China / Hong Kong Industry Focus China Auto Sector

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1 China / Hong Kong Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 1 Feb 218 Dealership: Auto finance drives robust car sales Auto dealerships expected to post 5-1% FY17 earnings growth; driven by strong luxury car market, 218 industry fundamentals remain solid Auto financing an important catalyst; raised forecast for mid-term industry auto loan size by 2% to US$3bn by 22 Buying opportunity arising again after recent profit-taking China ZhengTong (1728 HK) our top pick Solid industry fundamentals. We anticipate car buyers upgrading activities, persistently low inventory pressure, easier access to auto finance loans and new car models to continue supporting the strong luxury car market. We project the luxury car market to grow at a faster pace than the overall passenger vehicle industry at 9% per annum from By 22, we expect luxury car penetration to reach about 11%, compared to global average estimate of about 15%. Raised industry auto loan estimates by 2%. It has been shown that auto finance is a big booster to new car sales. Given the recent bullish luxury new car sales as well as auto finance companies rapid business expansion strategy, we revised up our industry loan estimates by 2% to US$3bn by 22. Auto finance penetration rate is expected to reach >5% by 22, but still lower than the US and Western Europe's 7-8%. In the mid-term, the Chinese auto finance market still offers huge upside potential. Valuation and top pick. The auto dealership stocks underwent a healthy correction recently after outperforming the market sharply in 217. Currently, auto dealership is trading at a more attractive valuation multiple despite the sector's projected FY18 earnings growth of 27%. Among the listed luxury auto dealerships, we prefer China ZhengTong for its fast-growing auto finance business and asset-light strategy on store expansions, which stand out among the various players. We have a TP of HK$9.6 on China ZhengTong and projected FY17-19 net earnings CAGR of 28%. HSI : 32,649 ANALYST Rachel MIU rachel_miu@dbs.com Recommendation & valuation Source: Thomson Reuters, *DBS Vickers China auto dealership index vs luxury car sales growth Source: Companies, Thomson Reuters, DBS Vickers Target PE Mkt Price Price 18F Cap Company Name Code Local$ Local$ Recom x US$m China ZhengTong* 1728 HK BUY China Yongda* 3669 HK BUY Dah Chong Hong* 1828 HK BUY ZhongSheng* 881 HK BUY Baoxin Auto Group 1293 HK 3.51 n.a. NR China Harmony Auto 3836 HK 5.65 n.a. NR Index (1 J an 9 = 1) % 1, (2) Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Auto dealer index (LHS) Luxury car sales growth (RHS) Jan-17 Jan-18 ed-th / sa-cs / AH

2 Auto dealership remains a favourite segment Industry is still exciting. After 217's sharp share price rally, the auto dealership sector is still a market favourite, because the earnings upcycle is not over yet and there are more to come. The recent share price correction is healthy, and offers investors a chance to re-enter the auto dealership sector for price appreciation. There are several critical growth drivers that should support the sector's growth outlook, which we discuss in the sections below. Among the HK-listed auto chains, we like China ZhengTong. Its fast-growing auto finance business is expected to boost future earnings trend, accounting for 18-2% of total gross profit by 219. In view of the rising growth opportunity, the company has also recently strengthened its balance sheet by approximately Rmb1.8bn via the issuance of new shares. At the same time, we have revised up our TP for Dah Chong Hong (1828 HK) to HK$4.7, on sustainable growth coming from its auto business (China and recovery in HK) as well as improvement of its consumer business, especially the postacquisition synergy of Li & Fung Asia (LFA). The auto dealership sector index chart shows that valuation has been trending upwards since 4Q16 on volume sales recovery and anticipation of margin expansion. As we are optimistic on luxury car demand, it should support the index's performance. Currently, the auto dealership sector is trading at 9x FY18F PE, which is undemanding considering the sector's expected earnings growth of approximately 27% this year. China auto dealership index vs luxury car sales growth Index (1 J an 9 = 1) % 1, (2) Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Auto dealer index (LHS) Luxury car sales growth (RHS) Source: Companies, Thomson Reuters, DBS Vickers Page 2

3 Solid industry fundamentals Consumer confidence index at its record level; retail sales climbing higher. China consumers optimism on the health of the economy held up well throughout last year. The consumer confidence index has been climbing up since 2H16 and breached the 12 level in 4Q17. China consumer confidence index Source: CEIC Jan-9 Jul-91 Jan-93 Jul-94 Jan-96 Jul-97 Jan-99 Jul- Jan-2 Jul-3 Jan-5 Jul-6 Jan-8 Jul-9 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17 This is also reflected by their spending appetite. China retail sales increased by about 8% y-o-y to Rmb13.2tr in 217. Of this, automobile retail sales accounted for 28% of total retail sales, about 8% y-o-y expansion to Rmb3.7tr last year. China total retail sales market RMB bn % 14, , 19. 1, , 13. 6, , 7. 2, Source: CEIC Total retail sales China automobile retail sales market YoY growth (RHS) RMB bn % 4, 3,5 3, 2,5 2, 1,5 1, The Chinese economy is expected to remain in a healthy state in 218. Our bank economist projects China's GDP to grow at 6.4% this year, which is positive on the overall consumer sentiment and the retail sales market. Source: CEIC Auto retail sales (LHS) YoY growth (RHS) Auto finance driving luxury car market. The auto finance market has been growing rapidly in China in recent years. Easier auto finance options have helped to accelerate the industry's development. China s auto finance penetration rate is still low at about 39% (end-216) way below the 7-8% of development markets in the west. In 217, approximately 1.6m vehicles sold were under auto finance loans and we estimate this to reach about 14m by 22. Page 3

4 In our previous report dated 1 August 217, we had forecast the auto finance market to grow at 2% per annum to US$25bn by 22. But we now believe the growth rate could reach 25% per annum to hit about US$3bn by 22. By then, China s auto finance penetration rate would be ~52%. China auto finance market growth projections RMB bn % 2,5 2 2, 15 China auto finance penetration rate projections 1,5 1 % Source: CAAM, DBS Vickers F 219F 22F 1, Source: CAAM, DBS Vickers 29 Total loan size (LHS) 211 New model pipelines. In 217, sales of luxury cars outperformed the passenger vehicle (PV) market. It grew at low double digits to approximately 2.4m units in 217, compared to the total PV sales expansion of a mere 1.4%. The luxury car penetration rate has reached about 1% of the total PV market. Major luxury car makers achieved very strong sales performance in 217, as shown in the table below F 219F 5 Y-o-Y growth (%) (RHS) -5 Premium auto brand sales ' units 1.1% % 24.3% Audi BMW Mercedes Benz 53.7% 22.4% 19.2% 25.8% 9.6% 66.% Cadillac Volvo JLR Porsche Lexus Lincoln Source: Companies Page 4

5 The luxury car makers have lined up several new models to stimulate sales. More importantly, the three German luxury brands are aiming to protect their market shares in the coming years via their new model cycles. China is the second largest luxury car market in the world after Western Europe. We forecast the luxury car market to grow at a CAGR of 9% from This should translate to a penetration rate of about 12%. China luxury car sales projections m units % Automobile inventory days months May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Source: CADA Sino-Foreign JV brands Imports Price volatility; good accumulation opportunity on strong growth outlook Luxury car sales (LHS) Source: DBS Vickers 218F 219F 22F Y-o-Y growth (RHS) Price fluctuation on profit taking. We believe the auto dealerships still have upside potential especially after the recent profit-taking on the sector. In 217, their share price had surged by 3-25%, and outperformed the market by a wide margin. We believe the recent correction is healthy, and is giving investors an opportunity to accumulate on dips. Inventory days at record low levels. Inventory pressure had been a big issue for the auto dealerships during the down cycle. The inventory pressure started to improve in 4Q16 and continued into 217. At end-december 217, the sino-foreign JV brands' inventory was at <3 days, while imported inventory had fallen to below 1.5 months. We expect the healthy inventory level to remain in 218, reasons being demand is still growing at a healthy pace and automakers are getting more realistic with their production output to protect profit margins. Page 5

6 Auto dealerships' share price performance Based on closing prices as at 1 Feb 218 Source: Thomson Reuters Share Price Performance (%) Company Code 1-month 3-month 6-month 1-y ear YTD Baoxin Auto 1293 HK (9.7) (16.) (1.9) 84.8 (9.7) China Harmony 3836 HK China Meidong 1268 HK China Yongda 3669 HK (1.5) China ZhengTong 1728 HK.6 (.9) Dah Chong Hong 1828 HK Sparkle Roll 97 HK (2.4) (2.4) Zhongsheng 881 HK Strong earnings expected; 218 remains an exciting year. The HK-listed auto dealerships are expected to report 5-1% earnings expansion in 217, recovering from a low base. Strong volume demand as well as better profit margins are the key earnings drivers. For some like China ZhengTong which has ventured into the auto finance business, it becomes another important growth pillar. The earnings momentum in 218 is expected to stay strong at 27% after a robust 217, to be driven by the above-mentioned solid industry fundamentals. China auto dealership earnings cycle RMB m % Total net profit (LHS) E 218E YoY growth (RHS) (1) (2) (3) (4) China auto dealership: FY17 earnings preview Company Ticker FY16 Y-o-Y growth FY17E (%) Reasons China Yongda 3669 HK 871 1,499 >7% V olume and margins expansion China ZhengTong 1728 HK 493 1,14 >1% Volume and margins expansion; also rapid expansion of auto finance business Dah Chong Hong 1828 HK >5% Volume and margins expansion in China; full year contribution from LFA and lower provision for China food business Zhongsheng 881 HK 1,86 2,861 >5% Volume and margins expansion Grand Baoxin 1293 HK >1% Volume and margins expansion China Meidong 1268 HK >5% Volume and margins expansion Source: Companies; DBS Vickers Source: Companies, DBS Vickers Page 6

7 Stock summary China ZhengTong (1728 HK; BUY; TP HK$9.6) advancing ahead of peers. China ZhengTong (ZhengTong) is our top pick among the luxury auto dealers. Its potential upside from the auto finance business (offline and online) has yet to be factored into its share price. Another listed peer online auto finance company, Yixin (2858 HK), is trading at 28.3x FY18F PE compared to ZhengTong s 11.5x. The introduction of PICC as a strategic investor is viewed positively as it could strengthen the auto insurance business. The ongoing new business development should help ZhengTong to diversify its income stream and avoid over-relying on new car sales and after-sales services, though the latter commands higher profit margins. Besides, the improving luxury car market has boosted its profitability. The quarterly performance shows a marked improvement in Wuhan ZhengTong's (a major subsidiary of the group) 217 net profit margins. Another positive factor is that the company is the first to move into an asset-light strategy to expand its sales network without having to over-stretch its balance sheet. Wuhan ZhengTong quarterly net margins performance % networks to provide a wide range of services, covering auto sales, auto repairs, pre-owned vehicles and car rentals, and other auto-related services. Among these, the company is targeting the fast-growing finance business - auto finance leasing and small loans - as one of the new growth pillars. The company plans to widen its finance network to cover more cities, with 5-1 outlets planned for 218. The quarterly performance shows a marked improvement in Shanghai Yongda's (a major subsidiary of the group) 217 net profit margins. We keep our TP of HK$11.9, pegged to 9x FY18 earnings. Shanghai Yongda quarterly net margins performance % Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Company Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Company China Yongda (3669 HK: BUY; TP HK$11.9) tapping the online platform to diversify business. China Yongda (Yongda) is one of the beneficiaries of the auto dealership sector turnaround. Its 4S store locations along the coastal cities have benefitted from the robust consumption growth and helped to drive profit expansion. Yongda is positioning itself as a onestop auto dealer, leveraging the online platform and offline Dah Chong Hong (1828 HK; BUY; TP HK$4.7) a potential dark horse, trading at discount to book. Dah Chong Hong (DCH) is bottoming out and there are several auto and nonauto growth factors that are driving its earnings improvement. The auto dealership business in China is expected to remain strong, in a similar trend as its peers. In Hong Kong, the improving consumer confidence is also expected to lift automobile consumption. In 1H17, the HK auto business was down but the sales momentum has been gradually improving. For 11M17, new private car registration posted an 8% increase. With the HK GDP expected to post a 2.5% growth trajectory in 218, car consumption appetite should be better than in 217. The synergy from acquisition of LFA is also finally being realised, contributing to earnings expansion. We raised our FY18 earnings by c.34% and rolled over our TP to FY18 earnings. Since the company is not a pure auto dealership operator, its Page 7

8 Since the company is not a pure auto dealership operator, its valuation has been at a discount to the large dealerships (such as Zhongsheng and China ZhengTong). Thus we have pegged DCH fair valuation to 1x FY18 PE (a slight discount to 11x average PE of the larger players), our new TP is HK$4.7 (previously 12x FY17 PE). The current share price is about 2% below its book value. New car registrations in Hong Kong [yearly bar chart] units 6, 5, 4, 3, 2, 1, Source: CEIC E Motor Vehicles Private Cars New Registration (LHS) Y-o-Y chg (RHS) 5% 4% 3% 2% 1% % -1% -2% -3% Zhongsheng (881 HK; BUY; TP HK$22.) extensive network coverage together with Jardine. Zhongsheng is a key auto dealership of the Mercedes-Benz and Lexus auto brands in China, which have been doing very well in recent years. We expect the demand outlook for these two luxury auto brands to remain firm in the coming years given ongoing car buyers' upgrading activities, while the automakers have also demonstrated their ability to avoid over-producing to protect the dealers profit margins. Zhongsheng focuses on its core ability to manage 4S stores and will tap the balance sheet of the automakers and other financial institutions to provide auto finance support to its customers. Zhongsheng has a prime advantage in the form of its strong strategic investor Jardine Strategic (which owns about 2% stake). Jardine Motors operates over 3 Mercedes-Benz outlets in the southern and western regions of China, hence complementing Zhongsheng s northern region focus. This strategic relationship and strong brand representation have allowed Zhongsheng to trade at a premium over peers. Besides, the current strong trading liquidity could also boost Zhongsheng s valuation. Our new TP of HK$22. is pegged to 13x PE on FY18 earnings (previously based on 12x rolling PE). Mercedes-Benz and Lexus volume sales in China ' units ' units Jan/15 May/15 Sep/15 Source: Companies Jan/16 May/16 Mercedes Benz (LHS) Sep/16 Jan/17 May/17 Sep/17 Lexus (RHS) Auto dealerships: Earnings and TP revisions Net profit (Old) (Local$ m) Net profit (New) (local$ m) % chg Source: DBS Vickers Old TP (HK$) New TP (HK$) FY18F FY19F FY18F FY19F FY18F FY19F Ticker Auto dealerships China Yongda 3669 HK ,799 2,183 1,799 2,183 Nil Nil China ZhengTong 1728 HK ,375 1,653 1,375 1,653 Nil Nil Dah Chong Hong 1828 HK Nil Zhongsheng 881 HK ,359 3,778 3,359 3,778 Nil Nil Page 8

9 Appendix: new models pipeline XC6 (SUV crossover) V olvo Cayenne Macan Porsche Land Rover Discovery E-pace I-pace J aguar LS LS Hybrid LC Lexus X3 X2 X7 M5 8 series BMW Q2 Q8 A8 A7 Q5L Audi CLS Coupe C-class G-class GLC (LWB) Mercedes Benz ATS Sedan CTS SEDAN XTS SEDAN Cadillac Source: Company website, Motortrend, Caranddriver, Drivemag, carwow, CarNewsChina.com, Engadget Page 9

10 Auto dealers peers comparison Mkt PE PE Yield Yield P/Bk P/Bk EV /EBITDA ROE ROE Currency Price Cap F iscal 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F Company Name Code Local$ US$m Yr x x % % x x x x % % Hong Kong Dah Chong Hong* 1828 HK HKD Dec ZhongSheng* 881 HK HKD ,649 Dec China ZhengTong* 1728 HK HKD ,544 Dec Baoxin Auto Group 1293 HK HKD ,279 Dec China Yongda* 3669 HK HKD ,244 Dec China Meidong Auto 1268 HK HKD Dec China Harmony Auto 3836 HK HKD ,116 Dec Av erage Source: Thomson Reuters, *DBS Vickers Page 1

11 China ZhengTong (1728 HK Equity, HK$7.95, BUY, Target Price 12-mth HK$ 9.6) Forecast & Valuation General Data FY Dec (RMB m) 216A 217F 218F 219F At A Glance Turnover 31,519 34,664 4,518 45,574 Issued Capital (m shrs) 2,216 EBITDA 1,656 2,42 3,19 3,584 Mkt. Cap (HK$m/US$m) 17,614 / 2,252 Pre-tax Profit 791 1,522 2,73 2,494 Net Profit 493 1,14 1,375 1,653 Major Shareholders Net Pft (Pre Ex) (core profit) 493 1,14 1,375 1,653 Wang Muqing (%) 62.5 Net Profit Gth (Pre-ex) (%) (2.2) Free Float (%) 37.5 EPS (RMB) EPS (HK$) m Avg. Daily Val. (US$m) 16.3 Core EPS (HK$) Core EPS (RMB) EPS Gth (%) (2.3) Core EPS Gth (%) (2.3) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) Core PE (X) P/Cash Flow (X) P/Free CF (X) nm EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Nil Nil Nil Consensus EPS (RMB) Other Broker Recs: B: 18 S: H: 2 Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 216A 217F 218F 219F FY Dec 216A 217F 218F 219F Turnover 31,519 34,664 4,518 45,574 Net Fixed Assets 3,913 4,496 5,52 5,59 Cost of Goods Sold (28,783) (3,92) (35,927) (4,283) Invts in Assocs & JVs 2,198 2,84 3,82 3,386 Gross Profit 2,736 3,744 4,592 5,291 Other LT Assets 7,25 7,191 7,836 7,979 Other Opg (Exp)/Inc (1,59) (1,72) (1,899) (2,153) Cash & ST Invts 1,625 1,965 4,87 5,297 Operating Profit 1,227 2,42 2,693 3,137 Inventory 3,19 3,17 3,328 3,495 Other Non Opg (Exp)/Inc Debtors 6,384 6,42 6,57 6,616 Associates & JV Inc Other Current Assets 3,565 4,264 4,737 5,294 Net Interest (Exp)/Inc (462) (546) (647) (671) Total Assets 27,729 3,39 34,628 37,657 Dividend Income Exceptional Gain/(Loss) ST Debt 3,253 6,253 7,253 8,253 Pre-tax Profit 791 1,522 2,73 2,494 Other Current Liab 12,126 12,359 12,722 13,55 Tax (282) (487) (664) (798) LT Debt 2, Minority Interest (15) (21) (35) (42) Other LT Liabilities Preference Dividend Shareholder s Equity 8,858 1,23 13,123 14,777 Net Profit 493 1,14 1,375 1,653 Minority Interests Net profit before Except ,14 1,375 1,653 Total Cap. & Liab. 27,729 3,39 34,628 37,657 EBITDA 1,656 2,42 3,19 3,584 Sales Gth (%) Non-Cash Wkg. Cap 842 1,496 1,85 2,35 EBITDA Gth (%) (3.1) Net Cash/(Debt) (4,166) (4,89) (3,687) (3,477) Opg Profit Gth (%) (7.) Effective Tax Rate (%) Cash Flow Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 216A 217F 218F 219F FY Dec 216A 217F 218F 219F Pre-Tax Profit 791 1,522 2,73 2,494 Revenues (RMB m) Dep. & Amort New car sales 27,42 29,367 33,829 37,896 Tax Paid (185) (282) (487) (664) After-sales services 3,422 3,819 4,392 5,24 Assoc. & JV Inc/(loss) (25) (26) (27) (28) Logistics services & lubricant (Pft)/ Loss on disposal of FAs Interest from financial services ,52 1,85 Net Operating CF ,767 1,935 Total 31,519 34,664 4,518 45,574 Capital Exp.(net) (711) (8) (8) (8) Gross Profit (RMB m) Other Invts.(net) New car sales 782 1,388 1,67 1,843 Invts in Assoc. & JV After-sales services 1,621 1,814 2,86 2,387 Div from Assoc & JV Logistics services & lubricant Other Investing CF (66) (277) (757) (241) Interest from financial services Chg in Gross Debt 1,23 3, 1, 1, Total 2,736 3,744 4,592 5,291 Capital Issues 19 Gross Profit Margins (%) Other Financing CF (882) (2,51) 893 (683) New car sales Net Financing CF , After-sales services Currency Adjustments 9 Logistics services & lubricant Chg in Cash ,122 1,21 Interest from financial services Total Key Assumptions Premium brands (units) 67, , , ,125.9 Middle market brands (units) 28, , , ,9.6 Source: Company, DBS Vickers Page 11

12 China Yongda Automobiles (3669 HK Equity, HK$9.52, BUY, Target Price 12-mth HK$ 11.9) Forecast & Valuation General Data FY Dec (RMB m) 216A 217F 218F 219F At A Glance Turnover 43,33 5,737 61,591 7,817 Issued Capital (m shrs) 1,73 EBITDA 2,91 2,787 3,446 4,47 Mkt. Cap (HK$m/US$m) 16,468 / 2,15 Pre-tax Profit 1,152 1,939 2,54 3,81 Net Profit 871 1,389 1,799 2,183 Major Shareholders Net Pft (Pre Ex) (core profit) 871 1,389 1,799 2,183 Cheung Tak On (%) 39.4 Net Profit Gth (Pre-ex) (%) EPS (RMB) Salata Jean Eric (%) 7.6 EPS (HK$) Cai Yingjie (%) 6.7 EPS Gth (%) Gu Mingchang (%) 5.6 Diluted EPS (HK$) Free Float (%) 4.7 DPS (HK$) BV Per Share (HK$) m Avg. Daily Val. (US$m) 7.8 PE (X) P/Cash Flow (X) P/Free CF (X) nm EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Nil Nil Nil Consensus EPS (RMB) Other Broker Recs: B: 18 S: H: Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 216A 217F 218F 219F FY Dec 216A 217F 218F 219F Turnover 43,33 5,737 61,591 7,817 Net Fixed Assets 3,987 4,691 5,37 6,23 Cost of Goods Sold (39,227) (45,733) (55,3) (63,487) Invts in Assocs & JVs Gross Profit 3,85 5,4 6,291 7,33 Other LT Assets 2,942 3,411 3,81 4,217 Other Opg (Exp)/Inc (2,27) (2,613) (3,278) (3,754) Cash & ST Invts 1,772 3,48 3,623 4,433 Operating Profit 1,599 2,391 3,13 3,576 Inventory 4,317 4,663 4,896 5,141 Other Non Opg (Exp)/Inc Debtors 4,638 5,12 5,612 6,174 Associates & JV Inc Other Current Assets 2,264 2,47 2,676 2,921 Net Interest (Exp)/Inc (479) (487) (512) (537) Total Assets 2,375 23,875 26,517 29,48 Dividend Income Exceptional Gain/(Loss) ST Debt 7,97 7,97 7,97 7,97 Pre-tax Profit 1,152 1,939 2,54 3,81 Other Current Liab 5,333 5,971 6,558 7,168 Tax (224) (446) (584) (79) LT Debt 2,148 2,648 3,148 3,648 Minority Interest (57) (15) (156) (19) Other LT Liabilities Preference Dividend Shareholder s Equity 4,962 7,219 8,617 1,28 Net Profit 871 1,389 1,799 2,183 Minority Interests Net profit before Except ,389 1,799 2,183 Total Cap. & Liab. 2,375 23,875 26,517 29,48 EBITDA 2,91 2,787 3,446 4,47 Sales Gth (%) Non-Cash Wkg. Cap 5,887 6,264 6,627 7,67 EBITDA Gth (%) Net Cash/(Debt) (7,473) (6,697) (6,622) (6,312) Opg Profit Gth (%) Effective Tax Rate (%) Cash Flow Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 216A 217F 218F 219F FY Dec 216A 217F 218F 219F Pre-Tax Profit 1,152 1,939 2,54 3,81 Revenues (RMB m) Dep. & Amort Luxury & ultra luxury car sales 29,298 34,68 43,67 5,22 Tax Paid (541) (224) (446) (584) Mid-high end cae sales 7,85 8,773 9,38 9,843 Assoc. & JV Inc/(loss) (33) (36) (39) (42) After-sales services 5,439 6,798 8,498 1,198 (Pft)/ Loss on disposal of FAs Automobile rental services Chg in Wkg.Cap. (996) (641) (562) (642) Finance leasing Other Operating CF N/A N/A N/A N/A Net Operating CF 571 1,87 2,373 2,746 Total 43,33 5,737 61,591 7,817 Capital Exp.(net) (581) (1,) (1,) (1,) Gross Profit (RMB m) Other Invts.(net) (515) Luxury & ultra luxury car sales 1,45 1,575 2,46 2,351 Invts in Assoc. & JV (186) Mid-high end cae sales Div from Assoc & JV After-sales services 2,49 3,93 3,867 4,589 Other Investing CF (3) (474) (384) (379) Automobile rental services Net Investing CF (1,311) (1,474) (1,384) (1,379) Finance leasing Div Paid (211) (252) (41) (52) (4) N/A N/A N/A Chg in Gross Debt 1, Total 3,85 5,4 6,291 7,33 Capital Issues (39) 1,12 Gross Profit Margins (%) Other Financing CF (58) (487) (512) (537) Luxury & ultra luxury car sales Net Financing CF (413) (557) Mid-high end cae sales Currency Adjustments After-sales services Chg in Cash 24 1, Automobile rental services Finance leasing Total Key Assumptions Volume Sales (units) 147, , , ,146. Luxury & ultra luxury brands 83, , , ,335. Mid-high end brands (units) 63,86. 71, , ,81.5 Source: Company, DBS Vickers Page 12

13 Dah Chong Hong (1828 HK Equity, HK$3.89, BUY, Target Price 12-mth HK$ 4.7) Forecast & Valuation General Data FY Dec (HK$ m) 216A 217F 218F 219F At A Glance Turnover 46,462 55,555 62,667 7,367 Issued Capital (m shrs) 1,832 EBITDA 1,688 1,7 1,824 1,932 Mkt. Cap (HK$m/US$m) 7,127 / 911 Pre-tax Profit 1,97 1,249 1,41 1,552 Net Profit Major Shareholders Net Pft (Pre Ex) (core profit) CITIC Group (%) 56.1 Net Profit Gth (Pre-ex) (%) (4.5) Free Float (%) 43.9 EPS (HK$) Core EPS (HK$) m Avg. Daily Val. (US$m).8 EPS Gth (%) (1.4) Core EPS Gth (%) (4.6) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) Core PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Nil 33.7 New Consensus EPS (HK$) Other Broker Recs: B: 1 S: 1 H: Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 216A 217F 218F 219F FY Dec 216A 217F 218F 219F Turnover 46,462 55,555 62,667 7,367 Net Fixed Assets 3,318 3,769 4,145 4,542 Cost of Goods Sold (41,1) (48,555) (54,834) (61,642) Invts in Assocs & JVs Gross Profit 5,461 7, 7,833 8,726 Other LT Assets 4,837 4,744 4,658 4,579 Other Opg (Exp)/Inc (4,46) (5,574) (6,256) (7,15) Cash & ST Invts 1,16 1,145 1, Operating Profit 1,55 1,426 1,577 1,711 Inventory 7,161 7,519 7,895 8,29 Other Non Opg (Exp)/Inc 22 Debtors 8,13 8,414 8,834 9,276 Associates & JV Inc Other Current Assets Net Interest (Exp)/Inc (179) (29) (23) (198) Total Assets 25,415 26,549 27,569 28,674 Dividend Income Exceptional Gain/(Loss) 169 ST Debt 2,357 2,157 1,957 1,757 Pre-tax Profit 1,97 1,249 1,41 1,552 Other Current Liab 8,74 8,689 9,153 9,632 Tax (465) (375) (423) (466) LT Debt 5,67 5,67 5,67 5,67 Minority Interest (121) (15) (118) (13) Other LT Liabilities Preference Dividend Shareholder s Equity 8,732 9,347 9,984 1,68 Net Profit Minority Interests Net profit before Except Total Cap. & Liab. 25,415 26,549 27,569 28,674 EBITDA 1,688 1,7 1,824 1,932 Sales Gth (%) Non-Cash Wkg. Cap 7,487 7,631 7,964 8,321 EBITDA Gth (%) (2.9) Net Cash/(Debt) (6,264) (6,79) (5,981) (5,87) Opg Profit Gth (%) (2.6) Effective Tax Rate (%) Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 216A 217F 218F 219F FY Dec 216A 217F 218F 219F Pre-Tax Profit 1,97 1,249 1,41 1,552 Revenues (HK$ m) Dep. & Amort Motor & Motor-related 32,594 36,84 39,77 43,759 Tax Paid (366) (156) (375) (423) Food & Consumer Products 9,951 1,898 12,251 13,763 Assoc. & JV Inc/(loss) (3) (33) (36) (39) Others (Pft)/ Loss on disposal of FAs LFA 3,879 8,534 1,667 12,81 Net Operating CF 2,234 1,149 1,32 1,7 Total 46,462 55,555 62,667 7,367 Capital Exp.(net) (645) (6) (5) (5) Segment operating profit (HK$ Other Invts.(net) (1,899) Motor & Motor-related 1,14 1,271 1,188 1,261 Invts in Assoc. & JV Food & Consumer Products Div from Assoc & JV Others Other Investing CF LFA Chg in Gross Debt 89 (2) (2) (2) Total 1,332 1,913 1,949 2,171 Capital Issues Segment operating profit Other Financing CF (712) (22) (214) (28) Motor & Motor-related Net Financing CF (53) (574) (645) (668) Food & Consumer Products Currency Adjustments (49) Others Chg in Cash 133 (15) (12) (89) LFA Total Key Assumptions Total vehicle sales (units) 115, , , ,66. Auto ASP (HK$'/unit) Source: Company, DBS Vickers Page 13

14 ZhongSheng Group (881 HK EQUITY, HK$19.38, BUY, Target Price 12-mth HK$ 22.) Forecast & Valuation General Data FY Dec (RMB m) 216A 217F 218F 219F At A Glance Turnover 71,599 83,789 92,11 98,585 Issued Capital (m shrs) 2,267 EBITDA 4,775 6,78 6,89 7,581 Mkt. Cap (HK$m/US$m) 43,936 / 5,616 Pre-tax Profit 2,878 4,375 5,127 5,767 Net Profit 1,86 2,863 3,359 3,778 Major Shareholders Net Pft (Pre Ex) (core profit) 1,86 2,863 3,359 3,778 Li Guoqiang & Huang Yi (%) 57.7 Net Profit Gth (Pre-ex) (%) Jardine Strategic (%) 2. Free Float (%) 22.3 EPS (RMB) EPS (HK$) Core EPS (HK$) Core EPS (RMB) m Avg. Daily Val. (US$m) 8.5 EPS Gth (%) Core EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) Core PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Nil Nil Nil Consensus EPS (RMB) Other Broker Recs: B: 13 S: 1 H: 3 Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 216A 217F 218F 219F FY Dec 216A 217F 218F 219F Turnover 71,599 83,789 92,11 98,585 Net Fixed Assets 8,81 9,47 9,39 8,992 Cost of Goods Sold (65,47) (75,593) (82,891) (88,635) Invts in Assocs & JVs Gross Profit 6,552 8,196 9,219 9,951 Other LT Assets 9,299 9,417 9,433 9,448 Other Opg (Exp)/Inc (3,985) (4,441) (4,928) (5,274) Cash & ST Invts 5,719 7,82 11,62 14,646 Operating Profit 2,567 3,755 4,291 4,676 Inventory 6,53 7,618 8,64 9,439 Other Non Opg (Exp)/Inc 1,294 1,551 1,782 2,48 Debtors 1,149 1,345 1,478 1,582 Associates & JV Inc Other Current Assets 8,89 8,331 8,58 8,837 Net Interest (Exp)/Inc (987) (935) (951) (963) Total Assets 39,645 43,631 48,29 53,8 Dividend Income Exceptional Gain/(Loss) ST Debt 16,135 15,544 16,544 17,344 Pre-tax Profit 2,878 4,375 5,127 5,767 Other Current Liab 7,449 8,125 8,665 9,14 Tax (837) (1,247) (1,435) (1,615) LT Debt 1,893 1,893 1,893 1,893 Minority Interest (182) (266) (332) (374) Other LT Liabilities 1,69 1,69 1,69 1,69 Preference Dividend Shareholder s Equity 12,218 15,853 18,639 21,746 Net Profit 1,86 2,863 3,359 3,778 Minority Interests 881 1,147 1,479 1,852 Net profit before Except. 1,86 2,863 3,359 3,778 Total Cap. & Liab. 39,645 43,631 48,29 53,8 EBITDA 4,775 6,78 6,89 7,581 Sales Gth (%) Non-Cash Wkg. Cap 8,32 9,168 1,33 1,755 EBITDA Gth (%) Net Cash/(Debt) (12,39) (9,617) (7,376) (4,591) Opg Profit Gth (%) Effective Tax Rate (%) Cash Flow Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 216A 217F 218F 219F FY Dec 216A 217F 218F 219F Pre-Tax Profit 2,878 4,375 5,127 5,767 Revenues (RMB m) Dep. & Amort New car sales (after sales tax) 62,459 72,547 79,182 84,364 Tax Paid (41) (1,134) (1,247) (1,435) After-sales business 9,14 11,242 12,928 14,221 Assoc. & JV Inc/(loss) (4) (5) (5) (6) Total 71,599 83,789 92,11 98,585 (Pft)/ Loss on disposal of FAs Gross Profit (RMB m) Chg in Wkg.Cap. (7) (962) (1,53) (91) New car sales (after sales tax) 2,89 2,71 2,975 3,82 Other Operating CF 1, After-sales business 4,463 5,486 6,244 6,869 Net Operating CF 4,513 3,977 4,585 5,24 Total 6,552 8,196 9,219 9,951 Capital Exp.(net) (1,433) (1,) (8) (8) Gross Profit Margins (%) Other Invts.(net) New car sales (after sales tax) Invts in Assoc. & JV (1,132) After-sales business Div from Assoc & JV Total Other Investing CF (215) (81) Key Assumptions Net Investing CF (2,78) (1,81) (757) (725) New car sales vol - Mid-high 183, , , ,686. Div Paid (95) (572) (573) (672) New car sales vol - Luxury 117, , , ,437. Chg in Gross Debt 231 (592) 1, 8 Capital Issues 1,344 Other Financing CF (2,183) (976) (1,14) (1,58) Net Financing CF (2,48) (796) (587) (93) Currency Adjustments 8 Chg in Cash (37) 2,11 3,241 3,585 Source: Company, DBS Vickers Page 14

15 DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>2% 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, >1% for large caps) HOLD (-1% to +15% total return over the next 12 months for small caps, -1% to +1% for large caps) FULLY VALUED (negative total return i.e. > -1% over the next 12 months) SELL (negative total return of > -2% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 1 Feb :52:57 (HKT) Dissemination Date: 1 Feb 218 2:35:4 (HKT) Sources for all charts and tables are DBS Vickers unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSV HK ). This report is solely intended for the clients of DBS Bank Ltd., DBS Bank (Hong Kong) Limited (DBS HK), DBSV HK, and DBS Vickers Securities (Singapore) Pte Ltd. ( DBSVS ), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSV HK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group ) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) (b) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. Page 15

16 ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 3 Jan Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. Compensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Dah Chong Hong Holdings Limited (1828 HK) as of 31 Dec 217. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 4. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 16

17 RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd. ( DBS ) or DBS Vickers Securities (Singapore) Pte Ltd ( DBSVS ). DBS holds Australian Financial Services Licence no DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 21 ( CA ) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for wholesale investors within the meaning of the CA. Hong Kong Indonesia Malaysia This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities. This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies. Singapore Thailand United Kingdom Dubai International Financial Centre Wong Ming Tek, Executive Director, ADBSR This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No E) or DBSVS (Company Regn No G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at for matters arising from, or in connection with the report. This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. This report is produced by DBSVHK which is regulated by the Hong Kong Securities and Futures Commission This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd ( DBSVUK ). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 56538, 3 rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it. Page 17