Geely Auto [0175.HK] BUY. March 12, Sales disappointing; waiting for turnaround in 2H14. China Auto Sector

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1 March 12, 214 Geely Auto [175.HK] Sales disappointing; waiting for turnaround in 2H14 Weak sales again in February. New versions coming soon. Geely reported sales volume of 54,85 units, down 42% year-on-year (YoY), for Jan-Feb 214. According to CPCA, sales at the retail level look slightly better, with a 17.8% decline during the same period. The big decline is attributed to 1) restructuring distribution network; and 2) preparation for upcoming product upgrading cycle - intentionally selling fewer vehicles to dealers where models are awaiting the launch of new versions. Prudent 213 result ahead; 1H14 remains tough. Despite the sales target miss in 213, we believe Geely will present solid earnings growth of 29.5% YoY to RMB2,642.1m on improving product mix, broadly in line with the market consensus. Understanding the market concerns around the declining sales volume, we assume 1% of existing dealer outlets will terminate operation, mainly impacting on low-end vehicles. It will drag 1H14 sales volume down by 1.6% YoY, and net earnings down by 27.2% YoY. Market likely to bet on 2H14 recovery; catalysts on the way. We expect a meaningful rebound in 2H14, with net earnings up 43.5%, on the back of 1) ramp-up of new versions of best-selling models (GX7 new version launched in March; EC7 new version coming in April); 2) more options with turbo engines from Q2 214, more appealing to Chinese consumers; and 3) improving operating profit on reduced subsidies to lowyield dealers after dealership restructuring. TP cut to HK$3.5 from HK$5.1. Limited downside at 1.x book value with 15.2% ROE in 214E. After revising our assumptions this year on product mix and sales schedule, we lower our 214E/215E basic EPS forecast by 8%/7%. As our target is.7x 214E PEG for E basic EPS CAGR, we cut our target Price (TP) to HK$3.5. However, we believe the current valuation reflects most negatives and implies limited downside, approaching the valuation level during Moreover, we see new catalysts emerging such as new GX7 and EC7 and turbo engines, which are more easily marketable in the current environment. We reiterate our BUY rating. China Auto Sector BUY Close: HK$2.63 (Mar 11, 214) Target Price: HK$3.5 (+33%) Price Performance Market Cap US$2,983m Shares Outstanding 8,81m Auditor Grant Thornton Free Float 57% 52W range HK$ M average daily T/O US$19.7m Major Shareholding Mr. Li Shu Fu (43%) Source: Company, Bloomberg Turnover (RMBm) 2,965 24,628 3,224 32,765 37,24 Net profit (RMBm) 1,543 2,4 2,642 2,83 3,221 Net margin 7.4% 8.3% 8.7% 8.6% 8.7% Basic EPS (RMB) YoY Growth 11.5% 3.6% 14.5% 2.9% 14.9% Diluted EPS (RMB) PER (x) Yield (%) Angela Han Lee (852) angelahanlee@chinastock.com.hk John Mulcahy (852) johnmul@chinastock.com.hk PBR (x) Source: Company, CGIHK Research 1

2 Key Financials Profit & loss (RMBm) Cash flow (RMBm) Revenue 2, , , , ,24.1 Net Income 1, ,4. 2, ,83.4 3,221.3 COGS (17,144.8) (2,69.1) (24,498.) (26,458.2) (29,761.8) Depreciation and Amort ,63.5 1,188.7 Gross Profit 3,82.1 4, , ,37.1 7,262.3 Change in Working Capital (1,646.9) 1, (562.2) (81.) Other Income ,47.7 1,11.6 1, Other Operating Cashflow Distribution and Selling Expenses (1,359.3) (1,483.) (1,7.4) (1,834.2) (2,4.1) Operating Cashflow 1,27.9 4, , ,34.7 3,69. Administrative Expenses (963.) (1,319.3) (1,593.5) (1,834.9) (1,998.7) CAPEX (3,174.) (1,765.4) (2,37.6) (2,616.6) (2,769.8) Share-based Payments (137.2) (78.8) (18.) (93.4) (1.7) Proceeds from Disposals Operating Profit 2, , , , ,1.3 Other Investing Cashflow (98.) (424.8) Financial Costs (167.3) (194.6) (11.1) (48.7) (47.9) Investing Cashflow (2,953.3) (2,71.) (2,2.3) (2,294.8) (2,59.1) Share of Results of Associates (7.2) (1.7) (6.) (6.) (6.) Net Proceeds from Borrow ings (1,46.5) (685.7) (19.4) Other Non-Operating Expenses Share Issue Profit before Tax 2, , , , ,46.3 Dividend Paid (17.4) (169.5) (297.) (413.9) (425.8) Tax Expenses (467.4) (479.3) (663.8) (74.3) (89.3) Other Financing Cashflow (166.2) (193.9) Profit after Tax 1, ,49.8 2,655. 2, ,237. Financing Cashflow (1,26.2) (982.8) (433.3) (241.4) Minority Interests (172.4) (9.8) (12.9) (13.7) (15.7) Foreign Exchange Rate Adj. (1.2) (1.9) Net Profit 1, ,4. 2, ,83.4 3,221.3 Net change in Cash (1,362.7) 1, , Basic EPS (RMB) Free Cashflow (1,966.1) 2, , Diluted EPS (RMB) Total DPS (HK$) Key ratios Revenue Grow th 4.3% 17.5% 22.7% 8.4% 13.% Operating Profit Grow th 9.5% 15.6% 26.% 4.1% 14.7% Net Profit Grow th 12.8% 32.2% 29.5% 6.1% 14.9% Gross Margin 18.2% 18.5% 18.9% 19.2% 19.6% Balance sheet (RMBm) Operating Margin 11.2% 11.1% 11.4% 1.9% 11.1% Cash and Cash Equivalents 3,3.4 4, , ,38.1 6,896.7 Net Margin 7.4% 8.3% 8.7% 8.6% 8.7% Inventories 1, , , , ,739.5 Return on Asset 5.6% 6.5% 7.2% 6.9% 7.% Trade and Other Receivables 12, , , , ,571.7 Return on Equity 16.1% 15.8% 16.5% 15.2% 15.2% Other Current Assets Net Debt to Equity 4% Net Cash Net Cash Net Cash Net Cash Total Current Assets 17,6. 19, , , ,559.3 Quick Ratio 1.x 1.1x 1.1x 1.1x 1.2x Property, Plant and Equipment 6, ,7.7 7,22.6 7,377. 7,62. Current Ratio 1.1x 1.2x 1.2x 1.3x 1.3x Intangible Assets and Goodw ill 2,228. 2,82.7 3, , ,988.1 Interest Coverage Ratio 14.1x 14.x 31.2x 73.4x 85.5x Prepaid Land Lease Payments 1, ,461. 1,41.3 1, ,32.9 Other Non-Current Assets Total Assets 27, , ,91.7 4, ,261. Sales Volume (units) ST Borrow ings 2, , EC7 91, ,53 193,21 228,23 251,53 Trade and Other Payables 12, , , , ,516.5 Geely Kingkong 84,969 78,444 44,556 39,154 35,239 Other Current Liabilities Free Cruiser 82,72 66,481 37,852 19,493 17,543 Total Current Liabilities 14, , , , ,1.5 SC7 46,349 45,569 46,951 49,143 54,57 LT Borrow ings ,8.4 GX7-3,793 52,44 57,75 66,36 Other Non-Current Liabilities 1, SX ,37 11,13 12,8 Total Liabilities 17, , , ,5.1 24,714.3 Vision 51,478 33,36 35,321 21,85 22,139 Common Stock - Par Value Geely Panda 43,25 31,471 35,79 23,711 22,525 Reserves 9, , , , ,26.1 GC7-14,948 36,718 72,985 8,283 Shareholders Equity 9, , ,2. 18, ,187.1 SC3-12,952 12,24 8,67 8,177 Minority Interest EC8 14,983 12,771 1,281 2,555 2,682 Total Equity & Liabilities 27, , ,91.7 4, ,261. SC6-11,377 27,17 43,314 45,48 Others 6,187 2,868 7,268 1,127 3,945 Basic BPS (RMB) Total 421, , , , ,284 Source: Company, CGIHK Research 2

3 Monthly Sales Volume Sales Volume Model Model (Chinese) Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec Sedan EC7 帝豪 EC7 9,528 9,221 1,335 9,526 8,289 13,946 1,66 1,153 15,886 16,481 16,568 15, ,516 SC7 海景 5,34 4,95 5,543 4,179 3,82 4,766 3,352 2,55 2,978 4,146 5,89 5,376 51,99 Vision 吉利远景 3,874 2,483 3,5 2,953 1,449 1,733 1,18 1,598 3,74 3,696 5,778 6,91 37,247 Geely Kingkong 吉利金刚 5,637 5,95 6,191 5,291 4,661 4,913 3,411 3,232 3,413 3,985 3,367 4,55 54,556 Others 14,134 13,964 14,298 14,16 9,23 12,94 12,287 11,632 14,965 15,898 16,563 19, ,838 Subtotal 38,477 36,478 39,867 36,55 27,431 38,298 3,674 29,165 4,316 44,26 47,365 51,815 46,147 SUV GX7 GX ,37 2,112 2,28 3,7 3,13 4,311 4,571 4,847 4,945 31,141 SX7 SX Subtotal ,37 2,112 2,28 3,7 3,13 4,311 4,571 4,847 4,945 31,141 Total 38,477 36,478 39,867 38,362 29,543 4,326 33,681 32,178 44,627 48,777 52,212 56,76 491,288 Sales Volume Model Model (Chinese) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec Sedan EC7 帝豪 EC7 18,516 11,557 14,436 13,732 1,21 14,47 15,221 13,175 15,71 2,275 2,953 21, ,21 SC7 海景 5,5 3,15 4,461 4,66 14,83 2,81 2,771 3, , ,281 Vision 吉利远景 5,33 3,558 4,345 3,425 2,788 2,245 1,921 2,517 4,67 5,846 6,115 5,335 36,718 Geely Kingkong 吉利金刚 4,98 2,254 4,442 4,339 3,42 1,894 1,486 2, ,27 1,611 12,24 Others 21,18 1,457 15,152 14,323 15,494 9,299 9,3 8,571 2,235 2,994 4,181 3,738 27,17 Subtotal 55,137 3,976 42,836 39,885 37,58 3,295 3,699 3,778 37,313 48,35 5,768 52,38 486,583 SUV GX7 GX7 5,316 3,51 5,1 3,24 2,985 3,311 2,43 3,364 4,654 6,273 5,63 7,518 52,44 SX7 SX ,566 1,34 1, ,172 1,62 1,163 1,274 1,287 1,37 Subtotal 5,316 3,51 5,1 4,59 4,19 4,329 3,224 4,536 5,716 7,436 6,337 8,85 62,81 Total 6,453 34,477 47,837 44,475 41,527 34,624 33,923 35,314 43,29 55,786 57,15 6, ,393 Sales Volume Model Model (Chinese) Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec Sedan EC7 帝豪 EC7 18,247 4,8 11,63 12,629 17,698 18,473 22,19 2,965 21,584 26,133 27,7 27, ,23 SC7 海景 ,555 Vision 吉利远景 5,654 1,732 3,78 3,481 2,857 2,43 3,271 4,493 1,447 11,931 12,48 1,888 72,985 Geely Kingkong 吉利金刚 1, ,252 8,67 Others 4,646 1,147 3,11 2,623 2,756 1,193 2,32 3,182 4,159 5,15 7,3 6,261 43,314 Subtotal 52,286 15,819 33,421 33,63 36,691 32,457 37,841 41,985 49,194 56,681 59,721 59,74 59,44 SUV GX7 GX7 5,639 1,761 5,37 3,959 3,98 4,335 3,182 4,44 5,484 6,653 5,369 7,973 57,75 SX7 SX7 1, ,384 1, ,13 Subtotal 7,564 2,352 6,421 5,144 4,691 5,15 3,782 5,291 6,27 7,365 6,15 8,762 68,835 Total 59,85 18,171 39,841 38,747 41,382 37,563 41,624 47,276 55,41 64,47 65,871 68, ,238 Sources: CPCA, CGIHK Research estimates 3

4 Profit and Loss Breakdown Income Statement 1H11 2H11 1H12 2H12 1H13 2H13E 1H14E 2H14E Currency RM Bm RM Bm RM Bm RM Bm RM Bm RM Bm RM Bm RM Bm Turnover 1,538. 1, , , , , , ,417.9 Cost Of Goods Sold (8,73.6) (8,441.2) (9,237.2) (1,831.9) (12,8.1) (12,489.8) (1,778.1) (15,68.1) Gross Profit 1, , ,94.2 2, , , , ,737.8 Other Income Distribution and Selling Expenses (591.7) (767.7) (659.4) (823.6) (82.9) (879.5) (87.) (1,27.1) Administrative Expenses (453.9) (59.1) (577.9) (741.4) (746.9) (846.6) (87.4) (1,27.6) Share-based Payments (78.3) (58.8) (63.7) (15.1) (46.) (62.) (42.) (51.4) Operating Profit 1,339. 1,18.7 1, , , , , ,243.1 Share of Results of Associates (1.2) (6.) (1.4) (.3) (3.8) (2.2) (2.4) (3.6) Finance Costs (1.8) (66.4) (124.1) (7.5) (56.6) (53.5) (19.8) (28.9) Pre-tax Profit 1, ,26.8 1, , , ,31.8 2,21.6 Provision for Income Tax (26.) (261.3) (233.9) (245.4) (323.) (34.7) (286.9) (417.4) Minority Interest (After Tax) (93.2) (79.2) (7.2) (2.6) (3.4) (9.4) (5.6) (8.1) Net Profit ,19.6 1,2.3 1, , ,18.3 1,785.1 Per Share Items Basic EPS Diluted EPS DPS (HK$) Margins Gross Margin 17.4% 19.% 17.4% 19.5% 19.2% 18.7% 19.2% 19.2% Operating Margin 12.7% 9.8% 12.4% 1.% 12.% 1.7% 1.% 11.6% Net Margin 8.9% 5.8% 9.1% 7.6% 9.4% 8.1% 7.6% 9.2% Distribution and Selling Expenses as % of Turnover -5.6% -7.4% -5.9% -6.1% -5.5% -5.7% -6.% -5.3% Administrative Expenses as % of Turnover -4.3% -4.9% -5.2% -5.5% -5.% -5.5% -6.% -5.3% Sources: CGIHK Research 4

5 Comparable Valuation Table Company Ticker Price 52-Wk Mkt Cap 3m Avg PER Dividends Yield Price Range Turnover E 214E E 214E (HK$/RMB) (HK$/RMB) (US$m) (US$m) (x) (x) (x) (%) (%) (%) GEELY AUTOMOBILE 175 HK / , BRILLIANCE CHINA 1114 HK / , GREAT WALL MOT-H 2333 HK / , DONGFENG MOTOR-H 489 HK / , GUANGZHOU AUTO-H 2238 HK / , BYD CO LTD-H 1211 HK / , , WEICHAI POWER-H 2338 HK / , SINOTRUK HK LTD 388 HK / 5.1 1, Simple Avg Mkt Cap Avg A-Share Peers SAIC MOTOR-A 614 CH / , CHONGQING CHAN-A 625 CH / , FAW CAR CO LTD-A 8 CH / , (21.3) ZHENGZHOU YUT-A 666 CH / 2.2 3, BEIQI FOTON-A 6166 CH / 7.4 2, Company Ticker PBR ROE Net Debt/Equity E 214E E 214E E 214E (x) (x) (x) (%) (%) (%) (%) (%) (%) GEELY AUTOMOBILE 175 HK Net Cash Net Cash Net Cash BRILLIANCE CHINA 1114 HK GREAT WALL MOT-H 2333 HK Net Cash Net Cash Net Cash DONGFENG MOTOR-H 489 HK Net Cash Net Cash Net Cash GUANGZHOU AUTO-H 2238 HK Net Cash Net Cash Net Cash BYD CO LTD-H 1211 HK WEICHAI POWER-H 2338 HK Net Cash Net Cash SINOTRUK HK LTD 388 HK Simple Avg Mkt Cap Avg A-Share Peers SAIC MOTOR-A 614 CH Net Cash Net Cash Net Cash CHONGQING CHAN-A 625 CH Net Cash Net Cash FAW CAR CO LTD-A 8 CH (9.5) ZHENGZHOU YUT-A 666 CH Net Cash Net Cash Net Cash BEIQI FOTON-A 6166 CH Net Cash Source: Company, Bloomberg Estimates, CGIHK Research March 11, 214 Figure 1: PER band Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Share price 2.x 8.x 14.x 2.x Source: Bloomberg, CGIHK Research Figure 2: PBR band Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Share price.5x 1.5x 2.5x 3.5x Source: Bloomberg, CGIHK Research 5

6 Units Units Units Figure 3: Growth mainly from SUV sales 7, Figure 4: Larger contribution from Emgrand s models 1% 6, 5, 4, 3, % 6% 11% 13% 13% 9% 8% 7% 6% 5% 4% 33% 31% 25% 32% 27% 26% 26% 37% 4% 41% 2, 3% 1, Sedans SUVs Source: Company, CGIHK Research Figure 5:Sales volume by model 7, 6, 5, Source: CGIHK Research Figure 6:Margins 25% 2% 2% 1% % 42% 37% 36% 34% 34% GLEagle Emgrand Englon 4, 3, 2, 15% 1% 1, EC7 Geely Kingkong Free Cruiser SC7 GX7 Vision Geely Panda GC7 SC3 EC8 SC6 Others Source: Company data, CAAM, CGIHK Research 5% % Gross Margin Operating Margin Net Margin Source: Company data, CGIHK Research Figure 7:Monthly sales volume 8, 7, 6, 5, 4, 3, 2, 1, - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: CPCA, CGIHK Research resimates 6

7 Analyst Certification The research analyst who is primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 3 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. Explanation on Equity Ratings BUY share price will increase by >2% within 12 months in absolute terms SELL share price will decrease by >2% within 12 months in absolute terms HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL DISCLAIMER For private perusal only. This report (including any information attached) is issued by China Galaxy International Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to individual addressee whether they are professional, institutional client or otherwise, in good faith from sources believed to be reliable but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published view of China Galaxy International Financial Holdings Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. Please take note that member companies of China Galaxy International Financial Holdings Limited (including but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers, agents and employees ( the Relevant Parties ) may have an interest in securities of the company or companies referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. COPYRIGHT RESERVED China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459, Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: