the rules is that auto dealers have the freedom to source spare parts from certified independent brands suppliers, hence reducing the high reliance on authorised spare parts from automakers and designated suppliers. This should bring down spare parts prices. Our channel checks indicate this is positive in the long run (as it should boost volume growth) and certain price sensitive consumers will opt for the cheaper spare parts, leaving the high end and luxury segment largely intact. Therefore, the margin impact on luxury car dealerships’ after-sales services should be small after the change. But the margin trend will come down in the long run.

The third aspect involves opening up the car import industry via parallel imports. This allows auto distributors and dealers to import expensive cars into China more freely, with the Shanghai Free Trade Zone as the test-bed. This effectively removes the middle-man from the sales channel and reduces

Industry Focus

China Auto Sector

Page 12

selling prices of imported cars. However, parallel imports account for a tiny volume of the current sales profile.

Meaningful change in business model, bigger push into auto related services. The key difference between the Chinese and US auto dealerships is in the provision of auto related services as well as second hand car sales. Hence, the US auto dealerships are generating higher blended gross margins. The Chinese model is lagging behind as the pre-owned market is still at its infancy stage, while auto financing and auto insurance are seeing higher penetration. Some of these auto dealers have secured licensing approvals to provide such services hence we should expect to see a more meaningful transformation in the business model.

Higher contributions from auto insurance and auto financing should enhance earnings potential. As auto insurance and auto financing are tied to new car sales, the ability to create value from these two businesses are the top priority of many auto dealers. Based on market research, the auto services market (including sales of spare parts, repairs & maintenance, second hand car sales, car retrofit services, leasing, car insurance and car financing) was valued at Rmb600bn last year, representing growth of 30%. Going forward, the market is estimated to be worth over Rmb1tr by 2018.

Auto dealership new car gross margins comparison (China vs US)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2012 2013 1H14*

US China

%

* 11M14 for US

Source: Companies, NADA, Companies

Auto dealership blended gross margins comparison (China vs US)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2012 2013 1H14*

US China

%

* 11M14 for US

Source: Companies, NADA, Companies

Auto related services market size

0

200

400

600

800

1,000

1,200

2013 2014 2018F

RMB bn

CAGR: 16.8%

Source: Website

Industry Focus

China Auto Sector

Page 13

Auto dealership laggards within the auto value chain; recommend to bottom fish. The auto dealership sector had a weak performance in the past three months, as the market awaits FY14 results to assess GP margin performance.

Auto dealership – 3-month & YTD share price performance

(45)(35)(25)(15)(5)5

15 25 35

Chi

na H

arm

ony

Chi

na M

eido

ng

Dah

Cho

ng H

ong

Chi

na Z

heng

Tong

Zhon

gShe

ng

Baox

in

Chi

na Y

ongd

a

3-mth YTD

%



We suggest bargain hunting auto dealers that have clear strategies to enhance income from auto-related services and those with strong auto brands. Overall, the sector valuation is attractive, which should have factored in business operating pressure. Plus, FY15 earnings growth is estimated at 28%, strong in our opinion. Ultimately, we believe the government’s action should help the auto dealers in the mid-long-term as it should give auto dealers larger autonomy in their business operations.

Auto dealership – FY15 PE

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Chi

na

Yon

gda^

Chi

na

Mei

dong

Baox

in A

uto

Gro

up^

Chi

na

Zhen

gTon

g

Zhon

gShe

ng

Chi

na

Har

mon

y

Dah

Cho

ng

Hon

g

x

^ Consensus


Auto dealership – FY15 PEG

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45

Chi

na

Mei

dong

Chi

na

Har

mon

y

Baox

in A

uto

Gro

up^

Chi

na

Yon

gda^

Zhon

gShe

ng

Dah

Cho

ng

Hon

g

Chi

na

Zhen

gTon

g

x

^ Consensus


Limited impact from currency depreciation. The recent weakness of the Euro against the USD is expected to have limited impact on auto dealership. In recent years, Chinese consumers’ appetite for imported expensive cars was high. We believe it has to do with the strength of the RMB previously. However, the recent depreciation in currencies (Euro and RMB)

Industry Focus

China Auto Sector

Page 14

against the USD may not translate to significant price savings for the auto dealerships, as most of the cost savings would have accreted to the importing arms of the foreign automakers. Besides, the volume of imported models is small compared to the localised car models.

Car imports into China from Eurozone*

0

500

1,000

1,500

2,000

2,500

Jan/

08Ju

n/08

Nov

/08

Apr

/09

Sep/

09Fe

b/10

Jul/1

0D

ec/1

0M

a y/1

1O

ct/1

1M

ar/1

2A

ug/1

2Ja

n/13

Jun/

13N

ov/1

3A

pr/1

4Se

p/14

US$m

* Include Germany, France & Italy

Source: CEIC

Industry consolidation inevitable; buy-out is happening. During the global financial crisis, smaller auto dealerships in the US exited from the industry, while the Chinese government’s stimulus policy extended the life-span of the smaller players then.

Now, the operating environment is more challenging for small Chinese dealership operators. Although industry consolidation is slow in China, the larger dealership groups have better chances to ride out this period.

Recently, we also saw acquisitions of auto dealership groups taking place in the US by investment fund houses, the most matured auto market in the world. Since China is the largest auto market in the world, its auto dealership sector will continue to transform and improve over time. Besides, there is upside potential from M&A.

In the US, we saw the Berkshire Group acquiring a large auto dealership group last year and Soros Fund Management is also looking into buying auto dealerships. In Asia, the Jardine Group bought into Zhongsheng in early 2014.

Automakers – be selective

Stays neutral on OEMs. The anti-trust drive is already starting to have an impact, with automakers cutting auto parts prices to avoid unnecessary scrutiny from the watchdog. The anti-trust and anti-corruption exercises have also sidelined some car buying decisions, as consumers wait for better priced bargains before re-entering the market. Besides, automakers are also moving into the lower end of the vehicle price range, as they penetrate deeper into the inland regions where consumers tend to be more price sensitive compared to car buyers in the coastal regions. Also, premium auto brands are expected to see greater competition, as this group of automakers are each trying to secure market share with high sales targets and cheaper car models.

Retail sales breakdown (2014)

Food, Beverage, Tobacco &

Liquor14%

Clothing, Shoes, Hats

& Textile11%

Household Electric &

Video Appliance

6%

Petroleum & Related Product

13%Automobile

28%Gold, Silver and Jewelry

2%

Chinese & Western Medicine

5%

Others21%

Source: CEIC

The share price performance of automakers went through a roller-coastal ride. The worst performing counter last year - Geely – made a turnaround early this year to become the best performing stock within the automaker space.

Industry Focus

China Auto Sector

Page 15

Automakers – 3-month & YTD share price performance

(50)(40)(30)(20)(10)

0 10 20 30 40

Gre

at W

all M

otor

Cho

ngqi

ng

Cha

ngan

Brilli

ance

Chi

na

Gua

ngzh

ou A

uto

Don

gfen

g M

otor

Gee

ly A

uto

BYD

BAIC

Mot

or

3-month YTD

%

n.a.



The Chinese automakers’ valuation is currently at 9-31x FY15F PE while the Sino-foreign automakers are priced at 6-11x PE. The valuation disparity among the different automakers is a reflection of their earnings ability and market focus.

The market has assigned a higher valuation for automakers that have competitive advantages in certain high growth segments, like the SUV market. However, we keep our view that competition will also intensify as more players rush in for a slice of this market, hence we advise investors to switch out of the SUV space into other laggard names.

Automakers - FY15 PE ranking

0

5

10

15

20

25

30

35

Don

gfen

g M

otor

Cho

ngqi

ng

Cha

ngan

^

SAIC

Mot

or

'A'^

Gua

ngzh

ou

Aut

o

BAIC

Mot

or

^

Gee

ly A

uto

Brilli

ance

C

hina

Gre

at W

all

Mot

or

BYD

^

x

^ Consensus


Automakers - FY15 PB ranking

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Don

gfen

g M

otor

Gua

ngzh

ou A

uto

Gee

ly A

uto

BAIC

Mot

or^

SAIC

Mot

or 'A

'^

BYD

^

Cho

ngqi

ng

Cha

ngan

^

Brilli

ance

Chi

na

Gre

at W

all M

otor

x

^ Consensus


Industry Focus

China Auto Sector

Page 16

Automakers - FY15 PEG ranking

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Gee

ly A

uto

BAIC

Mot

or

Cho

ngqi

ng

Cha

ngan

^

Gua

ngzh

ou A

uto

BYD

^

Don

gfen

g M

otor

Gre

at W

all M

otor

SAIC

Mot

or 'A

'^

Brilli

ance

Chi

na

x

^ Consensus


Chinese automakers’ valuation recovered on earnings improvement. Great Wall Motor’s share price has recovered to almost to its pre-crisis level in recent months on high expectations of its Havel H8 high-end SUV launch in 1Q15. At this level, share price should have largely priced in this piece of news. In our opinion, Great Wall Motor has to expand its SUV mix in order to preserve its leading position. Judging from Great Wall Motor’s FY14 preliminary financial data, the upward migration is important to expand ASP and profit margins.

On the other hand, Geely’s share price has recovered from the negative foreign currency impact. A good re-rating factor for Geely is the new range of vehicles in the pipeline that the company is developing with Volvo. After a major correction last year, Geely has posted the best share price performance YTD. The main issue with Chinese automakers is lack of capability on product quality upgrades due to low level of R&D. Geely’s collaboration with Volvo would have a long-term positive impact compared to other Chinese automakers.

BYD, the darling among auto names in the NEV segment, saw its shares being sold down sharply and remains in negative territory YTD. The NEV policy is not helping the company’s share price much especially after news that the amount of subsidy will be scaled back gradually from last year to before the subsidy scheme expires in 2020.

Hence, we conclude that product range expansion, product upgrades and the ability to carry out major R&D on new technology by Chinese automakers are crucial factors on determining the winners.

R&D Expenditure – Automobile

50,000

52,000

54,000

56,000

58,000

60,000

62,000

64,000

66,000

68,000

70,000

2012 2013

RMB m

19.2%

Source: CEIC

Sino-foreign names neglected; premium auto brand valuation gap narrowing. For the Sino-foreign auto companies, Dongfeng Motor is among the cheapest as market is concerned of its growth prospects (especially given the slow performance of its Japanese JVs last year). Market perceives that Dongfeng Motor has lost its direction. In fact, in the past 1-2 years, Dongfeng’s management has carried out various projects to expand its business base, especially after its direct investment into PSA Peugeot Citroen. The company has also successfully sealed a joint venture agreement with Volvo Commercial Vehicles. Therefore the group’s underlying structure has undergone some major changes to strengthen its future earnings prospects. Compared with other SOE auto groups, Dongfeng has been actively planning for its next growth path with several new projects on the plate.

With the listing of Beijing Motor (1958), a close peer to Brilliance China, we do not expect luxury brand automakers to trade at huge premium valuation over sector peers. Both are close competitors in the German premium brand segment, which explains Brilliance’s recent volatile share price performance.

Industry Focus

China Auto Sector

Page 17

Low production cost inflation favourable for automakers. Low crude oil prices and raw material cost inflation are helping automakers to maintain a reasonable level of profit margin. The low production cost is helping to support a larger budget

on marketing and financial incentives for auto dealers. While the low production cost factor is positive, the opposing force is automakers’ product mix changes toward the lower price cars, which would drag profit margin expansion a little.

Gross margins comparison (FY15F)

0 5

10 15 20 25 30

Suzu

ki M

otor

#

Gre

at W

all M

otor

'H'*

Hon

da M

otor

#

BMW

Dai

mle

r

Sino

truk

(Hon

gkon

g)

Toyo

ta M

otor

#

Hyu

ndai

Mot

or

BYD

'H'

Gee

ly A

utom

obile

*

Kia

Mot

ors

Niss

an M

otor

#

CQ

Cha

ngan

'A'

Don

gfen

g M

otor

'H'*

Fiat

Chr

ysle

r Aut

o

Gen

eral

Mot

ors

GZ

Aut

o 'H

'*

Brilli

ance

Chi

na*

Ford

Mot

or

SAIC

Mot

or 'A

'

%

# FY16

Source: Thomson Reuters, *DBS Vickers

China Domestic Cold Rolled Steel Sheet Sport Average Price

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15

RMB/ton

Source: Bloomberg Finance L.P.

Crude Oil Dated Brent

0

20

40

60

80

100

120

140

160

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

US$/BBL


Industry Focus

China Auto Sector

Page 18

Top picks

Along the value chain, we have several stock picks from the auto parts and auto dealership industries. Within the automakers, we have selected companies with good turnaround themes.

Minth (BUY; TP HK$19.10). The European and American auto brand segments are expected to achieve a high growth rate this year, as they localize model productions in the coming months. On the export front, the European auto market recovery is expected to stay on track while the US auto market is standing on firm ground. Overall, we estimate double-digit expansion in volume shipments this year. We have fined-tuned our product margin assumptions slightly for FY14-16. Our 16% earnings CAGR estimate (FY14 to FY16) is decent compared to its track record of 18% in the past 7 years. We estimate approximately Rmb3bn new orders were secured last year. Strong visibility and a solid balance sheet (with net cash >Rmb2bn) should support its growth and valuation upside.

Nexteer (Initiate with BUY; TP HK$9.30). The company’s core technology edge is in electronic power steering (EPS), which increases fuel efficiency compared to the hydraulic power steering (HPS). Nexteer is in the most exciting growth phase, benefitting from the global trend in fuel-efficient car development. Besides, the entry barrier is relatively high for new players. The company has significant market shares in the US for its EPS products. Based on growth prospects, we estimate >20% earnings CAGR (FY14-16), a strong support to valuation. Nexteer is one of the strongest steering players in the world.

Xinchen (Upgrade to BUY; TP HK$4.40). The strategy to transform itself into an engine parts supplier is unchanged, as the company recently acquired the crankshaft production line from BMW JV for Rmb391.4m and will invest another Rmb791m to upgrade the facility to prepare for the new Bx8 engine production. All in, Xinchen currently assembles the N20 engine as well as supply engine connection rods and crankshaft to the BMW JV. Valuation is attractive after the recent sharp correction and we believe it has not factored in the BMW story. We see potential share price appreciation in view of the improving business prospect and growth.

China ZhengTong (BUY; TP HK$5.50). Higher incentive payouts would help ZhengTong to achieve GP margins of 4.7% for luxury new cars in 2H (1H14: 5.7%). Volume sales are picking up, hence digesting some inventory on hand, bringing the level down to about 1.5 months. The auto finance business has

commenced and company is looking for asset loans of Rmb1-2bn in the initial period. The integrated sales centre in Shenzhen will allow the company to tap the after sales services market especially after the implementation of auto sales restriction.

Dah Chong Hong (BUY; TP HK$5.05). Consumers are set to return post the anti-trust investigation, as vehicle prices have corrected during the 4Q. The higher rebates from automakers last year should mitigate the auto pricing pressure in China. In HK, retail sentiment was affected by the Occupy Central protests. In Nov 14, private car registrations fell by 15% y-o-y, due to the protect impact. We expect HK car sales to recover going forward. Besides, the weaker yen and commercial vehicle replacement program are positive for the HK auto business. The divestment of non-core assets would help to unlock hidden values. DCH may eventually divest its electronic factory site (200,000sm) in Guangdong at an appropriate time. In 2H14, the sale of a property in Canada should result in gains of about HK$80m. Maintain Buy on potential from unlocking of hidden value.

Dongfeng Motor (BUY; TP HK$15.70). The localization of Infiniti (Nissan’s premium marque) and the commercial vehicle JV with Volvo are expected to contribute to top line. Its direct investment in PSA Peugeot Citroen (PSA) should be positive as the European auto market is warming up and PSA China operation continues to trend up. The new projects are expected to enhance its earnings fundamentals but are not reflected in its valuation. Market has mis-priced Dongfeng previously on concerns of slowing earnings growth momentum. The Euro weakness is an earnings risk on its direct investment in PSA.

Geely (BUY; TP HK$3.70). The company’s domestic sales should see a pick-up this year, at low-double digit expansion after last year’s 16% decline. Geely is lining up four new products (sedan, EV and two SUVs) and another two models for 2015/16 release. It will also include four vehicle facelifts. The recent price correction should have priced in last year’s negatives. Current valuation is undemanding as Geely is one of the few Chinese automakers to invest on technology, particularly its tie-up with Volvo on future vehicle development. We believe the new vehicle platforms will give the company more flexibility and enable it to be more cost efficient.

Industry Focus

China Auto Sector

Page 19

2015 policy on fuel efficient and new energy cars

Implementation of national IV fuel standard. Starting 2015, diesel vehicles would have to comply with the China IV standard. By end 2017, China plans to roll out the national V standard nationwide for both gasoline and diesel vehicles, in an effort to reduce the greenhouse effect.

The Beijing government is expected to give an additional Rmb2,000 subsidy to encourage scrapping of old vehicles of age six years and above. This brings total subsidies to Rmb8,000 per scrapped car. Beijing had about 5.2m vehicles on the road last year and since the implementation of auto sales restriction some three years ago, the Beijing has capped the total number of new car plates to 150,000 per year.

Fuel efficient cars. This year, auto makers will have to comply with the average 6.9L/100km fuel limit and by end 2020, this will further reduce to 5L/100km. The new fuel policy means automakers have to produce light weight compact cars and new energy vehicles in the future.

New fuel consumption policy

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

2015 2016 2017 2018 2019 2020

L/100km

Source: NDRC

Amount of new energy vehicle subsidies to be scaled down. According to the latest announcement by the State Council, the new energy vehicle subsidy scheme will be extended from 2016 to 2020. However, the level of subsidies on pure electric vehicles and plug-in hybrid vehicles will be reduced by 10% in 2017 based on 2016 subsidy levels. Another 10% downward adjustment in subsidies will take place in 2019 based on 2017 subsidy levels. Earlier, the government revised down the

amount of subsidies in 2014 and 2015 by 5% and 10% respectively based on 2013 subsidies (pure EV of Rmb60,000 and plug-in hybrid of Rmb35,000).

New energy vehicle subsidy scheme (2016-2020)

RMB 2016 2017 2019

Pure electric PV 32,000-55,000

28,800-49,500

25,920-44,550

Plug-in PV 32,000 28,800 25,920

Pure electric bus 220,000-300,000

198,000-270,000

178,200-243,000

Plug-in bus 170,000-230,000

153,000-207,000

137,700-196,300

Source: State Council

Exemption from purchase tax for NEV. The government also waived the 10% purchase tax on NEV since July 2014 to further encourage more NEV car buyers.

NEV market sales

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2012 2013 2014

Pure electric Plug in hybrid Total

units

CAGR: 142%

Source: CAAM

Hence using BYD’s Qin and E6 model as examples, end consumers are effectively paying around the same price as a traditional car after deducting the subsidies and purchase tax savings. However, demand for NEV is low because of the teething power charging network issue. A strong commitment by the government to resolve the charging stations is a driver on volume growth.

Industry Focus

China Auto Sector

Page 20

NEV cost savings impact

Qin(plug- in hy brid)

E6(pure electric PV )

ASP (Rmb) 189,800-209,800 309,800-369,800

Central governmentsubsidy (Rmb)

31,500 54,000

Local government (Rmb) 31,500 54,000

Savings on purchase tax(Rmb)

18,980-20,980 30,980-36,980

Net of subsidy & taxsavings (Rmb)

107,820-125,820 170,820-224,820

Source: Company; DBS Vickers

Industry Focus

China Auto Sector

Page 21

Industry risks

Possible sub-80% utilisation rate as new capacity starts operations. During the boom years, automakers started planning for capacity expansion. From 2010 to 2012, total new capacity launched amounted to 3.45m units. We estimate around 1.5-2 million units of new capacity will commence operations in 2015. In fact, the excess capacity risk is already being felt as automakers kept production output high, resulting in rising inventory levels in 2H14.

New production capacity trend

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

'000 units/year

Source: China Statistical Yearbook

The less efficient automakers could be facing sub-80% utilisation rates in coming years. The excess capacity is about 2.8m units this year, based on our estimates.

Total new production capacity vs total sales

0

5,000

10,000

15,000

20,000

25,000

30,000

2009 2010 2011 2012 2013 2015F

New production capacity Sales

'000 units

Source: Website, CEIC, DBS Vickers

The amount of new capital invested by motor vehicle manufacturers has been rising since early 2000. Almost all international auto companies have identified China as the next “big” market and have been pouring new investments into the auto manufacturing sector. This means market competition will intensify further and pace of market consolidation may increase.

Investment by motor vehicle manufacturers in China

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

RMB m

Source: CEIC

Industry Focus

China Auto Sector

Page 22

Rising inventory risk puts pressure on funding costs. High inventory is a potential risk on the auto value chain. As shown in the chart below, the vehicle inventory alert index rose from 50.5% in Jan 2014 to 56.3% in Dec 14, implying that the risk still remains.

Vehicle inventory alert index (%)

0

10

20

30

40

50

60

70

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep-

13O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4Se

p-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

%

Source: CADA

Auto sales restriction policy in more cities. The Shenzhen government followed the other cities in limiting car sales. Under the scheme, the city government will issue up to 100,000 pieces of car plate licences per year. Among which, 60% of the total licence plates will be issued on lottery and the balance 40% on auction.

The auto restriction would lead to negative sentiment, which is also part of the reasons contributing to our moderate growth assumption for 2015. The Chinese Association of Automobile Manufacturers (CAAM) has indicated several other cities that may introduce sales restrictions, including Chengdu, Chongqing, Qingdao, Wuhan, Dalian, Jiangzu etc.

The impact on luxury auto brand dealerships is limited because the restriction will result in more upgrades to expensive cars.

Industry Focus

China Auto Sector

Page 23

Peers valuation

Peers’ valuations – Auto parts

EV / Earn ings Earn ings

M k t PE PE P/Bk EB IT DA RO E G row t h CA G RCurrency Pric e Cap 15F 16F 15F 15F 15F 15F 16F F Y 14- 16

Company Name Code L oc al$ US$m x x x x % % % %HK list edXiny i Glass Holdings 868 HK HKD 4.15 2,099 9.1 7.3 1.1 6.7 16.8 54.4 10.6 30.7Minth Group* 425 HK HKD 16.1 2,279 11.2 9.6 1.6 7.2 14.8 16.0 16.4 16.2Xingda Intl.Holdings 1899 HK HKD 2.43 475 6.6 5.9 n.a. n.a. 8.2 16.3 12.3 14.3Changfeng Axle (China) 1039 HK HKD 0.58 60 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.China Metal Intl.Hdg. 319 HK HKD 2.43 315 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Shougang Ccrd.Cen.Hdg. 103 HK HKD 0.265 66 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Launch Tech 'H' 2488 HK HKD 13.7 533 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Perennial Intl. 725 HK HKD 1.27 33 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Huazhong In-V ehicle Hdg. 6830 HK HKD 1.69 174 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Weichai Power 'H' 2338 HK HKD 31.15 8,033 10.8 9.5 1.3 5.2 13.1 (5.6) 14.8 4.1China V eh.Compns.Tech. 1269 HK HKD 2.16 107 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Wuling Motors Holdings 305 HK HKD 0.55 108 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Xinchen China Power Hdg.* 1148 HK HKD 3.00 498 8.3 5.9 1.1 4.8 13.9 43.4 42.1 42.8Nexteer Automotiv e Group* 1316 HK HKD 7.25 2,336 11.8 9.6 2.7 7.0 25.3 29.5 22.4 25.9Changan Minsheng 1292 HK HKD 7.84 164 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.A v erage 9 .6 8 .0 1 .6 6 .2 15 .4 25 .7 19 .8 22 .3

PRC list edZongshen Pwr. Machinery 001696 CH CNY 10.08 1,844 26.7 23.4 3.3 n.a. 13.0 10.9 8.8 9.8Shanghai Aerospace Auto 600151 CH CNY 10.43 2,084 21.6 15.5 2.7 9.1 13.7 75.7 39.8 56.7Av ic Aero-Engine Cntls. 000738 CH CNY 19.18 3,511 54.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a.Sic.Chengfei Intg.Tech. 002190 CH CNY 36.9 2,035 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Ningbo Huaxiang Elt. 002048 CH CNY 14.55 1,232 9.8 7.7 1.7 n.a. 16.8 29.9 24.1 27.0F engfan Stock 600482 CH CNY 14 1,200 30.4 n.a. n.a. n.a. 10.1 14.7 n.a. n.a.J ialeng Songzhi Auto 002454 CH CNY 16.57 1,074 20.5 17.4 2.6 n.a. 13.2 23.6 23.0 23.3F angda Special Stl.Tech. 600507 CH CNY 5.48 1,161 10.3 9.4 1.9 n.a. 18.3 14.5 11.3 12.9Harbin Dongan Auto Enn. 600178 CH CNY 6.89 509 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.F away Auto Compns. 600742 CH CNY 31.58 1,067 10.7 n.a. 1.7 n.a. n.a. 19.2 n.a. n.a.Shanghai J iao Yun Group 600676 CH CNY 10.57 1,457 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Guihang Auto Components 600523 CH CNY 17.14 791 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Zhejiang Wanliy ang Tnsm. 002434 CH CNY 17.77 965 22.8 n.a. 2.5 n.a. 10.8 27.1 n.a. n.a.Xuchang Ynd.Driv e Shaft 002406 CH CNY 11.06 496 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Weifu High Tech.Gp. 200581 CH HKD 28.31 3,725 10.8 8.8 1.8 9.6 18.0 29.1 23.4 26.2China Erzhong Group 601268 CH CNY 2.35 861 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.J iangnan Mould & Plastic 000700 CH CNY 13.9 686 15.5 13.3 2.1 n.a. 13.3 18.0 17.1 17.5Shenyang J inbei Autv . 600609 CH CNY 3.88 677 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Anhui Quanchai Engine 600218 CH CNY 12.78 579 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Kunming Yunnei Pwr. 000903 CH CNY 7.15 913 21.7 12.2 1.6 n.a. 6.7 48.5 68.5 58.2Lingy un Industrial 'A' 600480 CH CNY 13.84 800 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Beijing Wkw Autv .Pas.'A' 002662 CH CNY 13.86 1,661 17.1 13.5 2.3 n.a. 13.5 43.4 22.8 32.7Changchai 200570 CH HKD 4.99 361 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Av ic Aero-Engine Cntls. 000738 CH CNY 19.18 3,511 54.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a.China Autv .Sy s. CAAS US USD 6.3 202 5.4 n.a. n.a. n.a. n.a. 13.0 n.a. n.a.Sorl Auto Parts SORL US USD 3.27 63 5.1 n.a. n.a. n.a. n.a. 2.3 n.a. n.a.China Yuchai Intl. CYD US USD 19.1 730 8.1 n.a. n.a. n.a. 9.4 (21.2) n.a. n.a.A v erage 20 .3 13 .5 2 .2 9 .4 13 .1 23 .2 26 .5 29 .4


Industry Focus

China Auto Sector

Page 24

Peers’ valuations – Auto makers

M k t PE PE Y ield Y ield P/Bk P/Bk EV /EB IT DA RO E RO ECurrency Pric e Cap F isc al 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F

Company Name Code Loc al$ US$m Y r x x % % x x x x % %Hong K ongGZ Auto 'H'* 2238 HK HKD 7.06 5,860 Dec 7.9 6.9 3.8 4.4 0.9 0.8 5.4 4.7 12.3 12.9Sinotruk (Hongkong) 3808 HK HKD 4.25 1,514 Dec 14.3 12.0 2.0 2.3 0.5 0.5 5.7 5.2 3.1 3.7Dongfeng Motor 'H'* 489 HK HKD 11.32 12,582 Dec 5.7 5.0 2.0 2.0 0.9 0.8 3.6 2.8 17.4 17.1Brilliance China* 1114 HK HKD 13.98 9,063 Dec 10.4 9.5 1.1 1.1 2.4 1.9 9.7 9.0 26.4 22.7Great Wall Motor 'H'* 2333 HK HKD 44.25 17,365 Dec 10.5 8.9 3.3 3.9 2.6 2.2 7.4 6.2 27.6 26.6BYD 'H' 1211 HK HKD 28.3 9,038 Dec 30.5 22.0 0.2 0.3 2.0 1.8 11.2 9.7 6.6 8.2Qingling Motors 'H' 1122 HK HKD 2.67 855 Dec 10.3 9.6 7.6 8.5 0.7 0.7 2.7 2.4 6.1 6.2Geely Automobile* 175 HK HKD 3.25 3,689 Dec 9.1 8.0 1.6 1.9 1.2 1.1 4.6 4.7 13.9 14.0BAIC Motor 'H' 1958 HK HKD 8.49 8,327 Dec 8.3 6.6 3.9 5.0 1.3 1.1 8.6 5.7 16.5 18.0A v erage 9 .6~ 8.3~ 2 .8 3.3 1 .4 1.2 6 .5 5 .6 14.4 14 .4

ChinaSAIC Motor 'A' 600104 CH CNY 22.5 39,643 Dec 7.7 6.9 6.0 7.0 1.4 1.2 4.4 4.2 18.7 18.6F aw Car 'A' 000800 CH CNY 17.01 4,424 Dec 16.8 15.6 0.3 0.6 2.6 2.2 5.3 4.7 13.1 13.9CQ Changan 'A' 000625 CH CNY 20.44 15,230 Dec 9.0 7.3 1.7 2.2 2.7 2.0 6.4 8.7 31.8 29.3CQ Changan 'B' 200625 CH HKD 19.51 11,735 Dec 7.2 5.9 2.3 3.0 2.2 1.6 30.5 20.2 33.6 31.4Beiqi F oton Motor 'A' 600166 CH CNY 6.11 2,743 Dec 12.4 11.1 2.5 n.a. 1.0 1.0 n.a. n.a. 6.0 8.6Tianjin F aw Xiali 'A ' 000927 CH CNY 6.71 1,710 Dec 149.1 35.3 0.1 n.a. 3.2 n.a. n.a. n.a. n.a. n.a.Dong F eng Auto 'A' 600006 CH CNY 5.84 1,866 Dec 58.4 38.9 0.3 n.a. 1.9 n.a. n.a. n.a. n.a. n.a.Anhui J ianghuai 'A' 600418 CH CNY 12.92 2,653 Dec 12.9 10.4 2.3 2.5 2.0 1.7 3.5 2.8 15.2 17.3Yutong Bus 'A' 600066 CH CNY 25.4 5,996 Dec 12.3 10.2 3.1 3.7 2.6 2.2 10.0 8.3 22.4 22.2Haima Automobile 'A' 000572 CH CNY 5.37 1,411 Dec 24.4 n.a. 1.3 n.a. 1.2 n.a. n.a. n.a. n.a. n.a.Great Wall Motor 'A' 601633 CH CNY 47.03 22,865 Dec 11.8 9.6 2.5 3.1 3.3 2.6 6.3 5.1 29.5 29.0GZ Auto. 'A' 601238 CH CNY 8.29 8,525 Dec 10.7 8.3 2.7 3.3 1.4 1.2 39.7 42.9 12.7 13.9BYD 'A' 002594 CH CNY 38.73 15,324 Dec 43.9 31.1 0.3 0.4 3.5 3.2 14.9 11.9 8.1 9.8A v erage 29 .0 15.9 2 .0 2.9 2 .2 1.9 13 .4 12 .1 19.1 19 .4

USF ord Motor F US USD 15.65 59,123 Dec 9.8 8.3 3.6 3.9 1.9 1.7 4.2 3.6 24.1 22.0General Motors GM US USD 33.98 54,596 Dec 7.7 7.3 3.8 3.5 1.2 1.0 3.3 3.1 17.3 15.8A v erage 8 .8 7.8 3 .7 3.7 1 .5 1.3 3 .7 3 .4 20.7 18 .9

K oreaKia Motors 000270 KS KRW 45,400 16,739 Dec 5.4 5.0 2.2 2.5 0.7 0.6 3.6 3.3 13.9 13.4Hy undai Motor 005380 KS KRW 166,000 43,103 Dec 5.2 5.0 1.5 1.8 0.7 0.6 5.8 5.7 13.0 12.3A v erage 5 .3 5.0 1 .9 2.1 0 .7 0.6 4 .7 4 .5 13.5 12 .9

J apanToy ota Motor# 7203 J P J PY 7550 219,475 Mar 9.8 8.9 2.9 3.4 1.4 1.2 4.5 4.1 14.6 14.4Honda Motor# 7267 J P J PY 3593.5 55,361 Mar 9.4 8.4 2.9 3.3 0.9 0.9 4.4 4.0 10.2 10.8Nissan Motor# 7201 J P J PY 1010 38,832 Mar 8.1 7.2 3.9 4.4 0.8 0.8 4.2 4.0 10.6 11.1Suzuki Motor# 7269 J P J PY 3620.5 17,276 Mar 14.7 13.4 0.8 1.0 1.3 1.2 4.5 4.1 9.4 9.6Mitsubishi# 8306 J P J PY 622 74,953 Mar 8.3 7.8 3.1 3.3 0.6 0.6 n.a. n.a. 7.7 7.7A v erage 10 .1 9.1 2 .7 3.1 1 .0 0.9 4 .4 4 .1 10.5 10 .7

EuropeBMW BMW GR EUR 106.91 79,590 Dec 11.2 10.7 3.2 3.3 1.6 1.5 3.9 3.7 15.0 15.6V olkswagen (Swx) V OW GR CHF 219.1 112,320 Dec 8.7 7.7 2.8 3.1 1.1 1.0 2.8 2.5 13.0 13.4Saab 'B' SAABB SS SEK 203.3 2,694 Dec 15.8 13.6 2.6 3.1 1.6 1.5 7.8 7.3 10.7 11.8Peugeot UG FP EUR 13.08 11,668 Dec 13.7 10.7 0.0 0.6 0.9 0.9 2.5 2.2 7.3 8.8Porsche Aml.Hldg.Pref. PAH3 GR EUR 77.3 26,846 Dec 6.9 6.0 3.2 3.5 0.6 0.6 n.a. n.a. 10.9 10.0Daimler DAI GR EUR 82.198 99,726 Dec 11.8 10.8 3.3 3.6 1.7 1.6 4.5 4.1 15.1 15.0F iat Chry sler Auto F CA IM EUR 12.05 17,559 Dec 12.9 8.4 0.1 0.3 1.3 1.2 2.8 2.4 9.9 13.4A v erage 11 .6 9.7 2 .2 2.5 1 .3 1.2 4 .0 3 .7 11.7 12 .6

IndonesiaAstra International ASII IJ IDR 7,625 24,362 Dec 14.3 13.0 3.1 3.4 2.9 2.5 10.9 10.0 20.6 20.4

# FY15: FY16; FY16: FY17 ~ Exclude BYD Source: Thomson Reuters, *DBS Vickers

Industry Focus

China Auto Sector

Page 25

Peers’ valuations – Auto dealers

M k t PE PE Y ield Y ield P/Bk P/Bk EV /EBIT DA ROE ROE

Currency Price Cap F iscal 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F

Company Name Code Local$ US$m Y r x x % % x x x x % %

Hong K ong

Dah Chong Hong* 1828 HK HKD 4.55 1,075 Dec 7.2 6.4 4.2 4.7 0.8 0.7 6.3 5.5 11.6 12.0

ZhongSheng* 881 HK HKD 6.86 1,900 Dec 7.1 5.8 2.1 2.6 0.9 0.8 6.2 5.3 13.8 14.7

China ZhengTong* 1728 HK HKD 3.92 1,117 Dec 6.4 5.4 3.1 3.7 0.7 0.7 4.4 3.5 12.3 12.9

Baoxin Auto Group 1293 HK HKD 4.54 1,498 Dec 6.4 5.1 4.0 5.3 1.3 1.1 5.8 4.9 24.1 23.9

China Yongda 3669 HK HKD 4.5 859 Dec 5.7 4.6 5.8 5.2 1.1 0.9 4.5 3.7 20.5 21.2

China Meidong Auto 1268 HK HKD 1.8 232 Dec 5.9 4.8 4.6 5.6 1.2 0.9 n.a. n.a. 34.3 31.8

China Harmony Auto 3836 HK HKD 5.51 842 Dec 7.1 5.5 2.0 2.2 1.5 n.a. n.a. n.a. 22.4 n.a.

Sparkle Roll Group 970 HK HKD 0.335 129 Mar n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Auto Italia Holdings 720 HK HKD 0.187 125 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

New Focus Auto 360 HK HKD 0.49 238 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

China Rundong Auto 1365 HK HKD 3.41 473 Dec 4.8 4.3 0.0 0.0 1.1 0.8 3.6 2.9 25.5 21.9

Sunfonda Group 1771 HK HKD 3.51 272 Dec 6.6 5.1 0.0 0.0 0.9 0.7 n.a. n.a. 14.2 16.0

A v erage 6.4 5.2 2.9 3.3 1.1 0.8 5.1 4.3 19.8 19.3

Ot her A sia

J ardine Cyc.& Carr. J CNC SP SGD 41.89 11,021 Dec 11.2 10.0 3.7 4.1 2.1 1.9 5.0 4.6 17.0 17.1

Tan Chong Intl TCM MK HKD 2.5 649 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Zhejiang Material 600704 CH CNY 10.38 1,652 Dec 14.6 n.a. 2.0 n.a. 1.6 n.a. n.a. n.a. n.a. n.a.

Pang Da Auto 601258 CH CNY 6.31 3,267 Dec 31.6 11.9 0.5 n.a. 1.8 1.6 n.a. n.a. 8.9 13.7

Wuhu Yaxia Auto 002607 CH CNY 8.32 365 Dec 21.9 29.7 1.8 n.a. 1.6 1.9 n.a. n.a. 5.4 6.3

Sinomach Auto 600335 CH CNY 21.76 2,181 Dec 12.7 10.6 0.4 0.5 2.1 1.8 n.a. n.a. 16.8 16.7

Yulon Motor 2201 TT TWD 46.1 2,295 Dec 18.5 17.5 2.1 2.4 1.0 1.0 8.7 8.0 5.3 5.7

Hotai Motor 2207 TT TWD 456 7,882 Dec 26.9 27.8 2.6 2.7 6.5 5.8 16.8 15.8 22.2 22.0

A v erage 19.6 17.9 1.9 2.4 2.4 2.3 10.2 9.4 12.6 13.6

US

Autonation AN US USD 63.17 7,147 Dec 16.4 14.8 0.0 0.0 3.0 2.6 9.0 8.4 19.0 18.0

Group 1 Auto GPI US USD 82.75 2,011 Dec 12.9 11.6 0.8 0.5 1.6 1.5 7.1 6.7 14.4 14.0

Asbury Auto ABG US USD 78.8 2,346 Dec 16.2 14.0 0.0 0.0 3.4 2.7 8.3 7.7 23.5 19.3

Carmax KMX US USD 63.75 13,388 Feb 21.9 19.6 0.0 0.0 3.3 2.8 19.1 18.3 17.4 16.7

Lentuo Intl LAS US USD 0.71 23 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

A v erage 16.8 15.0 0.2 0.1 2.8 2.4 10.9 10.3 18.6 17.0


Page 26 www.dbsvickers.com ed-TH / sa- AH

HOLD HK$13.98 HSI : 24,555

Price Target : 12-Month HK$ 15.10 Potential Catalyst: New BMW model launches in 2016 DBSV vs Consensus: Our FY15 EPS is c.6% below consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

89

139

189

239

289

4.9

6.9

8.9

10.9

12.9

14.9

16.9

Feb-11 Feb-12 Feb-13 Feb-14 Feb-15

Relative IndexHK$

Brilliance China (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 6,103 6,217 13,766 18,419 EBITDA 3,556 5,155 5,827 6,151 Pre-tax Profit 3,325 4,847 5,533 6,131 Net Profit 3,374 4,931 5,462 5,999 Net Pft (Pre Ex.) 3,374 4,931 5,462 5,999 EPS (RMB) 0.67 0.98 1.09 1.19 EPS (HK$) 0.83 1.22 1.35 1.48 EPS Gth (%) 46.6 46.2 10.8 9.8 Diluted EPS (HK$) 0.83 1.21 1.34 1.48 DPS (HK$) 0.10 0.11 0.15 0.16 BV Per Share (HK$) 3.21 4.43 5.78 7.26 PE (X) 16.8 11.5 10.4 9.5 P/Cash Flow (X) (294.1) (210.7) 429.8 174.5 P/Free CF (X) nm nm nm nm EV/EBITDA (X) 16.2 11.1 9.7 9.0 Net Div Yield (%) 0.7 0.8 1.1 1.1 P/Book Value (X) 4.4 3.2 2.4 1.9 Net Debt/Equity (X) 0.1 0.1 0.0 CASH ROAE (%) 29.3 31.9 26.4 22.7 Earnings Rev (%): 10 4 New Consensus EPS (RMB): 1.02 1.17 1.38 Other Broker Recs: B: 21 S: 4 H: 5 ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: Brilliance is the only local partner to produce the BMW X1, 3 and 5 series cars in China. It also sells minibus under the Jinbei brand Source of all data: Company, DBSV, Thomson Reuters, HKEX

Tail-end of product lifecycle

New BMW models only ready in 2016; current year experiencing tail-end of product lifecycle

Expect 2014 result to be excellent; but share price has largely factored in positives

Profit margin pressure remains as operating environment is becoming more competitive

Maintain Hold. HK$15.10 TP based on FY15 earnings and pegged to 11x PE

Patience needed for new BMW models in 2016. Current models are nearing the end of their product lifecycles. The local production of new models (including the X1 extended version) is expected to be a volume catalyst for 2016. Besides, we are also looking forward to the new BMW 5 series in 2017. With the new models planned for future launches, the BMW JV is doubling up production capacity from 300,000 units currently.

Expect excellent 2014 performance. The BMW JV performed excellently in 2014. A strong surge in sales volume (+35% y-o-y) brings down unit production cost and hence lifted profit margins. However, we are cautious that the high level of margin will not sustain, as competition in the luxury car market is intensifying and growing consumer awareness after the anti-monopoly probe last July. We believe the strong FY14 financial result of the JV Company should have largely been priced in.

Volume growth to slow in 2015. As the existing BMW vehicles are nearing the end of their product lifecycles, volume sales growth should be around teen levels. Also, the new MPV under the “Huasong” brand will probably start selling from 2Q, and therefore unlikely to turn around the self-brand business in the near term until the volume is being ramped up. Suggest accumulate on share price weakness. Maintain HOLD.

At A Glance Issued Capital (m shrs) 5,026 Mkt. Cap (HK$m/US$m) 70,260 / 9,063

Major Shareholders Huachen Auto (%) 42.5 Templeton Asset Management (%) 17.8

Free Float (%) 39.7 Avg. Daily Vol.(‘000) 10,576

China Auto Sector

Brilliance China Bloomberg: 1114 HK | Reuters: 1114.HK Refer to important disclosures at the end of this report

China Auto Sector

Brilliance China

Page 27

Income Statement (RMB m) Balance Sheet (RMB m)

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 6,103 6,217 13,766 18,419 Net Fixed Assets 1,686 2,276 2,642 2,896 Cost of Goods Sold (5,417) (5,564) (11,839) (15,803) Invts in Assocs & JVs 9,418 13,091 17,533 22,322 Gross Profit 687 653 1,927 2,615 Other LT Assets 1,362 1,269 1,176 1,083 Other Opng (Exp)/Inc (912) (961) (1,846) (2,340) Cash & ST Invts 1,077 1,586 2,236 3,232 Operating Profit (225) (308) 81 276 Inventory 769 808 889 978 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 834 902 964 1,033 Associates & JV Inc 3,641 5,257 5,525 5,875 Other Current Assets 3,843 3,983 4,086 4,193 Net Interest (Exp)/Inc (92) (103) (73) (19) Total Assets 18,990 23,915 29,525 35,736 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 2,826 2,800 2,775 2,750 Pre-tax Profit 3,325 4,847 5,533 6,131 Creditors 2,991 3,080 3,173 3,268 Tax (8) (19) (20) (21) Other Current Liab 975 1,009 1,039 1,069 Minority Interest 58 104 (51) (111) LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 56 56 56 56 Net Profit 3,374 4,931 5,462 5,999 Shareholder’s Equity 13,015 17,947 23,409 29,408 Net Profit before Except. 3,374 4,931 5,462 5,999 Minority Interests (874) (978) (927) (816) EBITDA 3,556 5,155 5,827 6,151 Total Cap. & Liab. 18,990 23,915 29,525 35,736 Sales Gth (%) 3.2 1.9 121.4 33.8 EBITDA Gth (%) 40.3 45.0 13.0 5.6 Non-Cash Wkg. Cap 1,481 1,603 1,728 1,866 Opg Profit Gth (%) (71.5) (36.9) N/A 239.8 Net Cash/(Debt) (1,749) (1,215) (539) 482 Net Profit Gth (%) 46.6 46.2 10.8 9.8 Effective Tax Rate (%) 0.3 0.4 0.4 0.3 Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 3,325 4,847 5,533 6,131 Gross Margins (%) 11.2 10.5 14.0 14.2 Dep. & Amort. 139 206 221 234 Opg Profit Margin (%) (3.7) (5.0) 0.6 1.5 Tax Paid (9) (4) (10) (10) Net Profit Margin (%) 55.3 79.3 39.7 32.6 Assoc. & JV Inc/(loss) (3,641) (5,257) (5,525) (5,875) ROAE (%) 29.3 31.9 26.4 22.7 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 19.3 23.0 20.4 18.4 Chg in Wkg.Cap. (55) (163) (161) (174) ROCE (%) (1.7) (1.8) 0.4 1.0 Other Operating CF 49 103 73 19 Div Payout Ratio (%) 11.8 8.9 11.0 10.5 Net Operating CF (193) (269) 132 325 Net Interest Cover (x) (2.5) (3.0) 1.1 14.3 Capital Exp.(net) (616) (616) (493) (394) Asset Turnover (x) 0.3 0.3 0.5 0.6 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 40.2 51.0 24.7 19.8 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 211.3 206.8 98.2 74.4 Div from Assoc & JV 1,084 1,584 1,084 1,085 Inventory Turn (avg days) 55.6 53.7 26.7 21.6 Other Investing CF 41 (24) 79 131 Current Ratio (x) 1.0 1.1 1.2 1.3 Net Investing CF 509 944 670 822 Quick Ratio (x) 0.3 0.4 0.5 0.6 Div Paid (394) 0 0 0 Net Debt/Equity (X) 0.1 0.1 0.0 CASH Chg in Gross Debt 151 0 0 0 Capex to Debt (%) 21.8 22.0 17.8 14.3 Capital Issues 0 0 0 0 Z-Score (X) 5.9 5.9 5.9 N/A Other Financing CF (7) (166) (152) (150) N.Cash/(Debt)PS (RMB) (0.43) (0.30) (0.13) 0.12 Net Financing CF (250) (166) (152) (150) Opg CFPS (RMB) (0.03) (0.02) 0.06 0.10 Currency Adjustments 0 0 0 0 Free CFPS (RMB) (0.16) (0.18) (0.07) (0.01) Chg in Cash 67 509 650 996

Interim Income Statement (RMB m) Key Assumptions

FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 3,106 2,572 3,531 2,496 Key Assumptions Cost of Goods Sold (2,771) (2,296) (3,121) (2,278) Sales volume ('000) Gross Profit 335 276 411 218 Minibuses - Jinbei 83.7 84.6 80.4 72.3 Other Oper. (Exp)/Inc (476) (430) (482) (391) BMW 206.7 279.1 329.3 395.2 Operating Profit (141) (154) (71) (173) BMW net margin (%) 9.4 11.0 10.0 9.5 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 1,090 2,202 1,440 3,812 Net Interest (Exp)/Inc (35) (47) (45) (53) Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 913 2,002 1,323 3,585 Tax (5) (2) (6) (5) Minority Interest 60 30 28 48 Net Profit 969 2,030 1,344 3,628 Net profit bef Except. 969 2,030 1,344 3,628 Sales Gth (%) (5.2) (8.5) 13.7 (3.0) Opg Profit Gth (%) N/A N/A 49.6 (12.7) Net Profit Gth (%) 11.2 52.4 38.8 78.7 Gross Margins (%) 10.8 10.7 11.6 8.7 Opg Profit Margins (%) (4.5) (6.0) (2.0) (6.9) Net Profit Margins (%) 31.2 78.9 38.1 145.4 Source: Company, DBS Vickers


BUY HK$3.92 HSI : 24,555

Price Target : 12-Month HK$ 5.50 Potential Catalyst: Improvement on profit margins DBSV vs Consensus: Our FY1`5/16 EPS c.9%/8% below consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

48

68

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148

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208

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Relative IndexHK$

China ZhengTong Auto (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 29,840 32,668 36,041 38,704 EBITDA 1,979 2,196 2,523 2,926 Pre-tax Profit 1,206 1,357 1,611 1,923 Net Profit 837 944 1,086 1,297 Net Pft (Pre Ex.) 837 944 1,086 1,297 EPS (RMB) 0.38 0.43 0.49 0.59 EPS (HK$) 0.47 0.53 0.61 0.73 EPS Gth (%) 38.4 12.7 15.1 19.4 Diluted EPS (HK$) 0.47 0.53 0.61 0.73 DPS (HK$) 0.10 0.11 0.12 0.15 BV Per Share (HK$) 4.23 4.66 5.27 6.00 PE (X) 8.3 7.4 6.4 5.4 P/Cash Flow (X) 5.5 4.8 4.0 3.3 P/Free CF (X) 13.2 644.8 9.2 5.4 EV/EBITDA (X) 5.5 5.2 4.4 3.5 Net Div Yield (%) 2.5 2.7 3.1 3.7 P/Book Value (X) 0.9 0.8 0.7 0.7 Net Debt/Equity (X) 0.5 0.5 0.4 0.3 ROAE (%) 11.8 11.9 12.3 12.9 Earnings Rev (%): (8) (13) (12) Consensus EPS (RMB): 0.44 0.54 0.64 Other Broker Recs: B: 15 S: 0 H: 3 ICB Industry: Consumer Services ICB Sector: General Retailers Principal Business: One of the major premium auto brand dealer groups in China which sells BMW, Audi, Land Rover and Volvo cars Source of all data: Company, DBSV, Thomson Reuters, HKEX

Seeking better terms from automakers

More financial incentives from major auto brands to compensate for price discounting and inventory holding costs

Inventory gradually normalising following strict financial discipline

Making deeper inroad into auto financing business post licensing approval

Maintain BUY; TP at HK$5.50

Bolder approach. Auto dealers are becoming bolder in their approach towards the automakers on setting sales targets, inventories, and new store openings. BMW, one of ZhengTong’s key luxury brands, is paying out Rmb5.1bn to its dealers to cover for the huge price promotion in 2H14 and inventory holding costs. BMW achieved total volume sales of 456,000 units in China last year, a y-o-y growth of 17%. Higher incentive payouts would help ZhengTong achieve new luxury car GP margin of c.4.7% in 2H (1H14: 5.7%). Volume sales are picking up, hence clearing some inventories on hand, bringing the level to about 1.5 months.

Volume growth outlook. Anti-trust and recent changes to dealership registration rules are aimed at creating a level playing field for auto dealers and protect the consumers. Automakers are making adjustment to the vehicle and spare part prices. ZhengTong is looking to achieve luxury volume sales growth higher than the PV market, at around teens’ level. Replacements (vehicle upgrades) and new stores are key volume catalysts.

Building up after-sales services and auto financing & insurance. The auto finance business has commenced and the company is looking for asset loans of Rmb1-2bn in the initial period. The integrated sales centre in Shenzhen will allow the company to tap the after-sales market and other auto related services, especially after the implementation of auto sales restriction. Our HK$5.50 TP is based on FY15 earnings, pegged to 9x PE. Maintain BUY.


Major Shareholders Grand Glory (%) 62.2 GMT Capital Corp (%) 5.1


China Auto Sector

China ZhengTong Auto Bloomberg: 1728 HK | Reuters: 1728.HK Refer to important disclosures at the end of this report

China Auto Sector

China ZhengTong Auto

Page 29


FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 29,840 32,668 36,041 38,704 Net Fixed Assets 2,283 3,411 4,025 4,350 Cost of Goods Sold (27,252) (29,674) (32,655) (34,904) Invts in Assocs & JVs 166 189 213 238 Gross Profit 2,588 2,993 3,386 3,800 Other LT Assets 6,353 6,263 6,172 6,081 Other Opng (Exp)/Inc (930) (1,233) (1,363) (1,465) Cash & ST Invts 1,487 1,433 1,798 2,697 Operating Profit 1,658 1,760 2,022 2,336 Inventory 2,528 2,781 2,920 3,066 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 4,771 4,885 5,016 5,166 Associates & JV Inc 22 23 24 25 Other Current Assets 1,527 1,527 1,527 1,527 Net Interest (Exp)/Inc (474) (426) (436) (438) Total Assets 19,116 20,489 21,671 23,125 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 2,942 3,442 3,442 3,442 Pre-tax Profit 1,206 1,357 1,611 1,923 Creditors 4,628 4,673 4,639 4,637 Tax (352) (393) (467) (558) Other Current Liab 636 677 750 841 Minority Interest (17) (19) (57) (68) LT Debt 2,353 2,353 2,353 2,353 Preference Dividend 0 0 0 0 Other LT Liabilities 919 919 919 919 Net Profit 837 944 1,086 1,297 Shareholder’s Equity 7,543 8,310 9,397 10,694 Net Profit before Except. 837 944 1,086 1,297 Minority Interests 95 114 171 240 EBITDA 1,979 2,196 2,523 2,926 Total Cap. & Liab. 19,116 20,489 21,671 23,125 Sales Gth (%) 7.9 9.5 10.3 7.4 EBITDA Gth (%) 18.8 11.0 14.9 16.0 Non-Cash Wkg. Cap 3,563 3,843 4,074 4,281 Opg Profit Gth (%) 29.2 6.1 14.9 15.5 Net Cash/(Debt) (3,808) (4,362) (3,997) (3,098) Net Profit Gth (%) 38.5 12.7 15.1 19.4 Effective Tax Rate (%) 29.2 29.0 29.0 29.0 Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 1,206 1,357 1,611 1,923 Gross Margins (%) 8.7 9.2 9.4 9.8 Dep. & Amort. 299 413 477 565 Opg Profit Margin (%) 5.6 5.4 5.6 6.0 Tax Paid (147) (352) (393) (467) Net Profit Margin (%) 2.8 2.9 3.0 3.4 Assoc. & JV Inc/(loss) (22) (23) (24) (25) ROAE (%) 11.8 11.9 12.3 12.9 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 4.6 4.8 5.2 5.8 Chg in Wkg.Cap. (508) (322) (304) (298) ROCE (%) 8.9 8.6 9.1 9.8 Other Operating CF 443 387 397 398 Div Payout Ratio (%) 21.1 20.0 20.0 20.0 Net Operating CF 1,271 1,461 1,762 2,096 Net Interest Cover (x) 3.5 4.1 4.6 5.3 Capital Exp.(net) (742) (1,450) (1,000) (800) Asset Turnover (x) 1.7 1.6 1.7 1.7 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 47.9 53.9 50.1 48.0 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 57.8 58.0 52.8 49.3 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 39.3 33.1 32.3 31.8 Other Investing CF (127) 22 26 25 Current Ratio (x) 1.3 1.2 1.3 1.4 Net Investing CF (869) (1,428) (974) (775) Quick Ratio (x) 0.8 0.7 0.8 0.9 Div Paid (14) (177) 0 0 Net Debt/Equity (X) 0.5 0.5 0.4 0.3 Chg in Gross Debt 396 500 0 0 Capex to Debt (%) 14.0 25.0 17.3 13.8 Capital Issues 0 0 0 0 Z-Score (X) 2.9 2.9 3.1 3.2 Other Financing CF (511) (409) (423) (423) N.Cash/(Debt)PS (RMB) (2.14) (2.45) (2.24) (1.74) Net Financing CF (129) (86) (423) (423) Opg CFPS (RMB) 0.81 0.81 0.94 1.08 Currency Adjustments (8) 0 0 0 Free CFPS (RMB) 0.24 0.00 0.35 0.59 Chg in Cash 265 (54) 365 899

Interim Income Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions

FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 13,967 14,010 15,830 15,609 Revenues (RMB m) Cost of Goods Sold (12,710) (12,711) (14,541) (14,143) Premium & ultra premium brands 23,494 25,397 27,939 29,657 Gross Profit 1,257 1,299 1,289 1,467 Middle market brands 3,101 3,218 3,312 3,375 Other Oper. (Exp)/Inc (650) (445) (485) (539) After-sales services 2,783 3,567 4,280 5,136 Operating Profit 606 854 804 927 Logistics services & lubricant oil

trading 463 486 510 536

Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 10 8 14 13 Total 29,840 32,668 36,041 38,704 Net Interest (Exp)/Inc (196) (201) (273) (212) Gross Profit (RMB m) Exceptional Gain/(Loss) 0 0 0 0 Premium & ultra premium brands 1,225 1,321 1,397 1,453 Pre-tax Profit 420 662 545 728 Middle market brands 38 32 33 34 Tax (137) (188) (164) (219) After-sales services 1,261 1,587 1,905 2,260 Minority Interest (9) (8) (8) (9) Logistics services & lubricant oil

trading 64 53 51 54

Net Profit 274 465 372 499 Net profit bef Except. 274 465 372 499 Total 2,588 2,993 3,386 3,800 Gross Profit Margins (%) Premium & ultra premium brands 5.2 5.2 5.0 4.9 Sales Gth (%) 65.7 2.4 13.3 11.4 Middle market brands 1.2 1.0 1.0 1.0 Opg Profit Gth (%) 54.0 26.2 32.6 8.5 After-sales services 45.3 44.5 44.5 44.0 Net Profit Gth (%) 18.9 40.9 35.7 7.4 Logistics services & lubricant oil

trading 13.8 11.0 10.0 10.0

Gross Margins (%) 9.0 9.3 8.1 9.4 Opg Profit Margins (%) 4.3 6.1 5.1 5.9 Total 8.7 9.2 9.4 9.8 Net Profit Margins (%) 2.0 3.3 2.4 3.2 Key Assumptions Premium brands (units) 54,394 62,553 71,311 78,442 Middle market brands (units) 25,675 27,472 28,846 30,000 Source: Company, DBS Vickers


BUY HK$4.55 HSI : 24,555

Price Target : 12-month HK$ 5.05 Potential Catalyst: Auto sales recovery DBSV vs Consensus: Our FY15 EPS c.5% below consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

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11.5


Relative IndexHK$

Dah Chong Hong (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (HK$ m) 2013A 2014F 2015F 2016FTurnover 42,261 45,158 50,099 54,392 EBITDA 2,044 1,962 2,376 2,626 Pre-tax Profit 1,274 1,322 1,604 1,804 Net Profit 901 952 1,157 1,297 Net Pft (Pre Ex.) 889 872 1,157 1,297 EPS (HK$) 0.49 0.52 0.63 0.71 EPS Gth (%) (14.0) 5.6 21.6 12.1 Diluted EPS (HK$) 0.49 0.52 0.63 0.71 DPS (HK$) 0.19 0.20 0.19 0.21 BV Per Share (HK$) 4.91 5.23 5.66 6.17 PE (X) 9.2 8.8 7.2 6.4 P/Cash Flow (X) (16.3) 7.2 5.4 3.5 P/Free CF (X) nm 52.1 19.2 6.7 EV/EBITDA (X) 6.8 7.4 6.3 5.5 Net Div Yield (%) 4.3 4.4 4.2 4.7 P/Book Value (X) 0.9 0.9 0.8 0.7 Net Debt/Equity (X) 0.6 0.6 0.6 0.5 ROAE (%) 10.3 10.2 11.6 12.0 Earnings Rev (%): Nil Nil Nil Consensus EPS (HK$): 0.52 0.60 0.66 Other Broker Recs: B: 4 S: 1 H: 3

ICB Industry: Consumer Services ICB Sector: General Retailers Principal Business: A diversified conglomerate engaged in auto retailing, food & consumer product distribution and logistic services Source of all data: Company, DBSV, Thomson Reuters, HKEX

Consumer product expansion

Awaiting pick-up in auto sales in the PRC and HK

Consumer products expansion on track; recent acquisition of home appliance business helps further market penetration

Potential divestment of non-core assets unlock hidden value for investors

Maintain BUY; TP at HK$5.05

Auto buying returning. Consumers are set to return following the anti-trust investigation, as vehicle prices have corrected during 4Q. Last year, the higher rebates from automakers should mitigate the auto pricing pressure in China. In HK, retail sentiment was affected by the Occupy Central protests. In Nov 14, new private car registrations fell by 15% y-o-y, due to the protest impact. We expect HK car sales to recover going forward. Besides, the weaker yen and commercial vehicle replacement programmes are positive on the HK auto market.

Consumer product business acquisition. Recently, DCH acquired an electrical and home appliance group, Gilman, to expand its consumer product distribution business in HK, Macau, the PRC and ASEAN countries. The acquisition is earnings accretive. In the food distribution business, DCH continues to focus on penetrating tier 2/3 cities. The company is looking into investing in a new logistic facility in Hengqin, Macau to further compliment its extensive logistic network in HK, Macau, Guangzhou, Xinhui and Shanghai.

Unlocking asset value, maintain BUY. The divestment of non-core assets helps to unlock hidden values. DCH may eventually divest its electronic factory site (200,000sm) in Guangdong at an appropriate time. In 2H14, the sale of a property in Canada should result in gains of about HK$80m. Maintain BUY on potential realisation of hidden values.


Major Shareholders CITIC Group (%) 56.1 Schroders Plc (%) 8.0


China Auto Sector

Dah Chong Hong Bloomberg: 1828 HK | Reuters: 1828.HK Refer to important disclosures at the end of this report

China Auto Sector

Dah Chong Hong

Page 31

Income Statement (HK$ m) Balance Sheet (HK$ m)

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 42,261 45,158 50,099 54,392 Net Fixed Assets 3,798 4,398 5,060 5,680 Cost of Goods Sold (37,389) (39,919) (44,188) (47,920) Invts in Assocs & JVs 650 662 675 689 Gross Profit 4,872 5,238 5,912 6,473 Other LT Assets 2,017 1,955 2,111 2,055 Other Opng (Exp)/Inc (3,439) (3,726) (4,046) (4,396) Cash & ST Invts 2,173 1,210 714 1,345 Operating Profit 1,433 1,512 1,865 2,077 Inventory 6,259 6,760 7,178 7,034 Other Non Opg (Exp)/Inc 21 (24) 0 0 Debtors 6,483 7,131 7,702 8,164 Associates & JV Inc 24 12 13 14 Other Current Assets 246 246 246 246 Net Interest (Exp)/Inc (216) (258) (274) (286) Total Assets 21,626 22,362 23,684 25,213 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 12 80 0 0 ST Debt 5,608 5,108 5,108 5,108 Pre-tax Profit 1,274 1,322 1,604 1,804 Creditors 4,465 4,867 5,256 5,729 Tax (340) (304) (401) (460) Other Current Liab 121 304 401 460 Minority Interest (33) (66) (46) (47) LT Debt 1,816 1,816 1,816 1,816 Preference Dividend 0 0 0 0 Other LT Liabilities 243 243 243 243 Net Profit 901 952 1,157 1,297 Shareholder’s Equity 8,994 9,579 10,369 11,319 Net Profit before Except. 889 872 1,157 1,297 Minority Interests 379 445 491 538 EBITDA 2,044 1,962 2,376 2,626 Total Cap. & Liab. 21,626 22,362 23,684 25,213 Sales Gth (%) (12.0) 6.9 10.9 8.6 EBITDA Gth (%) (8.8) (4.0) 21.1 10.5 Non-Cash Wkg. Cap 8,402 8,966 9,468 9,255 Opg Profit Gth (%) (18.3) 5.5 23.4 11.3 Net Cash/(Debt) (5,251) (5,714) (6,210) (5,579) Net Profit Gth (%) (13.8) 5.6 21.6 12.1 Effective Tax Rate (%) 26.7 23.0 25.0 25.5 Cash Flow Statement (HK$ m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 1,274 1,322 1,604 1,804 Gross Margins (%) 11.5 11.6 11.8 11.9 Dep. & Amort. 566 463 500 537 Opg Profit Margin (%) 3.4 3.3 3.7 3.8 Tax Paid (387) (121) (304) (401) Net Profit Margin (%) 2.1 2.1 2.3 2.4 Assoc. & JV Inc/(loss) (24) (12) (13) (14) ROAE (%) 10.3 10.2 11.6 12.0 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 4.3 4.3 5.0 5.3 Chg in Wkg.Cap. (2,092) (747) (519) 155 ROCE (%) 6.4 6.8 7.9 8.4 Other Operating CF 151 257 272 284 Div Payout Ratio (%) 39.4 38.5 30.0 30.0 Net Operating CF (512) 1,162 1,540 2,366 Net Interest Cover (x) 6.6 5.9 6.8 7.3 Capital Exp.(net) (1,036) (1,000) (1,100) (1,100) Asset Turnover (x) 2.0 2.1 2.2 2.2 Other Invts.(net) 36 0 (295) 0 Debtors Turn (avg days) 51.6 55.0 54.0 53.2 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 44.7 43.2 42.3 42.3 Div from Assoc & JV 2 0 0 0 Inventory Turn (avg days) 58.5 60.2 58.2 54.7 Other Investing CF 150 19 9 4 Current Ratio (x) 1.5 1.5 1.5 1.5 Net Investing CF (848) (981) (1,386) (1,096) Quick Ratio (x) 0.8 0.8 0.8 0.8 Div Paid (352) (367) (367) (348) Net Debt/Equity (X) 0.6 0.6 0.6 0.5 Chg in Gross Debt 983 (500) 0 0 Capex to Debt (%) 14.0 14.4 15.9 15.9 Capital Issues 12 0 0 0 Z-Score (X) 3.3 3.4 3.5 3.6 Other Financing CF (340) (277) (284) (291) N.Cash/(Debt)PS (HK$) (2.86) (3.12) (3.39) (3.04) Net Financing CF 303 (1,144) (651) (638) Opg CFPS (HK$) 0.86 1.04 1.12 1.21 Currency Adjustments 13 0 0 0 Free CFPS (HK$) (0.85) 0.09 0.24 0.69 Chg in Cash (1,044) (963) (497) 632

Interim Income Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions

FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 24,378 18,935 23,326 22,094 Revenues (HK$ m) Cost of Goods Sold (21,570) (16,592) (20,797) (19,435) Motor & Motor-related

Business 32,624 34,409 37,385 40,330

Gross Profit 2,808 2,343 2,529 2,659 Other Oper. (Exp)/Inc (1,988) (1,715) (1,724) (1,912) Food & Consumer Products 9,595 10,704 12,668 14,013 Operating Profit 820 628 805 747 Others 42 44 46 49 Other Non Opg (Exp)/Inc (15) 0 0 (24) Total 42,261 45,158 50,099 54,392 Associates & JV Inc 1 14 10 8 Net Interest (Exp)/Inc (163) (101) (115) (126) Segment operating profit Exceptional Gain/(Loss) 19 13 20 7 Motor & Motor-related

Business 1,184 1,215 1,323 1,430

Pre-tax Profit 662 554 720 612 Tax (281) (159) (181) (128) Food & Consumer Products 324 431 566 562 Minority Interest 14 6 (39) (54) Others 72 79 87 96 Net Profit 395 401 500 430 Total 1,580 1,725 1,976 2,088 Net profit bef Except. 376 388 480 423 Segment operating profit Motor & Motor-related

Business 3.6 3.5 3.5 3.5

Sales Gth (%) (7.3) (19.9) (4.3) 16.7 Opg Profit Gth (%) (5.5) (34.2) (1.8) 18.9 Food & Consumer Products 3.4 4.0 4.5 4.0 Net Profit Gth (%) (24.3) (38.3) 26.6 7.2 Others 171.4 179.6 188.1 197.1 Gross Margins (%) 11.5 12.4 10.8 12.0 Total 3.7 3.8 3.9 3.8 Opg Profit Margins (%) 3.4 3.3 3.5 3.4 Net Profit Margins (%) 1.6 2.1 2.1 1.9 Key Assumptions Total vehicle sales (units) 100,354 110,918 121,626 132,140 Auto ASP (HK$'000/unit) 325.1 310.2 307.4 305.2 Source: Company, DBS Vickers


BUY HK$11.32 HSI : 24,555

Price Target : 12-month HK$ 15.70 (Prev HK$15.3) Potential Catalyst: Commencement of new auto JVs DBSV vs Consensus: Our FY15 EPS c.1% below consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

64

84

104

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144

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Relative IndexHK$

Dongfeng Motor Group (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 37,263 66,802 72,029 77,423 EBITDA 11,664 12,620 14,475 16,438 Pre-tax Profit 10,712 11,642 13,490 15,369 Net Profit 10,528 11,851 13,849 15,885 Net Pft (Pre Ex.) 10,528 11,851 13,849 15,885 EPS (RMB) 1.22 1.38 1.61 1.84 EPS (HK$) 1.52 1.71 1.99 2.29 EPS Gth (%) 15.8 12.6 16.9 14.7 Diluted EPS (HK$) 1.52 1.71 1.99 2.29 DPS (HK$) 0.22 0.22 0.22 0.22 BV Per Share (HK$) 9.09 10.57 12.34 14.40 PE (X) 7.5 6.6 5.7 5.0 P/Cash Flow (X) (8.3) (108.3) (118.9) (210.2) P/Free CF (X) nm nm nm nm EV/EBITDA (X) 5.2 4.5 3.6 2.8 Net Div Yield (%) 2.0 2.0 2.0 2.0 P/Book Value (X) 1.2 1.1 0.9 0.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 18.0 17.4 17.4 17.1 Earnings Rev (%): 1 (0.1) New Consensus EPS (RMB): 1.48 1.59 1.77 Other Broker Recs: B: 19 S: 0 H: 9 ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: A leading automaker partnering with Nissan, Honda and PSA Group to produce passenger and commercial vehicles Source of all data: Company, DBSV, Thomson Reuters, HKEX

Value play

Product diversification strategy starts seeing results; new JVs on PV and CV should start sales this year

Expect sales improvement after 2014’s transition period

Maintain BUY with HK$15.70 TP New JVs will start sales this year. After several years of preparation, the new JVs are rolling out vehicles for sales this year. The localisation of Infiniti (premium marque of Nissan) and the commercial vehicle JV with Volvo are expected to contribute to the top line. Its direct investment in Peugeot SA (PSA) should be positive as the European auto market is warming up and PSA's China operation continues to trend up. At the same time, the group also re-aligned its production plants to handle the growing car production volume. It gives the group greater flexibility to hand several car models at minimal additional costs, hence improving production efficiency.

Volume improvement. Total volume sales grew 6.5% last year, dragged by a 12% decline in CV sales and slower Japanese auto sales (keen market competition is the key factor). Total PV sales grew by 10% last year, as the Japanese JVs adjusted production since Aug14 to allow for the high inventory to be digested. We estimate total vehicle sales growth of 10% with PV and CV at 11% and 6% respectively. DF-Nissan and DF-Honda JVs expect to post 9-12% volume growth while DF-PSA is going for 12% volume expansion. New models from the JVs are volume drivers.

Maintain BUY. The new projects are expected to enhance its earnings fundamentals but are not reflected in its valuation. We roll over our TP to FY15 earnings, pegged to 8x PE to arrive at a new figure of HK$15.70. The market had mispriced Dongfeng previously on concerns of earnings growth momentum. That said, the weakness in Euro is an earnings risk on its direct investment in PSA.

At A Glance Issued Capital - H shares (m shs) 2,856 - Non H shrs (m shs) 5,760 H shs as a % of Total 33 Total Mkt. Cap (HK$m/US$m) 97,534 / 12,582 Major Shareholders

Dongfeng Motor Corp. (%) 66.9 Major H Shareholders (%)

JPMorgan Chase & Co. (%) 11.2 BlackRock, Inc. (%) 10.0 Prudential plc (%) 6.1

H Shares-Free Float (%) 72.7 Avg. Daily Vol.(‘000) 14,945

China Auto Sector

Dongfeng Motor Group Bloomberg: 489 HK | Reuters: 0489.HK Refer to important disclosures at the end of this report

China Auto Sector

Dongfeng Motor Group

Page 33


FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 37,263 66,802 72,029 77,423 Net Fixed Assets 9,418 10,466 11,507 12,722 Cost of Goods Sold (32,582) (57,049) (61,081) (65,190) Invts in Assocs & JVs 35,903 37,346 39,302 41,680 Gross Profit 4,681 9,753 10,948 12,233 Other LT Assets 13,055 13,035 13,015 12,995 Other Opng (Exp)/Inc (5,228) (7,606) (7,842) (7,991) Cash & ST Invts 24,399 28,917 34,119 40,464 Operating Profit (547) 2,147 3,107 4,242 Inventory 4,245 4,670 5,136 5,650 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 25,266 26,416 29,457 32,883 Associates & JV Inc 11,429 9,701 10,589 11,391 Other Current Assets 3,712 4,083 4,492 4,941 Net Interest (Exp)/Inc (170) (206) (206) (264) Total Assets 115,998 124,932 137,028 151,335 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 5,875 5,875 5,875 5,875 Pre-tax Profit 10,712 11,642 13,490 15,369 Creditors 34,750 33,702 33,567 33,607 Tax (109) 291 450 617 Other Current Liab 8,064 7,664 7,505 7,338 Minority Interest (75) (83) (91) (100) LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 3,275 3,275 3,275 3,275 Net Profit 10,528 11,851 13,849 15,885 Shareholder’s Equity 63,135 73,435 85,733 100,067 Net Profit before Except. 10,528 11,851 13,849 15,885 Minority Interests 899 982 1,072 1,172 EBITDA 11,664 12,620 14,475 16,438 Total Cap. & Liab. 115,998 124,932 137,028 151,335 Sales Gth (%) 511.9 79.3 7.8 7.5 EBITDA Gth (%) 22.2 8.2 14.7 13.6 Non-Cash Wkg. Cap (9,591) (6,197) (1,987) 2,528 Opg Profit Gth (%) 25.5 N/A 44.7 36.6 Net Cash/(Debt) 18,524 23,042 28,244 34,589 Net Profit Gth (%) 15.8 12.6 16.9 14.7 Effective Tax Rate (%) 1.0 N/A N/A N/A Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 10,712 11,642 13,490 15,369 Gross Margins (%) 12.6 14.6 15.2 15.8 Dep. & Amort. 763 772 779 805 Opg Profit Margin (%) (1.5) 3.2 4.3 5.5 Tax Paid (206) (109) 291 450 Net Profit Margin (%) 28.3 17.7 19.2 20.5 Assoc. & JV Inc/(loss) (11,429) (9,701) (10,589) (11,391) ROAE (%) 18.0 17.4 17.4 17.1 (Pft)/ Loss on disposal of FAs (374) (338) (582) (1,258) ROA (%) 11.8 9.8 10.6 11.0 Chg in Wkg.Cap. (8,825) (2,994) (4,052) (4,348) ROCE (%) (0.8) 2.7 3.5 4.1 Other Operating CF (185) 0 0 0 Div Payout Ratio (%) 14.7 13.1 11.2 9.8 Net Operating CF (9,544) (727) (663) (375) Net Interest Cover (x) (3.2) 10.4 15.1 16.0 Capital Exp.(net) (814) (1,800) (1,800) (2,000) Asset Turnover (x) 0.4 0.6 0.5 0.5 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 159.7 141.2 141.6 146.9 Invts in Assoc. & JV 8,341 (500) (300) (100) Creditors Turn (avg days) 222.1 222.0 203.6 190.4 Div from Assoc & JV 8,937 8,758 8,933 9,112 Inventory Turn (avg days) 31.2 28.9 29.7 30.6 Other Investing CF 1,518 543 788 1,258 Current Ratio (x) 1.2 1.4 1.6 1.8 Net Investing CF 17,982 7,002 7,621 8,270 Quick Ratio (x) 1.0 1.2 1.4 1.6 Div Paid (1,504) (1,551) (1,551) (1,551) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (145) 0 0 0 Capex to Debt (%) 13.9 30.6 30.6 34.0 Capital Issues 0 0 0 0 Z-Score (X) 2.3 2.5 2.6 2.6 Other Financing CF (3,401) 0 0 0 N.Cash/(Debt)PS (RMB) 2.67 3.32 4.06 4.98 Net Financing CF (5,050) (1,551) (1,551) (1,551) Opg CFPS (RMB) (0.08) 0.26 0.39 0.46 Currency Adjustments 0 0 0 0 Free CFPS (RMB) (1.20) (0.29) (0.29) (0.28) Chg in Cash 3,388 4,723 5,408 6,345


FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 3,361 9,750 27,513 30,949 Revenues (RMB m) Cost of Goods Sold (3,200) (8,523) (24,059) (26,496) Passenger vehicles 104,634 107,405 121,104 134,644 Gross Profit 161 1,227 3,454 4,453 Commercial vehicles 18,664 3,761 0 0 Other Oper. (Exp)/Inc (659) (1,249) (3,979) (3,170) Others 692 1,384 1,661 1,993 Operating Profit (498) (22) (525) 1,283 Total JCE revenue 123,990 112,550 122,765 136,637 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 4,322 5,733 5,696 8,387 Net Interest (Exp)/Inc (63) (82) (88) (236) Gross profit (RMB m) Exceptional Gain/(Loss) 0 0 0 0 Passenger vehicles 22,078 22,523 24,221 26,929 Pre-tax Profit 3,761 5,629 5,083 9,434 Commercial vehicles 2,719 564 0 0 Tax (28) (74) (35) (877) Total JCE GP 24,797 23,087 24,221 26,929 Minority Interest (12) (17) (58) (51) Net Profit 3,721 5,538 4,990 8,506 Net profit bef Except. 3,721 5,538 4,990 8,506 Gross profit Margins (%) Passenger vehicles 21.1 21.0 20.0 20.0 Sales Gth (%) N/A 257.3 718.6 217.4 Commercial vehicles 14.6 15.0 N/A N/A Opg Profit Gth (%) N/A 90.7 (5.4) N/A Net Profit Gth (%) N/A 3.1 34.1 53.6 Key Assumptions Gross Margins (%) 4.8 12.6 12.6 14.4 DF Nissan ('000 units) 926.2 954.2 1,040.0 1,133.6 Opg Profit Margins (%) (14.8) (0.2) (1.9) 4.1 DF Honda ('000 units) 321.4 308.2 345.2 376.3 Net Profit Margins (%) 110.7 56.8 18.1 27.5 DF PSA ('000 units) 550.0 704.0 788.5 859.5 DF self - PV ('000 units) 260.3 321.0 365.2 401.7 DF self - CV ('000 units) 160.7 336.4 356.6 385.1 Source: Company, DBS Vickers


BUY HK$3.25 HSI : 24,555

Price Target : 12-Month HK$ 3.70 (Prev HK$3.3) Potential Catalyst: Recovery in volume sales post-restructuring DBSV vs Consensus: Our FY16 EPS c.3% higher than consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

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210

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3.8

4.3

4.8


Relative IndexHK$

Geely Automobile Holdings (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 28,708 21,806 23,465 26,950 EBITDA 4,422 2,390 3,900 3,670 Pre-tax Profit 3,304 1,626 3,114 3,618 Net Profit 2,663 1,274 2,534 2,886 Net Pft (Pre Ex.) 2,663 1,274 2,534 2,886 EPS (RMB) 0.32 0.14 0.29 0.33 EPS (HK$) 0.39 0.18 0.36 0.41 EPS Gth (%) 17.3 (54.4) 98.9 13.9 Diluted EPS (HK$) 0.38 0.18 0.36 0.41 DPS (HK$) 0.05 0.03 0.05 0.06 BV Per Share (HK$) 2.27 2.40 2.73 3.08 PE (X) 8.3 18.1 9.1 8.0 P/Cash Flow (X) 6.2 9.8 7.4 7.0 P/Free CF (X) 8.5 22.2 37.4 15.5 EV/EBITDA (X) 4.0 7.4 4.6 4.7 Net Div Yield (%) 1.4 0.8 1.6 1.9 P/Book Value (X) 1.4 1.4 1.2 1.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 18.4 7.7 13.9 14.0 Earnings Rev (%): 1 1 (6) Consensus EPS (RMB): 0.21 0.29 0.32 Other Broker Recs: B: 12 S: 4 H: 14 ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: Geely Auto manufactures its own brands of passenger vehicles for the domestic and export markets

Source of all data: Company, DBSV, Thomson Reuters, HKEX

Improving outlook

GC9 sedan launch signals Geely's entry into the mid-to high-end vehicle market with foreign technology

Several product upgrades in 2015/16 positive on future ASP and mitigate margin erosion

Mid-term sales momentum improving, share price correction has factored in previous concerns

Maintain BUY; TP at HK$3.70 New product line-up. Geely is lining up four new products (one sedan, one EV and two SUVs) and another two models for 2015/16 release. It will also include four vehicle facelifts. In the new energy vehicle segment, Geely has two JVs engaged in the micro electric vehicle (EV) business. Its JV with Kandi Technologies (KNDI US) has shipped about 14,400 EVs in 2014 while Xin Dayang targets to start production by 2018. The GC9 sedan, the first vehicle under the collaboration with Volvo, was launched in Dec14. This new vehicle is said to be sibling of the Volvo S60 model, incorporating various international parts technology. Total capex is budgeted at Rmb2.5-3bn for 2015, largely on new vehicle development.

Sales strategy restructuring almost completed. Selling expense should come down with the exit of the non-performing dealers (down from 1,000 to about 700). The new brand strategy should take effect from 2016 and, coupled with the Compact Modular Architecture (developed with the help of Volvo) and Framework Extendable vehicle platforms, it will help improve product development and production efficiency.

Inflexion point: domestic sales recovery, maintain BUY. Geely’s domestic sales should see a pick-up this year, at a low double-digit expansion after last year’s 16% decline. The recent price correction should have priced in last year’s negatives. Current valuation is undemanding as Geely is one of the few Chinese automakers to invest on technology, particularly its tie-up with Volvo on future vehicle development. We believe the new vehicle platforms will give the automaker more flexibility and cost effectiveness. We raised target PE from 9x to 10x on FY15 earnings to reflect the improving business outlook, and arriving at new TP of HK$3.70.


Major Shareholders Li Shu Fu (%) 42.8 JPMorgan Chase & Co. (%) 8.5


China Auto Sector

Geely Automobile Holdings Bloomberg: 175 HK | Reuters: 0175.HK Refer to important disclosures at the end of this report

China Auto Sector

Geely Automobile Holdings

Page 35


FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 28,708 21,806 23,465 26,950 Net Fixed Assets 6,209 6,569 8,631 9,926 Cost of Goods Sold (22,942) (17,663) (18,772) (21,479) Invts in Assocs & JVs 673 679 695 712 Gross Profit 5,766 4,143 4,693 5,471 Other LT Assets 4,466 4,492 4,514 4,730 Other Opng (Exp)/Inc (2,412) (2,473) (1,519) (1,812) Cash & ST Invts 5,583 8,534 8,396 8,475 Operating Profit 3,354 1,670 3,174 3,659 Inventory 1,784 1,962 2,158 2,417 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 11,852 11,615 12,414 13,314 Associates & JV Inc (10) 6 9 11 Other Current Assets 3,032 3,326 3,648 4,003 Net Interest (Exp)/Inc (40) (50) (69) (52) Total Assets 33,599 37,178 40,456 43,578 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 966 966 966 966 Pre-tax Profit 3,304 1,626 3,114 3,618 Creditors 10,578 11,107 11,663 12,246 Tax (624) (325) (545) (687) Other Current Liab 5,693 5,701 6,247 6,735 Minority Interest (17) (27) (34) (45) LT Debt 0 2,060 1,860 1,360 Preference Dividend 0 0 0 0 Other LT Liabilities 133 133 133 133 Net Profit 2,663 1,274 2,534 2,886 Shareholder’s Equity 16,068 17,023 19,366 21,872 Net Profit before Except. 2,663 1,274 2,534 2,886 Minority Interests 162 188 223 267 EBITDA 4,422 2,390 3,900 3,670 Total Cap. & Liab. 33,599 37,178 40,456 43,578 Sales Gth (%) 16.6 (24.0) 7.6 14.9 EBITDA Gth (%) 23.4 (46.0) 63.2 (5.9) Non-Cash Wkg. Cap 397 94 311 754 Opg Profit Gth (%) 23.1 (50.2) 90.1 15.3 Net Cash/(Debt) 4,618 5,509 5,570 6,149 Net Profit Gth (%) 30.5 (52.1) 98.9 13.9 Effective Tax Rate (%) 18.9 20.0 17.5 19.0 Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 3,304 1,626 3,114 3,618 Gross Margins (%) 20.1 19.0 20.0 20.3 Dep. & Amort. 1,078 713 717 789 Opg Profit Margin (%) 11.7 7.7 13.5 13.6 Tax Paid (610) (624) (325) (545) Net Profit Margin (%) 9.3 5.8 10.8 10.7 Assoc. & JV Inc/(loss) 10 (6) (9) (11) ROAE (%) 18.4 7.7 13.9 14.0 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 8.2 3.6 6.5 6.9 Chg in Wkg.Cap. (449) 601 (437) (586) ROCE (%) 16.3 7.1 12.2 12.6 Other Operating CF 228 50 69 52 Div Payout Ratio (%) 12.0 15.0 15.0 15.0 Net Operating CF 3,562 2,361 3,128 3,317 Net Interest Cover (x) 83.9 33.4 45.8 69.9 Capital Exp.(net) (930) (1,300) (2,500) (1,800) Asset Turnover (x) 0.9 0.6 0.6 0.6 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 148.9 196.4 186.9 174.2 Invts in Assoc. & JV (37) 0 0 0 Creditors Turn (avg days) 161.8 233.5 230.2 203.1 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 30.1 40.3 41.6 38.9 Other Investing CF 102 200 (300) (500) Current Ratio (x) 1.3 1.4 1.4 1.4 Net Investing CF (865) (1,100) (2,800) (2,300) Quick Ratio (x) 1.0 1.1 1.1 1.1 Div Paid (264) (320) (191) (380) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (930) 2,060 (200) (500) Capex to Debt (%) 96.3 43.0 88.5 77.4 Capital Issues 0 0 0 0 Z-Score (X) 2.5 2.0 2.2 2.3 Other Financing CF (172) (50) (76) (58) N.Cash/(Debt)PS (RMB) 0.65 0.78 0.79 0.87 Net Financing CF (1,366) 1,690 (467) (938) Opg CFPS (RMB) 0.48 0.20 0.41 0.44 Currency Adjustments (41) 0 0 0 Free CFPS (RMB) 0.31 0.12 0.07 0.17 Chg in Cash 1,289 2,951 (139) 79


FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 13,451 14,855 13,853 10,158 Revenues (RMB m) Cost of Goods Sold (10,832) (12,008) (10,934) (8,092) Auto & related parts 26,678 20,760 23,465 26,950 Gross Profit 2,619 2,847 2,919 2,066 Gearbox 2,030 1,046 0 0 Other Oper. (Exp)/Inc (1,280) (1,062) (1,350) (632) Total 28,708 21,806 23,465 26,950 Operating Profit 1,339 1,785 1,568 1,434 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 0 (4) (6) 2 Net Interest (Exp)/Inc (71) (57) 17 (3) Key Assumptions Exceptional Gain/(Loss) 0 0 0 0 Car sales ('000 units) 549.5 417.9 451.3 505.4 Pre-tax Profit 1,268 1,725 1,579 1,433 Blended ASP (RMB/unit) 47,017.2 47,487.4 49,861.8 51,357.6 Tax (245) (323) (301) (307) Minority Interest (3) (3) (14) (12) Net Profit 1,020 1,398 1,265 1,113 Net profit bef Except. 1,020 1,398 1,265 1,113 Sales Gth (%) 29.0 32.9 3.0 (31.6) Opg Profit Gth (%) 28.8 28.8 17.1 (19.7) Net Profit Gth (%) 68.4 37.2 23.9 (20.4) Gross Margins (%) 19.5 19.2 21.1 20.3 Opg Profit Margins (%) 10.0 12.0 11.3 14.1 Net Profit Margins (%) 7.6 9.4 9.1 11.0 Source: Company, DBS Vickers


HOLD HK$44.25 HSI : 24,555

Price Target : 12-Month HK$ 42.70 (Prev HK$32.65) Potential Catalyst: Business update DBSV vs Consensus: FY15 EPS c.4% below consensus Analyst Rachel MIU +852 2863 8843 [email protected]

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Relative IndexHK$

Great Wall Motor (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 56,784 59,361 72,270 84,353 EBITDA 10,956 11,449 13,771 15,920 Pre-tax Profit 9,920 9,873 12,136 14,347 Net Profit 8,224 8,384 10,395 12,156 Net Pft (Pre Ex.) 8,224 8,384 10,395 12,156 EPS (RMB) 2.70 2.76 3.42 4.00 EPS (HK$) 3.35 3.42 4.24 4.96 EPS Gth (%) 44.5 1.9 24.0 16.9 Diluted EPS (HK$) 3.35 3.42 4.24 4.96 DPS (HK$) 1.02 1.13 1.48 1.74 BV Per Share (HK$) 11.42 13.82 16.93 20.40 PE (X) 13.2 13.0 10.5 8.9 P/Cash Flow (X) 12.0 13.7 10.3 8.5 P/Free CF (X) 57.2 55.5 23.9 16.1 EV/EBITDA (X) 9.5 9.1 7.4 6.2 Net Div Yield (%) 2.3 2.5 3.3 3.9 P/Book Value (X) 3.9 3.2 2.6 2.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 33.2 27.1 27.6 26.6 Earnings Rev (%): (4) 1 7 Consensus EPS (RMB): 2.67 3.57 4.21

Other Broker Recs: B: 26 S: 2 H: 6

ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: Auto manufacturer of pickup truck, SUV and sedans

Source of all data: Company, DBSV, Thomson Reuters, HKEX

Testing the waters Moving into the high-end SUV segment; a boost to 2H15

earnings

Tweaked FY14/15/16 earnings on revisions in sales and margin assumptions

Improving earnings outlook; but share price has rallied, reflecting the positive sentiment

New TP pegged to 10x FY15 PE; maintain HOLD

Launch of high-end SUV model signifies the worst could be over. The unveiling of Havel H9 model at >Rmb200,000 ASP and the pending launch of H8 model shows the company’s determination to test the high-end SUV segment. This positive sentiment is driving its share price higher. The H8 SUV is expected to be rolled out in 1Q15 (but company has not finalized launch date). The higher price SUV models should mitigate some margin pressure under the current growing market competition. In 2014, the company delayed its Havel H8 launch twice and missed its sales target by c.18%. This year, the company is setting a sales volume target of 850,000 units, a y-o-y expansion of 16%.

Earnings revisions; current valuation has priced in model upgrade, take profit. We tweaked FY14/15/16 earnings to account for volume and margin assumption revisions. We believe the worst should be over, following the lacklustre FY14 earnings performance. We roll over our TP to FY15F earnings, pegged to 10x PE (1SD above historical average) to arrive at HK$42.70. GWM used to trade at mid-teen PEs before its share price collapsed last year. Take profit on recent share price rally. Potential swing factors are weak sales of its high-price SUVs and further margin compression with new players entering the market.


Baoding Innovation Great Wall Asset Mgt (%) 56.0 Major H Shareholders (%)

JPMorgan Chase & Co. (%) 11.0 BlackRock, Inc. (%) 6.5 Credit Suisse (%) 6.0


China Auto Sector

Great Wall Motor Bloomberg: 2333 HK | Reuters: 2333.HK Refer to important disclosures at the end of this report

China Auto Sector

Great Wall Motor

Page 37


FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 56,784 59,361 72,270 84,353 Net Fixed Assets 14,657 16,460 16,683 16,921 Cost of Goods Sold (40,538) (42,606) (51,927) (60,501) Invts in Assocs & JVs 53 67 83 103 Gross Profit 16,246 16,755 20,342 23,851 Other LT Assets 6,869 9,216 13,072 16,938 Other Opng (Exp)/Inc (6,422) (7,016) (8,365) (9,713) Cash & ST Invts 6,991 6,579 8,516 11,836 Operating Profit 9,825 9,739 11,977 14,139 Inventory 2,764 3,178 3,592 3,951 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 656 755 830 913 Associates & JV Inc 11 14 16 20 Other Current Assets 20,615 21,537 23,429 25,510 Net Interest (Exp)/Inc 84 121 143 188 Total Assets 52,605 57,792 66,206 76,172 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 182 182 182 182 Pre-tax Profit 9,920 9,873 12,136 14,347 Creditors 10,712 10,177 9,668 9,184 Tax (1,688) (1,481) (1,699) (2,080) Other Current Liab 11,945 11,771 13,023 14,844 Minority Interest (8) (8) (42) (110) LT Debt 1,757 1,757 1,757 1,757 Preference Dividend 0 0 0 0 Other LT Liabilities 0 0 0 0 Net Profit 8,224 8,384 10,395 12,156 Shareholder’s Equity 27,996 33,885 41,514 50,031 Net Profit before Except. 8,224 8,384 10,395 12,156 Minority Interests 12 20 62 173 EBITDA 10,956 11,449 13,771 15,920 Total Cap. & Liab. 52,605 57,792 66,206 76,172 Sales Gth (%) 31.6 4.5 21.7 16.7 EBITDA Gth (%) 46.9 4.5 20.3 15.6 Non-Cash Wkg. Cap 1,378 3,524 5,161 6,346 Opg Profit Gth (%) 48.7 (0.9) 23.0 18.0 Net Cash/(Debt) 5,051 4,639 6,577 9,896 Net Profit Gth (%) 44.5 1.9 24.0 16.9 Effective Tax Rate (%) 17.0 15.0 14.0 14.5 Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 9,920 9,873 12,136 14,347 Gross Margins (%) 28.6 28.2 28.1 28.3 Dep. & Amort. 1,165 1,849 1,920 1,896 Opg Profit Margin (%) 17.3 16.4 16.6 16.8 Tax Paid (5,723) (1,688) (1,481) (1,699) Net Profit Margin (%) 14.5 14.1 14.4 14.4 Assoc. & JV Inc/(loss) (11) (14) (16) (20) ROAE (%) 33.2 27.1 27.6 26.6 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 17.3 15.2 16.8 17.1 Chg in Wkg.Cap. (291) (1,939) (1,855) (1,567) ROCE (%) 30.7 25.2 26.0 25.3 Other Operating CF 3,980 (121) (143) (188) Div Payout Ratio (%) 30.3 33.0 35.0 35.0 Net Operating CF 9,039 7,962 10,561 12,769 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (7,133) (6,000) (6,000) (6,000) Asset Turnover (x) 1.2 1.1 1.2 1.2 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 4.3 4.3 4.0 3.8 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 89.9 93.2 72.2 58.6 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 25.3 26.5 24.6 23.4 Other Investing CF 437 140 164 213 Current Ratio (x) 1.4 1.4 1.6 1.7 Net Investing CF (6,696) (5,860) (5,836) (5,787) Quick Ratio (x) 0.3 0.3 0.4 0.5 Div Paid (1,831) (2,495) (2,767) (3,638) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt 182 0 0 0 Capex to Debt (%) 367.8 309.4 309.4 309.4 Capital Issues 0 0 0 0 Z-Score (X) N/A N/A N/A N/A Other Financing CF (753) (30) (22) (25) N.Cash/(Debt)PS (RMB) 2.06 1.89 2.68 4.04 Net Financing CF (2,402) (2,525) (2,788) (3,663) Opg CFPS (RMB) 3.07 3.25 4.08 4.71 Currency Adjustments (11) 0 0 0 Free CFPS (RMB) 0.63 0.64 1.50 2.23 Chg in Cash (69) (423) 1,938 3,319


FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 24,872 26,417 30,367 28,527 Revenues (RMB m) Cost of Goods Sold (18,085) (18,766) (21,772) (20,380) Pick-up trucks 7,777 6,757 7,099 7,603 Gross Profit 6,787 7,651 8,595 8,147 SUVs 34,007 43,581 54,912 65,532 Other Oper. (Exp)/Inc (2,861) (2,754) (3,668) (3,431) Sedan 11,656 5,585 6,409 7,060 Operating Profit 3,926 4,897 4,927 4,717 Other vehicles 357 0 0 0 Other Non Opg (Exp)/Inc 0 0 0 0 Others 2,988 3,437 3,849 4,157 Associates & JV Inc 2 4 8 4 Total 56,784 59,361 72,270 84,353 Net Interest (Exp)/Inc 57 30 53 46 Gross profit (RMB m) Exceptional Gain/(Loss) 0 0 0 0 Pick-up trucks 2,139 1,824 1,881 2,015 Pre-tax Profit 3,985 4,931 4,988 4,767 SUVs 10,712 13,074 16,474 19,660 Tax (640) (840) (848) (812) Sedan 3,194 1,340 1,410 1,553 Minority Interest (6) (4) (4) 0 Other vehicles 50 0 0 0 Net Profit 3,339 4,087 4,136 3,954 Others 448 515 577 623 Net profit bef Except. 3,339 4,087 4,136 3,954 Total 16,543 16,755 20,342 23,851 Gross profit Margins (%) Pick-up trucks 27.5 27.0 26.5 26.5 Sales Gth (%) 56.5 44.5 22.1 8.0 SUVs 31.5 30.0 30.0 30.0 Opg Profit Gth (%) 103.2 74.5 25.5 (3.7) Sedan 27.4 24.0 22.0 22.0 Net Profit Gth (%) 106.7 73.7 23.9 (3.3) Other vehicles 14.0 n.a. n.a. n.a. Gross Margins (%) 27.3 29.0 28.3 28.6 Others 15.0 15.0 15.0 15.0 Opg Profit Margins (%) 15.8 18.5 16.2 16.5 Total 29.1 28.2 28.1 28.3 Net Profit Margins (%) 13.4 15.5 13.6 13.9 Key Assumptions Total vehicles sales ('000 units) 770.6 730.8 849.8 970.3 Pick-up trucks 136.1 118.3 121.8 127.9 SUVs 420.3 519.4 623.3 729.3 Sedan 205.5 93.0 104.7 113.0 Other vehicles 8.7 0.0 0.0 0.0 Source: Company, DBS Vickers


BUY HK$7.06 HSI : 24,555

Price Target : 12-Month HK$ 8.30 (Prev HK$8.40) Potential Catalyst: Launch of Jeep SUVs DBSV vs Consensus: Our FY15 EPS c.6% higher than consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

49

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89

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149

169

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209

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Relative IndexHK$

Guangzhou Automobile Group (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 18,824 22,811 28,717 34,904 EBITDA 3,749 5,168 6,414 7,387 Pre-tax Profit 2,629 3,525 4,709 5,572 Net Profit 2,654 3,475 4,616 5,352 Net Pft (Pre Ex.) 2,654 3,475 4,616 5,352 EPS (RMB) 0.41 0.54 0.72 0.83 EPS (HK$) 0.51 0.67 0.89 1.03 EPS Gth (%) 131.4 31.0 32.8 16.0 Diluted EPS (HK$) 0.51 0.67 0.89 1.03 DPS (HK$) 0.20 0.19 0.27 0.31 BV Per Share (HK$) 6.41 6.88 7.59 8.35 PE (X) 13.8 10.6 7.9 6.9 P/Cash Flow (X) 67.0 (35.9) (32.5) (40.5) P/Free CF (X) nm nm nm nm EV/EBITDA (X) 8.7 6.5 5.4 4.7 Net Div Yield (%) 2.8 2.7 3.8 4.4 P/Book Value (X) 1.1 1.0 0.9 0.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 8.2 10.1 12.3 12.9 Earnings Rev (%): (4) (3) (2) Consensus EPS (RMB): 0.55 0.68 0.86 Other Broker Recs: B: 14 S: 5 H: 9 ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: Produces and sells passenger and commercial vehicles, under JCE with Honda and Toyota as well as self-owned brands Source of all data: Company, DBSV, Thomson Reuters, HKEX

New JVs to boost vehicle profile

Managing production to avoid excessive inventory; Japanese brands focus on earnings quality and prudent expansion

New JVs ramping up on new vehicle roll-outs; GAC-Fiat plans to launch several Jeep models

Self-brand Trumpchi to sell more SUV models to ride on robust market potential

Maintain BUY; TP of HK$8.30

2015 Japanese auto brand sales boost. 2015 volume sales expectations remain decent, on product renewal programme to ensure compliance with the new fuel requirement. Besides, production cost is favourable, with input costs such as cold-rolled sheet and utility prices coming down. In addition, Honda engine self-production is beneficial to cost structure. Also the Japanese automakers were the first batch to adjust their production volumes since 2H14 and inventory pressure is easing. Guangqi-Honda volume sales should improve to around mid-teens this year (with full year contribution from Vezel and launch of the new City in 2H15), while GAC-Toyota likely to post an 8-10% sales expansion.

New JVs focus on SUV expansion. The first Jeep model is expected to be rolled out by end-Dec15, to be followed suit by two more in 2016. The increase in volume production also helps to raise utilisation rate and lower operating losses. Both GAC-Mitsubishi and GAC-Fiat are the best performing units among the JCEs and are likely to clock up >20% unit growth this year.

Self-brand remains strong; BUY maintained. The Trumpchi brand should record 40% volume expansion this year, as the company introduces more SUV models. GS5 Super and a smaller SUV model are two volume boosters. Capacity expansion (doubling to 200K annual units) and increase in utilisation rate (reaching 80%) are earnings drivers. However, we tweaked our earnings assumptions slightly and our TP was adjusted accordingly, with fair PE unchanged at 9x FY15 EPS.


Guangzhou Automobile (%) 57.6 Major H Shareholders (%)

Templeton Asset Management (%) 23.0 Sun Life Financial, Inc. (%) 11.1 BlackRock, Inc. (%) 5.1


China Auto Sector

Guangzhou Automobile Group Bloomberg: 2238 HK | Reuters: 2238.HK Refer to important disclosures at the end of this report

China Auto Sector

Guangzhou Automobile Group

Page 39


FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 18,824 22,811 28,717 34,904 Net Fixed Assets 7,366 8,599 9,486 10,324 Cost of Goods Sold (16,830) (19,731) (24,696) (29,668) Invts in Assocs & JVs 18,425 20,442 23,466 26,176 Gross Profit 1,994 3,079 4,020 5,236 Other LT Assets 5,539 5,070 4,574 4,033 Other Opng (Exp)/Inc (3,217) (3,444) (4,454) (5,380) Cash & ST Invts 19,040 19,669 18,782 18,612 Operating Profit (1,222) (364) (434) (145) Inventory 2,036 2,240 2,464 2,710 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 4,725 5,434 6,249 7,186 Associates & JV Inc 4,020 4,497 5,739 6,329 Other Current Assets 713 713 713 713 Net Interest (Exp)/Inc (169) (608) (595) (613) Total Assets 57,843 62,166 65,733 69,754 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 9,397 11,397 11,397 11,397 Pre-tax Profit 2,629 3,525 4,709 5,572 Creditors 8,637 8,465 8,295 8,129 Tax (101) (200) (234) (313) Other Current Liab 25 225 459 772 Minority Interest 125 151 140 94 LT Debt 4,775 4,775 4,775 4,775 Preference Dividend 0 0 0 0 Other LT Liabilities 893 893 893 893 Net Profit 2,654 3,475 4,616 5,352 Shareholder’s Equity 33,311 35,757 39,400 43,368 Net Profit before Except. 2,654 3,475 4,616 5,352 Minority Interests 805 654 514 420 EBITDA 3,749 5,168 6,414 7,387 Total Cap. & Liab. 57,843 62,166 65,733 69,754 Sales Gth (%) 45.2 21.2 25.9 21.5 EBITDA Gth (%) 101.5 37.8 24.1 15.2 Non-Cash Wkg. Cap (1,188) (303) 672 1,708 Opg Profit Gth (%) 15.4 70.2 (19.1) 66.6 Net Cash/(Debt) 4,868 3,497 2,610 2,440 Net Profit Gth (%) 134.0 31.0 32.8 16.0 Effective Tax Rate (%) 3.8 5.7 5.0 5.6 Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 2,629 3,525 4,709 5,572 Gross Margins (%) 10.6 13.5 14.0 15.0 Dep. & Amort. 951 1,035 1,109 1,203 Opg Profit Margin (%) (6.5) (1.6) (1.5) (0.4) Tax Paid (172) 0 0 0 Net Profit Margin (%) 14.1 15.2 16.1 15.3 Assoc. & JV Inc/(loss) (4,020) (4,497) (5,739) (6,329) ROAE (%) 8.2 10.1 12.3 12.9 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 4.9 5.8 7.2 7.9 Chg in Wkg.Cap. 566 (1,085) (1,208) (1,350) ROCE (%) (2.6) (0.7) (0.7) (0.2) Other Operating CF 594 0 0 0 Div Payout Ratio (%) 38.8 28.0 30.0 30.0 Net Operating CF 548 (1,022) (1,128) (904) Net Interest Cover (x) (7.2) (0.6) (0.7) (0.2) Capital Exp.(net) (1,904) (1,800) (1,500) (1,500) Asset Turnover (x) 0.4 0.4 0.4 0.5 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 77.8 81.3 74.2 70.2 Invts in Assoc. & JV (1,333) 0 0 0 Creditors Turn (avg days) 172.5 166.9 129.7 105.3 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 39.5 41.7 36.4 33.2 Other Investing CF 3,946 2,480 2,715 3,619 Current Ratio (x) 1.5 1.4 1.4 1.4 Net Investing CF 708 680 1,215 2,119 Quick Ratio (x) 1.3 1.2 1.2 1.3 Div Paid 0 (1,030) (973) (1,385) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt 4,041 2,000 0 0 Capex to Debt (%) 13.4 11.1 9.3 9.3 Capital Issues (507) 0 0 0 Z-Score (X) 2.1 2.1 2.2 2.3 Other Financing CF (22) 0 0 0 N.Cash/(Debt)PS (RMB) 0.94 0.67 0.50 0.47 Net Financing CF 3,512 970 (973) (1,385) Opg CFPS (RMB) 0.00 0.01 0.01 0.07 Currency Adjustments 0 1 0 0 Free CFPS (RMB) (0.21) (0.44) (0.41) (0.37) Chg in Cash 4,767 629 (887) (170)


FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 7,482 8,247 10,577 10,766 Revenues (RMB m) Cost of Goods Sold (7,047) (7,615) (9,214) (9,705) Guangqi Honda 75,855 82,784 93,298 103,448 Gross Profit 435 632 1,362 1,061 GAC Toyota 47,113 57,571 60,934 66,357 Other Oper. (Exp)/Inc (1,243) (1,120) (2,097) (1,180) GAC Mitsubishi 6,520 10,053 12,818 16,151 Operating Profit (807) (488) (734) (119) GAC Fiat 5,321 7,640 9,645 12,659 Other Non Opg (Exp)/Inc 195 475 547 600 Associates & JV Inc 294 1,401 1,699 1,576 Net Interest (Exp)/Inc (65) (194) (77) (252) Unit Sales Exceptional Gain/(Loss) 0 0 0 0 Guangqi Honda 435,480 480,060 552,069 618,317 Pre-tax Profit (383) 1,194 1,435 1,806 GAC Toyota 303,088 374,108 404,037 444,440 Tax (2) (32) (69) (92) GAC Mitsubishi 43,035 63,199 78,999 94,799 Minority Interest 37 57 68 12 GAC Fiat 48,375 68,090 85,113 106,391 Net Profit (348) 1,219 1,434 1,725 Net profit bef Except. (348) 1,219 1,434 1,725 Key Assumptions Passenger vehicle (units) 127,100 160,377 208,646 258,106 Commercial vehicle (units) 884 783 822 863 Sales Gth (%) 29.1 50.4 41.4 30.5 Total veh sales at GAC

level 127,984 161,160 209,468 258,969

Opg Profit Gth (%) (649.7) n.a. n.a. n.a. Net Profit Gth (%) N/A (17.7) N/A 41.5 Gross Margins (%) 5.8 7.7 12.9 9.9 Opg Profit Margins (%) (10.8) (5.9) (6.9) (1.1) Net Profit Margins (%) (4.6) 14.8 13.6 16.0 Source: Company, DBS Vickers

Page 40 www.dbsvickers.com ed-TH/ sa- AH

BUY HK$16.10 HSI : 24,555

Price Target : 12-Month HK$ 19.10 (Prev HK$19.6) Potential Catalyst: Securing new contracts from automakers DBSV vs Consensus: Our FY15 EPS is c.6% below consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

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Relative IndexHK$

Minth Group (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 5,510 6,781 8,056 9,677 EBITDA 1,383 1,495 1,748 2,044 Pre-tax Profit 1,225 1,360 1,596 1,858 Net Profit 971 1,092 1,267 1,475 Net Pft (Pre Ex.) 971 1,092 1,267 1,475 EPS (RMB) 0.90 1.00 1.16 1.35 EPS (HK$) 1.11 1.24 1.44 1.67 EPS Gth (%) 14.7 11.6 16.0 16.4 Diluted EPS (HK$) 1.10 1.24 1.43 1.67 DPS (HK$) 0.46 0.50 0.57 0.67 BV Per Share (HK$) 8.52 9.24 10.18 11.28 PE (X) 14.5 13.0 11.2 9.6 P/Cash Flow (X) 26.1 14.8 12.3 10.7 P/Free CF (X) nm 39.3 21.8 17.1 EV/EBITDA (X) 9.1 8.6 7.2 6.1 Net Div Yield (%) 2.8 3.1 3.6 4.2 P/Book Value (X) 1.9 1.7 1.6 1.4 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 13.7 14.0 14.8 15.6 Earnings Rev (%): (4) (4) (4) Consensus EPS (RMB): 1.06 1.23 1.41 Other Broker Recs: B: 6 S: 0 H: 2

ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: A major automotive producer of exterior car body parts, including trims, body structural parts, decorative parts and car seat frames Source of all data: Company, DBSV, Thomson Reuters, HKEX

Strong shipments ahead Shipment orders remain in double-digits for most auto

brands

Export markets expected to grow at a faster pace than domestic market

New fuel regulation means more business opportunities for light-weight auto parts

Maintain BUY with TP at HK$19.10

Delivery outlook is positive. Although the Chinese passenger vehicle market is estimated to grow at 9% this year, we forecast Minth to achieve better results than the industry. The European and American auto brand segment are expected to achieve a high growth rate this year, as they localise model productions in the coming months. On the export front, the European auto market recovery is expected to stay on track while the US auto market is standing on firm ground. Overall, we estimate a double-digit expansion in volume shipment this year.

Potential benefits from new fuel regulation in China. The implementation means that automakers have to comply strictly with the standard. Development of fuel-efficient cars will gain greater importance, and should benefit Minth’s light-weight auto parts business. In fact, light-weight vehicle development is becoming a global trend and Minth’s products are gaining traction with its customers.

Double-digit earnings expansion. We fine-tuned our product margin assumptions slightly for FY14-16. Our 16% earnings CAGR is decent compared to its track record of 18% (FY08-13). We estimate that approximately Rmb3bn of new orders were secured last year. Strong visibility and a solid balance sheet (with net cash of >Rmb2bn) should support growth and valuation upside. We roll over to FY15 earnings to arrive at a new TP of HK$19.10, pegged to 13x (same as previously).


Major Shareholders Chin Jong Hwa (%) 40.8 The Capital Group Companies, Inc. (%) 10.0 Commonwealth Bank of Australia (%) 8.0 Matthews International Capital Mgt (%) 7.2 JPMorgan Chase & Co. (%) 5.0

Free Float (%) 29.0 Avg. Daily Vol.(‘000) 761

China Auto Sector

Minth Group Bloomberg: 425 HK | Reuters: 0425.HK Refer to important disclosures at the end of this report

China Auto Sector

Minth Group

Page 41


FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 5,510 6,781 8,056 9,677 Net Fixed Assets 2,546 2,977 3,281 3,549 Cost of Goods Sold (3,692) (4,611) (5,510) (6,639) Invts in Assocs & JVs 197 240 290 346 Gross Profit 1,819 2,170 2,546 3,039 Other LT Assets 904 918 929 935 Other Opng (Exp)/Inc (661) (904) (1,062) (1,307) Cash & ST Invts 4,119 4,602 4,848 5,209 Operating Profit 1,158 1,266 1,484 1,732 Inventory 928 1,114 1,337 1,604 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 1,939 2,234 2,574 2,968 Associates & JV Inc 33 43 50 57 Other Current Assets 859 859 859 859 Net Interest (Exp)/Inc 34 51 63 69 Total Assets 11,493 12,943 14,117 15,471 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 2,385 2,885 2,885 2,885 Pre-tax Profit 1,225 1,360 1,596 1,858 Creditors 1,201 1,387 1,606 1,864 Tax (196) (204) (255) (297) Other Current Liab 111 119 171 212 Minority Interest (58) (64) (74) (86) LT Debt 25 25 25 25 Preference Dividend 0 0 0 0 Other LT Liabilities 52 52 52 52 Net Profit 971 1,092 1,267 1,475 Shareholder’s Equity 7,457 8,150 8,980 9,948 Net Profit before Except. 971 1,092 1,267 1,475 Minority Interests 262 325 399 485 EBITDA 1,383 1,495 1,748 2,044 Total Cap. & Liab. 11,493 12,943 14,117 15,471 Sales Gth (%) 27.3 23.1 18.8 20.1 EBITDA Gth (%) 18.2 8.1 16.9 17.0 Non-Cash Wkg. Cap 2,414 2,700 2,993 3,355 Opg Profit Gth (%) 22.1 9.3 17.2 16.8 Net Cash/(Debt) 1,709 1,692 1,938 2,299 Net Profit Gth (%) 15.5 12.5 16.0 16.4 Effective Tax Rate (%) 16.0 15.0 16.0 16.0 Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 1,225 1,360 1,596 1,858 Gross Margins (%) 33.0 32.0 31.6 31.4 Dep. & Amort. 192 186 215 255 Opg Profit Margin (%) 21.0 18.7 18.4 17.9 Tax Paid (158) (196) (204) (255) Net Profit Margin (%) 17.6 16.1 15.7 15.2 Assoc. & JV Inc/(loss) (33) (43) (50) (57) ROAE (%) 13.7 14.0 14.8 15.6 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 9.3 8.9 9.4 10.0 Chg in Wkg.Cap. (567) (294) (344) (403) ROCE (%) 10.4 10.0 10.5 11.3 Other Operating CF (63) (69) 0 0 Div Payout Ratio (%) 41.1 40.0 40.0 40.0 Net Operating CF 540 962 1,150 1,329 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (817) (600) (500) (500) Asset Turnover (x) 0.5 0.6 0.6 0.7 Other Invts.(net) 106 0 0 0 Debtors Turn (avg days) 108.0 112.3 108.9 104.5 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 106.3 106.8 103.2 99.2 Div from Assoc & JV 74 0 0 0 Inventory Turn (avg days) 84.7 84.2 84.5 84.1 Other Investing CF (590) 79 91 97 Current Ratio (x) 2.1 2.0 2.1 2.1 Net Investing CF (1,227) (521) (409) (403) Quick Ratio (x) 1.6 1.6 1.6 1.6 Div Paid (332) (399) (437) (507) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt 1,002 500 0 0 Capex to Debt (%) 33.9 20.6 17.2 17.2 Capital Issues 75 0 0 0 Z-Score (X) 4.0 3.7 3.8 3.8 Other Financing CF (56) (58) (58) (58) N.Cash/(Debt)PS (RMB) 1.95 1.92 2.20 2.61 Net Financing CF 688 43 (495) (565) Opg CFPS (RMB) 1.02 1.15 1.37 1.59 Currency Adjustments (11) 0 0 0 Free CFPS (RMB) (0.26) 0.33 0.59 0.76 Chg in Cash (11) 483 246 361

Interim Income Statement (RMB m) Segmental Breakdown (RMB m)

FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 2,210 2,473 3,038 3,151 Revenues (RMB m) Cost of Goods Sold (1,514) (1,650) (2,042) (2,128) Trims 1,521 1,947 2,336 2,803 Gross Profit 696 823 996 1,023 Decorative parts 1,703 2,043 2,370 2,797 Other Oper. (Exp)/Inc (237) (251) (409) (398) Body structural parts 1,730 1,990 2,308 2,724 Operating Profit 459 571 586 626 Car seat frame 226 305 396 515 Other Non Opg (Exp)/Inc 0 0 0 0 Others 331 496 645 838 Associates & JV Inc 25 24 9 21 Total 5,510 6,781 8,056 9,677 Net Interest (Exp)/Inc 13 16 18 30 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 497 612 614 676 Tax (67) (88) (107) (89) Minority Interest (25) (24) (34) (25) Net Profit 405 499 472 562 Net profit bef Except. 405 499 472 562 Sales Gth (%) 6.3 16.6 37.4 27.4 Opg Profit Gth (%) 4.5 16.7 27.8 9.5 Net Profit Gth (%) 1.4 14.4 16.7 12.7 Gross Margins (%) 31.5 33.3 32.8 32.5 Opg Profit Margins (%) 20.8 23.1 19.3 19.9 Net Profit Margins (%) 18.3 20.2 15.5 17.8 Source: Company, DBS Vickers

www.dbsvickers.com

ed-TH / sa- AH

BUY HK$7.25 HSI : 24,555 (Initiating coverage)

Price Target : 12-Month HK$ 9.30 Reason for Report : Initiating coverage Potential Catalyst: Winning new contracts for EPS systems DBSV vs Consensus: Our FY15 EPS is inline with consensus

Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

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Oct-13 Mar-14 Aug-14 Jan-15

Relative IndexHK$

Nexteer Automotive Group (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation

FY Dec (US$ m) 2013A 2014F 2015F 2016F

Turnover 2,387 2,813 3,329 3,905 EBITDA 231 308 395 487 Pre-tax Profit 151 199 254 311 Net Profit 109 153 198 242 Net Pft (Pre Ex.) 109 153 199 243 EPS (US$) 0.06 0.06 0.08 0.10 EPS (HK$) 0.45 0.47 0.61 0.75 EPS Gth (%) 72.1 4.7 29.5 22.4 Diluted EPS (HK$) 0.45 0.47 0.61 0.75 DPS (HK$) 0.09 0.09 0.12 0.15 BV Per Share (HK$) 2.36 2.17 2.69 3.32 PE (X) 16.0 15.3 11.8 9.6 P/Cash Flow (X) 7.8 10.9 7.9 6.2 P/Free CF (X) 33.6 66.8 16.1 8.4 EV/EBITDA (X) 8.8 8.9 7.0 5.4 Net Div Yield (%) 1.3 1.3 1.7 2.1 P/Book Value (X) 3.1 3.3 2.7 2.2 Net Debt/Equity (X) 0.5 0.5 0.4 0.2 ROAE (%) 29.6 24.1 25.3 25.0 Earnings Rev (%): New New New Consensus EPS (US$) 0.06 0.08 0.10 Other Broker Recs: B: 6 S: 0 H: 0

ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: A leading steering systems producer with international automakers as its customers Source of all data: Company, DBSV, HKEX

Steering in the right direction

World’s leading electronic power steering (EPS) producer; counting major blue-chip automakers as its customers

Global trend towards fuel-efficient vehicles triggers shift from hydraulic power steering (HPS) to Nexteer's EPS systems

Significant EPS market shares in the US protected by high technical entry barriers

Expect valuation appreciation on strong earnings momentum. Initiate with BUY and TP of HK$9.30

Tapping growth in a new massive market. Nexteer has a long-established history in the US market and its current Chinese shareholder helps to position its next growth phase in the fastest-growing auto market in the world - China. The US auto market is standing on firm ground while the European auto market is rebounding. Nexteer has the best of both worlds to ride on growing auto demand.

Conversion from hydraulic to electrical steering system. Nexteer’s core technology edge is in electronic power steering (EPS), which increases fuel efficiency compared to the hydraulic power steering (HPS). Nexteer is in the most exciting growth phase, benefitting from the global trend in fuel-efficient car development. Besides, the entry barrier is relatively high for new players. The company has significant market shares in the US for its EPS products.

Strong earnings support higher valuation. Based on improving product mix and new market penetration, we estimate 26% earnings CAGR (FY14-16), a strong support to valuation. Our TP of HK$9.30 is derived from 15xFY15F PE (translating into PEG of 0.5x). Nexteer is one of the strongest steering players in the world and therefore our fair PE is not expensive. Initiate with Buy.


Major Shareholders Aviation Industry Corporation of China (%) 67.3 Mondrian Investment Partners Limited (%) 7.0


DBS Group Research . Equity 6 February 2015

China / Hong Kong Company Focus

Nexteer Automotive Group Bloomberg: 1316 HK Equity | Reuters: 1316.HK Refer to important disclosures at the end of this report

Company Focus

Nexteer Automotive Group

Page 43

INVESTMENT THESIS

Profile Rationale

Nexteer is the world’s leading producer of steering systems, and counts major automakers as its customers. The company's key products are electronic power steering (EPS) and hydraulic power steering (HPS) systems and driveline.

Strong earnings outlook

Tapping China, the world’s largest automotive market

Fuel-efficient car development

Global tend towards fuel-efficient vehicles trigger shift from HPS to EPS

Solid track record

Its long history with General Motors gives Nexteer an advantage over other players in the supply of steering products

Valuation Risks

Strong orders on hand provide delivery visibility and support earnings growth. Based on its earnings outlook and growth momentum, we arrived at our TP based on FY15 earnings, pegged to 15x PE.

Product recalls

May result in high warranty liability

Currency fluctuation

Affects overall profitability from its overseas business

Rise in raw material costs

Profit margin compression

Source: DBS Vickers

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History and principal activities

Over 100 years of history. Nexteer was set up in 1906 and has been part of the GM group since 1917 as the latter’s automotive division. In 2011, it was acquired by the AVIC Group. The company was listed in HK on 7th Oct, 2013.

Key products and manufacturing facilities. The company produces steering systems - electronic power steering (EPS) and hydraulic power steering (HPS) systems, as well as driveline (including halfshafts, intermediate drive shafts and propeller shaft joints). The steering systems are used in cars, SUVs, vans, pick-up, trucks, and crossover vehicles.

Nexteer’s production facilities are spread across major production hubs in North America (the US & Mexico), South America (Brazil), Europe (Poland) and Asia (China & India).

Serving blue-chip customers. The top international automakers are customers of Nexteer. The GM group accounts for >50% of revenue, while the five largest customers generate >80% of revenue. The long history with GM gives Nexteer an advantage over other players in the supply of steering products.

Market exposure and shares. The principal markets for Nexteer’s products are North America, Europe and China. Nexteer is among the top five players in the global steering system market with some 30% of market share in the US.

Growth catalysts

Adoption rate of EPS to rise on fuel-efficient cars worldwide. The rising emission standards in the US, Europe and China are forcing automakers to develop fuel-efficient cars. Hence, usage of EPS should rise as automakers need more fuel-efficient steering systems (because EPS systems use fewer components and hence lighter). Globally, this conversion process has just begun and we expect Nexteer to benefit more from this rising trend. The improving product mix with EPS accounting for >50% of steering product sales since 1H14 should generate better returns for shareholders.

Penetration into Chinese market. Through the change in shareholding structure, Nexteer is reaching out to the Chinese customers. It has entered into an equal share JV with Chongqing Changfeng Machinery to start a production facility in Chongqing to manufacture and sell EPS systems in China. This will become the third growth pillar for the company, with the first two being the US and Europe market.

High technical barriers. The entry barrier is high, thus limiting the number of industry players. Nexteer has been spending on product development and is reaping the benefits from such product development. In the past, the company’s engineering & development cost accounted for 3-4% of total revenue and we expect the same ratio going forward.

Earnings projections and risks

New programmes support earnings visibility. Typically, it takes about 24-30 months for a new project to take off from the production line and another six months to ramp up to full capacity. And generally, the project will last throughout the vehicle lifecycle (averaging 5-7 years). On hand, the company has about US$10bn worth of production contracts, and majority are EPS systems.

Product mix changes positive on revenue growth. The migration over to EPS systems has resulted in c.8% revenue CAGR (FY11-14F). Further product breakdown shows the EPS system revenue grew by 18% while the HPS systems fell by 13.6% over the same period. We forecast further expansion in EPS sales revenue as new markets start to commence operations. The EPS business is expected to grow at >20% per annum.

Revenue projections (breakdown, FY12-16)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

FY12 FY13 FY14F FY15F FY16F

EPS HPS Steering column (CIS) Driveline

US$m

Source: Company, DBS Vickers

Market diversification. The bulk of revenue was previously derived from the North America market. As the company is building up its Chinese business, this composition should start to change.

Company Focus


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Revenue breakdown by geographical regions (1H14)

North America

70%

Europe*13%

China13%

Rest of World4%


Margin expansion driving profits higher. Product upgrades is the main reason for the margin improvements, especially with the migration from HPS to EPS systems. Net profit is estimated to grow at >20% per annum from FY14-16F.

Profitability trend

0

2

4

6

8

10

12

14

16

FY12 FY13 FY14F FY15F FY16F

Gross EBITDAR Net

%

EBITDAR: Operating income before interest, taxes, depreciation &amortisation and restructuring costs


Cost structure. The major cost components are raw materials and manufacturing costs. Typically, Nexteer buys controllers, motors & sensors, and machined parts (such as castings & forgings, bearings and stampings). The key materials used in these components are steel and rare earth materials, which are impacted by global economic conditions.

Manufacturing cost comprises predominantly labour costs, utilities, scrap expenses, indirect & maintenance materials, and start-up and launch expenses.

Raw materials accounted for 68% of cost of sales while manufacturing cost takes up another 29%.

Cost of sales (1H14)

Raw materials68%

Manufacturing29%

Others3%


Financial health. The need for capex will remain high (close to US$200m each for FY15/16), as Nexteer expands its production base. In Nov14, the company issued US$250m worth of senior notes to finance its business growth. The senior notes will be due in Nov 2021. Post-issuance, net gearing is estimated to be 45% in FY15. We forecast healthy cashflow generation to finance its business expansion.

Earnings risks. Product recalls are a major earnings risk to Nexteer. The most recent recall by GM after the company expanded the scope of the exercise on the halfshaft had resulted in some US$14m of estimated expense. Currency risk is another potential risk, as part of the company’s revenue and operations are denominated in foreign currencies, such as the Mexican peso (in which Nexteer will hedge with forward contracts), Euro and RMB. Another risk is rising raw material cost, such as steel and other component price. However, due to current over-capacity in the steel industry, this risk is relatively low.

Valuation

Strong earnings support valuation upside; initiate with Buy rating. The company's prospects are solid, supported by robust orders on hand (US$9bn at end-Jun14). Based on earnings growth of 30% in FY15 and pegged to 15x PE (0.5x PEG; 8.7x EV/EBITDA), we arrive at TP of HK$9.30. We believe the strong earnings outlook should support valuation upside. The automotive sector's peer average valuation is 10x/0.4x/6.1x on PE/PEG and EV/EBITDA respectively.

Although Nexteer's share price has appreciated by 157% since its IPO listing, we believe more valuation upside potential is possible, because Nexteer’s operating environment has changed

Company Focus


Page 46

for the better since then. The current global trend for fuel-efficient vehicles is just at the early stage and there is a growing need for fuel-efficient car components. Therefore, it should be positive for EPS system demand. Hence, improving product mix with higher contribution from EPS sales would be positive for profit margins and earnings. Besides, China has the largest auto

market in the world and it offers great potential for Nexteer’s product sales (which currently account for about 15% of the company's total revenue). Moreover, new vehicle programmes from automakers provide good delivery visibility, hence supporting solid earnings growth.

Key management team

Name (A ge)Posit ion /T it le

Ro les & responsib ilit ies

ZHAO, Guibin (49)Chairman, Executiv e Director and Chief Executiv e Officer

Overseeing the Group's strategic v ision, direction and goals and overseeingthe overall execution of the Group's strategy

RICHARDSON, Michael Paul (57)Executiv e Director, Senior V ice President, Chief Technology andStrategy Officer and Chairman of China div ision and driv elinebusiness units

The Group's technology planning, information technology and strategicplanning

BRESSON, Laurent Robert (42)President and Global chief operating officer

Overseeing the Group's global functions including sales, engineering,operation, human resources, finance and global supply management, and isin charge of overseeing the Group's product lines.

PERKINS, J oseph Michael (45)Senior v ice presient and chief financial officer

The Group's investor relations, treasury , capital funding and structure, M&Asupport, accounting and financial reporting, financial planning and analy sis,program finance, risk management, financial controls and taxation

CORBEIL, J ames Martin (46)V ice president and chief procurement officer

Purchasing, supplier development, production control, global logistics as wellas supplier launch management functions

LIU, Tao (49)V ice president and chief operating officer of China div ision

The business plan, the overall financial position and adv ising on strategicdirection of the China div ision

Source: Company

Corporate structure

Production capacity

Aviation Industry

Corporation of China

Mondrian Investment

Partners Limited

Public shareholders

Ne xteer Automotive Group L im ited

67.3% 7.0% 25.7%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

EPS HPS -gears

HPS -pumps

Steering columns

Halfshafts

2013 2014

'000 units

Source: HKEx Source: Company

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Page 47

Steering systems and driveline

Column Assist Electric Power Steering Non-Adjustable Steering Columns

Pinion Assist Electric Power Steering EPs Intermediate Shaft

Intermediate Drive Halfshafts Rear Wheel Drive Halfshafts

Source: Company

Company Focus


Page 48

PE chart

PB chart

4

6

8

10

12

14

Oct

-13

No

v-1

3

Jan

-14

Feb

-14

Ap

r-1

4

May

-14

Jun

-14

Au

g-1

4

Sep

-14

No

v-1

4

Dec

-14

Feb

-15

x

Avg: 9.7x

+1SD: 11.3x

-1SD: 8x

+2SD: 12.9x

-2SD: 6.4x

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Oct

-13

No

v-1

3

Jan

-14

Feb

-14

Ap

r-1

4

May

-14

Jun

-14

Au

g-1

4

Sep

-14

No

v-1

4

Dec

-14

Feb

-15

x

Avg: 2.2x

+1SD: 2.6x

-1SD: 1.8x

+2SD: 3x

-2SD: 1.4x

Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers

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Page 49

Peers valuation

EV / Earn ings Earn ings

M k t PE PE P/Bk EB IT DA RO E G row t h CA G RCurrency Pric e Cap 15F 16F 15F 15F 15F 15F 16F F Y 14- 16

Company Name Code L oc al$ US$m x x x x % % % %HK list edXiny i Glass Holdings 868 HK HKD 4.15 2,099 9.1 7.3 1.1 6.7 16.8 54.4 10.6 30.7Minth Group* 425 HK HKD 16.1 2,279 11.2 9.6 1.6 7.2 14.8 16.0 16.4 16.2Xingda Intl.Holdings 1899 HK HKD 2.43 475 6.6 5.9 n.a. n.a. 8.2 16.3 12.3 14.3Changfeng Axle (China) 1039 HK HKD 0.58 60 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.China Metal Intl.Hdg. 319 HK HKD 2.43 315 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Shougang Ccrd.Cen.Hdg. 103 HK HKD 0.265 66 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Launch Tech 'H' 2488 HK HKD 13.7 533 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Perennial Intl. 725 HK HKD 1.27 33 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Huazhong In-V ehicle Hdg. 6830 HK HKD 1.69 174 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Weichai Power 'H' 2338 HK HKD 31.15 8,033 10.8 9.5 1.3 5.2 13.1 (5.6) 14.8 4.1China V eh.Compns.Tech. 1269 HK HKD 2.16 107 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Wuling Motors Holdings 305 HK HKD 0.55 108 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Xinchen China Power Hdg.* 1148 HK HKD 3.00 498 8.3 5.9 1.1 4.8 13.9 43.4 42.1 42.8Nexteer Automotiv e Group* 1316 HK HKD 7.25 2,336 11.8 9.6 2.7 7.0 25.3 29.5 22.4 25.9Changan Minsheng 1292 HK HKD 7.84 164 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.A v erage 9 .6 8 .0 1 .6 6 .2 15 .4 25 .7 19 .8 22 .3

PRC list edZongshen Pwr. Machinery 001696 CH CNY 10.08 1,844 26.7 23.4 3.3 n.a. 13.0 10.9 8.8 9.8Shanghai Aerospace Auto 600151 CH CNY 10.43 2,084 21.6 15.5 2.7 9.1 13.7 75.7 39.8 56.7Av ic Aero-Engine Cntls. 000738 CH CNY 19.18 3,511 54.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a.Sic.Chengfei Intg.Tech. 002190 CH CNY 36.9 2,035 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Ningbo Huaxiang Elt. 002048 CH CNY 14.55 1,232 9.8 7.7 1.7 n.a. 16.8 29.9 24.1 27.0F engfan Stock 600482 CH CNY 14 1,200 30.4 n.a. n.a. n.a. 10.1 14.7 n.a. n.a.J ialeng Songzhi Auto 002454 CH CNY 16.57 1,074 20.5 17.4 2.6 n.a. 13.2 23.6 23.0 23.3F angda Special Stl.Tech. 600507 CH CNY 5.48 1,161 10.3 9.4 1.9 n.a. 18.3 14.5 11.3 12.9Harbin Dongan Auto Enn. 600178 CH CNY 6.89 509 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.F away Auto Compns. 600742 CH CNY 31.58 1,067 10.7 n.a. 1.7 n.a. n.a. 19.2 n.a. n.a.Shanghai J iao Yun Group 600676 CH CNY 10.57 1,457 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Guihang Auto Components 600523 CH CNY 17.14 791 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Zhejiang Wanliy ang Tnsm. 002434 CH CNY 17.77 965 22.8 n.a. 2.5 n.a. 10.8 27.1 n.a. n.a.Xuchang Ynd.Driv e Shaft 002406 CH CNY 11.06 496 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Weifu High Tech.Gp. 200581 CH HKD 28.31 3,725 10.8 8.8 1.8 9.6 18.0 29.1 23.4 26.2China Erzhong Group 601268 CH CNY 2.35 861 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.J iangnan Mould & Plastic 000700 CH CNY 13.9 686 15.5 13.3 2.1 n.a. 13.3 18.0 17.1 17.5Shenyang J inbei Autv . 600609 CH CNY 3.88 677 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Anhui Quanchai Engine 600218 CH CNY 12.78 579 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Kunming Yunnei Pwr. 000903 CH CNY 7.15 913 21.7 12.2 1.6 n.a. 6.7 48.5 68.5 58.2Lingy un Industrial 'A' 600480 CH CNY 13.84 800 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Beijing Wkw Autv .Pas.'A' 002662 CH CNY 13.86 1,661 17.1 13.5 2.3 n.a. 13.5 43.4 22.8 32.7Changchai 200570 CH HKD 4.99 361 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Av ic Aero-Engine Cntls. 000738 CH CNY 19.18 3,511 54.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a.China Autv .Sy s. CAAS US USD 6.3 202 5.4 n.a. n.a. n.a. n.a. 13.0 n.a. n.a.Sorl Auto Parts SORL US USD 3.27 63 5.1 n.a. n.a. n.a. n.a. 2.3 n.a. n.a.China Yuchai Intl. CYD US USD 19.1 730 8.1 n.a. n.a. n.a. 9.4 (21.2) n.a. n.a.A v erage 20 .3 13 .5 2 .2 9 .4 13 .1 23 .2 26 .5 29 .4


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Segmental Breakdown (US$ m)

FY Dec 2012A 2013A 2014F 2015F 2016F Revenues (US$ m) EPS 765 981 1,256 1,569 1,921 HPS 447 388 349 332 315 Steering column (CIS) 482 548 614 706 777 Driveline 474 470 594 722 892 Total 2,168 2,387 2,813 3,329 3,905 Revenues (US$ m) North America 1,536.4 1,696.8 1,940.7 2,273.8 2,655.5 Europe 328.4 303.0 388.1 476.1 566.2 China 182.3 261.8 393.8 496.0 605.3 Rest of World 120.7 125.2 90.0 83.2 78.1 Total 2,168 2,387 2,813 3,329 3,905 Source: Company, DBS Vickers

Income Statement (US$ m) Margins Trend

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2012A 2013A 2014F 2015F 2016F

Operating Margin % Net Income Margin %

Revenue 2,248 2,168 2,387 2,813 3,329 3,905 Cost of Goods Sold (1,970) (1,896) (2,047) (2,405) (2,830) (3,312) Gross Profit 278 271 339 408 499 594 Other Opng (Exp)/Inc (189) (187) (166) (174) (205) (235) Operating Profit 89 84 173 234 294 359 Other Non Opg (Exp)/Inc 0 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 0 Net Interest (Exp)/Inc (16) (22) (22) (35) (40) (48)

Dividend Income 0 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 73 62 151 199 254 311 Tax (5) (4) (40) (44) (53) (65) Minority Interest (1) (2) (2) (2) (2) (3) Preference Dividend 0 0 0 0 0 0 Net Profit 67 57 109 153 198 242 Net Profit before Except. 67 57 109 153 199 243 EBITDA 143 142 231 308 395 487 Growth Revenue Gth (%) N/A (3.6) 10.1 17.8 18.4 17.3 EBITDA Gth (%) N/A (1.0) 62.8 33.2 28.2 23.3 Opg Profit Gth (%) N/A (5.9) 106.2 35.2 25.7 22.1 Net Profit Gth (%) N/A (14.4) 91.2 40.1 29.5 22.4 Margins & Ratio Gross Margins (%) 12.4 12.5 14.2 14.5 15.0 15.2 Opg Profit Margin (%) 4.0 3.9 7.2 8.3 8.8 9.2 Net Profit Margin (%) 3.0 2.6 4.6 5.4 5.9 6.2 ROAE (%) 120.3 40.5 29.6 24.1 25.3 25.0 ROA (%) 13.7 5.1 7.1 7.7 8.6 9.6

ROCE (%) 27.0 10.8 11.6 11.9 12.8 14.2

Div Payout Ratio (%) 0.0 0.0 20.0 20.0 20.0 20.0

Net Interest Cover (x) 5.7 3.9 7.9 6.7 7.4 7.5 Source: Company, DBS Vickers

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Interim Income Statement (US$ m) Margins Trend

FY Dec 1H2012 2H2012 1H2013 2H2013 1H2014

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1H

12

2H

12

1H

13

2H

13

1H

14

Operating Margin % Net Income Margin %

Revenue 1,143 1,025 1,165 1,222 1,434 Cost of Goods Sold (987) (909) (995) (1,053) (1,230) Gross Profit 156 116 170 169 204 Other Oper. (Exp)/Inc (89) (98) (87) (80) (82) Operating Profit 66 18 83 90 122 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (10) (12) (11) (11) (10) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 56 6 73 78 112 Tax 3 (7) (14) (26) (30) Minority Interest (1) (1) (1) (1) (1) Net Profit 59 (2) 58 51 81 Net profit bef Except. 59 (2) 58 51 81 Growth Revenue Gth (%) N/A N/A 1.9 19.2 23.1 Opg Profit Gth (%) N/A N/A 26.1 405.3 46.4 Net Profit Gth (%) N/A N/A (1.3) N/A 39.1 Margins Gross Margins (%) 13.6 11.3 14.6 13.8 14.2 Opg Profit Margins (%) 5.8 1.7 7.2 7.3 8.5 Net Profit Margins (%) 5.2 (0.2) 5.0 4.2 5.6 Source: Company, DBS Vickers

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Balance Sheet (US$ m) Asset Breakdown

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F Net Fixed Assets -38.6%

Assocs'/JVs -0.0%

Bank, Cash and Liquid

Assets -25.8%

Inventory -12.1%

Debtors -23.5%

Net Fixed Assets 290 434 563 667 725 725 Invts in Associates & JVs 0 0 0 0 0 0 Other LT Assets 88 197 303 378 423 427 Cash & ST Invts 78 64 318 446 441 582 Inventory 157 174 185 210 255 307 Debtors 316 324 364 407 469 494 Other Current Assets 44 65 72 79 87 96 Total Assets 973 1,259 1,805 2,188 2,400 2,632 ST Debt

405 99 130 130 130 130 Creditors 260 296 336 322 344 345 Other Current Liab 103 112 125 139 160 184 LT Debt 2 442 458 708 708 708 Other LT Liabilities 82 118 165 165 165 165 Shareholder’s Equity 111 171 568 699 866 1,069 Minority Interests 12 21 23 25 28 31 Total Cap. & Liab. 973 1,259 1,805 2,188 2,400 2,632 Non-Cash Wkg. Capital 155 155 159 235 307 368 Net Cash/(Debt) (328) (476) (270) (392) (397) (256) Debtors Turn (avg days) 25.6 53.9 52.6 50.0 48.0 45.0 Creditors Turn (avg days) 24.7 55.1 58.0 51.6 44.6 39.5 Inventory Turn (avg days) 14.9 32.9 33.0 30.9 31.1 32.2 Asset Turnover (x) 4.6 1.9 1.6 1.4 1.5 1.6 Current Ratio (x) 0.8 1.2 1.6 1.9 2.0 2.2 Quick Ratio (x) 0.5 0.8 1.2 1.4 1.4 1.6 Net Debt/Equity (X) 2.7 2.5 0.5 0.5 0.4 0.2 Net Debt/Equity ex MI (X) 3.0 2.8 0.5 0.6 0.5 0.2 Capex to Debt (%) 15.8 31.2 29.1 21.5 17.9 11.9 Z-Score (X) NA NA NA NA NA NA Source: Company, DBS Vickers

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Cash Flow Statement (US$ m) Capital Expenditure

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F

0

20

40

60

80

100

120

140

160

180

200

2012A 2013A 2014F 2015F 2016F

Capital Expenditure (-)

Pre-Tax Profit 73 62 151 199 254 310 Dep. & Amort. 54 58 58 74 101 128 Tax Paid (8) (6) (4) (40) (44) (53) Assoc. & JV Inc/(loss) 0 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 Chg in Wkg.Cap. (35) 8 8 (79) (82) (72) Other Operating CF 14 35 10 61 67 66 Net Operating CF 98 158 223 215 295 379 Capital Exp.(net) (64) (169) (171) (180) (150) (100) Other Invts.(net) 0 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF (69) (105) (106) (100) (80) (50) Net Investing CF (133) (273) (277) (280) (230) (150) Div Paid 0 0 0 (22) (31) (40) Chg in Gross Debt (3) 105 (22) 215 (40) (48) Capital Issues 3 0 326 0 0 0 Other Financing CF 0 (6) 0 0 0 0 Net Financing CF 0 99 305 193 (70) (88) Currency Adjustments 0 2 0 0 0 0 Chg in Cash (35) (14) 250 128 (5) 141 Opg CFPS (US$) 0.05 0.09 0.12 0.12 0.15 0.18 Free CFPS (US$) 0.01 (0.01) 0.03 0.01 0.06 0.11 Source: Company, DBS Vickers


BUY HK$3.00 HSI : 24,555 (Upgrade from Hold)

Price Target : 12-Month HK$ 4.40 (Prev HK$5.20) Potential Catalyst: Increasing contributions from BMW projects DBSV vs Consensus: FY15 EPS inline with consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

82

102

122

142

162

182

202

222

242

262

1.7

2.2

2.7

3.2

3.7

4.2

4.7

5.2

5.7

6.2

Mar-13 Aug-13 Jan-14 Jun-14 Nov-14

Relative IndexHK$

Xinchen China Power Hldgs (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 2,586 2,835 4,052 5,182 EBITDA 374 375 515 664 Pre-tax Profit 324 299 439 624 Net Profit 271 254 364 518 Net Pft (Pre Ex.) 271 254 364 518 EPS (RMB) 0.22 0.20 0.29 0.41 EPS (HK$) 0.28 0.25 0.36 0.51 EPS Gth (%) (28.0) (8.8) 43.4 42.1 Diluted EPS (HK$) 0.28 0.25 0.36 0.51 DPS (HK$) 0.00 0.00 0.00 0.00 BV Per Share (HK$) 2.22 2.40 2.76 3.28 PE (X) 10.9 11.9 8.3 5.9 P/Cash Flow (X) (61.5) 14.3 54.5 8.0 P/Free CF (X) nm nm nm 13.3 EV/EBITDA (X) 5.2 5.9 4.8 3.4 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.4 1.2 1.1 0.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 15.5 11.0 13.9 16.9 Earnings Rev (%): (8) (1) New Consensus EPS (RMB): 0.21 0.29 0.48 Other Broker Recs: B: 3 S: 0 H: 1 ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: The Company is an automotive engine manufacturer. Source of all data: Company, DBSV, Thomson Reuters, HKEX

Ready to take off

BMW-related projects remain intact; expansion into engine crankshaft supply further enhances its engine parts supply strategy

2014 self-brand engine sales below target; expect earnings to disappoint

Cut FY14/15 earnings by 8%/1%

Upgrade to BUY on valuation; TP rolled over to FY15 earnings; pegged to 12x forward valuation multiples

First full-year contribution from BMW projects in 2015. Xinchen is looking forward to higher output this year and we estimate 35,000 units of N20 engine sales in 2015 (up from 9,000 units in FY14E). Brilliance China's (1114) launch of its first MPV model should lift the N20 engine sales. Connection rod sales are also expected to rise, up from 800,000 pieces to ~1m this year. The strategy to transform into an engine parts supplier is further enhanced after Xinchen acquired the crankshaft production line from BMW JV for Rmb391.4m and will invest Rmb791m to upgrade the facility to prepare for the new Bx8 engine production.

Self-brand engine sales slowed in 2H14. We cut our FY14/15 earnings by 8%/1% to reflect the weaker volume sales assumptions. The overall self-brand auto market was squeezed by the Sino-foreign brands and the former's market share slid to <40%. 2H volume sales disappoint and as such, FY14 results are likely to be weak. Longer term, Xinchen hopes to leverage on the BMW engine and engine parts business to upgrade its self-brand engine quality.

Valuation is attractive, upgrade to BUY. The share's valuation is attractive after the recent sharp correction. We rolled over our TP to FY15 to arrive at HK$4.40, pegged to 12x PE (discounted from 13x sector average). We see potential share price appreciation in view of the improving business prospect and earnings growth.

At A Glance Issued Capital (m shrs) 1,287 Mkt. Cap (HK$m/US$m) 3,860 / 498

Major Shareholders Xinhua Investment (%) 31.9 Brilliance Investment (%) 31.1


China Auto Sector

Xinchen China Power Hldgs Bloomberg: 1148 HK | Reuters: 1148.HK Refer to important disclosures at the end of this report

China Auto Sector

Xinchen China Power Hldgs

Page 55


FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 2,586 2,835 4,052 5,182 Net Fixed Assets 350 676 940 1,047 Cost of Goods Sold (2,075) (2,306) (3,319) (4,215) Invts in Assocs & JVs 0 0 0 0 Gross Profit 511 529 733 967 Other LT Assets 313 309 307 325 Other Opng (Exp)/Inc (165) (188) (258) (325) Cash & ST Invts 1,357 1,583 1,317 1,516 Operating Profit 346 341 475 642 Inventory 385 576 730 927 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 896 1,255 1,515 1,923 Associates & JV Inc 0 0 2 22 Other Current Assets 1,146 990 1,451 1,847 Net Interest (Exp)/Inc (21) (43) (38) (40) Total Assets 4,448 5,390 6,261 7,585 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 343 743 743 743 Pre-tax Profit 324 299 439 624 Creditors 1,750 2,002 2,428 3,134 Tax (53) (45) (75) (106) Other Current Liab 135 171 251 352 Minority Interest 0 0 0 0 LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 39 39 39 39 Net Profit 271 254 364 518 Shareholder’s Equity 2,180 2,435 2,799 3,317 Net Profit before Except. 271 254 364 518 Minority Interests 0 0 0 0 EBITDA 374 375 515 664 Total Cap. & Liab. 4,448 5,390 6,261 7,585 Sales Gth (%) 0.5 9.6 43.0 27.9 EBITDA Gth (%) (7.7) 0.5 37.2 28.9 Non-Cash Wkg. Cap 543 649 1,017 1,211 Opg Profit Gth (%) (6.4) (1.2) 39.2 35.1 Net Cash/(Debt) 1,014 839 573 773 Net Profit Gth (%) (6.7) (6.1) 43.4 42.1 Effective Tax Rate (%) 16.5 15.0 17.0 17.0 Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 324 299 439 624 Gross Margins (%) 19.7 18.7 18.1 18.7 Dep. & Amort. 28 33 38 47 Opg Profit Margin (%) 13.4 12.0 11.7 12.4 Tax Paid (62) (37) (31) (52) Net Profit Margin (%) 10.5 9.0 9.0 10.0 Assoc. & JV Inc/(loss) 0 0 (2) (22) ROAE (%) 15.5 11.0 13.9 16.9 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 7.2 5.2 6.3 7.5 Chg in Wkg.Cap. (356) (114) (412) (247) ROCE (%) 14.0 10.0 11.6 13.9 Other Operating CF 18 31 24 29 Div Payout Ratio (%) 0.0 0.0 0.0 0.2 Net Operating CF (48) 212 56 378 Net Interest Cover (x) 16.2 8.0 12.4 16.0 Capital Exp.(net) (132) (356) (297) (150) Asset Turnover (x) 0.7 0.6 0.7 0.7 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 109.8 138.5 124.8 121.1 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 275.2 301.3 246.4 240.8 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 53.5 77.2 72.7 71.8 Other Investing CF 2 12 14 11 Current Ratio (x) 1.7 1.5 1.5 1.5 Net Investing CF (131) (344) (283) (139) Quick Ratio (x) 1.0 1.0 0.8 0.8 Div Paid 0 0 0 0 Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt 149 400 0 0 Capex to Debt (%) 38.5 47.8 40.0 20.2 Capital Issues 587 0 0 0 Z-Score (X) N/A N/A N/A N/A Other Financing CF (55) (43) (38) (40) N.Cash/(Debt)PS (RMB) 1.03 0.83 0.57 0.76 Net Financing CF 680 357 (38) (40) Opg CFPS (RMB) 0.25 0.26 0.37 0.50 Currency Adjustments 0 0 0 0 Free CFPS (RMB) (0.15) (0.11) (0.19) 0.18 Chg in Cash 502 225 (266) 200


FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 1,178 1,302 1,284 1,453 Revenues (RMB m) Cost of Goods Sold (935) (1,065) (1,010) (1,167) Light-duty gasoline engines 2,105 2,085 3,019 3,756 Gross Profit 244 237 274 287 Light-duty diesel engines 389 423 470 522 Other Oper. (Exp)/Inc (66) (63) (103) (93) BMW engine parts 0 224 451 780 Operating Profit 177 174 171 194 Others 93 102 112 124 Other Non Opg (Exp)/Inc 0 0 0 0 Total 2,586 2,835 4,052 5,182 Associates & JV Inc 0 0 0 0 Net Interest (Exp)/Inc (9) (8) (13) (22) Gross Profit (RMB m) Exceptional Gain/(Loss) 0 0 0 0 Light-duty gasoline engines 376 340 482 629 Pre-tax Profit 168 166 158 173 Light-duty diesel engines 86 92 103 114 Tax (27) (25) (28) (29) BMW engine parts 0 56 104 175 Minority Interest 0 0 0 0 Others 48 41 45 49 Net Profit 142 141 130 143 Total 511 529 733 967 Net profit bef Except. 142 141 130 143 Gross Profit Margins (%) Light-duty gasoline engines 17.9 16.3 16.0 16.7 Sales Gth (%) (1.3) (6.6) 9.0 11.6 Light-duty diesel engines 22.2 21.8 21.8 21.8 Opg Profit Gth (%) 0.5 (9.1) (3.5) 11.4 BMW engine parts N/A 25.0 23.0 22.4 Net Profit Gth (%) 11.2 (5.2) (8.3) 1.9 Others 51.9 40.0 40.0 40.0 Gross Margins (%) 20.7 18.2 21.3 19.7 Total 19.7 18.7 18.1 18.7 Opg Profit Margins (%) 15.1 13.4 13.3 13.4 Net Profit Margins (%) 12.0 10.8 10.1 9.9 Key Assumptions Engine sales ('000) 275.6 250.9 297.5 349.2 Connection rods ('000) 0.0 1,020.0 1,260.0 1,800.0 Crankshaft ('000) 0.0 0.0 140.0 320.0 Source: Company, DBS Vickers


BUY HK$6.86 HSI : 24,555

Price Target : 12-Month HK$ 8.80 (Prev HK$11.55) Potential Catalyst: Auto sales and margin recovery DBSV vs Consensus: Our FY15 EPS c.7% higher than consensus Analyst Rachel MIU +852 2863 8843 [email protected]

Price Relative

37

57

77

97

117

137

157

177

197

217

6.1

8.1

10.1

12.1

14.1

16.1

18.1


Relative IndexHK$

ZhongSheng Group (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014F 2015F 2016FTurnover 52,527 57,481 62,190 65,207 EBITDA 3,018 3,175 3,984 4,569 Pre-tax Profit 1,390 1,757 2,532 3,099 Net Profit 1,010 1,260 1,685 2,045 Net Pft (Pre Ex.) 1,010 1,260 1,685 2,045 EPS (RMB) 0.53 0.59 0.78 0.95 EPS (HK$) 0.66 0.73 0.97 1.18 EPS Gth (%) 34.7 10.9 33.7 21.4 Diluted EPS (HK$) 0.66 0.73 0.97 1.18 DPS (HK$) 0.10 0.11 0.15 0.18 BV Per Share (HK$) 5.47 6.64 7.50 8.54 PE (X) 10.5 9.4 7.1 5.8 P/Cash Flow (X) 5.8 7.1 4.5 3.6 P/Free CF (X) nm 51.8 7.7 5.3 EV/EBITDA (X) 7.9 7.7 6.2 5.3 Net Div Yield (%) 1.4 1.6 2.1 2.6 P/Book Value (X) 1.3 1.0 0.9 0.8 Net Debt/Equity (X) 1.2 0.9 0.8 0.6 ROAE (%) 12.7 12.7 13.8 14.7 Earnings Rev (%): (13) (8) New Consensus EPS (RMB): 0.58 0.73 0.87 Other Broker Recs: B: 11 S: 2 H: 5 ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: A leading automobile dealership group which has a high exposure to major Japanese auto brands, Mercedes Benz and Audi Source of all data: Company, DBSV, Thomson Reuters, HKEX

Oversold; value emerging

Luxury car sales boost from Mercedes-Benz’s (MB) market share increase

Expect new Japanese model and inventory digestion to stabilise ASP and margins

Tuned down FY14-15 earnings assumptions on margin pressure; TP adjusted accordingly

Maintain BUY on anticipation of earnings recovery

Benefitting from MB’s rising volume growth and stabilisation of new car sales margin. The brand’s volume sales surged 29% last year, the best among the German luxury auto brands. MB’s market share gained around 1.6ppts last year to c.21.4%. Zhongsheng should continue to benefit from the brand’s rising market presence in China, especially with the localisation of GLA and GLK models. MB is giving some Rmb1bn of incentives and rebates to its dealers to cover for the weak 2H.

Japanese car segment. Better new car model ASP and with the digestion of inventory in the past few months, the operating environment is stabilising. As such, new car sales margin is experiencing lesser downward pressure, especially with the financial incentives from the automakers to compensate the auto dealers for the heavy price discounting in 4Q. This year, the Japanese automakers are supportive on auto dealers and likely to set reasonable sales targets. Hence the inventory pressure should be more manageable this year.

A big laggard, value emerging. Anticipation of weak 2H should have priced in, based on the recent short-selling momentum ahead of the result season. MB is still strong this year, and the luxury car business account for ~60% to its new car sales operations, compared to peers’ ~80% exposure. We cut FY14/15 earnings by 13%/8% on lower margin assumptions and TP adjusted down accordingly to HK$8.80, pegged to 9x FY15 PE. Maintain Buy on anticipation of earnings recovery and better incentive scheme from automakers.


Major Shareholders Li Guoqiang (%) 59.2 The Capital Group Companies (%) 8.8


China Auto Sector

ZhongSheng Group Bloomberg: 881 HK | Reuters: 0881.HK Refer to important disclosures at the end of this report

China Auto Sector

ZhongSheng Group

Page 57


FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Turnover 52,527 57,481 62,190 65,207 Net Fixed Assets 6,309 7,443 8,173 8,837 Cost of Goods Sold (47,767) (52,157) (56,099) (58,597) Invts in Assocs & JVs 40 45 51 57 Gross Profit 4,761 5,323 6,091 6,610 Other LT Assets 7,570 7,763 7,957 8,151 Other Opng (Exp)/Inc (3,060) (3,449) (3,607) (3,782) Cash & ST Invts 5,462 7,113 6,186 5,942 Operating Profit 1,701 1,874 2,484 2,828 Inventory 6,810 8,614 9,262 9,668 Other Non Opg (Exp)/Inc 702 822 968 1,144 Debtors 590 646 699 733 Associates & JV Inc 5 5 6 6 Other Current Assets 6,953 6,277 6,744 7,037 Net Interest (Exp)/Inc (1,018) (945) (926) (880) Total Assets 33,735 37,900 39,071 40,425 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 16,764 15,264 14,264 13,264 Pre-tax Profit 1,390 1,757 2,532 3,099 Creditors 3,916 4,307 4,631 4,834 Tax (367) (430) (633) (775) Other Current Liab 2,016 1,746 1,883 1,962 Minority Interest (13) (66) (215) (279) LT Debt 558 2,969 2,969 2,969 Preference Dividend 0 0 0 0 Other LT Liabilities 785 785 785 785 Net Profit 1,010 1,260 1,685 2,045 Shareholder’s Equity 8,419 11,484 12,980 14,772 Net Profit before Except. 1,010 1,260 1,685 2,045 Minority Interests 1,278 1,344 1,559 1,838 EBITDA 3,018 3,175 3,984 4,569 Total Cap. & Liab. 33,735 37,900 39,071 40,425 Sales Gth (%) 5.0 9.4 8.2 4.9 EBITDA Gth (%) 14.2 5.2 25.5 14.7 Non-Cash Wkg. Cap 8,423 9,483 10,191 10,641 Opg Profit Gth (%) 13.9 10.2 32.5 13.8 Net Cash/(Debt) (11,860) (11,120) (11,047) (10,291) Net Profit Gth (%) 34.7 24.7 33.7 21.4 Effective Tax Rate (%) 26.4 24.5 25.0 25.0 Cash Flow Statement (RMB m) Rates & Ratio

FY Dec 2013A 2014F 2015F 2016F FY Dec 2013A 2014F 2015F 2016F Pre-Tax Profit 1,390 1,757 2,532 3,099 Gross Margins (%) 9.1 9.3 9.8 10.1 Dep. & Amort. 609 473 526 590 Opg Profit Margin (%) 3.2 3.3 4.0 4.3 Tax Paid (253) (631) (430) (633) Net Profit Margin (%) 1.9 2.2 2.7 3.1 Assoc. & JV Inc/(loss) (5) (5) (6) (6) ROAE (%) 12.7 12.7 13.8 14.7 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 3.1 3.5 4.4 5.1 Chg in Wkg.Cap. (979) (860) (911) (592) ROCE (%) 4.7 4.7 5.8 6.4 Other Operating CF 1,044 945 926 880 Div Payout Ratio (%) 15.0 15.0 15.0 15.0 Net Operating CF 1,807 1,678 2,637 3,337 Net Interest Cover (x) 1.7 2.0 2.7 3.2 Capital Exp.(net) (1,904) (1,450) (1,100) (1,100) Asset Turnover (x) 1.6 1.6 1.6 1.6 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 4.1 3.9 3.9 4.0 Invts in Assoc. & JV (397) 0 0 0 Creditors Turn (avg days) 29.6 29.0 29.4 29.8 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 50.9 54.5 58.7 59.6 Other Investing CF 292 (244) (243) (262) Current Ratio (x) 0.9 1.1 1.1 1.2 Net Investing CF (2,010) (1,694) (1,343) (1,362) Quick Ratio (x) 0.3 0.4 0.3 0.3 Div Paid 0 0 0 0 Net Debt/Equity (X) 1.2 0.9 0.8 0.6 Chg in Gross Debt 1,743 827 (1,000) (1,000) Capex to Debt (%) 11.0 8.0 6.4 6.8 Capital Issues 0 2,009 0 0 Z-Score (X) 2.1 2.3 2.5 0.0 Other Financing CF (1,819) (1,018) (1,032) (967) N.Cash/(Debt)PS (RMB) (7.71) (6.43) (6.38) (5.95) Net Financing CF (76) 1,818 (2,032) (1,967) Opg CFPS (RMB) 1.46 1.18 1.65 1.83 Currency Adjustments (1) 0 0 0 Free CFPS (RMB) (0.05) 0.11 0.72 1.04 Chg in Cash (280) 1,802 (738) 9


FY Dec 2H2012 1H2013 2H2013 1H2014 FY Dec 2013A 2014F 2015F 2016F Turnover 25,791 24,609 27,919 26,786 Revenues (RMB m) Cost of Goods Sold (23,687) (22,298) (25,468) (24,217) New car sales (after sales

tax) 46,493 49,817 52,994 54,631

Gross Profit 2,104 2,310 2,451 2,569 Other Oper. (Exp)/Inc (1,391) (1,402) (1,657) (1,604) After-sales business 6,034 7,664 9,196 10,576 Operating Profit 713 908 793 965 Total 52,527 57,481 62,190 65,207 Other Non Opg (Exp)/Inc 383 287 416 360 Associates & JV Inc 3 3 2 2 Net Interest (Exp)/Inc (518) (468) (550) (493) Gross Profit (RMB m) Exceptional Gain/(Loss) 0 0 0 0 New car sales (after sales

tax) 1,949 1,760 1,953 1,956

Pre-tax Profit 580 729 661 834 Tax (120) (198) (169) (217) After-sales business 2,812 3,564 4,138 4,653 Minority Interest (81) (42) 29 (36) Total 4,761 5,323 6,091 6,610 Net Profit 379 489 521 580 Net profit bef Except. 379 489 521 580 Gross Profit Margins (%) New car sales (after sales

tax) 4.2 3.5 3.7 3.6

Sales Gth (%) 1.1 1.4 8.3 8.8 Opg Profit Gth (%) (51.2) 16.2 11.3 6.3 After-sales business 46.6 46.5 45.0 44.0 Net Profit Gth (%) (58.2) 32.0 37.3 18.6 Total 9.1 9.3 9.8 10.1 Gross Margins (%) 8.2 9.4 8.8 9.6 Opg Profit Margins (%) 2.8 3.7 2.8 3.6 Net Profit Margins (%) 1.5 2.0 1.9 2.2 Key Assumptions New car sales vol - Mid-

high end (unit) 128,053 138,297 147,978 155,376

New car sales vol - Luxury 68,636 78,931 86,824 91,165 Source: Company, DBS Vickers

Industry Focus

China Auto Sector

Page 58

Appendix

Monthly vehicle sales

'000 units Dec-13 Nov -14 Dec-14 YoY

growth(%)

MoMgrowth

(%)

2013 2014 2015F 2015 YoYgrowth

(%)

As a % oftotal PV

(2014)

China total v ehicle sales 2,134 2,091 2,410 12.9 15.3 21,993 23,489 25,180 7.2

Passenger Vehicles 1,777 1,775 2,061 16.0 16.1 17,928 19,700 21,300 8.1 100%

Sedan 1,176 1,074 1,263 7.4 17.6 12,008 12,374 12,560 1.5 63%MPV 161 201 214 33.2 6.8 1,290 1,915 2,580 34.7 10%

SUV 315 415 492 56.1 18.6 2,989 4,078 5,100 25.0 21%Cross 125 86 92 (26.7) 7.5 1,641 1,332 1,060 (20.4) 7%

Commercial Vehicles 357 316 349 (2.3) 10.6 4,065 3,789 3,902 3.0Bus 54 50 63 17.3 27.1 477 527Truck 217 196 220 1.6 12.3 2,738 2,436

Tow Truck 30 26 26 (13.3) 1.2 263 279Unfinished Bus 7 7 7 (2.7) 4.4 80 77

Unfinished Truck 50 38 33 (34.0) (12.6) 507 469

Source: CAAM, CEIC, DBS Vickers

Industry Focus

China Auto Sector

Page 59

Monthly total vehicle sales in China Monthly total vehicle sales growth in China

0

500

1,000

1,500

2,000

2,500

3,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2009 2010 20112012 2013 2014

'000 units

(60)(40)(20)

0 20 40 60 80

100 120 140

Jan/

06Ju

l/06

Jan/

07Ju

l/07

Jan/

08Ju

l/08

Jan/

09Ju

l/09

Jan/

10Ju

l/10

Jan/

11Ju

l/11

Jan/

12Ju

l/12

Jan/

13Ju

l/13

Jan/

14Ju

l/14

YoY growth MoM growth

%

Monthly PV sales in China Monthly PV sales growth in China

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2009 2010 2011

2012 2013 2014

unit

(60)(40)(20)

0 20 40 60 80

100 120 140

Jan/

06Ju

l/06

Jan/

07Ju

l/07

Jan/

08Ju

l/08

Jan/

09Ju

l/09

Jan/

10Ju

l/10

Jan/

11Ju

l/11

Jan/

12Ju

l/12

Jan/

13Ju

l/13

Jan/

14Ju

l/14

Yoy, % MoM, %

%

Monthly CV sales in China Monthly CV sales growth in China

0

100,000

200,000

300,000

400,000

500,000

600,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2009 2010 20112012 2013 2014

unit

(50)

0

50

100

150

200

Jan/

06Ju

l/06

Jan/

07Ju

l/07

Jan/

08Ju

l/08

Jan/

09Ju

l/09

Jan/

10Ju

l/10

Jan/

11Ju

l/11

Jan/

12Ju

l/12

Jan/

13Ju

l/13

Jan/

14Ju

l/14

Yoy, % MoM, %

%

Source: CEIC

Industry Focus

China Auto Sector

Page 60

Automobile price - Sedan & SUV (Domestic made) Imports & exports of auto parts, accessories & body

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

Jan/

07

Jan/

08

Jan/

09

Jan/

10

Jan/

11

Jan/

12

Jan/

13

Jan/

14

Sedan SUV

RMB

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Imports Exports

US$m

Auto inventory days Imported motor vehicles and growth

0.6

1.6

2.6

3.6

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Total Sino-Foreign JV brandsImports Self-brands

months

(20)

0

20

40

60

80

100

0

200

400

600

800

1,000

1,200

1,400

1,600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Imported motor vehicles (LHS) Growth (RHS)

'000 units YoY, %

ASP of imported Sedan Monthly SUV sales volume in China

0

10,000

20,000

30,000

40,000

50,000

60,000

Jan/

03Ju

l/03

Jan/

04Ju

l/04

Jan/

05Ju

l/05

Jan/

06Ju

l/06

Jan/

07Ju

l/07

Jan/

08Ju

l/08

Jan/

09Ju

l/09

Jan/

10Ju

l/10

Jan/

11Ju

l/11

Jan/

12Ju

l/12

Jan/

13Ju

l/13

Jan/

14Ju

l/14

US$/unit

0

100,000

200,000

300,000

400,000

500,000

600,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2009 2010 2011

2012 2013 2014

unit

Source: CADA, CEIC

Industry Focus

China Auto Sector

Page 61

China auto sales growth projections Disposable income and net income per capita in China

0

10

20

30

40

50

0

5

10

15

20

25

30

35

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

F

2016

F

2017

F

2018

F

2019

F

PV sales (LHS) CV sales (LHS)Total sales growth(RHS)

m units YoY, %

2014-19 CAGR: 6%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Annual Net Income Per Capita: Rural Household

Annual Disposable Income Per Capita: Urban

RMB

Automobile price index - Domestic made

Vehicle inventory alert index

50

60

70

80

90

100

110

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14

PV MiniSmall Medium classHigh class Luxury

Jan 2004 = 100

0

10

20

30

40

50

60

70

Jan-

13Fe

b-13

Mar

-13

Apr

-13

Ma y

-13

Jun-

13Ju

l-13

Au g

-13

Sep-

13O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

u g-1

4Se

p-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

%

Gasoline price in China Diesel price in China

0

2,000

4,000

6,000

8,000

10,000

12,000

Aug

-04

Apr

-05

Dec

-05

Au g

-06

Apr

-07

Dec

-07

Au g

-08

Apr

-09

Dec

-09

Au g

-10

Apr

-11

Dec

-11

Au g

-12

Apr

-13

Dec

-13

Au g

-14

Gasoline, No 90: Without Lead



RMB/ton

0

2,000

4,000

6,000

8,000

10,000

12,000

Aug

-04

Apr

-05

Dec

-05

Aug

-06

Apr

-07

Dec

-07

Aug

-08

Apr

-09

Dec

-09

Aug

-10

Apr

-11

Dec

-11

Aug

-12

Apr

-13

Dec

-13

Aug

-14

Diesel Oil, No 0 Diesel Oil, No -10

RMB/ton

Source: CEIC, CADA, DBS Vickers

Industry Focus

China Auto Sector

Page 62

Dongfeng - total monthly sales

Dongfeng - total monthly sales growth

0

50,000

100,000

150,000

200,000

250,000

300,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2011 2012 2013 2014

unit

-60%

-40%

-20%

0%

20%

40%

60%

80%

-60%-40%-20%

0%20%40%60%80%

100%120%140%

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

Jun-

14Se

p-14

Dec

-14

Y-o-Y growth (LHS)

M-o-M growth (RHS)

GAC – total monthly sales

GAC – total monthly sales growth

0 20,000 40,000 60,000 80,000

100,000 120,000 140,000 160,000 180,000 200,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2011 2012 2013 2014

unit

-100%

-50%

0%

50%

100%

150%

200%

Jan-

10M

ar-1

0M

a y-1

0Ju

l-10

Sep-

10N

ov-1

0Ja

n-11

Mar

-11

Ma y

-11

Jul-1

1Se

p-11

Nov

-11

Jan-

12M

ar-1

2M

a y-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

Ma y

-13

Jul-1

3Se

p-13

Nov

-13

Jan-

14M

ar-1

4M

a y-1

4Ju

l-14

Sep-

14N

ov-1

4YOY growth MoM growth

Brilliance China – total monthly sales (BMW)

Brilliance China – total monthly sales growth (BMW)

0

5,000

10,000

15,000

20,000

25,000

30,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2012 2013 2014

unit

(50)

0

50

100

150

200

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4


%

Source: Companies

Industry Focus

China Auto Sector

Page 63

Geely – total monthly sales

Geely – total monthly sales growth

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2012 2013 2014 2015

unit

-100%

-50%

0%

50%

100%

150%

200%

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15


Great Wall Motor – total monthly sales

Great Wall Motor – total monthly sales growth

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

100,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2012 2013 2014 2015

unit

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Feb-

10

Jun-

10

Oct

-10

Feb-

11

Jun-

11

Oct

-11

Feb-

12

Jun-

12

Oct

-12

Feb-

13

Jun-

13

Oct

-13

Feb-

14

Jun-

14

Oct

-14


%

Source: Companies

Industry Focus

China Auto Sector

Page 64

Audi – monthly sales Audi – monthly sales growth

0

10

20

30

40

50

60

70

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2011 2012 2013 2014

'000 units

(40)

(20)

0

20

40

60

80

Jan/

10

Jul/1

0

Jan/

11

Jul/1

1

Jan/

12

Jul/1

2

Jan/

13

Jul/1

3

Jan/

14

Jul/1

4


%

BMW Group – monthly sales

BMW Group – monthly sales growth

0

5

10

15

20

25

30

35

40

45

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2011 2012 2013 2014

'000 units

(40)

(20)

0

20

40

60

80

100

Jan/

10

Jul/1

0

Jan/

11

Jul/1

1

Jan/

12

Jul/1

2

Jan/

13

Jul/1

3

Jan/

14

Jul/1

4


%

Mercedes Benz – monthly sales

Mercedes Benz – monthly sales growth

0

5

10

15

20

25

30

35

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2011 2012 2013 2014

'000 units

(60)

(40)

(20)

0

20

40

60

80

100

Jan/

10

Jul/1

0

Jan/

11

Jul/1

1

Jan/

12

Jul/1

2

Jan/

13

Jul/1

3

Jan/

14

Jul/1

4


%

Source: Companies

Industry Focus

China Auto Sector

Page 65

Porsche – monthly sales

Porsche – monthly sales growth

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2011 2012 2013 2014

'000 units

(60)(40)(20)

0 20 40 60 80

100 120

Sep/

11

Dec

/11

Mar

/12

Jun/

12

Sep/

12

Dec

/12

Mar

/13

Jun/

13

Sep/

13

Dec

/13

Mar

/14

Jun/

14

Sep/

14

Dec

/14


%

Jaguar Land Rover – monthly sales

Jaguar Land Rover – monthly sales growth

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2011 2012 2013 2014

'000 units

(100)

(50)

0

50

100

150

200

250

Feb/

10

Jun/

10

Oct

/10

Feb/

11

Jun/

11

Oct

/11

Feb/

12

Jun/

12

Oct

/12

Feb/

13

Jun/

13

Oct

/13

Feb/

14

Jun/

14

Oct

/14


%

Source: Companies

Industry Focus

China Auto Sector

Page 66

PE charts

Brilliance China (1114 HK) Dongfeng Motor (489 HK)

0

5

10

15

20

25

Jan

-10

Jun

-10

Dec

-10

May

-11

No

v-1

1

Ap

r-1

2

Oct

-12

Mar

-13

Sep

-13

Mar

-14

Au

g-1

4

Feb

-15

x

Avg: 11.5x

+1SD: 14.5x

-1SD: 8.5x

0

2

4

6

8

10

12

14

Dec

-05

Oct

-07

Au

g-0

9

Jun

-11

Ap

r-1

3

Feb

-15

x

Avg: 7.3x

+1SD: 9.3x

-1SD: 5.3x

Geely (175 HK) Great Wall Motor (2333 HK)

0

5

10

15

20

25

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

x

Avg: 10.1x

+1SD: 14.7x

-1SD: 5.5x

0

5

10

15

20

25

Dec

-03

May

-05

No

v-0

6

Ap

r-0

8

Sep

-09

Feb

-11

Au

g-1

2

Jan

-14

Jun

-15

x

Avg: 7x

+1SD: 10.8x

-1SD: 3.2x

Guangzhou Auto (2238 HK) BAIC (1958 HK)

5

10

15

20

25

30

35

40

Au

g-1

0

Ap

r-1

1

Dec

-11

Jul-

12

Mar

-13

Oct

-13

Jun

-14

Feb

-15

x

Avg: 14.7x

+1SD: 20.5x

-1SD: 9x

7.8

8.0

8.2

8.4

8.6

8.8

9.0

9.2

Dec

-14

Dec

-14

Jan

-15

Jan

-15

Jan

-15

Feb

-15

x

Avg: 8.6x

+1SD: 8.9x

-1SD: 8.3x


Industry Focus

China Auto Sector

Page 67

PE charts (continued)

CQ Changan ‘B’ (200625 CH) SAIC (600104 CH)

0

2

4

6

8

10

12

14

16

Jan

-09

Feb

-10

Mar

-11

Ap

r-1

2

Ap

r-1

3

May

-14

Jun

-15

x

Avg: 7.3x

+1SD: 10.1x

-1SD: 4.5x

2

4

6

8

10

12

14

Jan

-10

Jun

-10

Dec

-10

May

-11

No

v-1

1

Ap

r-1

2

Oct

-12

Mar

-13

Sep

-13

Mar

-14

Au

g-1

4

Feb

-15

x

Avg: 7.4x

+1SD: 9.1x

-1SD: 5.8x

China Zhengtong (1728 HK) Dah Chong Hong (1828 HK)

0

5

10

15

20

25

30

35

40

Dec

-10

Oct

-11

Au

g-1

2

Jun

-13

Ap

r-1

4

Feb

-15

x

Avg: 15.3x

+1SD: 23.1x

-1SD: 7.5x

0

5

10

15

20

25

Dec

-09

Sep

-10

Jun

-11

Feb

-12

No

v-1

2

Au

g-1

3

May

-14

Feb

-15

x

+1SD: 15.3x

Avg: 11.6x

-1SD: 7.9x

Zhongsheng Group (881 HK)

0

5

10

15

20

25

30

35

Mar

-10

Mar

-11

Mar

-12

Feb

-13

Feb

-14

Feb

-15

x

Avg: 16.7x

+1SD: 22x

-1SD: 11.4x


Industry Focus

China Auto Sector

Page 68

PE charts (continued)

Minth (425 HK) Nexteer Automotive (1316 HK)

0

5

10

15

20

25

30

Dec

-05

Oct

-07

Au

g-0

9

Jun

-11

Ap

r-1

3

Feb

-15

x

Avg: 10.9x

+1SD: 14.7x

-1SD: 7x

4

6

8

10

12

14

Oct

-13

No

v-1

3

Jan

-14

Feb

-14

Ap

r-1

4

May

-14

Jun

-14

Au

g-1

4

Sep

-14

No

v-1

4

Dec

-14

Feb

-15

x

Avg: 9.7x

+1SD: 11.3x

-1SD: 8x

+2SD: 12.9x

-2SD: 6.4x

Xinchen (1148 HK) Xingda Int’l (1899 HK)

468

1012141618202224

Mar

-13

Jul-

13

Dec

-13

May

-14

Sep

-14

Feb

-15

x

Avg: 13.2x

+1SD: 16.9x

-1SD: 9.6x

0

5

10

15

20

25

30

35

40

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

x

Avg: 11.5x

+1SD: 19.5x

-1SD: 3.6x


Industry Focus

China Auto Sector

Page 69

PB charts

Brilliance China (1114 HK) Dongfeng Motor (489 HK)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan

-10

Jun

-10

Dec

-10

May

-11

No

v-1

1

Ap

r-1

2

Oct

-12

Mar

-13

Sep

-13

Mar

-14

Au

g-1

4

Feb

-15

x

Avg: 2.8x

+1SD: 3.5x

-1SD: 2.1x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec

-05

Oct

-07

Au

g-0

9

Jun

-11

Ap

r-1

3

Feb

-15

x

Avg: 1.4x

+1SD: 1.9x

-1SD: 1x

Geely (175 HK) Great Wall Motor (2333 HK)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

x

Avg: 1.5x

+1SD: 2.1x

-1SD: 0.9x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec

-03

May

-05

No

v-0

6

Ap

r-0

8

Sep

-09

Feb

-11

Au

g-1

2

Jan

-14

Jun

-15

x

Avg: 1.3x

+1SD: 2x

-1SD: 0.6x

Guangzhou Auto (2238 HK) BAIC (1958 HK)

0.0

0.5

1.0

1.5

2.0

2.5

Au

g-1

0

Ap

r-1

1

Dec

-11

Jul-

12

Mar

-13

Oct

-13

Jun

-14

Feb

-15

x

Avg: 1.3x

+1SD: 1.6x

-1SD: 0.9x

1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

1.36

1.38

Dec

-14

Dec

-14

Jan

-15

Jan

-15

Jan

-15

Feb

-15

x

Avg: 1.3x

+1SD: 1.4x

-1SD: 1.3x


Industry Focus

China Auto Sector

Page 70

PB charts (continued)

CQ Changan ‘B’ (200625 CH) SAIC (600104 CH)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan

-09

Feb

-10

Mar

-11

Ap

r-1

2

Ap

r-1

3

May

-14

Jun

-15

x

Avg: 1.1x

+1SD: 1.6x

-1SD: 0.6x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan

-10

Jun

-10

Dec

-10

May

-11

No

v-1

1

Ap

r-1

2

Oct

-12

Mar

-13

Sep

-13

Mar

-14

Au

g-1

4

Feb

-15

x

Avg: 1.4x

+1SD: 1.8x

-1SD: 1x

China Zhengtong (1728 HK) Dah Chong Hong (1828 HK)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dec

-10

Oct

-11

Au

g-1

2

Jun

-13

Ap

r-1

4

Feb

-15

x

Avg: 1.4x

+1SD: 2.1x

-1SD: 0.9x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec

-09

Sep

-10

Jun

-11

Feb

-12

No

v-1

2

Au

g-1

3

May

-14

Feb

-15

x

+1SD: 1.9x

Avg: 1.5x

-1SD: 1x

Zhongsheng Group (881 HK)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Mar

-10

Mar

-11

Mar

-12

Feb

-13

Feb

-14

Feb

-15

x

Avg: 2.2x

+1SD: 3.1x

-1SD: 1.4x


Industry Focus

China Auto Sector

Page 71

PB charts (continued)

Minth (425 HK) Nexteer (1316 HK)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dec

-05

Oct

-07

Au

g-0

9

Jun

-11

Ap

r-1

3

Feb

-15

x

Avg: 1.5x

+1SD: 2x

-1SD: 1x

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Oct

-13

No

v-1

3

Jan

-14

Feb

-14

Ap

r-1

4

May

-14

Jun

-14

Au

g-1

4

Sep

-14

No

v-1

4

Dec

-14

Feb

-15

x

Avg: 2.2x

+1SD: 2.6x

-1SD: 1.8x

+2SD: 3x

-2SD: 1.4x

Xinchen (1148 HK)

0.60.81.01.21.41.61.82.02.22.42.6

Mar

-13

Jul-

13

Dec

-13

May

-14

Sep

-14

Feb

-15

x

Avg: 1.5x

+1SD: 1.9x

-1SD: 1.2x


Industry Focus

China Auto Sector

Page 72

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

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Industry Focus

China Auto Sector

Page 73

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Documents

China / Hong Kong Industry Focus China Auto Sector DBS Group Research . Equity 6 February 2015 China / Hong Kong Industry Focus ... (881 HK) 56 Appendix 58. Industry Focus China Auto