BAIC Motor Corp (LHS)

Transcription

1 Bloomberg: 1958 HK Equity Reuters: 1958.HK Refer to important disclosures at the end of this report DBS Group Research. Equity 13 Oct 216 BUY (Initiating coverage) Last Traded Price ( 12 Oct 216):HK$8.15 (HSI : 23,47) Price Target 12-mth: HK$9.6 (18% upside) Potential Catalyst: Competitive new models to drive earnings Where we differ: Our earnings forecast slightly higher than consensus Analyst Rachel MIU rachel_miu@hk.dbsvickers.com Price Relative HK$ 4.3 Dec-14 May-15 Oct-15 Mar-16 Aug-16 (LHS) Relative HSI (RHS) Relative Index Forecasts and Valuation FY Dec (RMB m) 215A 216F 217F 218F Turnover 84,112 19,769 13, ,334 EBITDA 8,266 8,676 1,696 11,525 Pre-tax Profit 8,321 12,18 14,551 15,733 Net Profit 3,319 5,82 6,197 6,78 Net Pft (Pre Ex) 3,319 5,82 6,197 6,78 EPS (RMB) EPS (HK$) EPS Gth (%) (37.8) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) 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).1.1 CASH CASH ROAE (%) Earnings Rev (%): New New New Consensus EPS (RMB) Other Broker Recs: B: 12 S: 1 H: 6 ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: BAIC produces and sells a variety of passenger vehicles in China Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Benz's new look wins over younger drivers Mercedes-Benz the fastest growing luxury brand with sleek looking new models Various business entities launching new vehicles to boost sales Golden opportunity for company to implement the new energy vehicle strategy Initiate coverage with BUY rating and TP of HK$9.6 Benefits arising from vehicle refresh programmes. Beijing Benz is becoming a fast-growing auto company after changing its products and sales strategy 2-3 years ago. The newer models are more appealing to younger car buyers. Since 213, Mercedes-Benz's car sales have been growing at a rapid rate and the trend is expected to continue following the launch of new models recently. It has also ventured into car engine production to further enhance profitability. Korean JV expected to turn around soon. The Korean JV is expected to post modest earnings expansion in FY17/18 as sales of new products start to ramp up and on lower A&P expense after the older models are completely phased out. Strong cash generation on profit expansions. The healthy profit growth is generating strong cashflows for the company. This not only supports capex plans but also allows higher dividend payout for shareholders. Valuation: Undemanding valuation. We project FY16-17F earnings to grow at c.15% per year to support valuation expansion. Our HK$9.6 TP is pegged to FY17F PE of 1x, benchmarked to global luxury auto brands, factoring in the company s underlying fundamentals. Key Risks to Our View: Poor quality control. Profit could decline sharply and reputation damaged by defective products which may cause serious injuries or deaths. Its self-brand may suffer a bigger operating loss if cost control is weak. At A Glance Issued Capital - H shares (m shs) 2,11 - Non H shrs (m shs) 5,495 H shs as a % of Total 28 Total Mkt. Cap (HK$m/US$m) 61,92 / 7,984 Major Shareholders Beijing Automotive Group (%) 45. Beijing Shougang (%) 13.5 Major H Shareholders (%) Daimler AG (%) 38.2 H Shares-Free Float (%) m Avg. Daily Val. (US$m) 4.2 ed-th / sa- JY

2 INVESTMENT THESIS Profile BAIC Motor has tie-ups with Daimler AG and Hyundai Motor to assemble and sell Mercedes-Benz and Hyundai cars in China. It also has the Beijing proprietary brand, which currently has three product series Senova, BJ and Wevan. The group s passenger vehicles comprise sedans, SUVs, MPVs and Crossovers. Rationale Product refresh cycle to boost sales. BAIC, through various entities, has planned for several new models to drive future volume sales and revenue. Luxury brand generating strong earnings. The launch of the new flagship E-Class model which has a strong appeal is expected to create a solid earnings stream. Undemanding valuation. Upside potential is supported by good earnings stream, which is not factored in the share price yet. Valuation Our valuation is based on earnings multiples and benchmarked to listed luxury automakers globally. Our valuation has factored in the growth prospects, stage of product upgrade cycle, as well as its financial health. Based on FY17 earnings and target 1x PE, we arrive at our target price of HK$9.6. Risks Overcapacity. Car sales in China are projected to slow in coming years while new capacity coming on stream could result in severe market competition. A steep climb for Chinese auto brands. The domestic brands have been facing rising competition from the sino-foreign brands. BJ Motor may experience rising operating losses if its products are not competitive. Losses at Beijing Electric Vehicle Co may widen. Demand sentiment for NEVs may drop after the cut-back in government subsidy, thus affecting the company sales. Anti-sales policy. With more cities mulling the implementation of sales restrictions, BAIC may suffer slower deliveries across the various auto brands. Source: DBS Vickers Page 38

3 Benefits from reorganising luxury car business Company Background Corporate history. BAIC Group is the fifth largest automobile group in China (based on 215 volume sales). The auto business was set up in 1958 under Beijing Automobile Factory. The company was renamed as BAIC Group which apart from engaging in automobile and related businesses, also had education, investment, financing and developed emerging industries. On September 21, the automobile business was carved out under the umbrella of BAIC Motor (BAIC). The company was subsequently listed on the HK Stock Exchange on 19 December 214. BAIC Group currently holds 44.98% in BAIC. The second largest shareholder is Shougang Ltd which has a 13.54% stake. Daimler, a strategic partner, holds 1.8% Corporate structure (H-share stake is 36.46%), the first for an international automaker to have a direct stake in a listed Chinese automobile company. Principal business. BAIC is engaged in the design, manufacture and sales of passenger vehicles. It has the Beijing proprietary brand as well as foreign brands under the Beijing-Benz JV with Daimler and Beijing-Hyundai. The Beijing-Benz is a 51%-owned subsidiary of the company, while it has a 5% share in Beijing- Hyundai. The range of vehicles comprises sedans, SUVs, MPVs and crossovers, covering various engine sizes. The cars are sold through appointed dealerships under the respective brands. Other Domestic Shareholders Shougang Shares BAIC Group Daimler AG (H Share Shareholders) H Share public Shareholders 13.82% 13.54% 44.98% 1.8% 17.58% 1% 1% 1% 1% 51% 49% Beijing Branch Guangzhou Branch BAIC Motor Sales Co. Ltd. BAIC (Hong Kong) Investment Co., Ltd. Beijing Benz Beijing Mercedes-Benz Sales Service Co., Ltd. 1% 1% 1% 5% 97.95% Zhuzhou Branch Beijing Automotive Powertrain Co., Ltd. Zhuzhou (BAIC) Motor Sales Co., Ltd. Beijing Beinei Engine Parts and Components Co., Ltd. BAIC Investment 5% Beijing Hyundai Source: Company 215 Annual Report Page 39

4 Earnings of key operating units Beijing-Benz: a cash cow. BAIC raised its stake in Beijing Benz (BJ Benz) to 51% from 5% in November 213. It produces vehicles under the premium German marquee, licensed to Beijing Benz by its owner, Daimler AG. The JV has an operating term of 5 years which will expire in 233. In FY15, the JV produced an operating profit of Rmb7.8bn, up from Rmb3.3bn the previous year. The JV generated cash of Rmb1bn last year. We expect the earnings strength to continue after it changed the business strategy in China, including faster new model implementation and sales network reorganisation. Business strategy change key reason for earnings improvement. Together with Daimler, the company has restructured its distributor and dealership network to improve sales efficiency as well as intensified its product renewal cycle, by launching new models more frequently. Mercedes-Benz is currently one of the best-selling brands in China. The JV produces the C-Class, E- Class, and two SUV models - GLA & GLC. In August 216, the JV launched the new E-Class, an important catalyst for the JV s future growth. The new E-Class (sedan) is an important volume and profit driver. This model has also incorporated the latest autonomous and safety features. To enhance the value chain, the JV ventured into engine production in 213 in China. The plant has an annual capacity of 3, units. In mid-214, BJ Benz began exporting engine cylinder blocks, cylinder heads, crankshafts and other parts to Daimler s engine plants in Germany. The vehicle assembly capacity has more than doubled to 25, units in 216 since 213. Besides, its dealership network is widening too, from 166 outlets in 21 to 52 shops by 215. To consolidate its business in China, BAIC acquired a 35% stake in Fujian Benz from Fujian Motor in September 216, further strengthening its long-term partnership between the company and Daimler. Fujian Benz manufactures minivans, MPVs and special purpose vehicles. Sales volume of Beijing Benz unit 3, 29% 25, CAGR: 28% 2, 15, 1, 5, M15 9M16 Source: Company Beijing Benz network in China No. of outlets % Number of outlets (LHS) YoY growth (RHS) Source: Company Page 4

5 Beijing Benz - Revenue Sales volume of Beijing Benz C-class & E-class RMB m % 14, 6 12, 5 1, 4 8, 3 6, 4, 2 2, 1 FY14A FY15A FY16F FY17F FY18F Revenue (LHS) YoY growth (RHS) units 12, 1, 8, 6, 4, 2, Jan/14 Mar/14 May/14 Jul/14 Sep/14 Nov/14 Jan/15 Mar/15 May/15 Jul/15 Sep/15 Nov/15 Jan/16 Mar/16 May/16 Jul/16 Beijing Benz E-class Beijing Benz C-class Source: CAAM Note: Drop in E-class related to the old model Beijing Benz Gross Profit and Margins RMB m % 35, 3 3, 25 25, 2 2, 15 15, 1, 1 5, 5 FY14A FY15A FY16F FY17F FY18F Beijing Benz SUV monthly sales units 9, 8, 7, 6, 5, 4, 3, 2, 1, Jan/14 Mar/14 May/14 Jul/14 Sep/14 Nov/14 Jan/15 Mar/15 May/15 Jul/15 Sep/15 Nov/15 Jan/16 Mar/16 May/16 Jul/16 Gross profit (LHS) Gross margin (RHS) Beijing Benz GLA Beijing Benz GLC Source: CAAM Beijing Benz GLK Note: GLC to replace GLK Beijing-Hyundai: recovery insight. Beijing Hyundai (BJ Hyundai) produces largely mid-end cars and is positioned slightly below the Japanese players in term of pricing. The JV was set up in 22 and annual sales had crossed the 1m mark in 213. The key product lines are the Sonata (sedan), Elantra (sedan), Mistra (entry level compact sedan), ix35 (SUV), and Santa Fe (mid-sized SUV). The JV also has some NEV models, including the Sonata Hybrid. Page 41

6 Old models phase-out dampened FY15 earnings. The Beijing Hyundai JV is one of the major contributors to BAIC s earnings. However, its FY15 earnings fell 28%, which we attribute to a weak product portfolio and partly to old models phase-out exercise. Volume sales at the JV fell by 5.1% y-o-y in 215 and the management is forecasting sales to increase by 5.4% this year. This growth projection looks decent since it has achieved 7% of its full-year budget in 8M16. The JV s earnings trend is expected to improve next year at a modest rate, supported by new models in the pipeline. A new compact passenger vehicle Verna is scheduled for launch in 4Q16. The new Elantra, Santa Fe (facelift) and Santa Fe Sport are expected to lift future earnings. The Elantra series account for 3-4% of the JV volume sales per year and hence a model revamp will be crucial for its earnings outlook. New energy vehicle strategy is also part of the JV s plan to enrich its product competitiveness. To handle the new model roll-out plans, the JV has expanded capacity to 1.25m units, up from 1.5m units last year. Beijing Hyundai - Revenue RMB m % 114, 6 112, 4 11, 2 18, 16, (2) 14, (4) 12, 1, (6) 98, (8) 96, (1) FY14A FY15A FY16F FY17F FY18F Revenue (LHS) YoY growth (RHS) Sales volume of Beijing Hyundai unit 1,2, CAGR: 9% 1,, 7% 8, 6, 4, 2, M15 9M16 Source: Company Beijing Hyundai Operating Profit & Margins RMB m % 18, 16 16, 14 14, 12 12, 1 1, 8 8, 6 6, 4, 4 2, 2 FY14A FY15A FY16F FY17F FY18F Operating profit (LHS) Operating margin (RHS) Page 42

7 Sales volume of Beijing Hyundai ' units 1,2 1, Elantra Mistra Sonata Tucson Others Source: Company Average selling price of Beijing Hyundai cars Model ASP (RMB) Elantra Lingdong 99,8 Sonata hybrid 29,8 Sonata 174,8 Elantra Langdong 15,8 Mistra 129,8 V erna (three boxes) 73,9 V erna (two boxes) 72,9 Elantra Yuedong 99,8 Moinca 116,8 Elantra 89,8 Tucson 159,9 ix25 119,8 New Santa Fe 224,8 ix35 149,8 Source: Company New Hyundai Elantra (217) Source: Company New Santa Fe Sport (217) Beijing Motor: still loss-making. The self-brand is held under Beijing Motor (BJ Motor), which has three product series Senova series (mid- to high-end passenger vehicles), BJ and Wevan series (mainly economic vehicles). BAIC started the Wevan in 211 and followed with Senova and BJ in 213 to diversify its product lines. The Senova product series are mainly based on the Saab derived technology, which BAIC acquired in 29 for US$27m. The deal includes the architecture for three Saab models, two turbo engines and two transmissions and other related core technologies and intellectual property rights. Senova's current models include five sedans and four SUVs, of which two new SUVs (X55 and X35) were introduced in 1H16. The BJ series have military appeal and are largely cross-country vehicles. Recently, to soften the appeal, the company introduced a light urban jeep to attract city drivers. Wevan's target customers are small and micro businesses, as well as individuals, thus this line produces mini-mpvs and economical SUVs. The small car segment currently benefits from the government's favourable tax policy (vehicles below 1.6L capacity are entitled to a 5% reduction in vehicle purchase tax). Once the favourable tax policy expires at end-216, we see some uphill tasks for the Chinese automakers. Source: Company While the favourable tax policy helps, BJ Motor is still growing its scale and has to incur development and promotion costs to raise brand awareness. Coupled with intense market competition from the other Chinese and Sino-foreign brands, BJ Motor has being incurring huge operating losses, which amounted to Rmb3.3bn in FY15, up from Rmb1.9bn in FY14. We project operating losses to remain high because of new vehicle developments (covering from traditional and NEVs), ongoing sales network expansion and high promotion and marketing expenses. The potential swing factor is the level of subsidy from the government on its NEV development. Page 43

8 Sales volume of Beijing Brand Beijing Motor Operating Losses unit 4, 35, 51% RMB m (5) 3, CAGR: 93% (1,) 25, (1,5) 2, (2,) 15, (2,5) 1, (3,) 5, (3,5) M15 9M16 (4,) FY14A FY15A FY16F FY17F FY18F Source: Company Beijing Motor - Revenue RMB m % 3, , 4 2, , , 15 5, 1 5 FY14A FY15A FY16F FY17F FY18F Revenue (LHS) YoY growth (RHS) Market share of China brand PV manufacturers by sales volume (215) FAW 4% Jianghuai 4% BYD 5% Chery 6% Geely 6% Source: CAAM Beijing Auto Works 7% Others 14% Great Wall 9% Changan 13% Dongfeng 9% Shanghai Auto 23% NEV strategy. Apart from gasoline-based cars, the company also develops and sells new energy vehicles (NEV), in line with the Beijing government s promotion of the NEV industry. The EV series include E15EV, EV16, EV2, EU26 and ES21 models. New models for 216 include EX2 (first pure electric car) and EH4 sedan. In 215, the company sold slightly over 2, units of NEV, a y-o-y expansion of 27%. This sales performance is decent, compared to market peers such as BYD. For 8M16, its NEV sales shot up 16% y-o-y. Page 44

9 BAIC NEV monthly sales unit 8, Industrial Development Investment Management Co Ltd, Beijing State-owned Capital Management Centre, and Beijing Electronics Holding Co Ltd. BJEV collaborates with Atieva, Siemens, SK Group and others to strengthen its technology and R&D capabilities. 7, 6, 5, 4, EV series (E15 EV) 3, 2, 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Company Source: Company To widen its NEV presence, BAIC had subscribed for 28m shares or a 6.5% stake in Beijing Electric Vehicle Co Ltd (BJEV) for Rmb532.48min March 216 to enhance its exposure in the NEV business. The largest shareholder is BAIC Corp, which has a 6% interest. The other shareholders in BJEV are Beijing BJEV is still a loss-making entity. In FY15, after-tax losses amounted to approximately Rmb251.2m, some 15% lower than FY14. Page 45

10 Critical earnings drivers High product refresh rate. This comes from the various auto brands. BJ Benz's new E-Class should continue to drive sales in the next two years while BJ Hyundai also has the mid-size sedan (Elantra) and SUV (Santa Fe) to boost sales prospect. For BJ Motor, the new models are primarily focused on SUVs and a front-wheel drive mini-mpv for families. In the NEV field, new models for 216 include EX2 (first pure electric car) and EH4 sedan. To be the top three self-brand players by 22. To achieve this goal from the current 8 th position, the company plans to develop more quality vehicles that are competitive in the market. It will strengthen the Senova series that focuses on the mid- to high-end sedans, SUVs and MPVs. As the western regions develop, BAIC expects car consumption to rise. Hence, Wevan and BJ will be the two key product lines that target these markets. It comprises durable and economy sedans, mini MPVs, and small SUVs. To address the quality issue, the company will tap into its three major research centres in China, Germany and the US to raise its car development standard. The sales target by 22 is 8, units, meaning a substantial jump from 3,-4, sales units in the near term. Capacity expansion. BAIC is expanding capacity in anticipation of rise in demand. At BJ-Benz JV, total designed capacity is 3, units per annum, although it is currently running at 25, units capacity. Based on the five-year plan, BJ Hyundai intends to increase capacity to 1.65m units by 22. BJ Motor's total production capacity has reached 45, units this year. BAIC EV to challenge rivals. Being close to the central government does give BAIC some advantage to pursue the NEV strategy. For 8M16, sales of NEV have surpassed the volume achieved in 215. With the Beijing government s more relaxed policy toward NEV car buyers, volume sales are expected to stay high. To expand the range of NEV models, the company will have to rely on the three R&D centres on power trains and core electrical and electronics parts development. BAIC EV is a potential threat to the incumbent in the NEV market. Tighter cost control on its loss-making unit. Production efficiency and better sales strategy should help to reduce the losses at BJ Motor. This unit has turned in a gross profit of about Rmb4m in 1H16, though small relative to its revenue size of Rmb1bn. We expect the profitability to gradually improve over time. Financial Projections Revenue and volume sales supported by new models. The main revenue drivers are the strong Mercedes-Benz models, which are helping volume growth during the forecast period. Despite the high sales expansion, we still project volume to expand at 33%/2% for FY16/17F. The BJ Benz JV contributes the bulk of top-line expansion for BAIC. For the self-brand, we estimate mid-single-digit volume expansion in FY17, following the expiry of the favourable vehicle purchase tax policy. However, the NEV business should remain robust on government support. Therefore, we forecast BAIC to post 3%/19%/1% revenue expansion for FY16/17/18 respectively. Group profit margins trends. We estimate GP margins of around 21-22% over the forecast period, due to strong profit margins from BJ Benz, while BJ Motor is expected to post a small profit as its business scale is still small. As such, gross profit trend is stable. Overall, we expect operating margins to hover around 8% during FY16-18F as operating costs are projected to increase in tandem with volume and business growth. BJ Hyundai modest recovery trend. We estimate BJ Hyundai to post a 1% drop in FY16 earnings. However, the new models in the pipeline should lift FY17/18F profits at a high-single-digit growth. But challenges remain as competition in the midmarket segment stays fierce in the coming years. Profits from foreign brands offset by operating losses at selfbrand. We estimate FY16-18F net profit CAGR of c.15% because of continual operating losses at its self-brand unit from the termination of the favourable vehicle tax policy and high NEV spending to build this business. Improvement in current ratio should help its balance sheet. The company has leveraged on the suppliers credit and short-term borrowings to support its operations. In the past three years, its net current liabilities have been on the rise to Rmb15.4bn last year. However, we expect this trend to reverse as the company expands its business operations and manages its trade payables. Hence, its current ratio is projected to range between.8x and 1x over Meanwhile, net gearing is low and likely to turn net cash in the coming 1-2 years. Good operating cashflow outlook. We project robust operating cashflow on strong profits from BJ Benz. In fact, the company has achieved positive free cashflow in 215 and the trend is expected to sustain. BAIC has to maintain a high level of capex for its new product developments. The ability to generate strong cashflow should also support a good dividend policy. Page 46

11 Group revenue breakdown Profit margins RMB m % 16, , 12, , , 6, , 2, FY13 FY14 FY15 FY16F FY17F FY18F FY14 FY15 FY16F FY17F FY18F Beijing Motor (LHS) Beijing Benz (LHS) Gross margin Operating margin YoY, % (RHS) Net margin Group net profit Net gearing RMB m % 8, 8 7, 6 6, 5, 4 4, 2 3, 2, 1, (2) (4) FY13 FY14 FY15 FY16F FY17F FY18F Net profit (LHS) YoY, % (RHS) % (5) (1) (15) FY13 FY14 FY15 FY16F FY17F FY18F Operating cashflow Capex RMBm RMBm 16, 14, 14, 12, 1, 12, 1, 8, 6, 4, 8, 6, 2, (2,) 4, 2, (4,) FY13 FY14 FY15 FY16F FY17F FY18F FY13 FY14 FY15 FY16F FY17F FY18F Page 47

12 Valuation Benchmarked to peers. Our valuation is based on earnings multiples and makes reference to HK-listed and luxury automakers globally. The global luxury brand players are trading at FY17F PE of 5-23x, while Brilliance China (1114 HK) is valued at about 9x. BAIC's trading history is relatively short and its historical average PE is about 11x. We forecast 2-year EPS growth of c.15% (FY16-18F). Our forward PE of 1x has considered its growth outlook, stage of product upgrade cycle, as well as its financial health (both balance sheet and cashflows). We arrive at target price of HK$9.6 per share. Initiate with a BUY rating. Peers valuation luxury stocks Mkt PE PE Yield Yield P/Bk P/Bk EV /EBITDA ROE ROE Currency Price Cap Fiscal 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F Company Code Local$ US$m Yr x x % % x x x x % % Brilliance China* 1114 HK HKD ,711 Dec BAIC Motor 'H'* 1958 HK HKD ,984 Dec BMW BMW GR EUR ,117 Dec Porsche PAH3 GR EUR ,23 Dec n.a. n.a Daimler DAI GR EUR ,916 Dec Audi NSU GR EUR ,313 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Ferrari (Mil) RACE IM EUR ,24 Dec V olvo 'B' V OLV B SS SEK ,64 Dec Source: Thomson Reuters, *DBS Vickers Share price performance. BAIC's trading history is short, as it was listed only in late December 214. Looking at the share price chart, the key share price movers are:- 1) The HK-Shanghai connect helped to lift its share price from Mar-May15 2) The A-share market meltdown sent the share price down south from May-Aug15 3) Its share price recovered in 4Q15 after the central government announced the 5% reduction in vehicle purchase tax to 5% which benefits many of the domestic automakers, effective from 1 October 215 to 31 December ) However, the broad market correction in early 216 again sent the share price lower. 5) Subsequently, its share price moved up in 3Q16 following the strong industry vehicle volume sales numbers as well as decent interim earnings growth, contributed largely by Beijing Benz. Share price of BAIC vs sales volume HK$ % (1) 2 (2) (3) Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 BAIC (LHS) BJ Benz & BJ Hyundai sales growth (RHS) Source: Thomson Reuters Note: Beijing Benz and Beijing Hyundai sales Page 48

13 Key Risks Overcapacity. Car sales in China are projected to slow in coming years, as the industry is heading towards maturity. However, the new capacity coming on stream by various automakers is quite alarming, which could result in severe market competition. A steep climb for Chinese auto brands. The domestic brands have been facing rising competition from the sino-foreign brands. BJ Motor may see its operating losses widen in the coming years if its products are not competitive. Losses at BJEV may widen. Although the losses were relatively small in 215, with the cutback of NEV subsidies by the government, the demand for NEV may drop and thus affect sales. BJEV's losses may increase substantially as a result. Slowdown in car purchases. More c ities may implement sales restrictions and the Chinese economy could head south. These may cause the car purchase to slow down and in turn impact BAIC s sales. Page 49

14 Key Assumptions FY Dec 213A 214A 215A 216F 217F 218F Beijing-Benz sales (' units) Beijing - Hyundai sales (' units) 1,3.8 1,12. 1,62.9 1,12.3 1, ,258.6 Self brand (' units) Segmental Breakdown (RMB m) FY Dec 213A 214A 215A 216F 217F 218F Revenues (RMB m) Beijing Motor 6,847 12,434 17,849 21,639 23,661 24,718 Beijing Benz 5,934 43,937 66,263 88,13 17, ,617 Total 12,782 56,37 84,112 19,769 13, ,334 Segment Gross Profit (RMB m) Beijing Motor (978) (69) (1,42) Beijing Benz 1,393 9,52 16,697 22,914 27,849 3,129 Total 415 8,983 15,277 23,563 28,322 3,747 Segment Gross Profit Margins (%) Beijing Motor (14.3) (.6) (8.) Beijing Benz Total Page 5

15 Income Statement (RMB m) Margins Trend FY Dec 213A 214A 215A 216F 217F 218F Revenue 12,782 56,37 84,112 19,76 13,77 143,33 Cost of Goods Sold (12,367 (47,387 (68,835 (86,26 (12,45 (112,58 Gross Profit 415 8,983 15,277 23,563 28,322 3,747 Other Opng (Exp)/Inc (2,899) (7,562) (1,798 (14,887 (17,626 (19,222 Operating Profit (2,484) 1,422 4,479 8,676 1,696 11,525 Other Non Opg (Exp)/Inc Associates & JV Inc 6,22 5,89 4,257 4,11 4,378 4,767 Net Interest (Exp)/Inc (474) (533) (416) (56) (523) (559) Dividend Income Exceptional Gain/(Loss) Pre-tax Profit 3,65 6,698 8,321 12,18 14,551 15,733 Tax (114) (857) (1,999) (3,15) (3,866) (4,167) Minority Interest (237) (1,331) (3,3) (3,993) (4,488) (4,858) Preference Dividend Net Profit 2,714 4,511 3,319 5,82 6,197 6,78 Net Profit before Except. 2,714 4,511 3,319 5,82 6,197 6,78 EBITDA (1,666) 3,786 8,266 8,676 1,696 11,525 Growth Revenue Gth (%) EBITDA Gth (%) N/A N/A Opg Profit Gth (%) N/A N/A Net Profit Gth (%) (2.6) 66.2 (26.4) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) (19.4) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) (5.7) Div Payout Ratio (%) Net Interest Cover (x) (5.2) % 8.% 7.% 6.% 5.% 4.% 3.% 2.% 214A 215A 216F 217F 218F Operating Margin % Net Income Margin % Page 51

16 Interim Income Statement (RMB m) FY Dec 2H213 1H214 2H214 1H215 2H215 1H216 Margins Trend 8% 6% Revenue 1,488 25,127 31,243 36,522 47,589 49,39 Cost of Goods Sold (9,759) (21,712) (25,675) (3,337) (38,498) (38,284) Gross Profit 729 3,415 5,568 6,185 9,91 1,754 Other Oper. (Exp)/Inc (2,169) (3,366) (4,196) (3,474) (7,324) (6,725) Operating Profit (1,441) 49 1,373 2,712 1,767 4,3 Other Non Opg (Exp)/Inc Associates & JV Inc 3,59 2,813 2,996 2,35 2,222 1,979 Net Interest (Exp)/Inc (267) (233) (3) (49) (7) (255) Exceptional Gain/(Loss) Pre-tax Profit 1,351 2,629 4,69 4,338 3,983 5,754 Tax (15) (318) (538) (847) (1,152) (1,334) Minority Interest (183) (53) (81) (1,32) (1,683) (2,9) Net Profit 1,64 1,781 2,73 2,171 1,148 2,411 Net profit bef Except. 1,64 1,781 2,73 2,171 1,148 2,411 4% 2% % -2% -4% -6% 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Operating Margin % Net Income Margin % Growth Revenue Gth (%) N/A Opg Profit Gth (%) N/A N/A N/A 5, Net Profit Gth (%) N/A (58.) 11.1 Margins Gross Margins (%) Opg Profit Margins (%) (13.7) Net Profit Margins (%) Page 52

17 Balance Sheet (RMB m) FY Dec 213A 214A 215A 216F 217F 218F Net Fixed Assets 24,755 34,218 38,353 43,457 46,983 49,832 Invts in Associates & JVs 12,649 14,66 14,582 17,234 19,973 22,828 Other LT Assets 14,228 17,255 22,221 23,576 24,89 26,149 Cash & ST Invts 16,794 21,923 23,946 28,657 35,23 42,882 Inventory 7,479 11,68 9,871 1,858 11,944 13,138 Debtors 6,4 6,422 1,949 12,43 13,248 14,573 Other Current Assets 3,486 4,95 7,471 8,48 9,712 11,227 Total Assets 85,396 19, , ,35 161,979 18,629 ST Debt 7,833 15,983 21,28 21,28 21,28 21,28 Creditors 11,112 14,978 21,382 23,521 25,873 28,46 Other Current Liab 17,975 2,539 24,965 28,51 31,962 35,263 LT Debt 15,122 13,935 8,986 1,986 11,986 12,986 Other LT Liabilities 2,3 2,455 3,711 3,872 4,49 4,244 Shareholder s Equity 23,692 33,355 35,1 4,92 46,29 52,998 Minority Interests 7,362 8,614 12,59 16,53 2,541 25,398 Total Cap. & Liab. 85,396 19, , ,35 161,979 18,629 Asset Breakdown Inventory - 9.7% Debtors - 1.7% Net Fixed Assets % Bank, Cash and Liquid Assets % Assocs'/JVs % Non-Cash Wkg. Capital (12,118) (13,121) (18,57) (2,641) (22,931) (24,785) Net Cash/(Debt) (6,161) (7,995) (6,32) (3,69) 1,964 8,616 Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH Net Debt/Equity ex MI (X) (.2) Capex to Debt (%) Z-Score (X) NA NA NA NA NA NA Page 53

18 Cash Flow Statement (RMB m) FY Dec 213A 214A 215A 216F 217F 218F Capital Expenditure RMBm 14,. Pre-Tax Profit 3,65 6,698 8,321 12,18 14,551 15,733 Dep. & Amort ,364 3,787 4,541 5,16 5,893 Tax Paid (258) (1,365) (1,674) (1,999) (3,15) (3,866) Assoc. & JV Inc/(loss) (6,22) (5,89) (4,257) (4,11) (4,378) (4,767) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. (45) 1,282 4,649 1,639 1,76 1,748 Other Operating CF (15) (97) (46) Net Operating CF (2,457) 2,262 1,365 12,351 13,934 14,741 Capital Exp.(net) (7,236) (11,785) (12,52) (11,) (1,) (1,) Other Invts.(net) 1,176 (2,37) Invts in Assoc. & JV (7,248) (1,129) (1,541) (2,) (1,5) (1,5) Div from Assoc & JV Other Investing CF 7,24 5,343 5,149 3,359 3,139 3,411 Net Investing CF 2,933 (9,941) (8,444) (9,641) (8,361) (8,89) Div Paid (285) (2,793) (2,78) Chg in Gross Debt 7,194 7, , 1, 1, Capital Issues 6,132 7, Other Financing CF ,897 Net Financing CF 13,254 12, , 1, 1, Currency Adjustments (3) (9) 28 Chg in Cash 13,727 5,133 2,23 4,711 6,573 7,652 Opg CFPS (RMB) (.43) Free CFPS (RMB) (1.73) (1.48) (.22) ,. 1,. 8,. 6,. 4,. 2,.. 214A 215A 216F 217F 218F Capital Expenditure (-) Page 54

19 Appendix PE chart PB chart x 2. x SD: 14.5x SD: 1.6x Avg: 1.7x Avg: 1.2x SD: 7x SD:.9x 4. Dec-14 Mar-15 Jun-15 Aug-15 Nov-15 Feb-16 Apr-16 Jul-16 Oct-16.6 Dec-14 Mar-15 Jun-15 Aug-15 Nov-15 Feb-16 Apr-16 Jul-16 Oct-16 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers Page 55

20 Products & ASP Beijing Benz Model New E-Class C-class GLC GLA ASP (RMB) 436,8-499,8 369, - 479, 396, - 579, 269,8-398, Source: Company Page 56

21 Key management team Name Age Position / Title Mr. Xu Heyi 58 Mr. Xu is the chairman of the Board, as well as the secretary of the party committee and a non-executive Director of the Company. He has more than 3 years of experience in the industry and in management. Mr. Zhang Xiyong 52 Mr. Zhang is a non-executive Director of the Company. He has more than 3 years of experience in the industry and in management. Mr. Li Zhili 6 Mr. Li is a non-executive Director of the Company. He has more than 3 years of experience in the industry and in management. Mr. Li Feng 52 Mr.Li is the executive Director, president and deputy secretary of the party committee of the Company. He has more than 3 years of experience in the industry and in management. Mr. Ma Chuanqi 6 Mr. Ma is a non-executive Director of the Company. He has more than 3 years of experience in finance and management. Mr. Qiu Yinfu 48 Mr. Qiu is a non-executive Director of the Company. He has more than 2 years of experience in the industry and in management. Mr. Hubertus Troska 56 Mr. Troska is a non-executive Director of the Company. He has nearly 3 years of experience in the automobile industry. Mr. Bodo Uebber 56 Mr. Uebber is a non-executive Director of the Company. He has 3 years of experience in finance and management. Ms. Wang J ing 44 Ms. Wang is a non-executive Director of the Company. She has more than 2 years of experience in the industry and management. Mr. Yang Shi 6 Mr. Yang is a non-executive Director of the Company. He has more than 3 years of experience in the law industry and management. Mr. Li J ikai 51 Mr. Li is a vice president of the Company responsible for the operation center production and technology center and various manufacturing bases of the Company. Mr. Wu Xuebin 5 Mr. Wu is the vice president of the Company with responsibility over research and development of new energy products, and is also the head of the automotive research institute of the Company. Mr. Chen Bao 54 Mr. Chen is a vice president of the Company, and mainly responsible for procurement center and quality center. Mr. Zhou Yanming 58 Mr. Zhou is a vice president of the Company, responsible for the planning and development, capital management and investment management. Mr. Chen Hongliang 5 Mr. Chen is a v ice president and also the senior executiv e v ice-president and the secretary of the party committee of Beijing Benz, responsible for the human resource management, IT management, company affairs and legal work of Beijing Benz. Mr. Liu Zhifeng 43 Mr. Liu is a vice president of the Company, and is also a standing deputy general manager of Beijing Hyundai. Mr. Wang Zhang 52 Mr. Wang is a vice president of the Company. He is also the general manager of the off-road branch company. Mr. Chen Guixiang 53 Mr. Chen is the vice president of the Company and is also the general manager of the Wevan business unit. Mr. Cai J ianjun 42 Mr. Cai is the v ice president of the Company with responsibilities ov er BAIC Motor Sales Co. Ltd. where he is also the party secretary of the party committee, executive Director and general manager. Mr. Gu Lei 56 Mr Gu is a v ice president of the Company. He is also the general manager of the technical center of MBtech. Mr. J iang Xiaodong 46 Mr. Jiang is a vice president of the Company with responsibility over the finance and economic center of which he is a director. Mr. Yun Tae Hwa 52 Mr. Yun is a vice president of the Company and the head of the production and technology center, with responsibility over production and technology management. Mr. Zhang Huaxie 6 Zhang is a v ice president of the Company. Mr. Liang Guofeng 44 Mr. Liang is a vice president of the Company with responsibility over the product center where he is also a supervisor. Mr. Xie Wei 46 Mr. Xie is the vice president of the Company with responsibility over the management center where he is also the director. Mr. Yan Xiaolei 4 Mr. Yan is the secretary to the Board of the Company and the company secretary of the Company. Source: Company Page 57

22 Industry Focus China Auto Sector 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: 13 Oct :45:5 Dissemination Date: 13 Oct :9:25 GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ). This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd. ( DBSVS ) and DBSVHK, 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 DBSVHK. 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., DBSVS and DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group )) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document 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. 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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) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) 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. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-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 11

23 Industry Focus China Auto Sector 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 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. As of 13 October 216, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities). 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. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended/mentioned in this report as of 12 Oct Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Baic Motor Corporation Limited (1958 HK), Astra International Terbuka (ASII IJ) and Dah Chong Hong Holdings Limited (1828 HK) as of 3 Sep 216. 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24 Industry Focus China Auto Sector Thailand United Kingdom This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it. This report is produced by DBSVHK which is regulated by the Securities and Futures Commission of Hong Kong. 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. Dubai United States Other jurisdictions This research report is being distributed in The Dubai International Financial Centre ( DIFC ) 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. This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Vickers (Hong Kong) Limited 18 th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) , Fax: (852) Company Regn. No Page 112