China Auto Sector. Selectively accumulate in 2013

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1 Asia Pacific/China Equity Research Automobile Manufacturers Research Analysts Jack Yeung Contribution by Alex Yang China Auto Sector INITIATION Selectively accumulate in 2013 Figure 1: Valuation comparison TP Up/down Price Mkt cap 6M ADTO P/E (x) Company Ticker (HK$) side (%) Rating (HK$) (US$ mn) (US$ mn) 13E 14E Brilliance 1114.HK O , BYD 1211.HK N , Dongfeng 0489.HK O , Geely 0175.HK U , Great Wall 2333.HK O , GAC 2238.HK N , Note: O = Outperform. N = Neutral, U = Underperform. Source: Bloomberg consensus, Credit Suisse estimates Luxury segment continues to outperform. By the end of 2012, China s USD millionaires reached more than 1mn, and a growing middle class particularly brand conscious that wants luxury cars that have been stretched to offer more space. As a result, sales of luxury vehicles and SUVs are outpacing the market with little sign of slowing down. Given the strong demand and enhanced local production, we expect China s luxury auto sales to grow at 20-25% p.a. by 2015, compared with about 8-1 growth for overall passenger vehicle (PV) sales. Mid-to-high end segment s competition intensifies. Japanese brands had a difficult year in 2012 due to anti-japan sentiment in China. Its sales started to recover at the end of 2012 with massive discounts and new model launches in These new models will have lower ASPs, which puts a lot pressure on some mid-end brands like Hyundai. We believe 2013 will be a recovery year for Japanese brands as they often known for better value for money and cheaper price will make them even more attractive. SUV segment: New battlefield with strong demand. More than 20 new SUV models are going to be launched across different segments in 2013, which will intensify competition among SUV makers. However, given the low SUV penetration rate and strong upgrade and replacement demand, we expect SUV sales to remain over 2 growth for the next 2-3 years. Initiating on the China auto sector with OUTPERFORM. Given China s low penetration rate and rising household income, we believe its PV segment will grow 8-1 for the next 3-5 years. We initiate coverage on Great Wall with OUTPERFORM (TP HK$ % upside), on BYD with NEUTRAL (TP HK$20.00, 12.5% downside) and on Geely with UNDERPERFORM (TP HK$3.50, 14.2% downside). We upgrade Guangzhou Auto to NEUTRAL (TP HK$6.50, 9% downside) and maintain OUTPERFORM on Brilliance (TP HK$12.00, 13.4% upside) and Dongfeng Motors (TP HK$14.00, 16.3% upside). Our top pick for the long term remains Brilliance and our near-term top pick (next 12 months) is Dongfeng Motors. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit or call +1 (877) US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus charts and table Figure 2: Growth of China auto sales by segment 6 Figure 3: Foreign brands PV market share in China 25% % 1 5% E 2014E 2016E 2018E 2020E Auto sales YoY % PV sales YoY % CV sales YoY % Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Nov-12 Japanese German American Korean French Source: CAAM, Credit Suisse estimates Figure 4: Luxury PV sales in China '000 Units 2,500 2,252 2,000 76% 1,877 53% 1,551 1,500 39% 1,272 33% 42% 25% 1,017 25% 1,000 22% 29% 22% 21% % 5% 7% % E 2013E 2014E 2015E Luxury PV sales (LHS) Luxury PV sales YoY (RHS) Total PV sales YoY (RHS) Source: Roland Berger, Credit Suisse estimates Source: CAAM Figure 5: SUV sales as % of China s PV sales 16% 14% 12% 1 8% 6% 4% 2% Jan/04 Oct/05 Jul/07 Apr/09 Jan/11 Oct/12 SUV sales as % of PV sales Source: CAAM Figure 6: Valuation comparison of major listed automakers Upside/ Share Market Dividend Company Ticker TP downside price cap P/E (x) P/B (x) yield (%) ROE (%) (HK$) (%) (HK$) (US$mn) 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E Brilliance 1114.HK , BYD 1211.HK , Dongfeng Motors 0489.HK , Geely 0175.HK , Great Wall Motor 2333.HK , Guangzhou Auto 2238.HK , Mkt cap wtd avg Source: Bloomberg consensus China Auto Sector 2

3 Selectively accumulate PV growth remains solid in 2013 China s low auto penetration rate and strong income growth will further its growth in the passenger vehicles (PV) segment in the next 3-5 years. Low-tier cities and inland regions have lower-than-average auto penetration rates, higher income growth rate as well as higher GDP growth; we believe they will become major auto markets in the next 5-10 years. Although automakers are expanding capacity aggressively, their overall utilization rate is still above 7. Automakers also have the flexibility to adjust their capacity plans to meet real demand growth. SUV segment: New battlefield with strong demand China s sports utility vehicle (SUV) segment has maintained strong sales growth in recent years despite slowing PV sales in 2011 and Over 20 new SUV models are planned to be launched in 2013 across all segments. We expect competition within the SUV segment to intensify, as most JV players are equally competitive. However, we note that rising upgrade and replacement demand will mainly benefit the mid-to-low end SUV segment. We expect Great Wall to maintain its leadership in this segment due to lack of strong competitors. Mid-to-high end segment: Intensifying competition Due to anti-japan protests in China in 2012, Japanese brands had a difficult year last year. Its sales started to recover at the end of 2012 with massive discounts and new model launches in 2013 in hoping to regain some of its lost market share. These new models will have lower ASPs, which will put a lot pressure on some of the mid-end brands like Korean brands. With cheaper price, we believe sales of Japanese brands will recover significantly in 2013 as they often known for better value for money. Luxury segment: Rising along with wealth in China China s luxury auto segment is still in its early growth stage, with a low penetration rate. We believe growing wealth will drive the country s luxury auto sales. We also expect strong waves of replacement purchases to support luxury auto sales in the next 3-5 years. Many luxury brands have launched their economy models with prices close to the mid-tohigh end. We believe these models will become strong engines for luxury auto sales and help luxury automakers to gain market share from mid- to high-end players. Valuation and stock picks We are initiating China Auto Sector with OUTPERFORM given China s low penetration rate and rising household income. We initiate on Great Wall Motor with an OUTPERFORM (TP HK$30.00 based on 13x 2013E EPS) given its leading position in China s SUV segment. For BYD, we initiate with NEUTRAL, (TP HK$20.00 based on a sum-of-the-parts valuation) as we believe its electric cars are yet to be commercialized. We initiate coverage on Geely with an UNDERPERFORM (TP HK$3.50 based on 10x 2013E EPS) as we believe it will face competition from JV brands moving toward low-end segment as it tries to move upward. We upgrade Guangzhou Auto to NEUTRAL from UNDERPERFORM (TP HK$6.50 based on 10x 2013E EPS) given recovering Japanese auto sales. Brilliance remains OUTPERFORM (TP HK$12.00, based on 14x 2013E EPS) as our long term top pick for the sector and Dongfeng Motors maintains OUTPERFORM, (TP HK$14.00, based on 9x 2013E EPS) as our near term (12 month) top pick for the sector. China s low auto penetration rate and strong income growth will further its PV growth in the next 3-5 years We expect competition in the SUV segment to intensify but demand to remain strong Japanese brands new models in 2013 would help them to regain market share but intensify competition in mid-to-high end segment We believe rising wealth in China will continue to drive luxury auto sales We are positive on sector growth and initiate coverage on Great Wall Motor, BYD, and Geely. Brilliance and Dongfeng Motors remain our top picks China Auto Sector 3

4 2013E ROE (%) 2013E P/B (x) 08 January 2013 Sector valuation comparison Figure 7: Auto sector valuation table Share Dividend Ticker price Mkt cap P/E (x) P/B (x) yield (%) ROE (%) Company (local ccy) (US$ mn) 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E H share automakers Brilliance China Auto 1114.HK , BYD 1211.HK , Dongfeng Motors 0489.HK , Geely 0175.HK , Great Wall Motor 2333.HK , Guangzhou Auto 2238.HK , Qingling Motors 1122.HK Sinotruk 3808.HK 6.2 1, Weichai Power Co HK , Mkt cap wtd avg Global automakers Honda Motor , Nissan Motor , Toyota Motor , Mitsubishi Motors , (2.6) (2.9) Mitsubishi Corp , Mazda Motor ,488 (3.1) (2.6) Hyundai Motor KS , Kia Motors KS , Ford Motor Co. F.N , General Motors Corp. GM.N , Fiat FIA.MI , BMW AG BMWG.DE , Porsche Auto PSHG_p.DE , Daimler DAIGn.DE , Mkt cap wtd avg Source: Bloomberg consensus Figure 8: Comparison within our coverage P/E vs RoE 35.0 Figure 9: Comparison within our coverage P/E vs P/B Dongfeng Motors Brilliance Great Wall Motor Geely Guangzhou Auto BYD E P/E (x) Dongfeng Motors Brilliance Great Wall Motor Geely Guangzhou Auto BYD E P/E (x) Source: Bloomberg consensus Source: Bloomberg consensus China Auto Sector 4

5 Table of contents Selectively accumulate... 3 PV growth remains solid in SUV segment: New battlefield with strong demand... 3 Mid-to-high end segment: Intensifying competition... 3 Luxury segment: Rising along with wealth in China... 3 Valuation and stock picks... 3 Sector valuation comparison... 4 PV growth remains solid in Low penetration rate suggests high growth potential... 6 Income growth is driving auto sales... 8 Growing demand in low-tier cities and inland regions... 9 Risks of oversupply SUV segment: New battlefield with strong demand Low SUV penetration rate with strong sales Upgrade and replacement demand to boost sales New model launches to intensify competition Limited competition in mid-to-low end segment Mid-to-high end segment: Intensifying competition Slowdown of PV sales Intensifying competition in PV segment Japanese brands to regain market share in Low-end segment is under pressure Luxury segment: Rising alone with wealth in China Low luxury auto penetration rate Growing wealth strengthens luxury auto demand Replacement demand drives luxury auto sales Proliferation of economy models Restrictive policies won t hurt luxury segment Great Wall Motor (2333.HK / 2333 HK) BYD Co Ltd (1211.HK / 1211 HK) Geely Automobile Holdings Ltd (0175.HK / 175 HK) Guangzhou Automobile Group (2238.HK / 2238 HK) Dongfeng Motors Group Co Ltd (0489.HK / 489 HK) Brilliance China Automotive Holding (1114.HK / 1114 HK) China Auto Sector 5

6 PV growth remains solid in 2013 Low penetration rate suggests high growth potential China s auto penetration rate (number of vehicles owned by per 1,000 people) was around 69 in 2011, much lower than mature auto markets such as Japan and Korea, Germany, and the US (Figure 10). It is also lower than the world s average of around 140. Given China s GDP per capita already exceeded US$5,000 in 2011, we believe its reasonable auto penetration rate is around 100 (Figure 10). However, most provincial regions in China have penetrations rate below 100 (Figure 11), suggesting high potential for auto sales growth. China s auto penetration rate is much lower than mature auto markets, suggesting high growth potential for auto sales Figure 10: 2011 auto penetration rate by country (No. of autos per 1,000 people) United states (815) Japan (622) Germany (567) Korea (381) China (69) GDP per capita (USD) ,000 10, ,000 Source: United Nation Statistics, Ward Auto, CEIC, IMF, Credit Suisse estimates Figure 11: 2011 China auto penetration rate by region No. of autos / 1,000 persons Beijing Zhejiang Tianjin Shanghai GDP per capita (RMB) 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 Source: CEIC, Credit Suisse estimates China Auto Sector 6

7 We plot the GDP per capita and auto penetration rate of more than 100 countries in Figure 10. We find auto penetration rates generally grow with GDP per capita and follow an S- shaped curve. We note that China is entering a stage of high growth on this S curve (Figure 10). We also note that growth of China s GDP per capita and its auto penetration from has generally followed the trend for Korea over (Figure 12). We expect China to continue to follow Korea s growth trends of between 2012 and According to International Monetary Fund (IMF) estimates, China s GDP per capita is likely to exceed US$9,500 in 2017, similar to Korea s in 1994 when Korea s auto penetration rate reached 167. We assume China s auto penetration rate will reach 160 in Then we use Korea s auto penetration rate for as a proxy to simulate China s penetration rate over (Figure 12). This suggests China s total number of autos would reach around 200 mn units in 2016 and its annual auto sales growth rate would be maintained at around 1 by 2015 then 8-9% up to 2020 (Figure 13 and Figure 14). We expect China s annual auto sales growth rate to be around 1 by 2015 and 8-9% up to 2020 Figure 12: Growth of GDP per capita and auto penetration rate USD Korea No. of vehilces per 1,000 people USD China No. of vehilces per 1,000 people 25, , , , , , , , , , E 2020E GDP per capita (LHS) Auto penetration rate (RHS) GDP per capita (LHS) Auto penetration rate (RHS) Source: World Bank, IMF, Credit Suisse estimates Figure 13: Growth of auto sales and auto population ('000 units) ('000 units) 350,000 40,000 Figure 14: Growth of auto sales by segment 6 300,000 35, ,000 30, , ,000 25,000 20,000 15, ,000 10, , E 2014E 2016E 2018E 2020E 5, E 2014E 2016E 2018E 2020E Auto sales (RHS) Total No. of autos (LHS) Auto sales YoY % PV sales YoY % CV sales YoY % Source: CAAM, Credit Suisse estimates Source: CAAM, Credit Suisse estimates China Auto Sector 7

8 Income growth is driving auto sales We expect China s auto sales to exceed 19 mn units in 2012, representing a CAGR of more than 2. This remarkable growth was mainly driven by a fast-growing domestic economy and rising individual incomes, with real GDP growing by around 1 p.a. from and Chinese disposable incomes per capita also growing by double digits. According to the National Bureau of Statistics, China s disposable income per capita for urban residents in 1H12 increased 13.3% YoY to Rmb13,679 or US$2,183, faster than 1H11 s 11.2%. During the same period, cash income per capita for rural residents increased 16.1% to Rmb4,303 or US$687, much faster than the growth of disposable income per capita for urban residents. With this rise in income, China s middle class defined as individuals earning more than Rmb50,000 or US$7,978 annually doubled 2006 s scale of about 12% of the country s total population in 2010 and may account for about 45% of the total population by 2020 (Figure 15). We believe the emergence of China s middle class is the power engine that will drive China s auto sales in the next few years. We believe strong income growth and rising middle class will be major engines for China s auto sales Figure 15: Growth of middle class in China 200 % 45 million E Number of middle class household or higher (LHS) Share of middle class & higher (RHS) Source: CEIC, Credit Suisse estimates Figure 16: Income growth of Chinese households income YoY 25% 2 15% 1 5% % Urban household Rural household Source: CEIC Figure 17: Income distribution of Chinese urban households % RMB ' Source: National Bureau of Statistics, CEIC % Share of urban households with annual income > RMB100,000 China Auto Sector 8

9 Growing demand in low-tier cities and inland regions The number of China s urban residents exceeded rural residents for the first time in The Chinese government was anticipating an urbanization rate of 51.5% by 2015E, which seems to have been easily realized in Tier 2 and 3 cities are the major engine of China s urbanization. Tier 2 cities accounted for around 16% of the country s population, but generated about 3 of total GDP and consumed over half of its foreign direct investment (Figure 18). The GDP growth rate of Tier 2 cities is about 2% higher than the whole economy in 2011 (Figure 19). We estimate that new car sales in Tier 2 cities will grow more than 1 p.a. by This rate would be 5-8% higher in Tier 3 cities, but less than 5% in Tier 1 cities, mainly due to auto restrictive policies. Moreover, China s inland regions have lower auto penetration rates, but higher income (indicated by GDP per capita) growth rates than the national average (Figure 20 and Figure 21). We believe auto sales growth in these regions will also be faster than other parts of China. We believe auto sales growth in low-tier cities and inland regions will be faster than the national average Figure 18: GDP contribution of Tier 1 and 2 cities 10 Figure 19: GDP growth rates of Tier 1 and 2 cities % % 64% 63% 62% % 58% % % 23% 24% 23% 26% 26% 26% 27% 27% % 13% 13% 14% 14% 14% 14% 13% 13% 12% 12% Tier-1 cties Tier-2 cities Other cities 5% 2,002 2,003 2,004 2,005 2,006 2,007 2,008 2,009 2,010 2,011 China total Tier-1 cties Tier-2 cities Source: CREIS, CEIC, Credit Suisse estimates Figure 20: PV penetration rate (number of PV per 1,000 persons) by region Source: CREIS, CEIC, Credit Suisse estimates Figure 21: CAGR of GDP per capita by region National average = 55.3 National average = 16.3% Source: CEIC, Credit Suisse estimates Source: CEIC, Credit Suisse estimates China Auto Sector 9

10 Risks of oversupply The return to strong growth in Chinese vehicle sales has prompted a wave of investment in new capacity. It has raised concerns that the industry could be left with a supply glut when sales growth slows following the end of government incentive schemes. The National Development and Reform Commission (NDRC) estimated that the industry was using 8 of its installed capacity in 2011, while we expect this to drop to about 75% in 2012 and less than 7 by Compared with JVs, domestic brands seem to be more aggressive on capacity expansion (Figure 22 and Figure 23). They also have much lower capacity utilization rates (Figure 24 and Figure 25). We expect domestic brands to be more rational facing the slowdown of demand in the low-end segment. As most new capacities are still being planned, there would be sufficient time for them to adjust their capacity expansion to fit the industry s demand growth. Domestic brands have higher risks of overcapacity. Figure 22: Capacity expansion of major JVs Figure 23: Capacity expansion of major domestic brands JVs Domestic brands DF Honda FAW Xiali GAC Toyota Jianghuai Changan Ford Mazda FAW Car GAC Honda Changan Auto DF PSA Brilliance Auto DF Yueda Kia Shanghai Auto FAW VW Geely FAW VW BYD SH VW Great Wall Motor SH GM Chery ,000 1,500 2, ,000 1,500 2, E capacity 2015E capacity 2012E capacity 2015E capacity Source: Company data Figure 24: Capacity utilisation rate of JVs Million units JVs % % 12 75% E 2013E 2014E 2015E Source: Company data Figure 25: Capacity utilisation rate of domestic brands Million units Domestic brands % 53% % 32% E 2013E 2014E 2015E PV capacity* (LHS) Capacity utilization rate (RHS) PV capacity* (LHS) Capacity utilization rate (RHS) * Including capacities for sedan, SUV and MPV Source: Company data, Credit Suisse estimates * Including capacities for sedan, SUV, and MPV Source: Company data, Credit Suisse estimates China Auto Sector 10

11 SUV segment: New battlefield with strong demand Low SUV penetration rate with strong sales SUVs are expected to contribute around 13% of China s PV sales in 2012, compared with about 5% in 2004 (Figure 26). However, this ratio is still much lower than the more than 3 in the US and Australia, and is also lower than China s neighbor such as Russia (Figure 27). SUV sales have grown much stronger than the PV industry in recent years (Figure 28). This is probably due to Chinese customers preferences for a more spacious driving experience, better visibility, outdoor lifestyles and better handling over tough road conditions. Moreover, prices for SUVs seem to be more resilient compared with other PV products, implying a lucrative playground for automakers (Figure 29). Given the low penetration rate and strong demand, we believe China s SUV sales will remain strong in the next few years, which should attract more players to enter the market. China s SUV penetration rate is lower than major economies. We believe the segment s sales will remain strong in next few years. Figure 26: SUV sales as a % of China s PV sales 16% 14% 12% 1 8% 6% 4% 2% Figure 27: 2011 SUV sales as a % of PV sales (by country) 35% 32% % 25% 2 16% 15% 11% 1 5% Jan/04 Oct/05 Jul/07 Apr/09 Jan/11 Oct/12 SUV sales as % of PV sales China US* Germany Russia Australia SUV sales as % of taotal PV sales (RHS) Source: CAAM Source: CAAM, VDA, FCAJ, SMMT Figure 28: PV sales growth by segment Sales YoY% E 2013E 2014E 2015E Source: CAAM, Credit Suisse estimates Total PV Sedan MPV SUV China Auto Sector 11

12 Figure 29: PV prices by segment 4 2 Price change (%) vs. Jan 2008 price Jan-08 Dec-08 Nov-09 Nov-10 Oct-11 Oct-12 PV Sedan SUV Mini Bus Source: NDRC Upgrade and replacement demand to boost sales The SUV segment grows the fastest among all PV segments in China. One of the main reasons for this increase is that Chinese customers tend to choose bigger vehicles to upgrade/replace their existing car. A family car is quickly becoming a desired, and attainable, consumer product in China. Many Chinese consumers have already purchased a first, entry-level car and will be ready to upgrade to newer, better models. According to Sinotrust s latest survey done in November 2012 on Chinese car owners preferences on their second vehicle, over 8 of Chinese car owners have only one car, who will become the major engine for auto sales in the next few years. Moreover, around 4 of Chinese car owners have indicated that they are going to buy an SUV as their second car, just behind sedans 49% (Figure 30: ). Also, the majority of upgrade and replacement purchases focus on models with an engine size between 1.7 and 2.0L and prices of Rmb50, ,000 (Figure 31, Figure 32). These models are usually classified as the mid-end and mid-to-low end segments. Therefore, we believe the mid-end and mid- to low-end SUV segments will have high sales growth potential given rising upgrade and replacement demand. We expect rising upgrade and replacement demand to mainly benefit mid-end and mid-to-low end SUV sales. Figure 30: Preference on vehicle model for first vehicle vs. second vehicle in China % 6.8% Hatchback sedan 64.4% 48.6% 39.8% 16.9% 2.5% 1.4% 1.8% 1.4% 0.5% 0.2% 0.8% 0.3% Sedan SUV MPV Cross-over Minibus Others Figure 31: Preference on engine size for first vehicle vs. second vehicle in China % % % 26.3% % 2 7.1% 1 1.2% 7.1% 0.6% % 1.2% 0.4% 0.4% <1.0L L L L L L >4.0L 1st vehicle 2nd vehicle 1st vehicle 2nd vehicle Source: Sinotrust, Credit Suisse estimates Source: Sinotrust, Credit Suisse estimates China Auto Sector 12

13 Figure 32: Preference on price of first vehicle vs. second vehicle in China % % 22.6% % 7.5% % 0.7% 3. <Rmb 30k Rmb 30-50k Rmb k Rmb k Rmb k >Rmb 300k 1st vehicle 2nd vehicle Source: Sinotrust, Credit Suisse estimates New model launches to intensify competition Attracted by the lucrative SUV market, many automakers launched their new models to gain market share. Generally, JVs have launched more new models than domestic brands, expanding their market share since 2008 (Figure 33). Four new models were launched in 4Q12 and over 20 new models are in the 2013 pipeline across different segments (Figure 34 through to Figure 38). In the high-end and luxury segments, Audi Q3 should become a strong competitor for the BMW X1, while the Land Rover Freelander 2 and Volvo XC60 will likely compete with each other starting 4Q13 (Figure 35). In the mid-to-high end segment, new models account for almost 4 of the total number of models (Figure 36). JV producers are major players in this segment and we expect their average margins to decline as competition intensifies. Although new models also account for around 4 of total models in the mid-end segment (Figure 37), we believe that Great Wall will retain its position as the No.1 best-selling brand. Its competitors in the mid-end segment are mainly domestic players not specialized in SUVs and with tiny market shares (Figure 38). Over 20 new models are due to be launched in 2013, which will intensify competition in the SUV segment Figure 33: SUV sales by automaker type % 45% 4 38% 48% 59% 57% 62% 59% 61% 63% 66% E 2013E 2014E 2015E JVs Domestic brands Source: CAAM, Credit Suisse estimates China Auto Sector 13

14 Figure 34: Launch time of new models Buick Encore Changan CS35 Mitsubishi ASX Beijing B40 Ford Kuga Peugeot 3008 JAC Rein II Geely Emgrand SX7 Zotye T600 Audi Q3 Benteng X80 Yongman T5 Mitsubishi Pajero Sport Mazda CX-7 Geely Emgrand EX8 Ford Ecosport Geely Emgrand EX6 Mazda CX-5 Chery T21 Great Wall H2 Geely Gleagle GX5 Haima C2 Beijing SC20 Volvo XC60 Land Rover Freelander 2 Skoda Yeti Chevrolet Orlando - 100, , , , , , ,000 4Q12 1Q13 2Q13 3Q13 4Q13 RMB New models Source: Company data, Credit Suisse estimates Figure 35: Price range of China-made SUV models in high-end and luxury segments 200, , , , , , ,000 Toyota Prado Nissan Murano Volvo XC60 Benz GLK Audi Q5 Land Rover Freelander 2 BMW X1 Toyota Highlander Audi Q3 Mitsubishi Pajero Mitsubishi Pajero Sport RMB Existing models New models Source: Company data China Auto Sector 14

15 Figure 36: Price range of China-made SUV models in mid-to-high end segment 100, , , , , ,000 Mazda CX-7 VW Tiguan Ford Kuga Chevrolet Captiva Nissan X-Trail Roewe W5 Nissan Paladin Mazda CX-5 Luxgen 7 Toyota RAV4 Honda CR-V Skoda Yeti Kia Sportage R Hyundai IX35 Peugeot 3008 Changfeng Leopard CS7 Chevrolet Orlando Hyundai Tucson Nissan Qashqai Kia Sportage Trumpche GS5 Benteng X80 Hawtai Boliger Mitsubishi ASX Buick Encore Jiangling Yusheng Geely Emgrand EX8 RMB Existing models New models Source: Company data Figure 37: Price range of China-made SUV models in mid-end segment 75, , , , , ,000 Beijing B40 Changfeng Leopard CT5 Zhonghua V5 Dongfeng Oting Great Wall H5 Landwind X Series Haima 7 Great Wall H6 Great Wall H3 Ford Ecosport Yongman T5 JAC Rein II Chery T21 BYD S6 Geely Gleagle GX7 Geely Emgrand SX7 Zotye T600 JAC Rein Huanghai V3 Chery Tiggo Great Wall H2 RMB Existing models New models Source: Company data China Auto Sector 15

16 Figure 38: Price range of China-made SUV models in low-end segment 50,000 75, , ,000 Hawtai Santa Fe Haima C2 Changan CS35 Lifan X60 Geely Emgrand EX6 Zotye 5008 Beijing SC20 RMB Existing models New models Source: Company data Limited competition in mid-to-low end segment Top JVs have equal strengths in the mid-to-high end SUV segment (Figure 39). Many of them are launching new models in 2013 and competition would become tougher. In contrast, the mid-to-low end SUV segment is dominated by Great Wall Motor (Figure 40). More than ten new models will be launched in 2013 in this segment. However, we believe Great Wall will be able to keep its leadership given its traditional strength in SUV and its good brand image. We expect the mid-to-low end segment to have less intensive competition but higher sales growth potential, which will mainly benefit Great Wall Motor. We believe Great Wall will continue to lead the mid-tolow end SUV segment due to lack of strong competitors Figure 39: Market share in mid-to-high end SUV segment Jan-Nov E Others 11% SH VW 19% Others 2 SH VW 17% FAW Toyota 1 DF Yueda Kia 12% DF Honda 17% FAW Toyota 9% DF Honda 16% DF Nissan 14% BJ Hyundai 17% DF Yueda Kia 11% DF Nissan 12% BJ Hyundai 15% Source: CAAM, Credit Suisse estimates Figure 40: Market share in mid-to-low end SUV segment Jan-Nov E Hawtai 4% Geely 4% Brilliance Auto 6% Jiangnan 6% Others 19% BYD 11% Chery 14% Great Wall 36% Hawtai 4% Geely 8% Brilliance Auto 5% Jiangnan 7% Others 21% BYD 9% Chery 13% Great Wall 33% Source: CAAM, Credit Suisse estimates China Auto Sector 16

17 Mid-to-high end segment: Intensifying competition Slowdown of PV sales China s auto sales slowed down after its high growth of (Figure 41). In the first 11 months of 2012, China s auto sales grew 3.9% YoY, rebounding a little from 2.6% for We expect its entire 2012 sales to reach around 19 mn units. The YoY growth rate of its quarterly sales has dropped to single digits since 1Q11 when most of the government s stimulus policies faded (Figure 42). Mid-to-high end PV sales have closely followed the industrial trend in recent years (Figure 43). We expect them to keep growing in single digits by 2015 (Figure 43). Given the slowdown of China s PV sales, we believe the mid-to-high end segment will grow in the single digits by 2015 Figure 41: Auto sales of major countries 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 '000 units E China India Japan Western Europe Russia USA (Light vehicles) Brazil Source: CAAM, Gasgoo, Wind, Credit Suisse estimates Figure 42: China s passenger vehicle (PV) sales ('000 units) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % 26% 25% 17% 17% 9% 8% 7% 8% 3% 2% -2% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E YoY China's PV sales (LHS) China's PV sales YoY (RHS) Source: CAAM, Credit Suisse estimates China Auto Sector 17

18 Figure 43: PV sales comparison by segment % 6 53% % 42% 33% 25% 25% 29% 22% 22% 21% 2 7% 1 1 7% 9% 5% E 2013E 2014E 2015E -2 Mid-to-high end YoY Luxury YoY Ultra-luxury YoY Total PV YoY Source: Roland Berger, Credit Suisse estimates Intensifying competition in PV segment China s auto sector is highly competitive and original equipment manufacturers (OEM) are flooding the market. There are more than 50 auto makers in China and the industry is relatively fragmented. Foreign brands dominate, with their Chinese JVs accounting for almost 7 of China s PV sales. Among them, GM and Volkswagen had a joint market share of around 35% in the first 11 months of 2012 (Figure 44). Their market shares have improved quickly in recent years, as Japanese brands lost market share in the mid- to high-end segment, especially after the Diaoyu islands dispute in mid-september The joint market share of domestic auto brands has kept decreasing in recent years, mainly due to weakening low-end PV sales, and is now less than one-third in Meanwhile, auto prices have also kept falling in recent years due to intensifying competition, while luxury auto prices are much more resilient compared with other segments (Figure 46). JVs are gaining market share in China s PV segment, while auto prices are declining due to intensifying competition. Figure 44: PV market share of major foreign auto brands in China 2 18% 16% 14% 12% 1 8% 6% 4% 2% GM Volkswagen Nissan Hyundai Toyota Honda Ford Kia PSA Jan-Nov 2012 Source: CAAM, Credit Suisse estimates China Auto Sector 18

19 Figure 45: PV market share of major domestic auto brands in China 6% 5% 4% 3% 2% 1% Chery Geely Great Wall BYD Brilliance Changan Jianghuai Lifan Jan-Nov 2012 Source: CAAM, Credit Suisse estimates Figure 46: Change of auto prices by segments (Jan 2008 price = 100) Jan-08 Jun-08 Dec-08 Jun-09 Nov-09 May-10 Nov-10 May-11 Oct-11 Apr-12 Oct-12 PV Mini Small Medium Class High Class Luxury Source: Cheshi, Credit Suisse estimates Japanese brands to regain market share in 2013 Probably due to conservative market strategies, Japanese auto brands market shares have kept declining in recent years. Moreover, they suffered strikes from the Japanese earthquake in March 2011 and the Diaoyu island dispute in September Top Japanese auto brands such as Nissan, Toyota, Honda, and Mazda saw their Sep-Nov 2012 sales decline sharply from the previous year (Figure 47). Japanese brands joint market share in China has fallen below 2 in the first 11 months of 2012 from more than 22% in 2010 (Figure 48). The market share losses of Japanese brands are mainly the gains of JV brands especially German brands such as Volkswagen (Figure 48). Domestic players have not gained much, as they do not have intensive overlap with Japanese brands, which primarily focus on the mid-to-high end segment. December 2012 shipment of major Japanese auto brands rebounded to around 75-85% of their December 2011 levels, suggesting a recovery is on track (Figure 47). Through our channel checks, we also learn that inventories at dealers have dropped to months from their peaks at 2-3 months in October Retail of Japanese auto brands in December 2012 has also We expect Japanese brands new models to help them regain market share in 2013 China Auto Sector 19

20 recovered to similar level as in December Brands, such as Nissan and Honda, plan to launch their new generation of sedans in 2013, which we expect will help them improve sales and regain market share. We expect these models to have lower ASPs than existing ones, which will not only intensify competition in the mid-to-high end segment, but also post high price pressure on the mid-end segment. However, luxury brand economy models are priced close to Japanese brands high-end models. Facing this top-down price pressure from the luxury segment, we expect Japanese brands to encounter a tough recovery in Figure 47: China sales of major Japanese auto brands China sales YoY (%) Sep-12 Oct-12 Nov-12 Dec Nissan Toyota Honda Source: Company data, Credit Suisse estimates Figure 48: Foreign brands PV market shares in China 25% 2 15% 1 5% Jan-09 May-09 Oct-09 Feb-10 Jul-10 Dec-10 Apr-11 Sep-11 Jan-12 Jun-12 Nov-12 Japanese German American Korean French Source: CAAM Low-end segment is under pressure Usually PVs with an engine size of less than 1.6L are classified as low-end vehicles in China. They achieved impressive sales growth in 2009, outpacing the country s PV sector (Figure 49). However, since 2010 the sales of low-end PVs have generally underperformed the sector (Figure 49). And we expect the share of low-end sedans (including A00, A0 and A classes) in China s total PV sales to drop to around 51% in 2012 from over 53% in 2006 (Figure 50). Given the slowdown in sales, we believe the peak period of strong demand growth for low-end vehicles has already passed. Automakers with a primary focus on low-end sedans, such as Geely and BYD, are therefore likely to be seriously affected. Low-end PV sales is slowing down as demand weakens. China Auto Sector 20

21 Jan, 2009 Apr, 2009 Jul, 2009 Oct, 2009 Jan, 2010 Apr, 2010 Jul, 2010 Oct, 2010 Jan, 2011 Apr, 2011 Jul, 2011 Oct, 2011 Jan, 2012 Apr, 2012 Jul, January 2013 Figure 49: China s low-end PV sales growth vs. total PV sales growth y-y Source: CEIC, Credit Suisse estimates Figure 50: China PV sales by class 10 Engine <=1.6L Total PV % 25% 25% 28% 31% 3 31% 2% 3% 3% 1% 2% 2% 3% 18% 2 19% 16% 15% 15% 15% % 35% 38% 36% 37% 38% % 14% 12% 11% 1 11% 1 6% 6% 6% 5% 5% 5% 4% E A00 A0 A B C Others PVs * A00, A0 and A classes are usually classified as low-end sedans; B class is usually classified as mid-end sedans; C class is usually classified as mid- to high-end sedans Source: CAAM, Credit Suisse estimates Given cooling sales in China s sedan market, major sedan manufacturers are fighting for market share, which is likely to become more difficult, as all the other rivals are increasing their efforts. Domestic sedan makers face more pressure from foreign brands and their JVs. Almost all of their market shares in China s sedan segment kept declining since 2009 (Figure 51). In the past few years, many JVs have launched self-owned brands using their old mid-end platforms (Figure 52). These JV self-owned brands have as good a product quality as their mid-end parents. However, most of them are priced below Rmb100,000, which is the traditional price range for low-end vehicles. We believe the top-down competition from JVs self-owned brands will continue to compress margins for domestic sedan makers such as Geely and BYD. JV self-owned brands are positing top-down competition pressure on low-end segment China Auto Sector 21

22 Figure 51: Sedan market shares of top domestic automakers % % 4.2% 3.7% 3.4% 3.2% 0.8% 2.1% 0.2% Geely Auto Chery Auto BYD Changan Auto Great Wall Motor 3.5% 2.4% 1.8% 1.8% 1.7% Tianjin FAW Auto FAW Car 0.2% 1.2% Jianghuai Auto Jan-Nov 2012 Source: CAAM, Credit Suisse estimates Figure 52: Official prices of major JV self-owned brands Self- Lowest Highest Lowest Highest owned price price Original price price Manufacturer brand (Rmb) (Rmb) platform (Rmb) (Rmb) GAC Honda Linian 69,800 99,800 Honda City 96, ,800 SH GM Wuling Baojun 62,800 95,800 Chevrolet Spark 77,800 88,800 DF Nissan Venucia 67,800 83,800 Nissan TIIDA 105, ,800 DF Honda CIIMO 111, ,800 Honda Civic 131, ,800 Source: Company data, Credit Suisse estimates China Auto Sector 22

23 Luxury segment: Rising alone with wealth in China Low luxury auto penetration rate Luxury PVs contribute to about 7% of total PV sales in China. This compares with 13% in the US and more than 2 in Europe (Figure 53). Luxury PVs account for about 9% of total automobiles in China, lower than most mature auto markets such as the US, Germany and the UK (Figure 54). Therefore, we believe that there is still large potential for luxury auto sales growth in China. We expect the luxury segment to keep growing at 20-25% p.a. by 2015 (Figure 56,Figure 57). We believe luxury auto sales have high growth potential in China mainly due to a low penetration rate Figure 53: Luxury* PV sales as % of total PV sales (2011) 35% Figure 54: Luxury* PV as % of total number of autos (2011) 35% 3 29% 3 29% 25% 23% 25% 2 15% 1 7% 13% 1 9% 2 15% 1 9% 11% 15% 16% 5% 5% 3% China US** Japan Germany Russia UK China US Japan Germany Russia UK Luxury* PV sales as % of taotal PV sales Luxury* vehilce as % of total number of automobiles * Includes both luxury and ultra-luxury models. * Includes both luxury and ultra-luxury models ** PV sales here refer to light vehicle sales. Source: SXRB, Credit Suisse estimates Source: CPCA, LMC Automotive, AEB, Credit Suisse estimates Growing wealth strengthens luxury auto demand Figure 55: Growth of number of millionaires in China % '000 persons 1,200 72% 964 1, % % 8% H12-12% -6% Number of millionaires (RHS) Number of millionaires y-y (LHS) Source: Capgemini, Merrill Lynch Global Wealth Management, RBC Wealth Management, Citi Private Bank, Credit Suisse Research Institute China Auto Sector 23

24 Figure 56: Luxury PV sales in China '000 Units 2,500 2,000 76% 1,877 2, ,500 1, % 22% % 7% % 29% % 718 1,551 42% 1,272 1,017 25% 22% 21% 2 5% 7% 1 1 9% E 2013E 2014E 2015E Luxury PV sales (LHS) Luxury PV sales YoY (RHS) Total PV sales YoY (RHS) -2 Source: Roland Berger, Credit Suisse estimates Figure 57: Ultra-luxury PV sales in China '000 Units % 79 79% 77% % 53% % 33% % 22% % 5% 7% 1 1 9% % E 2013E 2014E 2015E Ultra-luxury PV sales (LHS) Ultra-luxury PV sales YoY (RHS) Total PV sales YoY (RHS) Source: Roland Berger, Credit Suisse estimates Replacement demand drives luxury auto sales Most Chinese auto buyers are still first-time buyers and contributed more than 9 of total auto sales in 2011 (Figure 58). As the auto stock ages in China, people who bought their cars during should be looking to make a replacement purchase in the next few years. This trend may continue and we believe that replacement demand will gradually become the major driver of China s auto sales in the next 5-10 years. It is difficult to describe the Chinese customers affinity for luxury goods, such as luxury cars. In particular, they love SUVs or luxury cars for their second car. Since about 2003, China's affluent population has completely overtaken Americans with similar incomes in the purchase of luxury vehicles (Figure 59). For the same income bracket per 1,000 households, Chinese customers purchase nearly six times as many luxury cars as Americans do. We believe replacement demand will boost luxury auto sales in China, stronger than it did in other developed countries. We believe replacement demand will be the major driver of luxury auto sales in China China Auto Sector 24

25 Figure 58: New demand vs. replacement demand % 5% 25% 17% 5 76% 87% 91% 94% 95% 75% 83% 5 24% 13% 9% China (2010) China (2011) India Korea USA Japan UK German Replacement demand 1st time demand Source: JD Power, Wardsauto, China Auto Market Figure 59: Luxury car sales per 1,000 households with annual disposable incomes over US$100,000 Unit US Unit China Source: Euromonitor, US Census Bureau, HIS, World Bank, TNS, Credit Suisse estimates Proliferation of economy models Many luxury brands have launched their economy models with affordable prices. Some of them are selling below Rmb300,000, which is the traditional price range for the mid-to-high end segment (Figure 60 through to Figure 63). Major economy models, such as the Mercedes-Benz C class, BMW 3 series, Audi A4L and Volvo S60, are also the best-selling models for these luxury brands. We believe their good brand image and attractive prices will enable them to expand their customer base and gain market share from mid-to-high end players. This should fuel their sales growth in the next 3-5 years. Luxury brands economy models will help them to boost sales and gain market share China Auto Sector 25

26 Figure 60: Official prices of luxury brands economy models vs. key mid-to-high end models 100, , , , , , , , , , ,000 BMW New 3 Series Volvo S60 BMW 3 Series Mercedes-Benz C Class Audi A4L Nissan Teana Buick LaCrosse Honda Accord Toyota Camry VW Passart RMB Source: Company data Figure 61: Nov 12 retail prices of luxury brands economy models vs. key mid-to-high end models 100, , , , , , , , , , ,000 BMW New 3 Series Volvo S60 BMW 3 Series Mercedes-Benz C Class Audi A4L Nissan Teana Buick LaCrosse Honda Accord Toyota Camry VW Passart RMB Source: Channel checks with dealers China Auto Sector 26

27 Figure 62: Comparison among cheapest economy models of major luxury brands Model Official price ( 000 Rmb) Dec-12 Retail price ( 000 Rmb) Mercedes-Benz C Class BMW 3 Series BMW New 3 Series (Long-wheelbase) Audi A4L Volvo S60 C180 CGI Classic 318i Advance 320Li Fashion 30TFS I MT Comfort 2.0T Advance Size (m) 4.581/1.770/ /1.817/ /1.811/ /1.826/ /1.865/1.484 Wheelbase (m) Trunk volume (litre) Tank volume (litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 115/ / / / /5000 Max toque (n.m/rpm) 250/ / / / / Acceleration km/h (seconds) Transmission 7AT 6AT 8AT 6MT 6AT Fuel consumption (L/100km) Warranty 2 years 2 years 2 years 2 years 2 years or 100,000 km Emission standard Euro IV Euro IV Euro IV National IV National IV Source: Xcar, Channel checks with dealers Figure 63: Major luxury models with retail prices below Rmb300,000 Official Oct-12 Price Nov-12 Price Dec-12 Price price retail price cut retail price cut retail price cut Brand Model ( 000 Rmb) ( 000 Rmb) (%) ( 000 Rmb) (%) ( 000 Rmb) (%) Mercedes-Benz C180K CGI Classic C200 CGI C200 CGI Fashion BMW 318i 2.0 AT Advance Audi A4L TFSI MT Comfort A4L TFSI CVT Comfort A4L TFSI CVT Standard A4L TFSI CVT Comfort Volvo S60 2.0T Advance S60 2.0T T5 Smart S60 2.0T T5 Comfort S60 2.0T DCTT5 Smart S60 2.0T DCTT5 Comfort S60 1.6T DCTDRIVe Smart S60 1.6T DCTDRIVe Comfort S60 1.6T DCTDRIVe Smart S60 2.0T DCTT5 Comfort S60 2.0T DCTT5 Delux Lexus CT200h 1.8 CVT Elite CT200h 1.8 CVT Advance Source: Channel checks with dealers China Auto Sector 27

28 Sep-10 Dec E 2013E 2014E 2015E 2016E 08 January 2013 Restrictive policies won t hurt luxury segment Beijing and Guangzhou are adopting restrictive policies on auto sales to control congestion. Beijing announced the most strict restrictive policies on auto license plates in December The new measures set a 2011 annual quota for Beijing s new PV licenses of only 240,000 units, compared with its 2010 total auto sales of around 900,000 vehicles. Quotas for new car licenses are distributed by lottery draw, while upgrading/replacement purchases are not regulated by the new measures once an owner disposes of his/her old car. With this new license quota limit, car growth in Beijing has slowed down since 2011 (Figure 64). Accordingly, the CAGR for total number of autos in Beijing is expected to drop to about 3.7% in E from over 11% for It is also estimated that only one person in 20 can win the quota to buy a new car. Moreover, people with that precious quota are less likely to buy a cheap car, which in turn stimulates luxury auto sales. Further, luxury autos are bought by Chinese customers mainly as status symbols rather than a mode of transportation. Although some of the potential buyers may not have a valid Beijing license to bypass the quota application, they are still allowed to buy cars with non-beijing licenses with some restrictions on driving areas. Guangzhou s government announced its own auto purchase restriction policy on 30 June In the coming year, the number of incremental small- and medium-sized passenger cars in Guangzhou is capped at 120,000 units, translating into a monthly quota of 10,000 units. However, data shows that 226,000 vehicles were registered with license plates in Guangzhou in 2011, equivalent to around 19,000 units per month. As in Beijing, we believe auto buyers are more likely to choose high-end models, boosting sales of luxury autos. We believe restrictive policies in Tier 1 cities will create opportunities for luxury auto sales given precious quota and licences Figure 64: Number of automobiles in Beijing million vehicles m (2010 Sep) m (2010 Dec) 6 0 Source: Beijing Municipal Commission of Transport China Auto Sector 28

29 Asia Pacific / China Great Wall Motor Rating OUTPERFORM* [V] Price (04 Jan 13, HK$) Target price (HK$) 30.00¹ Upside/downside (%) 18.3 Mkt cap (HK$ mn) 84,052 (US$ 10,845) Enterprise value (Rmb mn) 58,413 Number of shares (mn) 3, Free float (%) week price range ADTO - 6M (US$ mn) 16.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Research Analysts Jack Yeung [email protected] Price (LHS) Rebased Rel (RHS) Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 07/01/13 On 07/01/13 the spot exchange rate was HK$7.75/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) (2333.HK / 2333 HK) Greatly moving ahead Initiate with OUTPERFORM. We initiate coverage on Great Wall Motor (GWM) with an OUTPERFORM rating and a target price of HK$30.00, which implies 18.3% potential upside. GWM is the largest SUV maker in China with a market share around 13%. It is also China s largest pick-up maker, contributing 33% of the country s total pick-up sales. Strong SUV demand. China s SUV segment is growing much faster than its other PV segments. It contributes 13% of the country s total PV sales vs. 32% in the US, implying high growth potential for SUV sales in China. Many Chinese car owners are choosing SUVs as their second vehicle. Therefore, we expect upgrade and replacement demand to become the major engine for SUV sales in the next few years. As the largest SUV maker in China, we believe GWM will be the major beneficiary of this strong SUV demand. New plant to support sales. GWM s H6 is facing capacity constraints, with a waiting list of around 20 days. GWM will open its second plant in Tianjin in 2H13, adding about 100,000 units of initial capacity. C50 will be transferred to the new plant to leave the existing plant purely for H6 production. We believe this arrangement will lay a solid foundation for GWM s SUV sales in 2013 and GWM also plans to launch five new models in 2H13, which we believe will enhance its leading position in this segment. Key downside risks include: (1) tougher-than-expected competition in the SUV segment; (2) slower-than-expected ramp up of its new capacity. Valuation. China s SUV sales are growing at more than 2 per year, similar to its luxury auto sales. We believe that GWM is well positioned in the SUV sector and should trade at 13x 2013E EPS, a premium to its Chinese peers (10x 2013E EPS) given its higher-than-peers sales growth rate, margins as well as strong product mix. Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 30, , , ,770.0 EBITDA (Rmb mn) 4, , , ,098.9 EBIT (Rmb mn) 3, , , ,559.8 Net profit (Rmb mn) 3, , , ,140.7 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Net cash Net cash Net cash Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Auto Sector 29

30 Greatly moving ahead No.1 SUV producer Hover series has been the No.1 best-selling SUV brand in China since Its first sedan-chassis SUV H6 was launched in August Its sales hit 15,800 units in November 2012, versus less than 6,000 in January Despite price cuts offered by its competitors, H6 s prices have stayed resilient throughout the year and customers still need to queue up for the vehicle. We believe H6 s strong sales is mainly due to GWM s traditional strength in SUV production. We believe that GWM will maintain its leadership in the SUV segment over the next few years and be the major beneficiary of the strong SUV demand. Dominant pick-up market share GWM is also China s largest pick-up producer, contributing about a third of the country s total pick-up sales. In particular, its key pick-up brand, Wingle, has maintained its position as the No.1 best-selling pick-up for 15 years. Given GWM s dominant share in the pick-up segment, we believe other players will not be able to challenge its leadership in the next few years. Moreover, we believe demand for pick-up trucks in inland regions will maintain strong growth in the next few years with GWM being the largest beneficiary. Expanding capacity + new models GWM s second plant in Tianjin will start operations in 2H13, adding about 100,000 units of capacity by end C50 will be transferred to the second plant and the existing plant will be used to purely produce H6. We believe the capacity expansion will lay a solid foundation for GWM s sales growth in the next few years. The company also plans to launch five new models in 2H13. We believe they will help to enhance its sales and improve its ASP. In particular, H8 is GWM s first SUV model priced above Rmb150,000, which we expect to help improving its brand image and paving the way for its further expansion. Solid exports and sedan sales GWM is the fifth-largest auto exporter in China. SUVs and sedans have become its major export drivers in recent years. Its H6 has received the European Union s market entry permit in December 2012, which would boost its exports to European markets starting from Its sedan exports grew the fastest among all segments in 2012 and we expect it to remain solid in the next few years. GWM s two key sedan models the C30 and C50 are very competitive in the low-end segment. We believe the sportive versions C30 and C50 to be launched in 2013 will enhance GWM s sedan sales. We also expect sedans to be a stable sales engine for the firm in the next two years. Initiate with an OUTPERFORM We initiate coverage on GWM with an OUTPERFORM rating given its leading position in China s SUV segment. We believe it is well positioned to cater to strong SUV demand growth in China. Our target price for GWM is HK$30.00 based on 13x 2013E EPS. We believe it deserves to trade at premium toward its domestic peers (10x 2013E EPS), given strong sales volume in SUV, leading position in pick-up tracks as well as higher than industry average margins. Downside risks include tougher-than-expected competition in the SUV segment and slower-than-expected ramp-up of GWM s new capacity. We believe GWM will be able to maintain its leadership in China s SUV market We believe GWM will maintain its No.1 position in the pick-up segment and benefit from rising demand in inland regions We expect GWM s expanding capacity and new models to enhance its position in the SUV segment We expect solid export and sedan business to be GWM s stable sales engine in the next two years Initiate with an OUTPERFORM with TP based on 13x2013E EPS China Auto Sector 30

31 Great Wall Motor 2333.HK / 2333 HK Price (04 Jan 13): HK$25.35, Rating:: NEUTRAL [V], Target Price: HK$30.00, Analyst: Jack Yeung Target price scenario Scenario TP %Up/Dwn Assumptions Upside E auto sales: 750,000 units Central Case E auto sales: 701,000 units Downside E auto sales: 650,000 units Income statement (Rmb mn) 12/11A 12/12E 12/13E 12/14E Sales revenue 30,089 41,600 47,220 54,770 Cost of goods sold 22,594 30,889 35,212 41,021 SG&A 2,477 3,203 3,636 4,217 Other operating exp./(inc.) EBITDA 4,641 6,945 7,920 9,099 Depreciation & amortisation ,247 1,539 EBIT 3,967 6,010 6,673 7,560 Net interest expense/(inc.) (22.9) (18.4) (30.2) (42.3) Non-operating inc./(exp.) Associates/JV Recurring PBT 4,133 6,228 6,929 7,865 Exceptionals/extraordinaries (2.2) Taxes 620 1,059 1,178 1,573 Profit after tax 3,511 5,169 5,751 6,292 Other after tax income Minority interests Preferred dividends Reported net profit 3,426 5,045 5,613 6,141 Analyst adjustments Net profit (Credit Suisse) 3,426 5,045 5,613 6,141 Cash flow (Rmb mn) 12/11A 12/12E 12/13E 12/14E EBIT 3,967 6,010 6,673 7,560 Net interest Tax paid (620) (1,059) (1,178) (1,573) Working capital 303 1, Other cash & non-cash items 799 1,135 1,474 1,802 Operating cash flow 4,449 7,167 7,373 8,334 Capex (3,759) (4,000) (3,800) (3,500) Free cash flow to the firm 690 3,167 3,573 4,834 Disposals of fixed assets Acquisitions (7.4) Divestments 1,802 Associate investments Other investment/(outflows) (1,700) Investing cash flow (3,664) (4,000) (3,800) (3,500) Equity raised 3,894 Dividends paid (663.4) (347.4) (511.5) (569.1) Net borrowings 4.8 Other financing cash flow Financing cash flow 3,456 (347) (511) (569) Total cash flow 4,241 2,820 3,061 4,265 Adjustments (7.9) Net change in cash 4,233 2,820 3,061 4,265 Balance sheet (Rmb mn) 12/11A 12/12E 12/13E 12/14E Cash & cash equivalents 6,306 9,126 12,187 16,452 Current receivables 10,033 12,296 13,958 16,189 Inventories 2,777 3,554 4,052 4,720 Other current assets 1,259 1,257 1,257 1,257 Current assets 20,374 26,235 31,454 38,619 Property, plant & equip. 7,392 10,457 13,010 14,971 Investments Intangibles 1,871 1,871 1,871 1,871 Other non-current assets 3,420 3,420 3,420 3,420 Total assets 33,135 42,060 49,833 58,959 Accounts payable 10,011 12,448 14,167 16,476 Short-term debt Current provisions Other current liabilities 4,702 6,370 7,184 8,278 Current liabilities 14,714 18,818 21,351 24,754 Long-term debt Non-current provisions Other non-current liab. 1,400 1,400 1,400 1,400 Total liabilities 16,113 20,218 22,751 26,154 Shareholders' equity 16,396 20,929 25,973 31,491 Minority interests Total liabilities & equity 33,135 42,060 49,832 58,958 Key earnings drivers 12/11A 12/12E 12/13E 12/14E Auto sales volume (Unit) 463, , , ,000 Per share data 12/11A 12/12E 12/13E 12/14E Shares (wtd avg.) (mn) 2,814 3,042 3,042 3,042 EPS (Credit Suisse) (Rmb) DPS (Rmb) BVPS (Rmb) Operating CFPS (Rmb) Key ratios and valuation 12/11A 12/12E 12/13E 12/14E Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) (37.0) (41.8) (45.0) (50.2) Net debt/ebitda (x) (1.36) (1.31) (1.54) (1.81) Interest cover (x) (173) (327) (221) (179) Source: Company data, Thomson Reuters, Credit Suisse estimates MF P/E multiple Source: IBES 12MF P/B multiple China Auto Sector 31

32 No.1 SUV producer GWM is China s largest SUV producer, with a current market share around 13%, much higher than other top players (Figure 65). Its SUV sales have maintained strong growth in recent years, generally outperforming the industry average and major JV SUV makers (Figure 66, Figure 67 and Figure 68). In particular, its Hover series have been ranked the No.1 best-selling SUV in China since 2009, contributing to about half of its SUV sales and more than 2 of its total auto sales. Its first sedan-chassis Hover SUV H6 was launched in August 2011, mainly competing with domestic SUV models such as the BYD S6, Geely GX7 and Chery Tiggo (Figure 70). Despite price cuts offered by these domestic models, the H6 has the most resilient retail prices and customers still need to queue for the vehicle. H6 sales hit 15,800 units in November 2012 versus less than 6,000 in January Its strong sales are probably due to its outstanding quality and GWM s good brand image in the domestic market. Given China s rising SUV demand and GWM s traditional strength in SUV production, we believe it will maintain its leadership in the SUV segment in the next few years. GWM is China s No.1 SUV makers. We believe it will maintain its leadership in the SUV segment in the next few years. Figure 65: Top-15 SUV producers in China Company JV/Indigenous 2011 sales Market share (%) Jan-Nov 12 sales Market share (%) Key model Great Wall Motor Indigenous 164, , Hover Shanghai VW JV 129, , Tiguan Dongfeng Honda JV 160, , CR-V Beijing Hyundai JV 154, , Tucson, IX35 Dongfeng Nissan JV 140, , Qashqai, X-Trail FAW Toyota JV 129, , RAV4 Chery Auto Indigenous 115, , Tiggo Dongfeng Yueda KIA JV 109, ,837 Sportage, Sportage 5.9 R FAW VW JV 58, , Audi Q5 BYD Indigenous 60, , S6 GAC Toyota JV 94, , Highlander Jiangnan Auto Indigenous 73, , Zotye T600 Brilliance Auto Indigenous 1, , Zhonghua V5 Hawtai Auto Indigenous 18, , Santa Fe Dongfeng Yulong JV 7, , Luxgen 7 Source: CAAM, Credit Suisse estimates Figure 66: SUV market share of top producers 16% 14% 12% 1 8% Figure 67: SUV sales of top producers ('000 units) % 4% 2% Great Wall Motor Shanghai VW Dongfeng Honda Beijing Hyundai FAW Toyota - Great Wall Motor Shanghai VW Dongfeng Honda Beijing Hyundai FAW Toyota E Source: CAAM, Credit Suisse estimates E Source: CAAM, Credit Suisse estimates China Auto Sector 32

33 Figure 68: Great Wall s SUV sales vs. China SUV sales % % 10 88% 46% 5 29% 32% 2 8% E 2013E 2014E Figure 69: Great Wall s revenue by product 10 4% 4% 1% 1% 1% 1% 1% 5% 9 28% 8 27% 34% 25% 23% 21% 7 47% % 4 46% 4 55% 59% 62% % 35% 1 25% 24% 19% 17% 16% E 2013E 2014E China SUV sales YoY Great Wall Motor SUV sales YoY Pick-up truck SUV Sedan Others Source: CAAM, Great Wall Motor, Credit Suisse estimates Source: Great Wall Motor, Credit Suisse estimates Figure 70: Comparison of Great Wall H6 and its major competitors Model Great Wall H6 BYD S6 Geely GLEagle GX7 Chery Tiggo 1.5TMT Urban 2.0MT Delux 2.0MT Comfort 2.0MT Elite Official price ( 000 Rmb) Dec-12 retail price ( 000 Rmb) Size (m) 4.640/1.825/ /1.855/ /1.833/ /1.765/1.705 Wheelbase (m) Trunk volume (Litre) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 110/ / / /5750 Max toque (n.m/rpm) 210/ / / / Acceleration km/h (s) Transmission 6MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 5 years or 100,000km 4 years or 100,000km 3 years or 100,000km 2 years or 60,000km Emission standard National IV National IV National IV National IV Source: Xcar, Channel checks with dealers China Auto Sector 33

34 Dominant in pick-up segment GWM is also China s largest pick-up producer with a market share of around 33% (Figure 72). Its Wingle series has been the No.1 best-selling pick-up for 15 years, with sales almost equivalent to the aggregate pick-up sales of the No.2 and No.3 players JAC and Zhengzhou Nissan (Figure 71). Given GWM s dominant share in the pick-up segment, we believe that other players would not be able to challenge its No.1 position in the next few years. Pick-up has also shown stronger growth potential than other CV products in China. Pick-up sales grew by around 7% YoY in the first ten months of 2012, the highest in the CV segment (Figure 73). More than half of the pick-ups are priced below Rmb80,000, and we believe domestic automakers led by GWM will continue to dominate the market (Figure 74 and Figure 75). Except for several affluent coastal regions, pick-up demand primarily came from inland regions (Figure 76). These regions have higher GDP growth rates than the national average and are the major engine of China s urbanization. We believe that demand for pick-ups in these regions will remain strong in the next few years and the company is expected to be the largest beneficiary. GWM is also China s No.1 pick-up maker. We believe it will benefit from strong pickup demand in inland regions. Figure 71: Pick-up market share of top producers 35% 3 25% 2 15% 1 5% Figure 72: Pick-up sales of top producers ('000 units) Great Wall Motor JAC Zhengzhou Nissan Zhongxing Foton - Great Wall Motor JAC Zhengzhou Nissan Zhongxing Foton E E Source: CAAM, Credit Suisse estimates Figure 73: China s CV sales by segment ('000 units) MDT and HDT -24.4% YoY % YoY 13 Medium and large Buses Source: State Information Centre % YoY % YoY % YoY 228 Light CVs Pick-up Minibus 2011 sales Jan-Oct 2012 sales Source: CAAM, Credit Suisse estimates Figure 74: Price distribution of pick-ups % 13.4% 12.9% 3.9% 2.2% 2.7% 6.1% 5.5% 8.5% 25.1% 23.2% 20.5% 6.6% 20.4% 26.3% 18.1% 17.4% 11.7% 24.4% 20.3% 19.2% Below RMB60k RMB60k-69k RMB70k-79k RMB80k-89k RMB90k-100k RMB100k-110k Above RMB110k Source: Sinotrust China Auto Sector 34

35 Figure 75: Comparison of Great Wall Wingle and its major competitors Model Great Wall Wingle Zhongxing Grandtiger Dongfeng Ruiqi Huanghai Dachaishen 2.4MT Biz Delux 2.4MT 4G69 2.4MT Standard 2.4MT 4WD Delux Official price ( 000 Rmb) Dec-12 retail price ('000 Rmb) Size (m) 5.020/1.720/ /1.750/ /1.690/ /1.850/1.760 Wheelbase (m) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 100/ / / /5250 Max toque (n.m/rpm) 200/ / / / Transmission 5MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 2 years or 50,000km 2 years or 50,000km 2 years or 60,000km 2 years or 50,000km Emission standard National IV National III National IV + OBD National IV Source: Xcar, Channel checks with dealers Figure 76: Distribution of pick-up sales in China Annual sales (units) Source: CPCA, CAAM, Credit Suisse estimates China Auto Sector 35

36 Expanding capacity + new models Capacity expansion in Tianjin GWM s Tianjin plant (production base of H6 and C50) is running over its designed capacity of 200,000 units in Tianjin plant is able to provide 240, ,000 units of maximum capacity by adding shifts, with priority given to H6 production. The second plant in Tianjin will start operation in 2H13E, adding about 100,000 units of capacity by the end of 2013 (Figure 77). C50 will be transferred to the second plant after its commissioning and the existing plant will be used to purely produce H6. We expect GWM to keep running at full capacity in 2013, which would help to maintain its high operational efficiency (Figure 77). We believe the solid expansion of its Tianjin plant s capacity will lay a solid foundation for GWM s sales growth in next few years. Tianjin plant s capacity expansion will laid a solid foundation for GWM s sales growth in next few years. Figure 77: Production capacity versus sales volume E 2013 E Utilisation Utilisation Utilisation 000 units Capacity Sales rate (%) Capacity Sales rate (%) Capacity Sales rate (%) SUV Sedan Pick-up truck Total Source: Great Wall Motor, Credit Suisse estimates New models to improve ASP Figure 78: Launch time of Great Wall s new models in 2013 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Updated Wingle 5 H2 H6 sportive version C50 sportive version C30 sportive version Source: Great Wall Motor Figure 79: Great Wall s ASPs by segments ('000 RMB) Mid E 2013E 2014E Source: Great Wall Motor, Credit Suisse estimates Pick-up SUV Sedan Overall 2H13 3Q13 3Q13 3Q13 China Auto Sector 36

37 GWM plans to launch five new models in 2H13 with higher prices (Figure 78 and Figure 81). This is consistent with its strategy in recent years to gradually improve its ASP by new model launches (Figure 79). In particular, the H8 will be GWM s first SUV priced between Rmb200,000 and Rmb250,000 in the mid-to-high end segment, which may be launched in early We believe that H8 is more symbolic for GWM to improve its brand image and elevate prices for its future SUV models. We expect H8 sales to ramp up slower than existing company models, as competition in the mid- to high-end segment is intensifying following more than ten new models being launched by JVs since 4Q12 (Figure 36). We do not think H8 will become a key sales driver for GWM within next few years. GWM s new models have higher prices, which would improve its ASPs in the next few years Figure 80: Great Wall Motor s vehicle models Segment Model Price ( 000 Rmb) Launch time of new model 2012E sales ( 000 units) 2013E sales ( 000 units) Pick-up Deer Wingle Wingle Updated Wingle Mid-2013 SUV H H H H H H6 sportive version Q M M M Sedan Florid Phenom C C30 sportive version Q C20R C C50 sportive version Q Cross-over Cowry Total Source: Great Wall Motor, Credit Suisse estimates Figure 81: Official prices of Great Wall models H8 H6 sportive version H5 H2 Cowry H6 H3 Updated Wingle 5 Wingle 5 Wingle 3 C50 sportive version C50 C30 sportive version M2 C30 Florid Phenom M4 C20R M1-50, , , , , ,000 RMB Existing model New model Source: Great Wall Motor China Auto Sector 37

38 Solid exports and sedan sales Growing exports driven by SUVs and sedans GWM is the fifth-largest auto exporter in China, contributing about 8% of the country s total auto exports for Jan-Nov 2012 and around 1 in the same period of last year (Figure 82). Most of its exports comprise pick-ups, whose share has kept declining in recent years (Figure 83). GWM s H6 has received the EU s market entry permit in December 2012, which would boost exports to the EU and Eastern European countries starting from Although its sedan sales grew the slowest in the domestic market, sedan exports grew the fastest among all segments in 2012 (Figure 85 and Figure 86). Given the recovery in the global economy and its improving brand image in overseas markets, we believe that its exports will remain solid in coming years and contribute over 2 of its total sales in 2014 (Figure 84). We believe GWM s export will remain solid in coming years and contribute over 2 of its sales since 2014 Figure 82: Market shares of Chinese auto exports Brilliance Auto 1% SH GM Wuling 3% Others 1 Jan-Nov 2011 Chery 33% Brilliance Auto 2% SH GM Wuling 2% Others 1 Jan-Nov 2012 Chery 28% BYD 4% BYD 3% JAC 4% JAC 11% Honda (China) 5% Geely 8% Honda (China) 5% Great Wall 8% Geely 15% Great Wall 1 SH GM 6% Lifan 9% SH GM 1 Lifan 13% Source: CAAM, Credit Suisse estimates Figure 83: Great Wall s exports by segment 10 6% 9 16% 15% 9% 21% % 39% 6 37% % % 43% E Pick-up SUV Sedan Source: Great Wall Motor, Credit Suisse estimates Figure 84: Great Wall exports as % of total sales ('000 units) 1,500 1,250 1, % 19% 17% 15% 16% 14% E 2013E 2014E Export Total sales Export as % of total sales Source: Great Wall Motor, Credit Suisse estimates 25% 2 15% 1 5% China Auto Sector 38

39 Figure 85: Export growth by product Export y-y % Figure 86: Domestic sales growth by product Domestic sales y-y 118% 108% 72% % 52% % 67% 44% 5-7% 17% 16% Pick-up truck SUV Sedan % 12% 3% -3% Pick-up truck SUV Sedan E E Source: Great Wall Motor, Credit Suisse estimates Solid sedan sales Source: Company data, Credit Suisse estimates Sales of GWM s two key sedan models, the C30 and C50, picked up fast after their launch in May 2010 and December Their ramp-up speed is similar to its flagship SUV model, the H6, which was launched in August 2011 (Figure 87). C30 and C50 are competitive models in the low-end segment. C30 offers attractive prices and the longest warranty among domestic brands (Figure 89). C50 offers the most powerful engine and also the longest warranty among its domestic and JV competitors (Figure 90). We believe the sportive version C30 and C50 to be launched in 2013 will enhance GWM s sedan sales. We also expect sedans to be a stable sales engine for GWM in in the next two years, contributing about 3 of its total sales (Figure 88). We also expect sedans to be a stable sales engine for GWM in in the next two years, contributing about 3 of its total sales Figure 87: Sales ramp-up of C30, C50 and H6 Unit 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000-1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th months after initial launch C30 C50 H6 Source: Great Wall Motor Figure 88: Great Wall s sales by product 10 2% 3% 1% 1% 1% 1% 1% 9 12% 8 34% 32% 3 29% 41% 41% % % 38% 32% 45% 49% 51% % 1 24% 27% 26% 22% 2 19% E 2013E 2014E Pick-up SUV Sedan Cross-over Source: Great Wall Motor, Credit Suisse estimates China Auto Sector 39

40 Figure 89: Comparison of Great Wall C30 and its major competitors Model Great Wall C30 BYD G3 Changan Yuexiang V5 SH GM Wuling Baojun MT Comfort 1.5MT Standard 1.5MT Fantasy 1.5DVVT Standard Official price ( 000 Rmb) Dec 12 retail price ('000 Rmb) Size (m) 4.452/1.705/ /1.705/ /1.710/ /1.736/1.462 Wheelbase (m) Trunk volume (litre) Tank volume (litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 78/ / / /5800 Max toque (n.m/rpm) 138/ / / / Acceleration km/h (s) Transmission 5MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 4 years or 150,000km 2 years or 60,000km 3 years or 60,000km 3 years or 60,000km Emission standard Euro IV National IV National IV National IV Source: Xcar, Channel checks with dealers Figure 90: Comparison of Great Wall C50 and its major competitors Model Great Wall C50 Geely Emgrand EC7 Nissan Sunny Hyundai Elantra 1.5T MT Delux 1.5MT Standard 1.5MT XE Comfort 1.6MT Comfort Official price ( 000 Rmb) Dec-12 retail price ( 000 Rmb) Size (m) 4.650/1.775/ /1.789/ /1.696/ /1.725/1.425 Wheelbase (m) Trunk volume (Litre) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 98/ / / /6000 Max toque (n.m/rpm) 188/ / / /4500 Acceleration km/h (s) Transmission 5MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 5 years or 150,000km 3 years or 100,000km 3 years or 100,000km 2 years or 60,000km Emission standard National IV National IV Euro IV National IV Source: Xcar, Channel checks with dealers China Auto Sector 40

41 Initiate with OUTPERFORM We initiate coverage on GWM with an OUTPERFORM rating given its leading position in China s SUV segment. Our target price for GWM is HK$30.00 based on 13x 2013E EPS. Given its higher than industry average sales growth rate, margins as well as strong product mix, we believe that it should trade at a premium towards its domestic peers, which are trading at around 10x 2013E EPS. Initiate coverage on GWM with an OUTPERFORM and TP based on 13x 2013E EPS Figure 91: Valuation comparison table H Share automaker Price Market Dividend cap P/E (x) P/B (x) yield (%) ROE (%) (l.c.) (US$ mn) 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E Brilliance China Auto 1114.HK , Dongfeng Motors 0489.HK , Geely 0175.HK , Great Wall Motor 2333.HK , Guangzhou Auto 2238.HK , Qingling Motors 1122.HK Sinotruk 3808.HK , Weichai Power Co. Ltd 2338.HK , Mkt cap wtd avg Source: Bloomberg consensus Valuation comparison with Brilliance Both GWM and Brilliance are positioned in segments with strong sales growth potential: SUV and luxury PVs. Since 2010, GWM has traded at an average discount of 44% to Brilliance in terms of 12-month forward P/E (Figure 93). Currently, it trades at a 17% discount to Brilliance. GWM has traded at an average 12-month forward P/E of 7.4x after its capitalization issue in January 2011, compared to Brilliance's average P/E of 13.5x (Figure 92). It now trades at 11.1x 12-month forward P/E, versus Brilliance s 13.4x. Valuation comparison with Brilliance Figure 92: 12-month forward P/E band Great Wall* vs. Brilliance Jan-10 Aug-10 Mar-11 Oct-11 May-12 Jan-13 Figure 93: Great Wall s P/E multiple* discount to Brilliance Jan-10 Aug-10 Mar-11 Oct-11 May-12 Jan-13 Brilliance 12m forward P/E Great Wall 12m forward P/E Great Wall 12m forward P/E discount average discount *Adjusted for the effect of its capitalisation issue in January 2011 Source: Bloomberg consensus * Adjusted for the effect of its capitalisation issue in January 2011 Source: Bloomberg consensus China Auto Sector 41

42 Valuation comparison with sector index GWM s average P/E multiple discount over the MSCI China Consumer Discretionary Index has been 56% since 2010, compared with Brilliance s average discount of 21% (Figure 95). Since its capitalization issue in January 2011, GWM has traded at an average discount of 47% over the MSCI China Consumer Discretionary Index (Figure 95). This compares with Brilliance s average discount of 7%. GWM s valuation has steadily improved since 2011 (Figure 94 and Figure 95). We believe that GWM s P/E multiple discount over Brilliance has great potential to narrow in the near term, given its leading position in China s SUV segment. Valuation comparison with sector index Figure 94: Forward P/E band for Great Wall Motor, Brilliance and MSCI China Consumer Discretionary Index Jan-10 Apr-10 Aug-10 Nov-10 Mar-11 Jul-11 Oct-11 Feb-12 May-12 Sep-12 Jan-13 Brilliance 12m forward P/E Great Wall 12m forward P/E MSCI China Consumer Discretionary Index 12m forward P/E Source: Bloomberg consensus, MSCI Figure 95: P/E multiple discount to MSCI China Consumer Discretionary Index Jan-10 Apr-10 Aug-10 Nov-10 Mar-11 Jul-11 Oct-11 Feb-12 May-12 Sep-12 Jan-13 Great Wall 12m forward P/E discount Brilliance 12m forward P/E discount Source: Bloomberg consensus, MSCI China Auto Sector 42

43 Risks to our investment case Tougher-than-expected competition in SUV segment More than ten new mid- to high-end SUV models and 12 new mid-end and low-end SUV models are being launched in the Chinese market from 4Q12 (Figure 37 and Figure 38). GWM has the leading position in China s SUV segment mainly in the price range of less than Rmb150,000. We do not think new models launched by domestic automakers below Rmb150,000 will significantly drag down its market share. However, the company may face competitive pressure from the mid- to high-end segment, especially from Japanese brands and GM. Japanese brands may offer more price cuts in 2013 to regain their market share. The retail prices of some of their SUV models, as well as their JV partners selfowned brands (such as Trumpche), are already below Rmb150,000 (Figure 96). The retail prices of GM s mid-to-high end brands such as Buick s Encore and Chevrolet s Orlander (to be launched in early 2013) also have basic models priced below Rmb150,000. As the competition in the mid-to-high end segment intensifies, it is likely that these models may offer massive price cuts to boost sales. This is expected to exert top-down pressure on the mid-end and low-end segments, and may impact GWM s sales. JV s mid- to high-end models may offer massive price cuts and impact GWM s sales Figure 96: Nissan, Mitsubishi, and Trumpche SUV models selling below Rmb150,000 Official Oct-2012 Price Nov 2012 Price Dec-2012 Price price retail price cut retail price cut retail price cut Brand Model ( 000 Rmb) ( 000 Rmb) (%) ( 000 Rmb) (%) ( 000Rmb) (%) Nissan Qashiqai 1.6MT XE WD Qashiqai 2.0MT XL WD Mitsubishi ASX 1.6MT Standard ASX 2.0MT Comfort Trumpche GS5 2.0MT Comfort GS5 2.0MT Elite GS5 2.0MT Elite ESP GS5 2.0AT Elite Buick Encore 1.4T MT Urban Advance Source: Company data, Credit Suisse estimates Slower-than-expected ramp-up of new capacities GWM s Tianjin plant is suffering capacity constraints due to strong demand for H6. The new plant in Tianjin should add 100,000 units of new capacity by the end of However, its effective capacity may be lower than 50,000 units, as it may start operations in 2H13E. The existing Tianjin plant s designed capacity is 200,000 units, which is expected to be raised to 240, ,000 by adding shifts. Its current monthly production volume for the H6 is around 16,000 units and around 6,000 units for the C50. This is equivalent to 264,000 units p.a. and already exceeds the plant s maximum capacity. The capacity constraint may help to keep H6 s current prices as it is short of supply. However, if the waiting list continues to grow, customers may lose their patience and turn to other SUV models launched by GWM s competitors. Therefore, any delay in new capacity may not only affect its sales in 2013, but also affect market share given debuts of new models by its competitors. Slower-than-expected rampup of GWM s new capacity in Tianjin plant may affect its shipment and sales China Auto Sector 43

44 Asia Pacific / China BYD Co Ltd Rating NEUTRAL* [V] Price (04 Jan 13, HK$) Target price (HK$) 20.00¹ Upside/downside (%) Mkt cap (HK$ mn) 56,976 (US$ 7,352) Enterprise value (Rmb mn) 61,496 Number of shares (mn) 2, Free float (%) week price range ADTO - 6M (US$ mn) 7.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Price (LHS) Research Analysts Jack Yeung [email protected] Rebased Rel (RHS) 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 04/01/13 On 04/01/13 the spot exchange rate was HK$7.75/US$1 120 Performance over 1M 3M 12M Absolute (%) Relative (%) (1211.HK / 1211 HK) Electric car yet to commercialize Initiate with NEUTRAL. We initiate coverage on BYD with a NEUTRAL rating and a target price of HK$20.00, which implies 12.5% potential downside. BYD is the third largest low-end sedan maker in China just behind Geely and Chery. It also produces electric vehicles (EV) with trial fleets in Shenzhen. Meanwhile, it is the world s largest handset battery maker. Intensifying competition at the low-end segment. BYD s conventional vehicles primarily focus on the low-end segment, where competition is intensifying. Till Nov 2012, BYD s monthly sedan sales were about 15% lower than in 2011 and over 2 lower than in We expect its sedan sales to remain weak in 2013 mainly due to intensifying competition. The company is recalibrating its product strategy by introducing more upscale models such as the SUV S6. We believe that it will miss its 2012 S6 sales target facing strong competition from Great Wall s H6 and Geely s GX7. It seems that BYD currently does not have other major breakthrough products in the low-end segment to support its future sales growth. Negative catalyst. BYD s profit from handset components and assembly services may fall more than over 9 YoY in Its major customers Nokia and HTC continued to suffer declines in market share, which is likely to impact its 2013 orders. We expect its solar segment to continue losses in 2013 mainly due to declining solar prices caused by oversupply in the industry. China's solar sector might experience a wave of consolidation in the years ahead, which could exert high pressure on small solar manufacturers such as BYD. Valuation. Our target price of HK$20.00 for BYD is based on a sum-of-theparts (SoTP). We value its auto business at HK$10.20 by using discounted cash flow (DCF). We use sector average P/E multiples for both its handset components and assembly business (valued at HK$9.10 based on 18x 2013E P/E) and battery business (valued at HK$0.70 based on 12x 2013E P/E). Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 46, , , ,172.2 EBITDA (Rmb mn) 4, , , ,333.0 EBIT (Rmb mn) 2, , , ,780.9 Net profit (Rmb mn) 1, EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. China Auto Sector 44

45 Electric car yet to commercialize Weak conventional vehicle sales BYD s conventional vehicles primarily focus on the low-end segment, where demand growth is slowing down and competition is intensifying. Up until November 2012, BYD s monthly sedan sales volume was still about 15% lower than in 2011 and over 2 lower than in We expect its sedan sales to remain weak in 2013 mainly due to a lack of attractive models and intensifying competition. BYD is recalibrating its product strategy and introducing more upscale models, such as the SUV S6 and mid-sized sedan G6. We believe that BYD will miss its S6 sales target in 2012 mainly due to strong competition from Great Wall s H6, whose sales and market share have grown throughout the year. BYD lost momentum in terms of conventional vehicles in recent years. Even though it has done well with some low-end models such as the S6, it does not have other major breakthrough products in this area. EV business in its infancy stage BYD has made remarkable progress in its electric vehicle (EV) segment. Its electric MPV E6 has been under trial running in Shenzhen for two years as an electric taxi. Its E-Bus K9 has also received thousands of orders from both domestic and overseas markets. Compared with other EV projects operated by domestic players, BYD is a leader in initial commercialization. However, major technical efforts in the auto industry are still concentrating on improving the current combustion engine technology. Moreover, currently almost all charging infrastructures in China are built by state-owned enterprise (SOE) grid companies and lag behind schedule. We expect policy support to remain the major determining force for China s EV industry in the next few years. We believe BYD s EV business will still be constrained by the infrastructure issue and is unlikely to spread over to the national market shortly. Uncertainties in handset and solar BYD s profit from handset components and assembly may fall more than 9 YoY in 2012, as its major customers, Nokia and HTC, continue to suffer declines in market share. Given the strong competition in the mobile phone and smart phone segments, we think it would be unlikely for these two companies to quickly achieve a dramatic rebound in market share. This is likely to impact BYD s 2013 orders and margins for handset components and rechargeable batteries. Moreover, we expect its solar segment to continue losses in 2013 mainly due to declining solar prices, which is caused by oversupply in the industry. China's solar sector might experience a wave of mergers, restructurings and company failures in the years ahead, which could exert high pressure on small manufacturers such as BYD. Initiate with a NEUTRAL We initiate coverage on BYD with a NEUTRAL rating. We believe that its EV business has long-term potential earnings upside but its conventional vehicle segment as well as handset and solar segments will remain weak in the near term. We value BYD s auto business at HK$10.20 using DCF; its handset components and assembly business at HK$9.10 based on 18x 2013E P/E; and its battery business at HK$0.70 based on 12x 2013E P/E. Major risks to our target price include uncertainties in EV technology breakthroughs and policies, as well as stronger-than-expected demand in low-end segment. BYD s conventional vehicles sales remained weak mainly due to intensifying competition and lack of new models. China s EV industry is still at its infancy stage. And BYD s EV business will be constrained by the infrastructure issue BYD should face weak handset orders and margin pressure in the solar segment Initiate NEUTRAL on BYD with TP based on SoTP China Auto Sector 45

46 BYD Co Ltd 1211.HK / 1211 HK Price (04 Jan 13): HK$22.85, Rating:: NEUTRAL, Target Price: HK$20.00, Analyst: Jack Yeung Target price scenario Scenario TP %Up/Dwn Assumptions Upside (4.99) 2013E auto sales: 533,000 units Central Case (12.47) 2013E auto sales: 493,000 units Downside (25.38) 2013E auto sales: 453,000 units Income statement (Rmb mn) 12/11A 12/12E 12/13E 12/14E Sales revenue 46,312 47,825 58,063 63,172 Cost of goods sold 39,445 41,772 49,699 53,906 SG&A 3,925 4,018 4,877 5,306 Other operating exp./(inc.) (2,043) (2,799) (3,060) (3,373) EBITDA 4,984 4,834 6,546 7,333 Depreciation & amortisation 2,516 3,535 4,111 4,552 EBIT 2,469 1,299 2,434 2,781 Net interest expense/(inc.) ,272 1,488 Non-operating inc./(exp.) Associates/JV 1.2 (12.6) Recurring PBT 1, ,163 1,293 Exceptionals/extraordinaries Taxes Profit after tax 1, ,023 1,099 Other after tax income Minority interests Preferred dividends Reported net profit 1, Analyst adjustments Net profit (Credit Suisse) 1, Cash flow (Rmb mn) 12/11A 12/12E 12/13E 12/14E EBIT 2,469 1,299 2,434 2,781 Net interest (1,001) (843) (1,197) (1,375) Tax paid (344.0) (59.7) (139.5) (194.0) Working capital 1,179 (752) Other cash & non-cash items 2,626 3,478 4,037 4,439 Operating cash flow 4,929 3,122 5,470 6,157 Capex (7,245) (5,260) (4,730) (5,313) Free cash flow to the firm (2,316) (2,137) Disposals of fixed assets Acquisitions Divestments Associate investments 13.1 Other investment/(outflows) (2,272) 1,130 (1,320) (1,320) Investing cash flow (8,923) (4,130) (6,050) (6,633) Equity raised 1,368 Dividends paid (0.33) Net borrowings 4,727 1,872 3,600 3,600 Other financing cash flow (302.6) Financing cash flow 5,792 1,872 3,600 3,600 Total cash flow 1, ,020 3,124 Adjustments (39.2) Net change in cash 1, ,020 3,124 Balance sheet (Rmb mn) 12/11A 12/12E 12/13E 12/14E Cash & cash equivalents 3,737 4,602 7,622 10,746 Current receivables 9,782 10,053 11,237 12,393 Inventories 6,596 7,899 8,026 8,144 Other current assets 2,665 3,321 3,659 3,989 Current assets 22,780 25,875 30,544 35,272 Property, plant & equip. 30,723 32,000 32,619 33,380 Investments Intangibles 2,481 3,809 5,129 6,449 Other non-current assets 10,310 8,887 8,887 8,887 Total assets 66,881 70,572 77,179 83,988 Accounts payable 17,236 18,167 19,427 20,773 Short-term debt 11,342 12,176 13,141 14,296 Current provisions Other current liabilities 6,050 6,617 7,340 8,105 Current liabilities 34,628 36,959 39,909 43,174 Long-term debt 7,079 8,117 10,752 13,197 Non-current provisions Other non-current liab. 1,194 1,175 1,175 1,175 Total liabilities 42,901 46,251 51,836 57,546 Shareholders' equity 21,125 21,310 22,026 22,796 Minority interests 2,856 3,010 3,317 3,647 Total liabilities & equity 66,881 70,572 77,179 83,988 Key earnings drivers 12/11A 12/12E 12/13E 12/14E Automobile sales (unit) 448, , , ,185 Per share data 12/11A 12/12E 12/13E 12/14E Shares (wtd avg.) (mn) 2,315 2,354 2,354 2,354 EPS (Credit Suisse) (Rmb) DPS (Rmb) BVPS (Rmb) Operating CFPS (Rmb) Key ratios and valuation 12/11A 12/12E 12/13E 12/14E Growth(%) Sales revenue (0.8) EBIT (27.4) (47.4) Net profit (45) (88) EPS (46) (88) Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/ebitda (x) Interest cover (x) Source: Company data, Thomson Reuters, Credit Suisse estimates MF P/E multiple Source: IBES 12MF P/B multiple China Auto Sector 46

47 Weak conventional vehicle sales Sedan sales remain weak BYD s conventional vehicles (mainly sedans) primarily focus on the low-end segment (Figure 97 and Figure 98), where demand growth is slowing and competition is intensifying. BYD s sedan sales slipped almost every month from August 2010 to July 2012, mainly due to network consolidation and weakening demand in the low-end segment. BYD launched a new low-end sedan model Surui in August 2012, which has competitive prices and better quality than the old ones. Surui achieved strong sales in September and October BYD also extended its warranty on new vehicles to four years/100,000 km to boost sales. However, up until October 2012, BYD s monthly sedan sales volume was still about 15% lower than in 2011 and more than 2 lower than its ordinary level in We also expect its sedan sales to remain weak in 2013 due to its lack of attractive models and intensifying competition in the low-end segment. BYD s sedan sales would remain weak due to intensifying competition and lack of attractive models Figure 97: Official prices of BYD models (RMB/unit) 400,000 Conventional vehicle 350, , ,000 Figure 98: BYD auto product portfolio EV and hybrid vehicle 0.5% Jan-Nov 2012 Mid-to-high end MPV (M6) 0.3% Mid-to-low end SUV (S6) 2 200, , ,000 50,000 0 Mid-to-high end vehicles Mid end vehicles E6 F3DM M6 F3 S6 L3 G6 G3 F6 Surui F0 (EV) (Hybrid) Low-end sedan 79% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 99: Sedan sales comparison of major domestic automakers Sedan sales Sedan sales 600,000 (unit) 20 YoY 500, , , , , E E -5 BYD (LHS) Geely (LHS) BYD Geely Chery Great Wall Motor Chery 9LHS) Great Wall Motor (RHS) Source: CAAM, Credit Suisse estimates China Auto Sector 47

48 Bottleneck in SUV sales BYD is recalibrating its product strategy and introducing more upscale models, such as the SUV S6 and mid-sized sedan G6. More and more Chinese consumers are now replacing their first cars, who have tended and are tending to buy cars from JVs. This is a trend that has depressed the sales of domestic brands, such as BYD, Chery and Geely, which are traditional makers of low-end compact models. By introducing more upscale vehicles, such as the S6 and the G6, BYD is trying to retain those consumers. The S6 was BYD s first SUV model, ranked the No.6 best-selling SUV in China in 10M12 and is mainly competing with Great Wall s H6 and Geely s GX7 (Figure 100, Figure 101 and Figure 102). BYD is targeting to sell 100,000 S6 units in However, we expect it to miss the target by about 15,000 units given weak sales in 2H12. Monthly sales of the H6 exceeded 10,000 units in the 4th month after its launch and steadily picked up above that level from the tenth month (Figure 103). However, monthly sales of the S6 exceeded 10,000 units in the eighth month after its launch and fell below that from the 13th month (Figure 103). We believe that the S6 s monthly sales volume has been capped in 2012 mainly due to strong competition from the H6, whose sales and market share kept growing throughout the year (Figure 98). We believe BYD s S6 will have limited growth potential due to strong competition from H6 Figure 100: BYD S6 Source: Company data Figure 101: Great Wall Motor H6 Source: Company data Figure 102: Geely GX7 Price Rmb89, ,900 Size 4.81m x 1.855m x 1.68m Wheelbase 2.72m Engine and transmission 2.0L 103kW /6000rpm, 186N*m/ rpm 5-speed manual 2.4L 118kW / rpm, 215N*m/ rpm 4-speed automatic Price Rmb95, ,800 Size 4.64m x 1.825m x 1.69m Wheelbase 2.68m Engine and transmission 2.0L 98kW /5500rpm, 186N*m/4000rpm 4-speed automatic / 5-speed manual 2.0T Diesel 110kW/4000rpm, 310N*m/ rpm 6-speed automatic / manual Price Rmb92, ,900 Size 4.541m x 1.833m x 1.7m Wheelbase 2.661m Engine and transmission 1.8L 102kW /6200rpm, 172N*m/4200rpm 5-speed manual 2.0L 104kW/6000rpm, 178N*m/ rpm 6-speed automatic / manual Source: Company data China Auto Sector 48

49 Figure 103: Sales ramp-up of S6, H6, and GX7 Sales (unit) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 Sales (unit) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - month after initial launch 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th 15th BYD S6 Great Wall Hover H6 Geely GX7 2,000 - Apr-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 BYD S6 Great Wall Hover H6 Geely GX7 Source: Company data, Credit Suisse estimates Figure 104: BYD s vehicle models Segment Model Price ( 000 Rmb) Launch time of new model 2012E sales ( 000 units) 2013E sales ( 000 units) Sedan F Surui F F G L G SUV S Updated S6 2.0T H13 MPV M EV E F3DM Qin 200 1Q13 1 E-Bus K9 2, Total Source: BYD, Credit Suisse estimates Figure 105: Launch time of BYD s new models in 2013 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Updated S6 2.0T Qin Source: BYD 1Q13 1H13 90 China Auto Sector 49

50 Figure 106: Official prices of BYD models - 50, , , , , , , ,000 RMB F3 Surui F6 F0 G3 L3 G6 S6 Updated S6 2.0T M6 E6 F3DM Qin Existing model New model Source: BYD Figure 107: Comparison of BYD Surui and its major competitors Model BYD Surui Geely GLEagle GC7 Great Wall C30 Venucia D50 1.5MT Comfort 1.5MT Comfort 1.5MT Comfort 1.6MT Comfort Official price ( 000 Rmb) Dec-12 retail price ('000 Rmb) Size (m) 4.680/1.765/ /1.734/ /1.705/ /1.695/1.535 Wheelbase (m) Trunk volume (Litre) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 80/ / / /6000 Max toque (n.m/rpm) 145/ / / /4400 Acceleration km/h (s) Transmission 5MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 4 years or 100,000km 4 years or 150,000km 4 years or 150,000km 3 years or 100,000km Emission standard National IV National IV Euro IV National IV Source: Xcar, Channel checks with dealers China Auto Sector 50

51 Figure 108: Comparison of BYD G6 and its major competitors Model BYD G6 Nissan Sylphy VW Bora Chevrolet Cruze 1.5T MT Delux 1.6MT Comfort 1.6MT Fashion 1.6 SL MT 2013 Official price ( 000 Rmb) Dec-12 retail price ( 000 Rmb) Size (m) 4.860/1.825/ /1.700/ /1.775/ /1.797/1.477 Wheelbase (m) Trunk volume (Litre) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 113/ / / /6000 Max toque (n.m/rpm) 240/ / / /3800 Acceleration km/h (s) Transmission 6MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 4 years or 100,000km 3 years or 100,000km 2 years or 60,000km 2 years or 60,000km Emission standard National IV Euro IV National IV National IV Source: Xcar, Channel checks with dealers Figure 109: Comparison of BYD E6 and its major competitors Model BYD E6 Nissan Leaf Ford Focus EV Honda Fit EV Official price ( 000 Rmb) Size (m) 4.560/1.882/ /1.770/ /2.060/ /1.695/1.525 Wheelbase (m) Trunk volume (Litre) Complete mass (kg) Battery (kwh) 48 (LiFePO4) 24 (Lith-ion) 23 (Lith-ion) 20 (Lith-ion) Max power (kw) Max toque (n.m) Acceleration km/h (s) <10 < Top speed (km/h) Transmission MT CVT Fix CVT Max range (km) Warranty 5 years or 100,000km 8 years or 160,000km NA NA Source: Xcar, Cheshi China Auto Sector 51

52 EV business in its infancy stage EV: The future for the auto industry Economies become more dependent on transportation fuel as they mature. In economies such as the US, road transportation fuel makes up the largest part of oil consumption, and if replaced with electric vehicles (EV), could significantly cut oil demand and pollution. Countries such as China, require less of an infrastructure overhaul to switch fuel types, and want to seize the opportunity to stem a growing dependence on oil. Electricity has the highest distribution efficiency of any fuel, which is more than 8. Recent advancements by BYD in electricity storage suggest that car batteries of the somewhat far-off future could be substantially more efficient compared to current ones. Despite sluggish global auto growth, along with the gloomy outlook in China, there is new hope within the industry and that is EV. Even though EV is still at the initial stages of development, we believe that it will be the King of Auto Market not only in China, but also in the world. EV, in our view, will be the answer to the future of the auto industry. It generates zero greenhouse gas emissions compared with conventional vehicles and has lower fuel costs, even when oil is cheap. That is because electric engines are more efficient than internalcombustion engines, and because generating energy on a large scale (in coal or nuclear plants) is less wasteful than doing it on a small scale (by burning gasoline in an internalcombustion engine). Besides the energy saving concept, there are material benefits from using electric/hybrid cars. The concept is similar to the light bulb, with an energy-saving light bulb charging five times more than usual light bulbs, but also saving on energy with the initial investment cost being fully earned back by electricity saved from such a light bulb. Moreover, EVs are very reliable and have almost free maintenance. There is no need for oil and filter changes, and tuning. In addition, EVs have less than one tenth as many parts as a conventional vehicle. For instance, they have no engine, transmission, spark plugs, valves, fuel tank, tailpipe, distributor, starter, clutch, muffler or catalytic converter. One of the critical cost issues for an EV is the efficiency of the battery. BYD is using a lithium iron phosphate (LiFePO 4 ) battery. The strength of this is the short charge time, high power density while it does not explode under extreme conditions normally. In a serious accident on 25 May 2012 in Shenzhen, a BYD E6 Taxi caught fire and burned out after it was hit by a sports car travelling at high speed. Three people were killed at the scene. However, a panel of experts organized to study the accident later concluded that the batteries on the taxi did not explode and the design passes all required safety standards. Some 75% of the vehicle s battery survived the fire and the other 25% had no structural damage. Also, the cost of an Li-iron battery is low, non-toxic and has readily available iron elements. Meanwhile, most consumer electronics are extensively using lithium cobalt oxide (LiCoO 2), lithium manganese oxide (LiMn 2 O 4 ) and lithium-nickel oxide (LiNiO 2 ). An Li-iron battery has relatively higher stability than the above material despite it having a lower capacity/size ratio. Thus, it should be more suitable for EV, as car space is sufficient than consumer electronics (especially portable devices). Is EV cost effective? Consider a driver in Shenzhen (BYD s cars sell mostly in Shenzhen) who drives every day and must decide whether to buy an EV or conventional vehicle. If we don t consider the environmental protection concept, let s examine two cases: (1) buy a gasoline sedan; and (2) buy an E6 electric car. For family users, the E6 breaks even compared with BYD s gasoline model F6 in terms of total cost at the end of their nine years of lifetime (Figure 110). We believe this breakeven point could decrease with technological improvements. In terms of per-km fuel costs, cheap electricity and minimal maintenance for re-charging batteries should bring down the fuel cost per km of the E6 to around 25% that of the F6 (Figure 111). The more often and longer the EV drives, the more it can save, making it more appealing to fleet operators than private users. Therefore, EV business has bright future but is still at the initial stages of development We believe EV will be a key growth area of the auto industry in the future BYD has advanced battery technology, which is critical to EV EV is cost effective compared with conventional vehicles China Auto Sector 52

53 fleet operators, such as taxi companies, are likely to reach breakeven within a short period and most likely to become BYD s major customers. Figure 110: Cost comparison between E6 and F6 (for family usage) E6 (pure electric car) F6 (gasoline car) Average mileage per day 60km (30km x 2) 60km (30km x 2) Energy price Rmb7.56 (Rmb0.13 per km) per day -- assuming Rmb0.70 for 1kWh -- assuming 18kWh for 100km Total energy cost used in nine years Rmb24, assume zero time value of money Car list price Rmb180, after government subsidies of Rmb120, assume no residual value Rmb33.60 (Rmb0.56 per km) per day -- assuming gasoline price at Rmb8.00/litre -- assuming 7 litres/100km Rmb110, assume zero time value of money Rmb109, assume no residual value Lifetime mileage Assume 200,000km (9 years and 60Km every day). Battery to charge 4,000 times before retirement Assume 200,000km (nine years and 60km every day). 300km per charge. Maximum mileage: 3,000 times x 300km = 900,000km. Maintenance cost Unknown, but may get government subsidy Assume no cost Total cost Rmb204,000 Rmb219,800 Source: BYD, Credit Suisse estimates Figure 111: Cost comparison between E6 taxi and gasoline taxi (for fleet operator) E6 Taxi (pure electric car) Gasoline taxi Average mileage per day 450km 450km Energy price Total energy cost used in 5 years Car list price Rmb81.90 (Rmb0.18 per km) per day -- assuming Rmb0.70 for 1kWh -- assuming 26kWh for 100km Rmb149, assume zero time value of money Rmb180, after government subsidies of Rmb120, assume no residual value Rmb (Rmb0.72 per km) per day -- assuming gasoline price at Rmb8.00 / litre -- assuming 9 litre / 100km Rmb591, assume zero time value of money Rmb100, assume no residual value Lifetime mileage Assume 730,000km (5 years and everyday 400km). Assume 730,000km (5 years and everyday 400km). Battery to charge 4000 times before retirement 300km per charge. Maximum mileage: 3,000 times x 300km = 900,000km Maintenance cost Unknown, but may get government subsidy Assume no cost Total cost Rmb329,500 Rmb691,300 Source: BYD, Credit Suisse estimates Figure 112: Cost comparison between E6 and F6 RMB 250,000 Family user RMB 1,500,000 Fleet operator 200,000 1,200, , , , ,000 50, ,000 0 number of years after purchase 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 0 number of years after purchase 1st 2nd 3rd 4th 5th 6th 7th 8th 9th E6 F6 E6 F6 Source: Company data, Credit Suisse estimates China Auto Sector 53

54 BYD is the closest proxy to EV in Asia BYD is the only auto manufacturer in Asia (ex-japan) to provide a one-stop solution in the EV market with commercial trials of electric taxis for more than two years in Shenzhen. If its EV dream comes true, the EV market would be kicked off globally, and BYD would be a good choice and may enjoy a scarcity premium. The reason that no other major players exist may be due to the high risk of this technology. Also, these traditional car makers usually are not equipped with battery knowledge, the learning curve is long and investment is huge for developing battery technology from scratch. Sanyo and Samsung SDI are the global leaders in lithium batteries, while Toyota and General Motors are the leaders in hybrid cars. Huge investment has been poured into hybrid car R&D, but we have yet to see any returns. However, we do not think these companies are really so investable because they are conglomerates and EV earnings would have little impact on their bottom line. Meanwhile, in Asia Pacific, BYD would be the closest proxy to the success of an electric vehicle. Although many large companies in the world are developing electric autos, BYD is the only one focusing on this area in China. Eyeing such great potential, automakers are racing to grab a share. Shanghai-based SAIC Motor Corp last week launched its first mass-produced all-electric car, the Roewe E50. BYD's joint venture with Daimler AG has launched the EV brand Denza, which is jointly designed by 80 German engineers from Daimler and 200 BYD engineers. A prototype vehicle of Denza is under road testing and the final version will be launched in the market around end BYD is planning to deliver 2,000 EVs in 2012 and 7,000 in According to foreign media reports, US electric vehicle company Tesla is also preparing to enter the Chinese market, first with a showroom planned in Beijing. However, among them, only BYD has the capability of mass-production. Currently, its Li-iron battery capacity is 1.6 GWh, which is able to support 500 K9s and over tens of thousands of E6s. It does not plan to expand its battery capacity yet. Average production costs for Li-iron battery are about Rmb2-2.5/Wh, which may be reduced to Rmb1.5-2/Wh in EV is still far from full commercialization Major technical efforts in the auto industry are still concentrating on improving the current combustion engine technology, powertrain systems, connected drives, safety systems and the development of new material solutions for vehicle weight reduction. One of the greatest challenges to commercializing EV is likely to be the development and industrialization of light, long-lasting and affordable battery systems. A market breakthrough of EVs would depend greatly on innovations in this field. We expect the corresponding development phase to last 5-10 years. The battery functions are crucial in an EV just as the combustion engine is in a conventional vehicle. The total value added of an EV is significantly higher than for conventional vehicles and is clearly dominated by the battery system. As the battery system is currently very cost intensive, the EV industry needs unified standards for its technology, components, as well as electrical interfaces, to avoid high switching costs. However, China s EV battery industry is still highly fragmented. Sufficient and standardized electric charging infrastructure is another key challenge to commercializing EVs. Infrastructure is the foundation of a unified EV market, especially in a large country, such as China. A well-established charging network not only provides a convenient charging solution, but also helps avoid a multiplicity of standards, which would hamper the development of the EV industry. Other than dedicated high-power charging stations on public roads, charging poles have lower construction and maintenance costs, providing more convenient refueling solutions than patrol stations. Battery swap stations and power storage stations are also good complements to shorten charging times. These charging facilities are already in place in China, but with limited locations and capabilities. At the end of 2011, there were 314 charging stations built in China with 16,184 charging poles, shared by around 10,000 EVs across the country (Figure 113). This compares with over BYD is the automaker in Asia (ex-japan) with the closest proxy to EV BYD is the only Chinese automaker with mass production of EVs We expect major market breakthrough of EVs in 5-10 years Due to constraints in battery technology and infrastructure support, EV is far from commercialising in China China Auto Sector 54

55 3,400 charging stations and over 20,000 charging poles in the US at the end of 2011, which were shared by fewer than 25,000 EVs. Figure 113: Expansion of EV charging facilities in China , , , , , , , , , E 2013E 2014E 2015E 300, , , , ,000 50,000 0 Number of charging station (LHS) Number of charging pole (RHS) Source: State Grid Corporation, China Southern Power Grid, Credit Suisse estimates Policy supports for EV in China For electric vehicles to make serious headway, they need much faster reductions in technology costs or continuing government subsidies. The latter looks unlikely to be sustainable in the long term, but is critical for the industry s development at its infancy stage. China has 25 pilot cities for new energy vehicles, with five (Shenzhen, Shanghai, Hangzhou, Hefei and Changchun) offering purchase subsidies for new energy vehicle buyers (Figure 114 and Figure 115). Major policies supporting EVs in China Figure 114: Pilot cities for new energy vehicles Launch Batch Time City 1 st 13 cities Jan-09 Beijing, Shanghai, Chongqing, Changchun, Dalian, Hangzhou, Jinnan, Wuhan, Shenzhen, Hefei, Changsha, Kunming, Nanchang 2 nd 7 cities Apr-10 Tianjin, Haikou, Zhengzhou, Xiamen, Suzhou, Tangshan, Guangzhou 3 rd 5 cities Jul-10 Shenyang, Hohhot, Chengdu, Nantong, Xiangyang Source: MST, NDR, MIIT, and MOF Figure 115: Purchase subsidies granted to new energy vehicle buyers Energy type PV and light CV City buses longer than 10m Hybrid Not more than Rmb50,000 Rmb50, ,000 Pure-electric Rmb60,000 Rmb500,000 Fuel cell Rmb250,000 Rmb600,000 Source: Company data Figure 116: Purchase subsidy for new energy vehicles in five pilot cities Rmb Unit Target 3,000 one-time/ per unit Vehicles with engine sizes below 1.6L and fuel consumption 2 lower than the current industrial standard 3,000 per kwh Hybrid electric passenger cars with total subsidy per car capped at Rmb50,000 3,000 per kwh Pure electric passenger cars with total subsidy per car capped at Rmb60,000 Source: Company data Other than subsidies, the Chinese government has issued several industry plans to call for more new energy vehicles. The Twelfth Five-year Planning for Electric Vehicle Technology Development was issued by the Ministry of Science and Technology in March Industry plans for new energy vehicles in China China Auto Sector 55

56 2012. It targets 2,000 EV charging stations (including battery swap stations) and 400,000 electric charging poles in over 20 pilot cities by 2015E, which are expected to be sufficient to foster initial commercialization of EVs. Another industry plan, the Energy Saving and New Energy Vehicle Development Plan, was released in July 2012 by the State Council. It set a 2020E target for total production and sales of 5 mn pure-electric vehicles and plug-in hybrids, with annual production capacity reaching 2 mn units. Banks are also giving financial support to BYD to encourage its EV sales. China Development Bank (non-listed), China Everbright Bank (non-listed) and other Chinese financial institutors launched a financial program with BYD in early November. This will provide loans with zero down payment for companies that buy BYD s K9 E-buses and E6 taxis. Currently, the E6 is selling at above Rmb300,000, while K9 sells at about Rmb2 mn. Even with subsidies from both central and local governments, the prices are still much higher than for conventional vehicles. Only fleet operators, such as taxi companies and bus companies, are willing to purchase EVs given their high daily mileage and therefore high savings benefits from low operating expenses of EVs. There are now 300 E6 taxis and 200 K9 E-buses running on the roads in Shenzhen. More than 500 E6s will be added to the fleet by the end of 2012, according to an agreement between BYD and a local taxi company. BYD also agreed with partners to produce its EVs in Tianjin and Yunnan province, and supply them for local public transport use. This is expected to help BYD gain local government support and penetrate local EV markets. The company is taking the same approach overseas, tapping public transport markets first. It has already provided electric buses to Denmark, the Netherlands, Spain and Hungry for trial use. It will attend two government-oriented auctions in Brussels (around hundreds of vehicles) and Italy (100 vehicles) in Most recently, it agreed with a London cab company to supply 50 E6 cars to its fleet in We expect BYD s EV sales to heavily rely on government orders focusing on the public transportation sector in next few years and government subsidies would continue to account for a large portion of its EV revenue. Banks supports for BYD s EV sales BYD is relying heavily on government purchases China Auto Sector 56

57 Uncertainties in handset and solar Weak orders from Nokia and HTC BYD s profit from handset components and assembly may fall over 9 YoY in 2012 as its major customers Nokia and HTC have continued to suffer declines in market share (Figure 117 and Figure 118). BYD s revenue from handset components and assembly fell 11.6% YoY in 1H12, while rechargeable battery sales dropped 5.5% YoY during the same period. Its largest customer, Nokia, continued its restructuring plans and its total mobile phone shipments fell 17.8% from mn units in 9M11 to mn units in 9M12. HTC s smartphone shipments dropped 30.9% YoY from 33.3 mn units in 9M11 to 23 mn in 9M12. Given the strong competition in the mobile phone and smart phone segments, it would be unlikely for these two companies to quickly achieve a dramatic rebound in market share. This is likely to impact BYD s orders for handset components and rechargeable batteries in 2H12 and in BYD s handset segment would have weak orders as major customers face declining market share Figure 117: Market share of top mobile phone makers % Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Samsung Nokia Apple ZTE LG Others Source: IDC Figure 118: Market share of top smart phone makers % Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Samsung Apple Nokia RIM HTC Source: IDC China Auto Sector 57

58 Solar: Oversupply remains a key challenge BYD s solar segment recorded about Rmb600 mn of losses in 1H12, higher than the segment s total loss of Rmb560 mn in This is mainly due to declining solar prices caused by oversupply in the industry. BYD is expecting another Rmb200 mn of losses in 2H12. According to solarbuzz, global solar capacity is approximately twice that of its expected 2012 demand of 30GW. Although many foreign manufacturers have exited from solar manufacturing, Chinese capacity has continued to expand in recent years. These new facilities were added during 2011 and 2012, fuelling solar capacity increases and prolonging the oversupply and competitive pricing issues. The ASPs of solar panels are still falling. Gross margins for solar panels have fallen to less than 1 from above 3 in 2010, and Chinese companies will need to shift to a highvolume, low-margin business if they want to survive. Despite efforts by some companies to reorganize and cut costs, China's solar sector might experience a wave of mergers, restructurings and company failures in the years ahead. Trina Solar Chief Executive Gao Jifan said the global solar industry may experience a stabilization phase in the next few years, which would be characterized by increasing consolidation and the liquidation of lower-tier manufacturers. Although attention has previously focused on the shakeout of European and US-based solar manufacturers, the next set of exits from the industry are likely to come from underperforming Chinese Tier 2 and 3 manufacturers, such as BYD. Overcapacity in the solar industry will continue to put high pressure on BYD s margins Solar industry may experience a wave of consolidation, which will seriously impact small players such BYD Figure 119: Chinese solar module suppliers revenue, gross margin and net margin USD billion Figure 120: Global solar supply and demand GW Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Revenue (LHS) Gross margin (RHS) Net margin (RHS) Source: IMS Research Source: NPD Solarbuzz Production Shipments Demand China Auto Sector 58

59 Initiate with a NEUTRAL We initiate coverage on BYD with a NEUTRAL rating. We derive BYD s target price of HK$20.00 based on SoTP. We value its auto business at HK$10.20 by using DCF; its handset components and assembly business at HK$9.10 based on 18x 2013E P/E; and its battery business at HK$0.70 based on 12x 2013E P/E. Initiate with NEUTRAL and TP based on SoTP Figure 121: DCF base case assumptions Base case Vehicle sales ( 000 units) 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E - Conventional Hybrid Electric car Electric Bus Total vehicle sales Total vehicle salesyoy (%) -4% 15% 9% 8% 9% 8% 8% 5% 5% ASP ( 000 Rmb) - Conventional Hybrid Electric car Electric Bus 1,530 1,530 1,530 1,400 1,400 1,300 1,200 1,100 1,000 Total revenue (Rmb mn) 25,071 30,140 37,000 42,990 48,800 54,890 62,400 67,450 71,160 EBITDA margin (%) 10.1% 11.3% 11.5% 11.3% 11.1% 10.9% 10.7% 10.5% 10.3% EBITDA (Rmb m) 2,534 3,398 4,269 4,858 5,417 5,983 6,677 7,082 7,329 Working capital (Rmb mn) 6,518 7,836 9,620 11,177 12,688 14,271 16,224 17,537 18,502 Working capital movement (Rmb mn) (522) (1,318) (1,784) (1,557) (1,511) (1,583) (1,953) (1,313) (965) Taxation (Rmb m) (391) (408) (640) (826) (1,083) (1,316) (1,669) (1,771) (1,832) Effective tax rate (%) 15% 12% 15% 17% 2 22% 25% 25% 25% EV utilisation rate 29% 43% EV capacity ( 000 units) Capex per EV ( 000 Rmb) Conventional vehicle utilisation rate 49% 56% 6 63% 67% 7 72% 73% 73% Conventional vehicle capacity ( 000 units) Capex per conventional vehicle ( 000 Rmb) Total capex (Rmb mn) (330) (370) (483) (483) (688) (1,069) (1,163) (1,163) (1,163) Free cash flow (Rmb mn) 1,291 1,302 1,362 1,991 2,135 2,015 1,893 2,836 3,370 Discount factor Present value (Rmb mn) 1,291 1,204 1,164 1,573 1,559 1,360 1,181 1,636 31,485 Terminal value (Rmb mn) 55,667 Rmb mn Enterprise value (end-2012) 42,453 - Net debt 15,500 - Minority interests 155 = Equity value 26,798 Source: Credit Suisse estimates China Auto Sector 59

60 Figure 122: WACC assumption and pricing Base case WACC assumptions Beta 1.00 Risk free rate (Rf) 3.0 Risk premium (Rp) 6.5 Required market return (Rm=Rf+Rp) 9.5 Cost of equity=rf+beta*(rm-rf) 9.5% Cost of debt (2012) 6.5% Tax rate 25. No of shares (mn) 2,354 Optimal leverage 20. WACC=CoE*(1-L)+CoD*(1-T)*L= 8.6% Perpetual growth 2. Pricing TP for Auto Project 10.2 Exchange rate (HKD=RMB) Source: Company data, Credit Suisse estimates The base case of our valuation is mainly supported by the following assumptions: BYD could ship 2.3k EVs in 2012 to 70k EVs in 2020 (CAGR 53%). ASP for electric car to decline to Rmb160k in 2020 from Rmb330k in ASP for E-Bus to decline to Rmb1 mn in 2020 from Rmb1.5 mn in Favourite tax policy would terminate in EV s capacity utilisation rate could rise to 8 in Conventional vehicles capacity utilisation rate could exceed 7 in Capex per EV would gradually decline due to technology advances. We expect capex per EV to drop to about Rmb30k in 2018, similar to capex for conventional vehicles. Risk premium 6.5%, cost of equity 9.5%, cost of debt 6.5%, tax rate 25%, perpetual growth 2%. Valuation comparison: Handset and battery makers Figure 123: Valuation comparison of major handset makers Share Market Dividend Price Cap P/E (x) P/B (x) yield (%) ROE (%) Company Ticker (local ccy) (USD m) 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E Alcatel-Lucent ALUA.PA , (8.2) (24.4) (9.4) (3.4) 3.7 ZTE Corp 0763.HK , Research in Motion RIMM.OQ , (9.7) (23.9) (26.6) (6.8) (2.8) (2.4) Plantronics Inc PLT.N , n.a na na HTC Corp 2498.TW , Vtech Holdings Ltd 0303.HK , Mkt cap wtd avg Source: Bloomberg consensus Figure 124: Valuation comparison of major battery makers Share price Market cap P/E (x) P/B (x) Dividend yield (%) ROE (%) Company Ticker (local ccy) (US$ mn) 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E Camel Croup Co Ltd SS , Shenzhen Desay Battery SZ Eve Energy Co Ltd SZ Sunwoda Electronic SZ Zhejiang Narada SZ Mkt cap wtd avg Source: Bloomberg consensus China Auto Sector 60

61 Risks to our investment case Technology challenges and policy risks for EVs A big problem for EVs is that they are expensive to make, and the single largest cost is the battery. Manufacturing a safe, reliable, long-lasting, and fast-charging battery for a car is a complex and costly undertaking. BYD claims to have achieved a breakthrough with its lithium iron ferrous phosphate technology, but no one can be sure whether it will work as promised. The recent accident of BYD s E6 taxi in Shenzhen raised the public s concerns on the safety of the EV and BYD s batteries. Moreover, its ability to produce EVs at scale and at a low cost remains unproven. It would take the company a long time to persuade people that it is selling a reliable, durable, and quality automobile. Moreover, government purchases and fleet purchases subsidised by the government are still the two major sales drivers for BYD s E6 and K9. We believe the EV industry is still at infancy stage, and changes in government policies would have a significant effect on EV makers such as BYD. If the government cuts its planned EV purchases or reduces subsidies to EV purchases, BYD s EV sales will be seriously hurt. Technology challenges and policy risks are major factors affecting EVs development Stronger-than-expected demand in low-end segment Almost three-fourths of BYD s conventional vehicle sales are from models priced below Rmb100,000 (Figure 125). Its current low-cost brand image seems not to be strong enough to support a mid-end model priced above Rmb150,000. For example, BYD s only MPV model M6 is its first conventional model priced above Rmb150,000. M6 started delivery in January 2012 and is offering 5-7% of price cuts (Figure 127). However, its monthly sales never exceed 140 units (Figure 126). If low-end demand grows stronger than expectation, it is likely that BYD s revenue and profits from the conventional auto business would also improve. Strong-than-expected lowend demand may benefit BYD given its intensive exposure to this segment Figure 125: Sales contribution of BYD s conventional vehicles by prices RMB100, ,000 25% 2012E >RMB150, % Figure 126: Sales of BYD s M6 140 Unit <RMB100,000 75% Source: BYD, Credit Suisse estimates - Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Source: BYD, CAAM Figure 127: Retail prices of BYD M6 Official price Oct 2012 retail Price Nov 2012 retail Price Dec 2012 retail Price Model ( 000 Rmb) price ( 000 Rmb) cut (%) price ( 000 Rmb) cut (%) price ( 000 Rmb) cut (%) M6 2.0L MT Delux M6 2.0L MT Glory M6 2.4L AT Delux M6 2.4L AT Glory M6 2.4L AT Flagship Source: Channel checks with dealers China Auto Sector 61

62 Asia Pacific / China Geely Automobile Holdings Ltd Rating UNDERPERFORM* [V] Price (04 Jan 13, HK$) 4.08 Target price (HK$) 3.50¹ Upside/downside (%) Mkt cap (HK$ mn) 33,700 (US$ 4,348) Enterprise value (Rmb mn) 28,247 Number of shares (mn) 8, Free float (%) week price range ADTO - 6M (US$ mn) 21.8 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Price (LHS) Research Analysts Jack Yeung [email protected] Rebased Rel (RHS) 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 04/01/13 On 04/01/13 the spot exchange rate was HK$7.75/US$1 140 Performance over 1M 3M 12M Absolute (%) Relative (%) (0175.HK / 175 HK) Struggling to climb up Initiate with an UNDERPERFORM. We initiate coverage on Geely with an UNDERPERFORM rating and a target price of HK$3.50, which implies 14.2% potential downside. Geely is China s largest domestic sedan maker. It is also China s second-largest auto exporter just after Chery. Rebranding remains difficult. Geely is trying to move its coverage upwards to the mid-end segment from low-end under its new brands Emgrand and GLEagle. However, a proliferation of brands could confuse consumers and is likely to require significant additional marketing spending. We expect this multi-brand strategy to hardly change consumers perceptions of Geely. We believe Geely will continue to face direct competition from JVs self-owned brands, which are selling at similar prices as its Emgrand and GLEagle brands. Moreover, many JVs low- to mid-end sedan models have experienced massive prices cuts since 2Q12 and are selling below Rmb100,000, exerting high pressure on low-end automakers such as Geely. Key challenge: localisation of Volvo. With the takeover of Volvo, Geely hopes to crack China's fast-growing luxury car market. But a made-in-china Volvo might not be very popular. Geely will likely face a tough challenge in the future to convince brand-conscious Chinese consumers to buy a homegrown Volvo. Its future strategy for Volvo is to build plants for Volvo cars tailored for Chinese consumers. Volvo cars are known for high safety standards, while Geely cars are not that safe. Despite quality improvements in recent years, Geely s reputation actually remains unchanged. Valuation. We believe Geely will face severe challenges in its rebranding strategy, selling a made-in-china Volvo, as well as intensified competition in China s low-end sedan segment. We value Geely based on 10x 2013E P/E as we believe it should trade on par with the sector average given similar growth rate. Potential upside risks to our TP include improvement in its exports and better-than-expected sales of its Emgrand brand. Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 20, , , ,365.5 EBITDA (Rmb mn) 3, , , ,935.1 EBIT (Rmb mn) 2, , , ,060.8 Net profit (Rmb mn) 1, , , ,535.4 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Auto Sector 62

63 Struggling to climb up Intensifying competition in the low-end segment Geely is China s largest domestic sedan maker with intensive exposure in the low-end segment. More than 9 of its sales are from models with official prices below Rmb100,000. Over 6 of its sales are from models classified as low-end sedans. Due to the relatively low entry barrier in the low-end sedan segment, the number of players has already increased significantly during the past few years. Slowing down of demand in this segment will intensify competition and reduce average selling prices. Moreover, many JVs have launched their self-owned brands with prices close to the low-end, which we believe will continue to compress low-end automakers margins. Rebranding remains difficult Geely is trying to move its coverage to the mid-end segment under its new brands, Emgrand and GLEagle. It has always been Geely s goal to move upwards to the mid-end sedan segment. It even launched these brands with different logos with some of them priced above Rmb100,000. However, a proliferation of brands could confuse consumers and is likely to require significant additional marketing spend. This may hardly change consumers perceptions of Geely. Moreover, many JV automakers have introduced their self-owned brands, with similar prices to Geely s Emgrand and GLEagle. Many JVs lowto-mid end models are also offering massive prices cuts since 2Q12, with some of them selling below Rmb100,000. We believe these brands and models will gain market share from domestic low-end players, such as Geely, and post high pressure on their margins. Volvo: Limited growth in China Most notably, Geely s acquisition of Volvo was probably aimed at increasing its exposure to the luxury sedan market, though also putting pressure on Geely s capital and management. Geely s takeover of Volvo granted it access to China's fast-growing luxury car market. However, Volvo s sales in China were much weaker than other large produced luxury brands such as BMW and Mercedes-Benz. Geely is also likely to face a tough challenge in the future to convince brand-conscious Chinese consumers to buy a made-in- China Volvo. Volvo cars are known for high safety standards, while Geely cars are usually deemed to be not as safe. Geely s low-cost image may affect Volvo s brand value and hurt its image in China s luxury auto segment. Initiate with UNDERPERFORM We rate Geely an UNDERPERFORM with a target price of HK$3.50 based on 10x 2013E EPS (sector average) given: (1) severe challenges from JV brands moving towards the low-end; (2) challenges over its multi-brand strategy; and (3) intensified competition in the low-end segment. Potential upside risks to our target price include improvement in Geely s export and better-than-expected sales performance of its Emgrand brand. We believe Geely will continue to face margin pressure due to its intensive exposure to the low-end segment We expect Geely to have a tough rebranding and high competition pressure from JVs low-to-mid end models Geely may have difficulty in fully localising Volvo in China in the next few years Initiate with an UNDERERFORM with a target price based on 10x 2013E EPS China Auto Sector 63

64 Geely Automobile Holdings Ltd 0175.HK / 175 HK Price (04 Jan 13): HK$4.08, Rating:: NEUTRAL [V], Target Price: HK$3.50, Analyst: Jack Yeung Target price scenario Scenario TP %Up/Dwn Assumptions Upside 3.65 (10.54) 2013E sales: 575,000 units Central Case 3.50 (14.22) 2013E sales: 551,000 units Downside 3.14 (23.04) 2013E sales: 500,000 units Income statement (Rmb mn) 12/11A 12/12E 12/13E 12/14E Sales revenue 20,965 24,279 30,239 37,365 Cost of goods sold 17,145 19,920 24,848 30,839 SG&A 2,322 2,889 3,598 4,446 Other operating exp./(inc.) (1,546) (2,068) (2,438) (2,855) EBITDA 3,044 3,539 4,231 4,935 Depreciation & amortisation EBIT 2,402 2,757 3,395 4,061 Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV (7.2) Recurring PBT 2,183 2,485 3,123 3,758 Exceptionals/extraordinaries Taxes Profit after tax 1,716 1,939 2,342 2,819 Other after tax income Minority interests Preferred dividends Reported net profit 1,543 1,744 2,107 2,535 Analyst adjustments Net profit (Credit Suisse) 1,543 1,744 2,107 2,535 Cash flow (Rmb mn) 12/11A 12/12E 12/13E 12/14E EBIT 2,402 2,757 3,395 4,061 Net interest (122.1) (235.9) (228.6) (247.0) Tax paid (280.7) (546.8) (780.8) (939.5) Working capital (1,647) (104) (717) (701) Other cash & non-cash items Operating cash flow 1,042 2,580 2,418 2,936 Capex (1,420) (1,000) (1,000) (1,000) Free cash flow to the firm (379) 1,580 1,418 1,936 Disposals of fixed assets Acquisitions (998.4) (215.4) Divestments 1, Associate investments (90.9) (46.4) Other investment/(outflows) (1,596) (614) (457) (444) Investing cash flow (2,953) (1,685) (1,266) (1,253) Equity raised Dividends paid (170.4) (192.9) (218.0) (263.4) Net borrowings (100.0) Other financing cash flow Financing cash flow (279.3) (118.0) (163.4) Total cash flow (1,352) 616 1,034 1,519 Adjustments (10.2) Net change in cash (1,363) 616 1,034 1,519 Balance sheet (Rmb mn) 12/11A 12/12E 12/13E 12/14E Cash & cash equivalents 3,030 3,646 4,680 6,200 Current receivables 12,215 14,168 16,983 19,962 Inventories 1,358 1,583 1,974 2,450 Other current assets Current assets 17,006 19,801 24,041 29,016 Property, plant & equip. 6,796 6,993 7,173 7,336 Investments Intangibles 2,228 2,708 3,002 3,273 Other non-current assets 1,483 1,480 1,480 1,480 Total assets 27,597 31,112 35,826 41,235 Accounts payable 12,114 14,189 16,679 19,433 Short-term debt 2,532 1,409 1,459 1,510 Current provisions Other current liabilities Current liabilities 14,985 15,937 18,477 21,281 Long-term debt 2,370 3,393 3,442 3,491 Non-current provisions Other non-current liab Total liabilities 17,447 19,422 22,011 24,865 Shareholders' equity 9,582 11,360 13,485 16,040 Minority interests Total liabilities & equity 27,597 31,112 35,826 41,235 Key earnings drivers 12/11A 12/12E 12/13E 12/14E Automobile sales volume 421, , , ,920 (Unit) Per share data 12/11A 12/12E 12/13E 12/14E Shares (wtd avg.) (mn) 7,450 7,471 7,478 7,478 EPS (Credit Suisse) (Rmb) DPS (Rmb) BVPS (Rmb) Operating CFPS (Rmb) Key ratios and valuation 12/11A 12/12E 12/13E 12/14E Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) (7.3) Net debt/ebitda (x) (0.24) Interest cover (x) Source: Company data, Thomson Reuters, Credit Suisse estimates MF P/E multiple Source: IBES 12MF P/B multiple China Auto Sector 64

65 Intensifying competition in the lowend segment Largest domestic sedan maker focusing on low-end Geely has overtaken Chery to become the largest domestic sedan maker in China, with around 4% market share in the sedan sector in the first 11 months of 2012 (Figure 128). Currently, about 15% of domestic branded sedans sold in China are made by Geely (Figure 129). However, over 9 of its sales are from models with average official prices below Rmb100,000 (Figure 130) and over 6 of its sales are from models classified as low-end sedans (Figure 131). Given its intensive exposure to the low-end sedan segment, we believe Geely will be more easily affected by the slowing demand and tough price competition in the low-end segment. Given Geely s intensive exposure to the low-end sedan segment, we believe it will be affected by slowing demand and the tough price competition in this segment Figure 128: Geely s market share in China s sedan sector Figure 129: Geely s sedan sales as % of domestic brands sedan sales Jan-Nov 2012 SH GM 12% Jan-Nov 2012 Geely 15% Geely Auto 4% Others 45% Chang'an Ford 4% FAW VW 12% SH VW 1 DF Nissan 6% BJ Hyundai 6% Lifan 4% Zhonghua (Huachen) 4% Others 33% Jianghuai 4% Great Wall 7% Chery 13% BYD 12% Chang'an 8% Source: CAAM, Credit Suisse estimates Source: CAAM, Credit Suisse estimates Figure 130: Geely product portfolio (by price) Average Official Prices >= RMB100k 9% Jan-Nov 2012 Figure 131: Geely product portfolio (by product category) Mid- to high-end sedan 0.2% Jan-Nov 2012 Mid-end sedan 3% Low- to mid-end sedan 3 Avearge Official Prices < RMB100k 91% Low-end sedan 61% Low- to mid-end SUV 6% Source: Geely, Credit Suisse estimates Source: Geely, Credit Suisse estimates Affected by the weakening demand of low-end sedans, Geely s domestic sales slowed in It sold 332,893 vehicles in the domestic market in the first 11 months of 2012, about 2% lower than the same period last year. During the past 11 months, Geely has experienced YoY sales decline for six months. Among this, its monthly sales declined by over 5% YoY in five consecutive months, from March to July (Figure 132). Slowdown of Geely s domestic sales in 2012 China Auto Sector 65

66 Figure 132: Geely s domestic sales in 2011 and ,000 70,000 60,000 Unit 1 11% 2 11% ,000 40,000-7% -6% -5% -11% -8% -1 30,000-26% -2 20, , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Domestic Sales 2012 Domestic Sales 2012 Domestic Sales y-y -5 Source: Geely, Credit Suisse estimates Due to the relatively low entry barriers in the low-end sedan segment, the number of players has already increased significantly during the past few years. Slowing down of demand will intensify competition and reduce average selling prices. For example, dealers are offering 4-11% discount on Geely s major low-end models over the past three months, and we expect these discounts to continue into 1Q13 (Figure 133). Moreover, without strong demand growth to boost production and enhance economies of scale, it becomes more difficult to lower the average cost. Therefore, we believe the average margin in the low-end sedan will narrow drastically. Other than that, there may be risk of overcapacity if demand for low-end sedans grows more slowly than expected. As new capacities built for low-end sedans are less likely to be fully utilized, production efficiency should decline. In the long term, rising idle resources may further erode the squeezed margins of auto producers. We believe the low-end segment will continue to face high margin pressure Figure 133: Retail prices of Geely s major low-end models Official Oct-12 Price Nov-12 Price Dec-12 Price price retail price cut retail price cut retail price cut Model ( 000 Rmb) ( 000 Rmb) (%) ( 000 Rmb) (%) ( 000 Rmb) (%) FreeCruiser 1.3L FreeCruiser 1.5L MT FreeCruiser 1.5L AT Panda 1.0L Basic Panda 1.0L Comfort Panda 1.0L Luxury Panda 1.3L Delux GC7 1.8 MT Elite GC7 1.8 AT Comfort GC7 1.8 MT Delux Kingkong II 1.5MT Kingkong II VVT 1.5MT Kingkong II 1.5MT Delux Kingkong II VVT 1.5MT Delux Source: Channel checks with dealers China Auto Sector 66

67 Rebranding remains difficult Sub brands didn t change Geely s low-end image Launching new models under different brands is part of Geely s strategy to make its products appealing to a wider range of consumers. Currently, it is using three baby brands: GLEagle, Emgrand and Englon. GLEagle is to be used for all affordable subcompacts, Englon for tasteful and friendly cars and Emgrand for more upscale vehicles. Most of GLEagle and Englon products are priced below Rmb100,000 (Figure 136). GX7 is the first low- to mid-end SUV of Geely priced above Rmb100,000. TX4 is priced above Rmb200,000 in the mid- to high-end segment, but sold only 724 units in the first 11 months of Emgrand s brand mainly consists of low-to-mid end sedans, accounting for about 32% of Geely s total sales. However, over 9 of Emgrand s sales were from the EC7 and EC7-RV, which were mainly sold below Rmb100,000. Geely's multi-brand strategy can be deemed as a tall task on changing its low-end image. However, a proliferation of brands could confuse consumers and is likely to require significant additional marketing spending. Geely s multi-brand strategy could not drastically change its low-end image Figure 134: Geely s vehicle models Brand Model Price ('000 Rmb) Launch time of new model 2012E sales ( 000 units) 2013E sales ( 000 units) Emgrand EC EC7-RV EC Upgraded EC Q13 EX H13 8 EX H13 8 EV H13 2 SX Early GLEagle Panda GX GX GC Vision Free Cruiser Englon Kingkong SC SC5-RV SC5-RV 1.3T H13 SC SC TX Volvo XC Total Source: Geely, Credit Suisse estimates Figure 135: Launching time of Geely s new models Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec SX7 Early 2013 Upgraded EC8 EX6 EX8 EV8 SC5-RV 1.3T XC60 Source: Geely 1Q13 1H13 1H13 2H13 2H End-2013 China Auto Sector 67

68 Figure 136: Official prices of Geely models Volvo Source: Geely - 50, , , , , , , ,000 EC7 RMB EC7-RV EC8 Emgrand Upgraded EC8 EX6 EX8 EV8 SX7 Panda GX2 GX7 GLEagle GC7 Vision Free Cruiser Kingkong SC3 SC5-RV Englon SC5-RV 1.3T SC6 SC7 TX4 XC60 Existing model New model Figure 137: Comparison of Geely Emgrand EC8 and its major competitors Model Geely Emgrand EC8 Chery New Eastar BYD F6 Hyundai Sonata moinca 2.0MT Advance 2.0MT Elegant 2.0CVT VIP 2.0M GL Comfort Official price ( 000 Rmb) Dec-12 retail price ( 000 Rmb) Size (m) 4.905/1.830/ /1.840/ /1.822/ /1.820/1.440 Wheelbase (m) Trunk volume (Litre) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 104/ / / /6000 Max toque (n.m/rpm) 178/ / / /4500 Acceleration km/h (s) Transmission 5MT 5MT CVT 5MT Fuel consumption (L/100km) Warranty 3 years or 100,000km 3 years or 60,000km 5 years or 100,000km 2 years or 60,000km Emission standard National IV National IV National IV National IV Source: Xcar, Channel checks with dealers China Auto Sector 68

69 Figure 138: Comparison of Geely Englon Kingkong II and its major competitors Model Geely Englon Kingkong II Xiali Weizhi BYD F3 Lifan MT Standard 1.5MT Standard 1.5MT Comfort 1.5MT ComfortA Official price ( 000 Rmb) Dec-12 retail price ( 000 Rmb) Size (m) 4.342/1.692/ /1.680/ /1.705/ /1.705/1.495 Wheelbase (m) Trunk volume (Litre) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 69/ / / /6000 Max toque (n.m/rpm) 128/ / / / Acceleration km/h (s) Transmission 5MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 3 years or 100,000km 2 years or 50,000km 4 years or 100,000km 3 years or 60,000km Emission standard National IV National IV National IV National IV Source: Xcar, Channel checks with dealers Figure 139: Comparison of Geely GLEagle FreeCruiser and its major competitors Model Geely GLEagle FreeCruiser Lifan 520 Changan Yuexiang V3 Suzuki Cultus II 1.3MT Fashion II 1.3MT Navi Basic 1.3MT Basic 1.3MT Basic Official price ( 000 Rmb) Dec-12 retail price ( 000 Rmb) Size (m) 4.152/1.680/ /1.700/ /1.650/ /1.590/1.395 Wheelbase (m) Trunk volume (Litre) Tank volume (Litre) Complete mass (kg) Engine size (L) Max power (kw/rpm) 63/ / / /6000 Max toque (n.m/rpm) 110/ / / / Acceleration km/h (s) Transmission 5MT 5MT 5MT 5MT Fuel consumption (L/100km) Warranty 2 years or 60,000km 3 years or 60,000km 2 years or 60,000km 3 years or 100,000km Emission standard National IV National IV National IV National IV Source: Xcar, Channel checks with dealers China Auto Sector 69

70 Low utilization rate for Geely s mid-end capacity Geely has around 130,000 units of capacity reserved for its three mid-end and mid-to-high end models: the Jinan plant has 60,000 units of capacity for EC8, the Chengdu plant has 60,000 units of capacity for GX7, and the Shanghai plant has 10,000 units for TX4. In the first 11 months of 2012, their utilization rates were only around 49.7%, 19.5%, and 7.9%, respectively. If we divide Geely s capacity into two groups categorized by engine size, it has 530,000 units of capacity for vehicles with engine size lower than 2.0L, whose capacity utilization rate has improved by 8.3% to 84.9% in the first 11 months of 2012 (Figure 140). However, the utilization rate of its capacity for vehicles with engine size larger than or equal to 2.0L dropped by 4.9% to 17.8% (Figure 140). In the absence of strong sales of mid-end and mid-to-high end models, we expect their capacity to continue to be a huge burden for Geely. Without substantial structural change in its product portfolio, we expect the company to retain its low-end image in the next few years. We expect Geely s mid-end capacity to maintain low utilisation rate in next few years. Figure 140: Utilisation rate of Geely s capacity by engine size 800, , , , , , , ,000 - Unit 84.9% 76.6% 530, , , ,380 70,000 15, % 17.8% 64,167 11,449 Engine size <2L Engine size >=2L 2011 Capacity (LHS) 2011 Sales (LHS) Jan-Nov 12 Capacity (LHS) Jan-Nov 12 Sales (:HS) 2011 utilization rate (RHS) Jan-Nov 12 utilization rate (RHS) Source: Company data, Credit Suisse estimates Competition pressure from JVs and domestic peers Geely s mid- to low-end sub brand Emgrand is mainly priced between Rmb80,000 and Rmb130,000, with its current retail prices between Rmb78,000 and Rmb124,000 (Figure 141). Some of the models, such as EC8 and EC7 CVT, are priced above Rmb100,000, higher than most JVs self-owned brands. They are also facing price pressure from JVs mid- to low-end sedan models, which have experienced massive prices cuts since 2Q12 and are selling below Rmb100,000 (Figure 142). Given Geely s low-end image and the relatively high selling prices of its Emgrand models, we expect more customers to choose JVs low-to-mid end models, which may bring down Emgrand s prices and hurt its margins. Moreover, Geely s other mid-to-low models its first SUV, GX7 exhibited much weaker ramp-up of sales compared with its domestic peers: Great Wall Hover H6 and BYD S6. Although these three SUVs have similar prices and specs, GX7 s monthly sales remained below 5,000 units after it was launched, while monthly sales of both H6 and S6 exceeded 10,000 units within ten months of their launch (Figure 103). The large gap between GX7 and its peers suggests Geely s weak brand image in the SUV segment, which we believe is unlikely to substantially improve in the near term. We believe Geely will face intensifying competition from JVs low-to-mid end models and its domestic peers such as Great Wall and BYD China Auto Sector 70

71 Figure 141: Retail prices of Geely s major low-to-mid end models Official Oct-12 Price Nov-12 Price Dec-12 Price price retail price cut retail price cut retail price cut Model ( 000 Rmb) ( 000 Rmb) (%) ( 000 Rmb) (%) ( 000 Rmb) (%) EC7 1.8L Basic EC7 1.8L Comfort EC7 1.8L Delux EC71.8L CVT RV Delux EC71.8L CVT Delux EC8 2.0L MT Basic EC8 2.0L MT Comfort EC8 2.0L AT Basic EC8 2.0L AT Comfort EC8 2.0L AT Luxury Source: Channel checks with dealers Figure 142: Retail prices of JVs' major low-to-mid end models Official Oct-12 Price Nov-12 Price Dec-12 Price price retail price cut retail price cut retail price cut Brand Model ( 000 Rmb) ( 000 Rmb) (%) ( 000 Rmb) (%) ( 000 Rmb) (%) Honda City 1.5 MT Comfort City 1.5 AT Comfort City 1.5 MT Toyota Yaris 1.6E MT Yaris 1.6E AT Yaris 1.6GS AT New Yaris 1.3E AT New Yaris 1.6E MT New Yaris 1.6G MT New Yaris 1.6E AT New Yaris 1.6G AT Corolla EX 1.6 MT Classic Corolla EX 1.6 MT Delux Corolla EX 1.6 AT Classic Corolla EX 1.6 AT Delux Mazda Mazda2 1.3L MT Mazda2 1.3L AT Mazda2 1.5L MT Mazda2 1.5L AT Mazda2 1.5L AT Delux Buick Excelle 1.6 LX MT Excelle 1.6 LX AT Excelle 1.6 LE MT Excelle 1.6 LE AT Chevloret Spark P-TEC 1.0MT Energy Spark P-TEC 1.0MT Fashion Spark 1.2MT Sport Excellence Spark 1.2MT Sport Energy Spark 1.2MT Sport Fashion Hyundai Elantra 1.6 MT 2011 version Elantra 1.6 AT 2011 version Ford Focus 1.8L MT Classic Focus 1.8L MT Comfort Source: Channel checks with dealers China Auto Sector 71

72 Volvo: Limited growth in China Volvo remains a small player even after a decade Apart from the latest batch of new models, Geely s US$1.8 bn acquisition of Volvo may provide it the ability to improve the quality of its cars by incorporating Volvo s advanced technology. Moreover, the deal could provide Geely with a highly recognized brand equity and a shortcut to the global automobile market. However, it remains to be seen if Geely has sufficient financial muscle and management wisdom to make Volvo profitable quickly. It looks very hard for Geely to turn Volvo around from its poor performance within a few years. Even in China s fast-growing luxury auto sector, Volvo s sales in 1H12 only increased by 1.7% YoY, compared to the sector s average of around 25%. Its Chinese market share dropped to around 3.4% in 1H12, slightly higher than its 2.9% share in 2004 (Figure 143). Given the weak sales performance, we believe Volvo is unlikely to easily recover its competitiveness against other luxury brands. We expect Volvo to maintain its current market share in China s luxury auto sector, which would still be around 3% by 2015 (Figure 145). We believe it is difficult for Volvo to change its weaker position than other luxury brands in China. Figure 143: Volvo s market share in China units 350, , , , , ,000 50, H % % % % % 0. BMW Group sales (LHS) Benz sales (LHS) Audi sales (LHS) Lexus sales (LHS) Volvo sales (LHS) Volvo market share (RHS) Source: Company data, Credit Suisse estimates Figure 144: China market share of luxury brands (2004) Volvo Others Lexus 3% 3% BMW 16% Mercedes- Benz 1 Figure 145: China market share of luxury brands (2015E) Volvo 3% Lexus 5% Others 15% BMW 27% Audi 68% Audi 26% Mercedes- Benz 24% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates China Auto Sector 72

73 Long way to massive localization Based on Volvo s historical sales performance, we do not think Geely can quickly turn around Volvo s competitiveness after a decade of weak performance. In the Chinese luxury car market, localization is key to luxury brands success. Many luxury brands have already established JVs with Chinese partners. These JVs have their own plants and have been producing China-made or China-only models for a few years (e.g., Audi built its first product line in FAW in 1990). Localized production lowers the cost of labor, transportation and tariffs. It also cultivates a localized platform to create diversified models to satisfy endusers requirements. Volvo also produces locally under Chang an Ford s plant, but it did not seem to give the brand a strong support in its sales. Since 2009, Volvo experienced the steepest decline in its localization rate compared with other major luxury brands in China (Figure 146). Sales of its China-made models also dropped by about 17% to 14,200 units in 2011 (Figure 147). Given Volvo s historical performance in China, it may difficult for Geely to fully localise this brand in a short while Figure 146: Sales of China made cars as a percentage of Chinese sales E BMW Benz Audi Volvo Source: Company data, Credit Suisse estimates Figure 147: Sales of China-made luxury vehicles 300, ,000 Unit 252, , , , ,000 50, , ,867 93,168 98,461 77,192 77,551 69,878 61,276 62,017 50,101 43,702 30,600 35,163 38,856 3,052 8,661 15,300 22,550 5,614 7,018 14,355 15,921 17,091 14,200 3,324 5,644 5,605 15, Source: Company data, Credit Suisse estimates BMW Benz Audi Volvo China Auto Sector 73

74 Volvo plans to build two new plants from scratch in Shanghai and Daqing. It is also using Geely s existing production facility in Chengdu to build another plant, mainly for SUVs, which may commence operations next year with initial capacity of around 50,000 units. Each of Volvo s new plants in China has phase I designed capacity of 100,000 units. We expect its total capacity in China to reach around 315,000 units by 2015, including Chang an Ford s existing capacity (Figure 148). This would be equivalent to around 5 of Audi s China capacity, during that time (Figure 148). However, Volvo only sold around 325,000 units globally and about 47,000 units in China in Given its small market share in China s luxury auto market, its 300,000 units of planned new capacity seem to be very aggressive and expensive at the moment. Moreover, Geely does not have strong and experienced technical teams like FAW, Brilliance, and Beijing Auto. So we think it may be difficult for Geely to quickly import and digest Volvo s technology. Recalling FAW and Audi s 20-year efforts towards localization, it looks very difficult for Geely to fully localize Volvo to directly challenge Audi, BMW, and Benz in the Chinese luxury car market. Volvo will have two new plants in China but still lag behind other luxury brands expansion of their China capacity. Figure 148: Capacity expansion of luxury brands in China '000 units Audi BMW Mercedes-Benz Volvo* E 2013E 2014E 2015E Source: Company data, Credit Suisse estimates *Volvo capacity between was estimated based on Changan Ford s Volvo production volume Geely s low-cost image may smear the Volvo brand Another major obstacle to Volvo s growth in the Chinese market is its relatively low brand recognition, which may also be affected by Geely s image as a low-end sedan manufacturer. In China s luxury car market, Volvo s models are sold at a much cheaper price than other luxury brands, especially after its recent massive price cuts by around 10-3 (Figure 149). However, its sales volume is much smaller. Even if Geely applies its low-cost strategy to Volvo, we do not think an even lower price will solve Volvo s problem. Volvo labeled "security" as its brand DNA similar to BMW s driving, Benz s comfort and Audi's technology. However, we do not believe that this means that luxury car buyers will think of BMW, Benz or Audi as unsafe, or even that they are any less safe than a Volvo. These competitors' brand DNAs to enjoy driving a BMW, or to own comfort in a Benz are prime considerations of consumers. We think Volvo s overemphasis on its security attributes will inevitably miss the key features end-users pursue, which we think was a great drawback for Volvo s China brand strategy prior to Geely s acquisition of it. Geely s low-cost image will likely hurt Volvo s brand recognition and sales in China China Auto Sector 74

75 Figure 149: Retail prices of major luxury brands Official Oct-12 Price Nov-12 Price Dec-12 Price price retail price cut retail price cut retail price cut Brand Model ( 000 Rmb) ( 000 Rmb) (%) ( 000 Rmb) (%) ( 000 Rmb) (%) Volvo S40 2.0DCT Smart S40 2.0DCT Elegant S40 2.0DCT Delux C30 2.0DCTAktive C30 2.0DCTAktive Joy C30 2.0DCTAktive Flash S60 2.0T DCTT5 Smart S60 2.0T DCTT5 Comfort S60 1.6T DCTDRIVe Smart S60 1.6T DCTDRIVe Comfort S60 1.6T DCTDRIVe Smart S60 2.0T DCTT5 Comfort S60 2.0T DCTT5 Delux S60 3.0T ATT6 AWD Delux Mercedes-Benz C180K Classic C200 CGI C200 CGI Fashion BMW 318i 2.0 AT Advance i 2.0 AT Morden i 2.0 AT Delux i 2.5 AT Fashion Audi A6L 2.0 TFSI Basic A6L 2.0 TFSI Comfort AT A4L 2.0 TFSI(155kW) Sport A4L 2.0 TFSI(155kW) Delux A4L 1.8 TFSI MT Comfort A4L 1.8 TFSI CVT Comfort A4L 2.0 TFSI CVT Standard A4L 2.0 TFSI CVT Comfort A4L 2.0 TFSI CVT Tech Lexus CT200h 1.8 CVT Elite CT200h 1.8 CVT Advance CT200h 1.8 CVTF Sport Source: Channel checks with dealers Due to shortcomings of Volvo s brand strategy in China, we think that Chinese customers current interpretation of its brand does not reflect its true value. Geely s image as a lowend auto manufacturer may further affect Volvo s reputation as a premium brand. From Geely s point of view, it always wanted to have its own luxury brands, which usually takes a long time to achieve. The acquisition of Volvo may shorten the time to achieve this, but the corresponding damage to Volvo s brand may be unavoidable. A 26-year-old Chinese private enterprise controlling an 85-year-old European classic brand might be something that many people would not accept easily especially luxury car buyers. Most importantly, the low-cost image of Geely may smear the outstanding attributes of Volvo in the Chinese market namely, its quality and security. Geely intends to use a few low-cost strategies with regards to Volvo, to obtain a price advantage, which can boost product sales in the short term, but which we feel, is more likely to drag Volvo away from the Benz, BMW and Audi luxury car camp. For some things the cheaper the better does not apply this includes luxury cars. The paradox is that Geely has to reduce the cost of the Volvo, which is believed to be the root cause of the latter s failure over the past decade a failure that could not even be handled by Ford since it took over Volvo. Volvo s failure in brand market strategy in China would not be easily handled by Geely China Auto Sector 75

76 Initiate with UNDERPERFORM We initiate coverage on Geely with an UNDERPERFORM rating, as we believe it will continue to feel pain from: (1) intensifying completion in the low-end segment; (2) challenges over its multi-brand strategy; and (3) top-down competition from JVs mid- to low-end models and self-owned brands. Our target price for Geely is HK$3.50 per share based on 10x 2013E EPS. We believe Geely should be traded on par with the sector average given similar growth rate, which is around 10x 2013E P/E (Figure 150). Initiate with UNDERPERFORM and TP based on 10x 2013E EPS Figure 150: Valuation comparison table Company (Local (USD m) P/E (x) P/B (x) Dividend yield % ROE (%) H-share automaker currency) 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E 11 12E 13E 14E Brilliance China Auto 1114.HK , Dongfeng Motors 0489.HK , Geely 0175.HK , Great Wall Motor 2333.HK , Guangzhou Auto 2238.HK , Qingling Motors 1122.HK Sinotruk 3808.HK 6.2 1, Weichai Power 2338.HK , Mkt cap wtd avg A-share automaker JAC SS , Foton Motor SS , DFAC SS (0.1) Faw Car SZ 7.9 1, (4.0) HAIMA AUTO SZ SAIC Motor SS , TJ FAW Xiali SZ , Mkt cap wtd avg Source: Bloomberg consensus Valuation comparison with Dongfeng Motors Figure 151: 12-month forward P/E band GAC vs. DFM Jan-10 Aug-10 Mar-11 Oct-11 May-12 Jan-13 Figure 152: Geely s P/E multiple premium to GAC Jan-10 Aug-10 Mar-11 Oct-11 May-12 Jan-13 Geely 12m forward P/E Dongfeng Motor 12m forward P/E Geely 12m forward P/E discount average premium Source: Bloomberg consensus Source: Bloomberg consensus Both Geely and Dongfeng Motors are major sedan producers in China. Since 2010, Geely has traded at an average premium of 32% to Dongfeng in terms of 12-month forward P/E Valuation comparison with Dongfeng Motors China Auto Sector 76

77 (Figure 152). Currently it trades at a 38% premium to Dongfeng. Geely has traded at an average 12-month forward P/E of about 9.7x since 2011, compared to Dongfeng's average P/E of 9.2x. It now trades at 11.6x 12-month forward P/E, versus Dongfeng s 8.4x. We expect Geely s 12-month forward P/E to gradually drop to the industrial average of around 10x. Valuation comparison with sector index Geely s average P/E multiple discount over the MSCI China Consumer Discretionary Index is 28% for Jan 2010-Dec 2012, compared with Dongfeng s average discount of 42% (Figure 154). Since January 2011, Geely has traded at an average discount of 33% over the MSCI China Consumer Discretionary Index (Figure 154). This compares with Dongfeng s average discount of 36% during the same period (Figure 154). Given all Geely s products are passenger vehicles, we believe it has a higher correlation with the Consumer Discretionary Index than Dongfeng. Therefore, it would be reasonable that Geely trades at the auto sector s average P/E. Valuation comparison with sector index Figure 153: Forward P/E band (DFM, GAC, MSCI China Consumer Discretionary Index) Jan-10 Apr-10 Aug-10 Nov-10 Mar-11 Jul-11 Oct-11 Feb-12 May-12 Sep-12 Jan-13 Geely 12m forward P/E Dongfeng Motor 12m forward P/E MSCI China Consumer Discretionary Index 12m forward P/E Source: Bloomberg consensus, MSCI Figure 154: P/E multiple discount to MSCI China Consumer Discretionary Index Jan-10 Apr-10 Aug-10 Nov-10 Mar-11 Jun-11 Oct-11 Jan-12 May-12 Aug-12 Dec-12 Dongfeng Motor 12m forward P/E discount Geely 12m forward P/E discount Source: Bloomberg consensus, MSCI China Auto Sector 77

78 Risks to our investment case Stronger-than-expected exports Geely s export volume almost doubled in 2011 and has increased 26 YoY in the first 11 months of It has maintained a strong upward trend of exports since August 2011, with its monthly export volume exceeding 10,000 units in June 2012 from around 4,000 units in August 2011 (Figure 156). We also observed a strong growth in the share of its exports in its total sales, which exceeded 25% during Jun-Oct 2012 from around 1 in 2011 (Figure 156). Geely s export models mainly consist of low cost economy sedans. These small economy cars are widely affordable in its major export markets such as the Middle East, Eastern Europe, Southeast Asia, and Central America. We believe its export models will remain attractive to customers in these regions due to their low prices, leaving Geely with a relatively lower risk of being affected by economic changes during the global recovery. Stronger-than-expected exports of Geely would boost its total sales Figure 155: Geely's auto exports Unit 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000-90,936 37,940 39,600 20,100 19,350 20, Jan-Nov 2012 Source: Company data, Credit Suisse estimates Figure 156: Geely s monthly auto exports 14,000 12,000 10,000 8,000 6,000 4,000 2, % 3 25% 2 15% 1 5% Geely export (Unit) Export as % of Geely's sales Source: Company data, Credit Suisse estimates China Auto Sector 78

79 Although weakness in the US economy, and steps to curb bank lending and real estate investment in China still remain, major economies are already on track for a slow recovery. Particularly, we do not see any major changes in the trend whereby expansion in emerging Asia leads the world economy. Therefore, China's exports should continue to grow, but we expect the pace of growth to be slow as global restocking of inventory runs its course. In Geely s case, a stronger-than-expected export growth may favor its profit growth in absolute terms. Stronger-than-expected sales of Emgrand models In 11M12, sales of Geely s Emgrand brand grew over 4 YoY, higher than its other sub brands (Figure 157). The low-to-mid end targeted Emgrand brand, has steadily increased its monthly sales volume to more than 14,000 units since September 2012 from around 10,700 units in January We believe the low-to-mid end segment would have less margin erosion than the low-end segment in the near term, given less intensive competition. We estimate the company s production capacity for Emgrand to be around 160,000 units, implying about 92.6% of utilization rate in 11M12. If it is able to promote Emgrand more successfully, it is likely that this model will achieve better-than-expected sales and contribute more to Geely s blended margin. Recovery of major economies would benefit Geely s exports Stronger-than-expected sales of Emgrand brand may help to improve Geely s blended margin Figure 157: Geely s sales by sub-brands 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Englon sales (unit) Emgrand sales (unit) GLEagle sales (unit) Englon sales y-y Emgrand sales y-y GLEagle sales y-y Source: Geely, Credit Suisse estimates China Auto Sector 79

80 Asia Pacific / China Automobile Manufacturers Guangzhou Automobile Group Rating (from Underperform) NEUTRAL* Price (04 Jan 13, HK$) 7.14 Target price (HK$) (from 5.00) 6.50¹ Upside/downside (%) -9.0 Mkt cap (HK$ mn) 47,679 (US$ 6,152) Enterprise value (Rmb mn) 40,527 Number of shares (mn) 6, Free float (%) week price range ADTO - 6M (US$ mn) 5.2 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Jack Yeung [email protected] (2238.HK / 2238 HK) Sluggish recovery in 2013 Upgrade to NEUTRAL. We are upgrading Guangzhou Auto (GAC) to a NEUTRAL from Underperform, given its recovering sales since the end of October Therefore, we raise our 2013 earnings estimate for GAC by 5.5%. Accordingly, our target price rises to HK$6.50 from HK$5.00 based on 10x 2013E P/E (from previous 8x), which implies 9% potential downside. Recovering GAC Honda and GAC Toyota sales. Our recent channel checks have shown that retail sales of Honda and Toyota in Dec-12 have recovered to similar levels as in Dec-11. Their inventories have also dropped to around 1.5 months from months in Oct-12. Accordingly, GAC s total PV shipment recovered over 7 from its October low in November 2012 and around 75-85% in December We believe the recovering sales will help GAC to regain market share mainly in 2H13. Lack of new models in 1H13. In 1H13, GAC is likely to continue losing market share to other mid-to-high end players mainly due to lack of new models. GAC Toyota will only launch several facelifts of Camry and Yaris in GAC Honda will launch a compact sedan Concept C in Jun-13 and the new-generation Accord in Sep-13. GAC Mitsubishi is likely to reach breakeven in 3Q13, with sales supports from AXS and its new SUV model, Pajero Sport (to be launched in 1H13). GAC Fiat will launch a hatchback model and an SUV in 2H13 but may continue its losses due to high start-up costs and low production volume. Moreover, we expect GAC s self-owned brands to maintain weak sales in 2013, given their low utilisation rates, high capex and lack of new models. Valuation. We believe GAC should trade at 10x 2013E P/E (from 8x previously) on par with Chinese peers that trade at around 10x 2013E EPS. Share price performance Price (LHS) Rebased Rel (RHS) Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 04/01/13 On 04/01/13 the spot exchange rate was HK$7.75/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 10, , , ,821.7 EBITDA (Rmb mn) EBIT (Rmb mn) Net profit (Rmb mn) 4, , , ,777.9 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. China Auto Sector 80

81 Sluggish recovery in 2013 Recovering Honda and Toyota sales Our Dec-12 channel checks have shown that both Honda and Toyota retail recovered to their similar levels as in Dec-11. Their inventories dropped to months from months in Oct-12 and months in Nov-12. Supported by the retail recovery of these two Japanese brands, GAC s total PV shipments recovered around 71% from its October low (Figure 159) and to 75-85% of its ordinary level in Dec-12. However, most of GAC s new models will be launched in 2H13. Due to lack of new models in 1H13, it is likely to continue losing market share to other mid-to-high end players such as Volkswagen, GM, and Hyundai. It also faces competition from economy models launched by luxury brands. Due to recovering sales of Japanese brands, we expect GAC s sales to recover mainly in 2H13 Figure 158: GAC PV sales YoY growth (%) Figure 159: GAC PV sales MoM growth (%) Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11-5 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov GAC PV sales YoY GAC Honda sales YoY GAC PV sales MoM GAC Honda sales MoM GAC Toyota sales YoY GAC Toyota sales MoM Source: Guangzhou Auto Source: Guangzhou Auto Mitsubishi and Fiat JVs: Struggling to breakeven GAC Mitsubishi is likely to reach breakeven in 3Q13, with supports from AXS and its new SUV model, Pajero Sport (to be launched in 1H13). GAC Fiat will launch a hatchback model will 1.4L engine and an SUV in 2H13. It also plans to localize Jeep in 2014 with phase I capacity of around 100,000 units. Due to high start-up costs and low production volume, GAC Fiat may continue losses in These two JVs will focus on SUVs in the next 3-5 years, which we expect will help GAC boost sales and improve its product mix. Self-owned brands Sales of GAC s self-owned brand, Trumpche, were stronger than expected in 4Q12. However, it may continue losses in 2013 given the high depreciation and amortization expense. Due to low utilization rates, GAC s other self-owned brands such as Changfeng and Gonow would maintain their low margins and are unlikely to become major profit drivers for the company. Upgrade to NEUTRAL We are upgrading GAC to a NEUTRAL from Underperform given its recovering sales since end-october. We expect its sales to continue recovering in 2013 and therefore raise our 2013 earnings estimate by 5.5%. Our target price increased to HK$6.50 from HK$5.00 based on 10x 2013E EPS (from previous 8x). We believe GAC should trade on par with its Chinese peers, which are trading at around 10x 2013E EPS. GAC Mitsubishi may achieve breakeven and GAC Fiat will continue to have losses in 2013 GAC s self-owned brand will continue to be its burden in 2013 Upgrade GAC to a NEUTRAL with a target price based on 10x 2013E EPS China Auto Sector 81

82 Guangzhou Automobile Group 2238.HK / 2238 HK Price (04 Jan 13): HK$7.14, Rating:: NEUTRAL, Target Price: HK$6.50, Analyst: Jack Yeung Target price scenario Scenario TP %Up/Dwn Assumptions Upside 6.91 (3.22) 2013 auto sales: 866,000 units Central Case 6.50 (8.96) 2013 auto sales:816,000 units Downside 5.71 (20.03) 2013 auto sales: 716,000 units Income statement (Rmb mn) 12/11A 12/12E 12/13E 12/14E Sales revenue 10,984 11,286 13,231 14,822 Cost of goods sold 10,560 10,771 12,430 13,840 SG&A 1,806 1,862 2,157 2,327 Other operating exp./(inc.) (1,646) (1,697) (1,881) (2,046) EBITDA Depreciation & amortisation EBIT (224.8) (331.2) (231.1) (159.8) Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV 4,639 2,422 4,607 5,246 Recurring PBT 4,057 1,670 3,972 4,653 Exceptionals/extraordinaries Taxes (109.9) (41.8) (79.4) (69.8) Profit after tax 4,167 1,712 4,051 4,722 Other after tax income (1.1) Minority interests (104.8) (77.0) Preferred dividends Reported net profit 4,271 1,789 3,362 3,778 Analyst adjustments 1.1 Net profit (Credit Suisse) 4,272 1,789 3,362 3,778 Cash flow (Rmb mn) 12/11A 12/12E 12/13E 12/14E EBIT (224.8) (331.2) (231.1) (159.8) Net interest (92.8) (248.2) (188.9) (218.8) Tax paid (80.8) Working capital (422.0) Other cash & non-cash items Operating cash flow (633.2) Capex (2,244) (1,808) (2,170) (2,288) Free cash flow to the firm (2,877) (1,769) (1,473) (1,464) Disposals of fixed assets Acquisitions (683.1) Divestments Associate investments (55.7) (51.0) (54.6) (56.6) Other investment/(outflows) 2, ,071 1,261 Investing cash flow (267) (925) (1,100) (1,017) Equity raised Dividends paid (1,009) (1,133) Net borrowings Other financing cash flow (909.9) Financing cash flow (201.4) (358.7) (483.4) Total cash flow (1,102) 51 (762) (678) Adjustments (41.4) Net change in cash (1,143) 51 (762) (678) Balance sheet (Rmb mn) 12/11A 12/12E 12/13E 12/14E Cash & cash equivalents 8,239 8,290 7,529 6,851 Current receivables 2,980 3,741 4,459 5,563 Inventories 1,537 1,564 1,703 1,896 Other current assets 8,903 8,903 8,903 8,903 Current assets 21,659 22,499 22,593 23,213 Property, plant & equip. 4,309 5,343 6,625 7,884 Investments 14,484 16,066 19,656 23,698 Intangibles 2,273 2,022 1,800 1,602 Other non-current assets 1,887 2,187 2,487 2,787 Total assets 44,612 48,117 53,161 59,184 Accounts payable 4,069 5,016 6,368 8,152 Short-term debt 2,100 2,500 2,900 3,300 Current provisions Other current liabilities Current liabilities 6,206 7,554 9,306 11,490 Long-term debt 7,737 7,987 8,237 8,487 Non-current provisions Other non-current liab Total liabilities 14,426 15,933 17,935 20,369 Shareholders' equity 29,210 31,285 33,638 36,283 Minority interests ,588 2,532 Total liabilities & equity 44,612 48,117 53,161 59,184 Key earnings drivers 12/11A 12/12E 12/13E 12/14E Auto Sales (Unit) 723, , , ,023 Per share data 12/11A 12/12E 12/13E 12/14E Shares (wtd avg.) (mn) 6,148 6,363 6,435 6,435 EPS (Credit Suisse) (Rmb) DPS (Rmb) BVPS (Rmb) Operating CFPS (Rmb) (0.10) Key ratios and valuation 12/11A 12/12E 12/13E 12/14E Growth(%) Sales revenue EBIT (233) (47) Net profit (0.5) (58.1) EPS (24.4) (59.5) Margins (%) EBITDA EBIT (2.05) (2.93) (1.75) (1.08) Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF (56) EV/sales EV/EBITDA EV/EBIT (178) (122) (181) (271) ROE analysis (%) ROE ROIC (0.81) (1.03) (0.64) (0.39) Asset turnover (x) Interest burden (x) (18.0) (5.0) (17.2) (29.1) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/ebitda (x) Interest cover (x) (0.63) (0.79) (0.57) (0.37) Source: Company data, Thomson Reuters, Credit Suisse estimates MF P/E multiple 0 Sep-10 Mar-11 Sep-11 Mar-12 Sep Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Source: IBES 12MF P/B multiple China Auto Sector 82

83 Asia Pacific / China Automobile Manufacturers Dongfeng Motors Group Co Ltd Rating OUTPERFORM* Price (04 Jan 13, HK$) Target price (HK$) 14.00¹ Upside/downside (%) 16.3 Mkt cap (HK$ mn) 103,738 (US$13,386 mn) Enterprise value (Rmb mn) 60,006 Number of shares (mn) 8, Free float (%) week price range ADTO - 6M (US$ mn) 33.5 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Price (LHS) Research Analysts Jack Yeung [email protected] Rebased Rel (RHS) 8 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 04/01/13 On 04/01/13 the spot exchange rate was HK$7.75/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) (0489.HK / 489 HK) Solid growth remains Maintain OUTPERFORM. We maintain an OUTPERFORM rating on Dongfeng Motors as we believe it will benefit from recovering Japanese auto sales and strong SUV demand in China. Our target price for Dongfeng remains HK$14.00, which implies 16.3% potential upside. Recovering DF Nissan and DF Honda sales. Dongfeng s PV shipments recovered 29% MoM in Nov-12, while DF Nissan shipments recovered 72% MoM and DF Honda shipment recovered 119% MoM. Our channel checks have shown that inventories for both DF Nissan and DF Honda are currently lower than one month. The company s solid sales recovery is in line with our expectation. With new model launches and continuing strong SUV demand, we believe Dongfeng will stage a strong recovery in New models to gain market share. We believe DF Nissan s newgeneration Teana to be launched in Mar-13 will be the key driver of its sales. Moreover, Dongfeng s major JVs are going to launch more economy models such as compact sedans and compact MPVs in These models have competitive prices and good brand image, which we believe will help Dongfeng to boost sales and regain market share in Figure 160: Launch time of Dongfeng Motors new models in 2013 Models Jan Feb Mar Apr May Jun Jul Aug Sep New Teana Mar 2013 New Livina Sep 2013 New economy sedan under Venucia Mid-2013 A compact MPV under DF Honda Sep 2013 Peugeot 3008 Early 2013 Compact sedan under Peugeot Early 2013 Compact sedan under Citroen Early 2013 Source: Dongfeng Motors Valuation. We value Dongfeng based on 9x 2013E P/E. We believe it should trade on par with domestic peers, which trade at 9-10x 2013E EPS. Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 131, , , ,908.5 EBITDA (Rmb mn) 17, , , ,741.2 EBIT (Rmb mn) 14, , , ,337.0 Net profit (Rmb mn) 10, , , ,769.0 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Net cash Net cash Net cash Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. China Auto Sector 83

84 Solid growth remains Recovery of DF Nissan and DF Honda sales Dongfeng s PV shipment recovered 29% MoM in Nov-12 (Figure 162). Among these, DF Nissan shipments recovered 72% MoM and DF Honda shipments 119% MoM (Figure 162). Through our channel checks, inventories for both DF Nissan and Honda are currently lower than one month. The company s solid sales recovery is in line with our expectation. With new Teana to be launched in Mar-13 and continuing strong SUV demand, we believe Dongfeng will stage a strong recovery in We believe Dongfeng Motors will have a strong recovery in 2013 mainly due to new models from DF Nissan and strong SUV demand. Figure 161: Dongfeng PV sales YoY growth (%) Figure 162: Dongfeng PV sales MoM growth (%) Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov Dongfeng Motors PV sales YoY DF Nissan PV sales YoY Dongfeng Motors PV sales MoM DF Nissan PV sales MoM DF Honda PV sales YoY DF Honda PV sales MoM Source: Dongfeng Motors New models to gain market share Source: Dongfeng Motors We believe DF Nissan s new-generation Teana, to be launched in Mar-13, will be the key driver of its sales. Moreover, Dongfeng s major JVs are going to launch more economy models such as compact sedans and compact MPVs in These models have competitive prices and a good brand image, which we believe will help DFM to boost sales and gain market share in Dongfeng is planning to launch several new models throughout 2013, which we believe will help it regain market share Figure 163: Launch time of Dongfeng Motors new models in 2013 Models Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec New Teana Mar 2013 New Livina Sep 2013 New economy sedan under Venucia Mid-2013 A compact MPV under DF Honda Sep 2013 Peugeot 3008 Early 2013 Compact sedan under Peugeot Early 2013 Compact sedan under Citroen Early 2013 Source: Dongfeng Motors Maintain OUTPERFORM We maintain our OUTPERFORM rating on Dongfeng Motors as we believe it will benefit from recovering Japanese auto sales and strong SUV demand in China. Our target price for Dongfeng Motors remains HK$14.00 based on 9x 2013E EPS. We believe it should trade on par with its domestic peers, which are trading at 9-10x 2013E EPS. Maintain OUTPERFORM with a TP based on 9x 2013E EPS China Auto Sector 84

85 Dongfeng Motors Group Co Ltd 0489.HK / 489 HK Price (04 Jan 13): HK$12.04, Rating:: OUTPERFORM, Target Price: HK$14.00, Analyst: Jack Yeung Target price scenario Scenario TP %Up/Dwn Assumptions Upside E sales: 2.55m units Central Case E sales: 2.5m units Downside E sales: 2.45m units Income statement (Rmb mn) 12/11A 12/12E 12/13E 12/14E Sales revenue 131, , , ,908 Cost of goods sold 105,051 98, , ,676 SG&A 9,916 9,763 11,035 12,305 Other operating exp./(inc.) (1,024) (2,835) (2,807) (2,814) EBITDA 17,498 16,169 19,956 21,741 Depreciation & amortisation 3,114 4,788 5,130 5,404 EBIT 14,384 11,381 14,826 16,337 Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT 14,361 11,218 14,792 16,346 Exceptionals/extraordinaries Taxes 3,401 2,805 3,698 4,086 Profit after tax 10,960 8,414 11,094 12,259 Other after tax income Minority interests Preferred dividends Reported net profit 10,481 8,077 10,650 11,769 Analyst adjustments Net profit (Credit Suisse) 10,481 8,077 10,650 11,769 Cash flow (Rmb mn) 12/11A 12/12E 12/13E 12/14E EBIT 14,384 11,381 14,826 16,337 Net interest Tax paid (4,315) (2,805) (3,698) (4,086) Working capital (2,505) (3,946) (1,308) (1,493) Other cash & non-cash items 2,024 3,788 4,108 4,187 Operating cash flow 10,209 8,874 14,439 15,574 Capex (6,542) (6,500) (6,500) (6,500) Free cash flow to the firm 3,667 2,374 7,939 9,074 Disposals of fixed assets Acquisitions (16.0) Divestments 1,393 Associate investments (159.0) Other investment/(outflows) 3,796 Investing cash flow (1,528) (6,500) (6,500) (6,500) Equity raised Dividends paid (2,644) (1,551) (1,195) (1,576) Net borrowings (701) (1,000) (1,000) (1,000) Other financing cash flow Financing cash flow (3,189) (2,551) (2,195) (2,576) Total cash flow 5,492 (177) 5,744 6,498 Adjustments Net change in cash 5,492 (177) 5,744 6,498 Balance sheet (Rmb mn) 12/11A 12/12E 12/13E 12/14E Cash & cash equivalents 31,381 31,204 36,948 43,447 Current receivables 25,306 30,091 34,806 39,035 Inventories 12,511 14,095 14,426 15,037 Other current assets 14,818 14,818 14,818 14,818 Current assets 84,016 90, , ,337 Property, plant & equip. 21,578 23,262 24,610 25,688 Investments 4,581 4,963 5,439 6,035 Intangibles 3,001 3,029 3,051 3,069 Other non-current assets 4,357 4,357 4,357 4,357 Total assets 117, , , ,486 Accounts payable 53,145 55,569 59,305 62,653 Short-term debt 5,993 5,493 4,993 4,493 Current provisions Other current liabilities 5,577 5,577 5,577 5,577 Current liabilities 64,715 66,639 69,875 72,723 Long-term debt 2,820 2,320 1,820 1,320 Non-current provisions Other non-current liab Total liabilities 67,949 69,373 72,109 74,457 Shareholders' equity 44,843 51,725 60,799 70,827 Minority interests 3,190 3,527 3,970 4,461 Total liabilities & equity 117, , , ,486 Key earnings drivers 12/11A 12/12E 12/13E 12/14E Sales volume (unit) 2,162,92 4 2,078,49 7 2,501,97 9 2,814,60 3 Per share data 12/11A 12/12E 12/13E 12/14E Shares (wtd avg.) (mn) 8,616 8,616 8,616 8,616 EPS (Credit Suisse) (Rmb) DPS (Rmb) BVPS (Rmb) Operating CFPS (Rmb) Key ratios and valuation 12/11A 12/12E 12/13E 12/14E Growth(%) Sales revenue 7.4 (7.2) EBIT (0.9) (20.9) Net profit (4.6) (22.9) EPS (4.6) (22.9) Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) (45.5) (41.4) (45.4) (48.9) Net debt/ebitda (x) (1.29) (1.45) (1.51) (1.73) Interest cover (x) Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple Source: IBES 12MF P/B multiple China Auto Sector 85

86 Asia Pacific / China Automobile Manufacturers Rating OUTPERFORM* [V] Price (04 Jan 13, HK$) Target price (HK$) (from 11.00) 12.00¹ Upside/downside (%) 13.4 Mkt cap (HK$ mn) 53,173 (US$ 6,860) Enterprise value (Rmb mn) 43,668 Number of shares (mn) 5, Free float (%) week price range ADTO - 6M (US$ mn) 17.6 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Research Analysts Jack Yeung [email protected] Brilliance China Automotive Holding (1114.HK / 1114 HK) Growing brilliantly! MAINTAIN OUTPERFORM. We maintain our OUTPERFORM rating on Brilliance given BMW s strong position in China s luxury segment and growing demand for luxury autos. Therefore, we raise our 2013 earnings estimate for Brilliance by 1%. Our target price increases to HK$12.00 from HK$11.00, implying 13.4% potential upside. Rising wealth to enhance luxury auto sales. The number of millionaires in China is growing significantly: the figure more than tripled during In this scenario, we estimate the luxury auto segment will grow 15-25% YoY, compared to around 1 YoY growth for the overall passenger vehicle sector. China has already become BMW s largest market. We believe strong income growth in China will drive luxury auto sales, and BMW Brilliance will be a major beneficiary. New models to boost BMW sales. BMW Brilliance launched X1 last March and the new 3 series last July. It also plans to launch a new-energy model under its self-owned brand in Apr-2013 and probably a simplified BMW new 3 series below Rmb300,000 in The new 3 series LWB version is expected to ramp up quickly, similar as the new 5 series LWB version when it was launched in Aug We believe the new 3 series will boost Brilliance s 2013 sales and enhance its strong position in China s luxury auto sector. BMW currently has 24% share in China s luxury market, ranked No.2 just after Audi. We expect its market share to rise to 27% in 2015 and overtake Audi to become the largest luxury brand in China by Valuation. Our TP for Brilliance is based on 14x 2013E P/E (from previous 13x). We believe it should trade on par with Chinese luxury goods, which are trading at around 14-15x 2013E EPS. Share price performance Price (LHS) Rebased Rel (RHS) Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 07/01/13 On 07/01/13 the spot exchange rate was HK$7.75/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 6, , , ,835.9 EBITDA (Rmb mn) EBIT (Rmb mn) Net profit (Rmb mn) 1, , , ,441.9 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. China Auto Sector 86

87 Growing brilliantly! Expanding market share of BMW Brilliance is the only Chinese automaker having a JV with BMW and its JV is the second largest among luxury automakers in China after FAW Audi. BMW currently has around 24% share in China s luxury market, ranked No.2 just after Audi. We expect its market share to increase to 27% in 2015 and overtake Audi to become the largest luxury brand in China by BMW Brilliance launched X1 last March and new 3 series last July. Its monthly sales have generally maintained over 5 YoY growth throughout the year (Figure 164). The new 3 series LWB version is likely to ramp up quickly, similar to the new 5 series LWB version launched in Aug-2010 (Figure 165). We believe this will boost Brilliance s sales and enhance its leading position in China s luxury auto sector. We believe Brilliance will continue to benefit from strong luxury auto demand and BMW s rising market share Figure 164: BMW Brilliance s sales YoY growth Figure 165: Sales ramp-up of new 3 series LWB version vs. new 5 series LWB version Unit 7,000 6,000 5,000 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov Brilliance BMW sales YoY Brilliance made 3 series and new 3 series sales YoY Brilliance made 5 series sales YoY 4,000 3,000 2,000 1,000 - No. of months after launch 1st 2nd 3rd 4th 5th 6th BMW new 3 series LWB version BMW new 5 series LWB version Source: Brilliance Rising wealth to enhance auto sales Source: Brilliance The number of millionaires in China is growing significantly: the number more than tripled during In this scenario, we estimate the luxury auto segment will grow 15-25% YoY, compared to around 1 YoY growth for the overall passenger vehicle sector. China has already become BMW s largest market. We believe strong income growth in China will drive luxury auto sales, and BMW Brilliance will be a major beneficiary. China auto sector: Top-down competition Many luxury brands have launched their economy models with prices close to those for mid- to high-end vehicles. We believe the top-down movement of China s passenger vehicle segment will continue in the next few years and help BMW Brilliance to gain market share from mid-to-high end JV brands. Maintain OUTPERFORM We maintain our OUTPERFORM rating on Brilliance, given its strong position in China s luxury segment and growing demand for luxury autos. We raise our 2013 earnings estimate for Brilliance by 1% as we believe BMW s marketing share wil continue to grow in Our TP increases to HK$12.00 from HK$11.00, based on 14x 2013E EPS (from previous 13x). We believe the stock should trade on par with Chinese luxury goods, which are trading at around 14-15x 2013E EPS. Strong income growth in China will drive luxury auto sales, and BMW Brilliance will be a major beneficiary Luxury auto brands economy brands will help them to expand market share Maintain an OUTPERFORM with target price based on 14x 2013E EPS China Auto Sector 87

88 Brilliance China Automotive Holding 1114.HK / 1114 HK Price (04 Jan 13): HK$10.58, Rating: OUTPERFORM [V], Target Price: HK$12.00, Analyst: Jack Yeung Target price scenario Scenario TP %Up/Dwn Assumptions Upside BMW sales reach 292,000 units in 2013 Central Case BMW sales reach 252,000 units in 2013 Downside (4.35) BMW sales reach 212,000 units in 2013 Income statement (Rmb mn) 12/11A 12/12E 12/13E 12/14E Sales revenue 6,443 5,787 6,317 6,836 Cost of goods sold 5,587 5,024 5,490 5,947 SG&A Other operating exp./(inc.) (185.6) (176.3) (193.4) (211.7) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV 1,912 2,831 4,083 5,300 Recurring PBT 1,949 2,847 4,083 5,268 Exceptionals/extraordinaries Taxes Profit after tax 1,891 2,648 3,593 4,636 Other after tax income Minority interests Preferred dividends Reported net profit 1,812 2,537 3,443 4,442 Analyst adjustments Net profit (Credit Suisse) 1,812 2,537 3,443 4,442 Cash flow (Rmb mn) 12/11A 12/12E 12/13E 12/14E EBIT Net interest (135.4) (118.5) (141.1) (176.9) Tax paid (11.6) (199.3) (490.0) (632.2) Working capital (946.6) Other cash & non-cash items Operating cash flow (806.7) 70.8 (75.2) (73.7) Capex (306.3) (301.1) (354.1) (419.3) Free cash flow to the firm (1,113) (230) (429) (493) Disposals of fixed assets Acquisitions (300.0) Divestments (0.73) Associate investments Other investment/(outflows) Investing cash flow 63.5 (301.1) (354.1) (419.3) Equity raised 9.4 Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (Rmb mn) 12/11A 12/12E 12/13E 12/14E Cash & cash equivalents ,126 1,233 Current receivables 2,423 1,416 1,320 1,337 Inventories Other current assets 2,285 2,268 2,282 2,295 Current assets 6,032 5,294 5,304 5,414 Property, plant & equip. 1,393 1,494 1,618 1,770 Investments 4,171 7,002 11,085 16,385 Intangibles Other non-current assets 1,018 1,085 1,169 1,275 Total assets 12,811 15,073 19,373 25,042 Accounts payable 4,256 3,401 3,495 3,870 Short-term debt 1,297 1,897 2,497 3,097 Current provisions Other current liabilities 1, Current liabilities 6,572 6,186 6,894 7,926 Long-term debt Non-current provisions Other non-current liab Total liabilities 6,573 6,187 6,895 7,928 Shareholders' equity 6,989 9,527 12,969 17,411 Minority interests (752.1) (641.4) (491.1) (297.1) Total liabilities & equity 12,811 15,073 19,373 25,042 Key earnings drivers 12/11A 12/12E 12/13E 12/14E BMW sales (Unit) 108, , , ,000 Minibus sales (Unit) 82,491 78,000 86,000 94,000 Per share data 12/11A 12/12E 12/13E 12/14E Shares (wtd avg.) (mn) 4,998 5,021 5,026 5,026 EPS (Credit Suisse) (Rmb) DPS (Rmb) BVPS (Rmb) Operating CFPS (Rmb) (0.16) 0.01 (0.01) (0.01) Key ratios and valuation 12/11A 12/12E 12/13E 12/14E Growth(%) Sales revenue (28.0) (10.2) EBIT (68.4) (13.1) Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF (53) 603 (568) (580) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/ebitda (x) Interest cover (x) Source: Company data, Thomson Reuters, Credit Suisse estimates Source: IBES 12MF P/B multiple China Auto Sector 88

89 Companies Mentioned (Price as of 04-Jan-2013) Alcatel-Lucent (ALUA.PA, 1.21) Audi (NSUG.DE^B12, 595.0) Brilliance China Automotive Holding (1114.HK, HK$10.58, OUTPERFORM[V], TP HK$12.0) BMW (BMWG.DE, 75.8) BYD Co Ltd (1211.HK, HK$22.85, NEUTRAL[V], TP HK$20.0) Camel Group ( SS, Rmb8.5) Changan Auto ( SZ, Rmb6.5) Daimler (DAIGn.DE, 42.63) Desay Battery ( SZ, Rmb30.2) DFAC ( SS, Rmb3.0) Dongfeng Motors Group Co Ltd (0489.HK, HK$12.04, OUTPERFORM, TP HK$14.0) EVE ( SZ, Rmb11.29) Faw Car ( SZ, Rmb7.9) Faw Xiali ( SZ, Rmb4.87) Fiat (FIA.MI, 4.01) Ford Motor Co. (F.N, $13.57) Foton Motor ( SS, Rmb6.61) Geely Automobile Holdings Ltd (0175.HK, HK$4.08, UNDERPERFORM[V], TP HK$3.5) General Motors Corp. (GM.N, $29.86) Great Wall Motor (2333.HK, HK$25.35, OUTPERFORM[V], TP HK$30.0) Guangzhou Automobile Group (2238.HK, HK$7.14, NEUTRAL, TP HK$6.5) HAIMA AUTO ( SZ, Rmb2.93) Honda Motor (7267.T, 3,270) HTC Corp (2498.TW, NT$287.0) Hyundai Motor ( KS, W206,000, OUTPERFORM, TP W287,000) JAC ( SS, Rmb6.76) Jiangling Moto ( SZ, HK$18.54) Kia Motors ( KS, W53,600, NEUTRAL, TP W70,000) Lifan ( SS, Rmb6.33) Mazda Motor (7261.T, 185) Mitsubishi Corp (8058.T, 1,710) Mitsubishi Motors (7211.T, 94) Nissan Motor (7201.T, 854) Nokia (NOK1V.HE, 3.22) Peugeot (PEUP.F, 6.188) Plantronics (PLT.N, $37.57) Porsche Auto (PSHG_p.DE, 62.89) Qingling Motors (1122.HK, HK$2.05) Renault (RENA.PA, 40.77) Research In Motion Limited (RIMM.OQ, $11.95) SAIC Motor ( SS, Rmb17.59) Samsung Engineering Co Ltd ( KS, W172,500, OUTPERFORM, TP W210,000) Sinotruk (Hong Kong) Limited (3808.HK, HK$6.2) Ssangyong Motor ( KS, W5,370) Toyota Motor (7203.T, 4,260) VTech Holdings (0303.HK, HK$86.75) Weichai Power Co. Ltd (2338.HK, HK$35.8) ZTE Corporation (0763.HK, HK$13.72) Volkswagen (VOWG_p.F, ) Volvo (VOLVa.ST, Skr94.3) Volvo (VOLVb.ST, Skr94.45) Important Global Disclosures Disclosure Appendix I, Jack Yeung, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. China Auto Sector 89

90 Price and Rating History for Kia Motors ( KS) KS Closing Price Target Price Date (W) (W) Rating 01-Feb-10 20,650 18,000 N 26-Apr-10 26,350 24, Aug-10 32,300 27, Nov-10 49,500 39, Jan-11 54,700 51, Aug-11 80,900 78, Oct-11 72,600 75, Jan-12 67,100 68, Apr-12 80,700 70,000 * Asterisk signifies initiation or assumption of coverage. N EU T RA L Price and Rating History for Hyundai Motor ( KS) KS Closing Price Target Price Date (W) (W) Rating 29-Jan ,000 84,000 U 23-Apr ,000 88, Jul , , Oct , , Jan , ,000 N 29-Jul , , Aug , ,500 O 27-Oct , , Mar , , Apr , , Jul ,000 R 01-Aug , ,500 O 26-Oct , ,000 U N D ERPERFO RM N EU T RA L O U T PERFO RM REST RI C T ED * Asterisk signifies initiation or assumption of coverage. Price and Rating History for Geely Automobile Holdings Ltd (0175.HK) 0175.HK Closing Price Target Price Date (HK$) (HK$) Rating 26-Jan O 13-Apr N 26-May U 18-Jan Mar Aug N 04-Dec O 13-Feb N 18-Jun NR * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM N EU T RA L U N D ERPERFO RM N O T RA T ED China Auto Sector 90

91 Price and Rating History for Dongfeng Motors Group Co Ltd (0489.HK) 0489.HK Closing Price Target Price Date (HK$) (HK$) Rating 26-Jan O 15-Apr N 26-May Aug O 07-Dec N 18-Jan May Aug O 04-Dec Jun NR 23-Nov O * * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM N EU T RA L N O T RA T ED Price and Rating History for Brilliance China Automotive Holding (1114.HK) 1114.HK Closing Price Target Price Date (HK$) (HK$) Rating 17-Jan U 29-Mar Dec Feb Jun NR 24-Oct O * * Asterisk signifies initiation or assumption of coverage. U N D ERPERFO RM N O T RA T ED O U T PERFO RM Price and Rating History for BYD Co Ltd (1211.HK) 1211.HK Closing Price Target Price Date (HK$) (HK$) Rating 16-Mar O 27-Apr May U 24-Aug Oct Oct Jan Feb Mar Apr May Jun Jun Jul Jul Aug Dec Jun NR * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM U N D ERPERFO RM N O T RA T ED China Auto Sector 91

92 Price and Rating History for Guangzhou Automobile Group (2238.HK) 2238.HK Closing Price Target Price Date (HK$) (HK$) Rating 05-Dec N 18-Jun NR 24-Oct U * 31-Oct Dec * Asterisk signifies initiation or assumption of coverage. N EU T RA L N O T RA T ED U N D ERPERFO RM Price and Rating History for Great Wall Motor (2333.HK) 2333.HK Closing Price Target Price Date (HK$) (HK$) Rating 04-Dec N 19-Jun NR * Asterisk signifies initiation or assumption of coverage. N EU T RA L N O T RA T ED The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; Austr alia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute tota l return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the % and % levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 2 or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. China Auto Sector 92

93 Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 39% (47% banking clients) Underperform/Sell* 15% (43% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Geely Automobile Holdings Ltd (0175.HK) Method: Our 12-month target price of HK$3.50 for Geely is based on 10x 2013E P/E. We believe it should trade on par with its Chiense peers, which are trading at around 10x 2013E EPS. Risk: Risks to our target price of HK$3.50 for Geely are: (1) stronger-than-expected exports; and (2) stronger-than-expected Emgrand sales. Price Target: (12 months) for Dongfeng Motors Group Co Ltd (0489.HK) Method: Our 12-month target price of HK$14.00 for Dongfeng Motors is based on 9x 2013E P/E. Given its strong position in China's auto sector, we believe it should trade on par with its Chinese peers, which are trading around 10x 2013E EPS. Risk: Risks to our target price of HK$14.00 for Dongfeng Motors include: (1) continuing anti-japanese sentiment in China; (2) massive price cut across Japanese brands to recover sales; and (3) introduction of more economy models from other JV players. Price Target: (12 months) for Guangzhou Automobile Group (2238.HK) Method: Our 12-month target price of HK$6.50 for Guangzhou Auto is based on 10x 2013E P/E, as we believe it should be traded on par with its Chinese peers, which are trading around 10x 2013E EPS. Risk: Risks to our target price of HK$6.50 for Guangzhou Auto include: (1) potential introduction of new high-end models; and (2) faster-thanexpected recovery of the macro economy. Price Target: (12 months) for Kia Motors ( KS) Method: Our target price of W70,000 for Kia Motors is based on SOTP valuation as applying target EBITDA multiple of 5.5x against 2011E EBITDA for the consolidated entity. Risk: Key risks to our W70,000 target price for Kia Motors include any sudden sharp fluctuations in currency movements, which could adversely impact its profitability. In the short term, the W/US$ and W/Eu exchange rates are both depreciating against the Korean Won, contracting the company's Won-denominated ASP. Price Target: (12 months) for Brilliance China Automotive Holding (1114.HK) Method: Our 12-month target price of HK$12.00 for Brilliance China Auto is based on 14x 2013E EPS. Risk: Risks to our 12-month target price of HK$12.00 for Brilliance China Auto include further capital requirement for capacity expansion, parent's motivation to transfer cash surplus, and strong competition from Audi. China Auto Sector 93

94 Price Target: (12 months) for BYD Co Ltd (1211.HK) Method: Our 12-month target price of HK$20.00 for BYD is based on SoTP. We value its auto segment at HK$10.20 by using DCF. We apply 12x 2013E P/E to its battery segment and get its value at HK$0.70. We apply 18x 2013E P/E to its handset components and assembly segment to get its value at HK$9.10. Risk: Risks to our 12-month target price of HK$20.0 for BYD include: (1) unfavourable government polices regarding EVs; (2) unsuccessful new model launches in its conventional automobile business; (3) weaknesses in the global economy, causing demand for the company's products to decline severely. Price Target: (12 months) for Great Wall Motor (2333.HK) Method: Our 12-month target price of HK$30.00 for Great Wall Motor is based on 13x 2013E P/E. Given China's SUV sales growth is as fast as luxury auto sales growth, we believe Great Wall the No.1 SUV maker in China should trade at a premium to its peers, which are currently trading at around 10x 2013E EPS. Risk: Risks to our target price of HK$30.00 for Great Wall Motor are: (1) tougher-than-expected competition in SUV segment; (2) slower-thanexpected ramp up of its new capacities. Price Target: (12 months) for Hyundai Motor ( KS) Method: Our W287,000 target price on Hyundai Motor is derived with residual income analysis. Based on using a COE (cost of equity) of 8.9% utilising a risk-free rate assumption of 3.01% and beta of 1.16, our residual income analysis over a 20-year business cycle suggests a target 2013E P/B (price-to-book) multiple of 1.2x, within historical valuation range, given expected ROE (return on equity) of 15.6% in Risk: Risks to Hyundai Motor achieving our W287,000 target price include the following: For the next months demand volatility in the global auto industry resulting from the completion of demand stimulus programmes in key demand centres may result in lower-thanexpected demand. Adverse market liquidity can cause the stock price to either overshoot or undershoot our TP under volatile market conditions. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (2238.HK, KS, 1114.HK, KS, 0763.HK, 2498.TW, 3808.HK, 7267.T, 7203.T, ALUA.PA, DAIGn.DE, F.N, FIA.MI, GM.N, NOK1V.HE, RENA.PA, RIMM.OQ, VOLVb.ST, VOWG_p.F) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2238.HK, 1114.HK, 3808.HK, 7267.T, 7203.T, F.N, FIA.MI, NOK1V.HE, VOWG_p.F) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company ( KS, KS, 0763.HK, 7267.T, 7203.T, DAIGn.DE, F.N, FIA.MI, GM.N, NOK1V.HE, RENA.PA, VOLVb.ST, VOWG_p.F) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (7267.T, 7203.T, F.N, FIA.MI, NOK1V.HE, VOWG_p.F) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2238.HK, 1114.HK, 3808.HK, 7267.T, 7203.T, F.N, FIA.MI, NOK1V.HE, VOWG_p.F) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0489.HK, 2238.HK, KS, 1114.HK, 1211.HK, 2498.TW, 3808.HK, 7261.T, 7201.T, 7211.T, 7267.T, 7203.T, ALUA.PA, F.N, FIA.MI, NOK1V.HE, RIMM.OQ, VOWG_p.F) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company ( KS, KS, 0763.HK, 7267.T, 7203.T, DAIGn.DE, F.N, FIA.MI, GM.N, NOK1V.HE, RENA.PA, VOLVb.ST, VOWG_p.F) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (7201.T, 7267.T, 7203.T, F.N, GM.N, RIMM.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0489.HK, 0763.HK, 2498.TW, DAIGn.DE, FIA.MI, NOK1V.HE). Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (0175.HK, 0489.HK, 2238.HK, KS, 1114.HK, 1211.HK, 2333.HK, KS, 0303.HK, 0763.HK, 2498.TW, 3808.HK, 7261.T, 7201.T, 7211.T, 7267.T, 7203.T, ALUA.PA, DAIGn.DE, F.N, FIA.MI, GM.N, NOK1V.HE, RENA.PA, RIMM.OQ, VOWG_p.F) within the past 12 months China Auto Sector 94

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