China autos and auto parts

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1 China autos and auto parts EQUITY: AUTOS & AUTO PARTS New wheels and new drivers Replacement, financing, and favourable seasonality to fuel sales growth upgrade in 2H14F We raise our 2014F PV sales volume growth forecast to 13% from 12% Defying market concerns over a slowdown in the beginning of the year, including a real estate market slowdown and more new car sales restrictions, new passenger vehicle (PV) sales volume grew at 11% YTD, which beats consensus of 8-10% at end We attribute such resilience to the emergence of replacement demand, auto financing, and rising affordability in lower-tier cities. As a result, we raise our PV sales volume growth forecast for 2014F and 2015F to 12.9% and 11.4% (from 12.1% and 11.0%), respectively. Any risk of a significant slowdown in 2H14F should be well-contained, owing to these structurally positive factors, as well as further macro policy easing, as projected by the Nomura economics team, in our view. We expect the Street to start raising its forecasts around the interim results season in August. Key beneficiaries of these positive trends will be SUVs (partly replacementdemand driven), entry-level luxury models (thanks to rising affordability and availability of auto financing), and OEMs with strong new model pipelines (to capture the peak-season demand from September onwards), in our view. Replacement demand is starting to make a real positive impact Replacement demand is an increasingly critical driver for China s auto demand, contributing more than first-time buyers to PV sales growth by 2015F, we estimate. This might explain why slower property sales this year have not led to a visible and negative impact on PV sales, since replacement demand should be less affected by property sales, as opposed to first-time buyers who typically purchase their cars after buying their homes, in our view. Auto financing will help fuel growth in lower-tier cities In China, approximately 20% of car buyers utilise auto financing, compared with typically 70% in overseas matured markets. We believe more financing packages will help fuel auto penetration, especially in lower-tier cities. Stock picks: SAIC (OEM top pick) and Nexteer (auto parts top pick) In view of our positive sector view and the favourable seasonality in 2H, we expect the sector P/E (now 8.8x) to be re-rated towards 10-11x. We initiate coverage of SAIC (OEM top pick) and Nexteer (auto parts top pick) with Buy, both offering c40% upside potential. Among the rest, we favour GAC (Buy), Dongfeng (upgrade to Buy) and Brilliance (upgrade to Neutral) going into the interim results season in August for their likely strong 1H numbers, but around results, recommend switching into Great Wall (Buy) and Geely (upgrade to Buy) on our expected 2H recovery. We have no Reduce-rated stocks. Global Markets Research 9 July 2014 Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our 2014F new PV sales volume growth forecast of 13% y-y is above consensus of 10%. Research analysts China Autos & Auto Parts Benjamin Lo - NIHK [email protected] Joseph Wong - NIHK [email protected] Fig. 1: Stock for action Market Cap Price TP Up/downside 2014F EPS 2015F EPS 2014F 2015F 2014F 2014F 2014F Div yld Ticker Rating (USDm) (HKD) (HKD) (%) Growth Growth PER (x) PER (x) PBR (x) ROE (%) Brilliance 1114 HK NEUTRAL 10, % 29% 13% % 1.1% Dongfeng 489 HK BUY 15, % 17% 17% % 1.9% Geely 175 HK BUY 3, % -23% 30% % 1.2% Great Wall 2333 HK BUY 12, % 13% 29% % 3.2% GAC 2238 HK BUY 8, % 61% 28% % 2.2% SAIC Motor Ch BUY 27,650 CNY15.56 CNY % 11% 11% % 8.6% Johnson 179 HK NEUTRAL 3, % 4% 7% % 1.7% Minth 425 HK BUY 2, % 14% 16% % 3.3% Nexteer 1316 HK BUY 1, % 11% 27% % 1.8% Source: Bloomberg, Nomura estimates. Initiating coverage for SAIC Motor and Nexteer. Pricing as of 4 July Note: For Johnson Electric, "14F" here refers to the fiscal year ending in March See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

2 Nomura China autos and auto parts 9 July 2014 Contents 4 Summary of our new ratings, TPs and estimates; initiate coverage on SAIC and Nexteer 5 PV sales volume growth - 5M14 at 11%; we raise our FY14F forecast to above-consensus 13% 7 Replacement demand: A long-term underpinning growth factor 9 Auto financing fuelling further auto penetration in China 13 Valuations: Sector P/E likely to head higher from August onwards 14 Seasonality factor 18 Investment risks 22 Appendix 1 New models in 2H14 24 Appendix 2 Market share trends 24 Luxury segment Germany s big 3 still the dominant force 26 Mid-size segment 27 Compact and subcompact segments Competition remains intense 28 SUV segment 29 Appendix 3 - China auto parts industry 29 Overview 30 Competitive landscape 31 Future development 32 Appendix 4 Global auto market outlook 33 Brilliance China 37 Dongfeng Motor 41 Geely Automobile 45 Great Wall Motor 2

3 Nomura China autos and auto parts 9 July Guangzhou Auto 53 SAIC Motor 63 Johnson Electric Holdings 67 Minth Group 71 Nexteer Automotive 92 Appendix A-1 3

4 Nomura China autos and auto parts 9 July 2014 Summary of our new ratings, TPs and estimates; initiate coverage on SAIC and Nexteer We update and revise our estimates and target prices for all auto stocks under our coverage universe in this report in view of the release of the latest sales volume data as well as the themes discussed herein. Additional details can be found in the individual company reports in the companies section. The two figures below summarise our estimate revisions and valuation methodologies. We have more detailed discussions on valuations for the sector and for each of the companies under our coverage in the valuation section and the company sections of this report. Regarding our ratings, we upgrade Dongfeng and Geely to Buy, and Brilliance to Neutral. We maintain our Buy rating on GAC and Great Wall. We also initiate coverage on two companies, SAIC and Nexteer, with Buy ratings. There is no Reduce rating in our coverage universe. Fig. 2: Summary of revisions to our ratings, TPs and EPS forecasts 2014F EPS (loc) Source: Bloomberg, Nomura estimates Note: For Johnson Electric, "14F" here refers to the fiscal year ending in March 2015 Current Previous % change 2015F EPS (loc) TP (HKD) 2014F EPS (loc) 2015F EPS (loc) Ticker Rating (old rating) TP (HKD) OEM Brilliance 1114 HK NEUTRAL (REDUCE) % 11.0% 12.2% Dongfeng 489 HK BUY (NEUTRAL) % 23.6% 31.7% Geely 175 HK BUY (NEUTRAL) % -15.0% 0.9% Great Wall 2333 HK BUY (BUY) % -10.0% -4.9% GAC 2238 HK BUY (BUY) % -3.8% -3.5% SAIC Motor CH BUY (NR) CNY n.a. n.a. n.a. n.a. n.a. n.a. Auto parts Johnson Electric 179 HK NEUTRAL (NEUTRAL) % -0.2% -0.2% Minth Group 425 HK BUY (BUY) % -4.9% -1.0% Nexteer 1316 HK BUY (NR) n.a. n.a. n.a. n.a. n.a. n.a. TP (HKD) 2014F EPS 2015F EPS Fig. 3: Summary of valuation methodology Company Ticker Rating TP (HKD) Valuation methodalogy Nomura comments OEM Brilliance 1114 HK Neutral x mid 15F P/E (representing LT average) Dongfeng Motor (DFM) Source: Bloomberg, Nomura estimates 489 HK Buy x mid 15F P/E (representing long-term average) Geely 175 HK Buy x P/B 2015F BVPS (representing - 1 SD below historical mean) Great Wall Motor (GWM) Guangzhou Auto Corp (GAC) 2333 HK Buy x mid 15F P/E (representing -1 SD below LT 2238 HK Buy x mid 15F P/E (representing long-term average) SAIC CH Buy CNY21.2 8x mid 15F P/E (representing LT average) Auto parts Minth 425 HK Buy x mid 15F P/E (representing +1 SD above mean) Given our concern on Brilliance's growth and valuation headwinds have alleviated, we rebased our target multiple back to LT average. Despite a near-term pick-up in earnings growth, we still assign LT-average as our target P/E multiple, as we do not see a multi-year re-rating story yet. We raised our TP to reflect the roll-forward 2015F BVPS, allowing us to look past the restructuring disruption in 2014F and hence better reflect the potential recovery We assign a lower target P/E (from LT average of 11x to -1 SD below mean) given the H8 uncertainty. A robust new model pipeline should continue to underpin strong earnings growth for GAC, hence justifying our target P/E at LT average. We consider 8x P/E to be reasonable when compared with Dongfeng Motor which has a similar LT growth profile and a LT-average P/E multiple of 8.5x. We assign +1 SD above mean as our target P/E multiple owing to its high earnings quality and track record. Johnson Electric 179 HK Neutral 6.90 DCF with WACC of 8.3% Our target price is based on DCF valuation which implies FY15F 15.2x P/E (EPS: USD0.06) and 1.7x P/B (BVPS: USD0.53) Nexteer 1316 HK Buy x mid 15F P/E Instead of its own histrocal average, we benchmark our multiple to Nexteer's peer average for its short trading history. 4

5 Nomura China autos and auto parts 9 July 2014 PV sales volume growth - 5M14 at 11%; we raise our FY14F forecast to aboveconsensus 13% China s auto industry has enjoyed a satisfactory start to 2014, with passenger vehicle (PV) demand posting 11% y-y growth in 5M14, largely due to the continued strong demand for SUVs, increasing popularity of entry-level luxury models, and an overall rising affordability for passenger cars. In the beginning of the year, we introduced our FY14F PV sales volume growth forecast of 12%, at a time when consensus was looking at 10% (with some bears predicting single-digit growth). While some risks have materialised, including the introduction of new vehicle sales restriction in more cities (eg. Tianjin and Hangzhou) and a generally soft Chinese economy, PV sales volume growth has remained healthy at 11% YTD. Fig. 4: China PV unit sales by segment Fig. 5: China monthly PV sales 120% 100% 80% 60% 40% 20% Sedan SUV Others MPV 2% 3% 3% 3% 7% 9% 10% 19% 18% 16% 15% 9% 7% 7% 6% 10% 11% 13% 17% 20% 23% 72% 69% 70% 69% 67% 64% 60% (units mn) y-o-y % 13.7% % 0.8 YTD: 11.1% 7.9% 7.0% % 16% 12% 8% 4% 0% F 2015F 0.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0% Source: China Auto Market, Nomura estimates Source: China Auto Market, Nomura research In our previous sector reported dated 13 th January 2014 (Anchor Report: China autos - Careful climbing), we argued a positive view on the longer-term growth outlook underpinned by a growing replacement demand and rising affordability. While sales momentum could taper during the summer months of the slow season for the industry, for 2014F and beyond, we believe end demand will branch out regionally into lower-tier cities that enjoy faster growth in consumer affordability. We also recognise a growing importance of replacement demand, which is also receiving some policy support as the central government is keen to phase out old vehicles that do not meet emission standards. We further argue in this report that the increasing availability of auto financing packages will underpin a faster auto penetration into lower tier cities. Hence, we raise our FY14F PV sales volume growth forecast to 13%, and also lift FY15F PV sales volume forecast slightly from 11% to 11.4%. For the long-term (for the next three to five years), we believe PV sales volume can continue to grow at high-single-digit to 10% level p.a. 5

6 Nomura China autos and auto parts 9 July 2014 Fig. 6: China annual PV sales and forecasts for F China auto sales forecast F 2015F Sedan 7,460,638 9,494,194 10,124,599 10,745,776 12,008,272 12,892,867 13,628,892 y-o-y 48.0% 27.3% 6.6% 6.1% 11.7% 7.4% 5.7% % of total 72.3% 69.1% 69.8% 69.4% 67.0% 63.7% 60.4% SUV 657,494 1,317,585 1,617,502 1,998,192 2,988,753 4,035,479 5,135,088 y-o-y 47.4% 100.4% 22.8% 23.5% 49.6% 35.0% 27.2% % of total 6.4% 9.6% 11.2% 12.9% 16.7% 19.9% 22.8% MPV 248, , , ,341 1,289,907 1,815,869 2,289,693 y-o-y 26.1% 78.9% 11.7% -0.8% 161.5% 40.8% 26.1% % of total 2.4% 3.2% 3.4% 3.2% 7.2% 9.0% 10.2% Others 1,948,277 2,491,704 2,258,436 2,256,260 1,641,065 1,495,163 1,495,163 y-o-y 83.2% 27.9% -9.4% -0.1% -27.3% -8.9% 0.0% % of total 18.9% 18.1% 15.6% 14.6% 9.2% 7.4% 6.6% PV sales 10,315,363 13,748,884 14,498,020 15,493,569 17,927,997 20,239,378 22,548,836 y-o-y 52.9% 33.3% 5.4% 6.9% 15.7% 12.9% 11.4% Source: China Auto Market, Nomura estimates For 2014F and beyond, we believe that end-demand will branch out regionally into lowertier cities which enjoy faster growth in consumer affordability. Despite near-term headwinds on potentially more cities adopting new car sale restrictions, we remain constructive on the long-term growth prospects of China s passenger vehicle market, with a growing importance of replacement demand and auto financing. In the near term, new car sales might actually benefit from the bringing-forward of demand from buyers on worries over more restrictions later. Any risk of a significant slowdown in 2H14F should be well-contained, owing to these structurally positive factors, as well as further macro policy easing as projected by the Nomura economics team, in our view. We expect the Street to start raising its forecasts around the interim results season in August. 6

7 Nomura China autos and auto parts 9 July 2014 Replacement demand: A long-term underpinning growth factor We believe a growing replacement demand will be a structural underpinning factor for China s PV sales in the mid-to-long term. Replacement demand is less affected by property sales (as opposed to first-time car buyers who typically purchase their cars after buying their homes). Its growing significance within the mix of new PV sales should reduce volatility (and hence, improve visibility) of future PV sales. We estimate replacement demand rising from our estimate of 23% of new PV sales in 2011 to 34% in 2015F. Fig. 7: Replacement demand and its proportion to total new PV sales (units mn) % % 4.0 Replacement demand (LHS) Proportion to total PV sales (RHS) 31.1% 28.7% % % 35% 30% 25% 20% 15% 10% 2 5% F 2015F 0% Source: China Auto Market, Nomura estimates At end-2012, there were approximately 103mn PVs registered in China. Based on an estimated c 5% replacement ratio (according to our estimates and checks with industry sources), this would imply approximately 5.1mn units as replacement demand for 2013F this coincides with a typical seven-year auto replacement cycle, as new PV sales in 2006 (i.e. seven years before 2013) was 5.15mn units. We note 5.1mn units out of a total estimated 17.8mn PVs sold in 2013F would imply that approximately 29% of China s new PV sales in 2013F were from replacement demand, with a majority of 71% from first-time new car registrations. If we do the same exercise for 2011 and 2012, we find that the replacement demand as a % of China s total new PV sales has gradually risen from our estimated 22.6% in 2011, to 25.6% in 2012, and further to 28.9% in 2013F. Based on the same methodology and retaining our assumption of a seven-year replacement cycle, we can assume that there could be 6.3mn units of replacement demand in 2014F (as 6.3mn units of new PVs were sold in 2007). As a result, replacement demand would further rise to 31.6% of total new PV sales volume. We expect replacement demand to contribute over half of new PVs sold in a year, similar to the global benchmark. This is an important structural development for the industry, as we believe replacement demand is less affected by property sales (as opposed to first-time car buyers who typically purchase their cars after buying their homes). This might explain the disconnect between China new property sales and PV sales volume growth this year. 7

8 Nomura China autos and auto parts 9 July 2014 Fig. 8: Replacement demand will be more important than new buyers as the source of PV sales volume growth, by our estimates Fig. 9: China property sales (GFA) growth vs. passenger vehicle sales volume growth the latter has been outperforming since 4Q13 New buyers Total y-o-y PV growth 15.7% Replacement demand 60% 50% 40% GFA PV sales 6.9% 8.1% 12.9% 6.5% 11.4% 4.6% 30% 20% 10% 0% 2.1% 7.6% 4.8% 6.4% 6.8% F 2015F -10% -20% -30% Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Source: China Auto Market, Nomura estimates Source: CEIC, CAAM, Nomura research We believe that the likely beneficiary of a rising replacement demand in coming years should be SUVs, which should be able to capture a large share of the future replacement demand given their rising popularity among car buyers in recent years and the availability of more choices (more auto makers diversifying their product line-up into SUVs, and also auto makers offering more SUV types, e.g. compact SUVs). We forecast above-industry average sales volume growth of 35% y-y for SUVs. Fig. 10: SUVs growing as a % of China s total PV sales volume, F (units mn) SUV (LHS) Proportion to total PV sales (RHS) % 25% % 6% % % % % % % 15% 10% 5% F 2015F 0% Source: China Auto Market, Nomura estimates 8

9 Nomura China autos and auto parts 9 July 2014 Auto financing fuelling further auto penetration in China Auto finance arises when the prices of cars are out of the reach of individual purchasers without any borrowing. In China, car buyers are becoming younger along with the continuous growth of the market. Different from those in the past who usually opted for lump-sum payment, young buyers nowadays are more open-minded towards personal finance options, making auto financing increasingly well-received among the general public. With the introduction of various auto finance packages, OEMs have become more capable of lowering the financial barrier of first-time car purchases, attracting more young buyers, and at the same time preserving their loyalty to the brands. The launch of different auto financing products and the enhancement of market penetration have become the key for OEMs to compete for market share, especially in the segment of younger consumers. While the penetration rate in overseas mature markets has reached approximately 70%, the average penetration rate in China is approximately 20%, with those of premium brands being marginally over 30%. The funding for personal car finance is provided either by a retail bank or a specialist car financing company. In the US, some car manufacturers own their own car financing arms, such as Ford with the Ford Motor Credit Company and General Motors with its GMAC Financial Services arm, which has now been renamed and rebranded as Ally Financial. The finance is typically arranged by the dealer which provides the car. In the case of Ford Motor Credit Company, it offers consumer loans and leases to car buyers, as well as business loans and lines of credit to dealerships selling Ford Motor Company products. In China, to take advantage of the booming market, banks and other well established OEMs are all setting their foot in the industry. Fig. 11: List of auto financing vehicles of Chinese OEMs OEM Auto finance vehicle Year of establishment in China Cooperative partner Registered Capital (CNY mn) Terms of years Shareholding structure Dongfeng Group Dongfeng Automotive Finance 1987 nil 1,319 nil 100% OEM SAIC GM SGM Auto Finance 2004 General Motor 500 n.a 60% GM; 40% SAIC Volkswagen VW Finance (China) 2004 Nil 500 n.a 100% OEM Toyota Toyota Auto Finance (China) 2005 Nil 1,800 n.a 100% OEM Ford Ford Automotive Finance (China) 2005 Nil 500 n.a 100% OEM Daimler-Chrysler DaimlerChrysler Auto Finance (China) 2005 Nil 500 n.a 100% OEM Dongfeng PSA DF PSA Auto Finance 2006 PSA Netherland Finance 500 n.a 50% OEM; 50% partner Volvo Volvo Auto Finance (China) 2006 Nil 500 n.a 100% OEM Dongfeng Nissan DF Nissan Automotive Finance 2007 Nissan Motor 1,200 n.a 65% Nissan; 35% DFM Fiat Fiat Automotive Finance 2007 Nil 500 n.a 100% OEM Chery Chery Motor Finance Service 2009 Huishang Bank 1,000 n.a 80% OEM, 20% partner BMW Brilliance BMW Auto Finance (China) 2010 BMW AG 500 n.a 42% OEM; 58% partner GAC GAC-SOFINCO Automobile Finance 2010 SOFINCO S.A 500 n.a 50% OEM; 50% partner Sany Sany Auto Finance 2010 Hunan Trust/ China Valin 800 n.a 92.5% OEM; 7.5% partners FAW Car FAW Car Auto Finance 2011 Bank of Jilin 1,000 n.a 66% OEM; 34% partner Beijing Hyundai Beijing Hyundai Auto Finance 2012 Hyundai 1,000 n.a 53% Hyundai; 47% BAIC Qingling Chongqing Auto Finance (CQAFC) 2012 CQ Rural Comm.Bank/Yufu Asset Mgt 500 n.a 41% OEM; 59% partners JAC Fortune Auto Finance 2013 Santander Consumer Finance 500 n.a 50% OEM; 50% partner Geely Geely Auto Finance 2013 BNP Paribas Personal Finance % OEM; 20% partner Greatwall Tianjin GreatWall Binyin Automotive Finance 2013 Tianjin Binhai Rural Comm.Bank 550 n.a 90% OEM; 10% partner Source: Companies data, Nomura research The auto financing industry has experienced rapid development in China since 1998, when it received the go-ahead from the central government. According to the PBOC, auto loan outstanding was at CNY43.6bn in 2001, and has grown to CNY158.3bn in 2008 and exceeded CNY300bn by In 2012, the industry grew by 30% y-y to CNY392bn and we expect its growth to continue exceeding the total new car sales volume growth in the foreseeable future. While traditionally a majority of the auto loans was granted through commercial banks directly, followed by credit card loans, we believe 9

10 Nomura China autos and auto parts 9 July 2014 auto financing vehicles established jointly by OEMs and banks will take an increasingly prominent role. Along with the emergence of younger car buyers, the enhancement of personal information system, the optimisation of auto financing regulation and a wider participation of OEMs, we expect the penetration rate of auto financing in China will continue to increase in coming years. The following are examples of some auto financing plans currently offered in the market. Fig. 12: Some auto financing packages currently offered in the market Name of auto finance company Downpayment Loan period End-payment Toyota Auto Finance (China) 30% or more of car price 12/24/36 months 50%-60% of original purchase price VW Finance (China) 20% or more of car price months 25-50% of original purchase price Audi Finance (China) 30% or more of car price months 25-50% of original purchase price DF Nissan Automotive Finance 20-50% of car price months Less than 25% of original purchase price Beijing Hyundai Auto Finance 20-50% of car price months up to 50% of original purchase price Fortune Auto Finance Flexible 12/24/36 months n.a Source: Companies data, Nomura research Fig. 13: Example of a typical package offered by Toyota Finance Services for buyers of Crown and Corolla in China Monthly instalment (CNY) Model Car price (CNY) Period Downpayment Final payment "wisdom" loan plan Fixed instalment Crown ,500 4,127 7,775 Crown , months 30% 50% 5,885 11,086 Corolla 142,800 1,794 3,380 Source: Companies data, Nomura research During the Beijing Auto Show in April 2014, Mercedes introduced a new auto financing product to its clients called the value-preserving hire purchase plan. The plan, which is different from traditional plans, does not require car buyers to pay huge upfront deposits, thereby lowering the entry requirement of purchasing premium vehicles. The plan offers an installment period of months, maximising customers choice on which model to purchase at the end of the hire purchase agreement. Take the purchase of an A180 model for CNY252,000 as an example. Should the buyer opt for the new plan, he is only required to pay CNY5,388 as the monthly rental after paying 10% of the vehicle price for each deposit and prepayment and to agree to drive 20,000 km mileage per annum within the 24-month contract period. With reference to the depreciation schedule of Mercedes, the residual value of the A180 would be CNY141,000 at the end of the contract. By then, the car buyer can choose to: 1) return the vehicle to the dealers, 2) buy the car at its residual value, or 3) pledge the vehicle for a new Mercedes model. Anecdotal evidence in overseas markets shows that most of the buyers would opt for the option of pledging the old vehicle for a new one. This would indirectly enhance the customer loyalty of the brand. From April 2013 to April 2014, the number of subscription to Mercedes Auto Finance rose 153% y-y, with contract activation rate up 118% y-y and total loan outstanding up 31% y-y, according to Mr. Alexandre Mallmann, CEO of Mercedes-Benz Auto Finance (China), who also targets to lift Mercedes auto-financing penetration rate to over 50% (which would exceed the typically 30%+ penetration rate enjoyed by premium brands in China during 2013). In the case of BMW in China, 99% of its existing dealers are already in partnership with BMW Auto Finance which enjoyed a market penetration rate of 30% in 2013 with an average loan per vehicle of CNY300,000, according to Mr. Liu Jun, head of sales of BMW Auto Finance (China). Some of the leading domestic brands have also started to take initiatives in auto financing. Great Wall made an announcement in June that its application for a business license for its financing company has been officially approved by Tianjin Binhai New Area's Administration for Industry and Commerce. The new company, known as the Tianjin Great Wall Binhai Banking Automobile Finance Company, possesses registered capital of CNY550 million (USD89.46mn) and is a 90/10 joint venture between Great 10

11 Nomura China autos and auto parts 9 July 2014 Wall, and the Tianjin Binhai Rural Commercial Bank. At this point, details are still lacking with respect to the services it will offer and how it will work together with other internal departments and dealerships. According to our channel survey, currently majority of Great Wall's financial services are done in cooperation with the China Construction Bank, whose loan application policies require over a week to complete, which delays the processing of manufacturers. In several cities the financial penetration rate for Great Wall's services is between 15% and 20%, lagging premium brands at 30%+. Now that Great Wall has established an independent financing company, its loan processing time should be reduced, thereby attracting more customers to use auto financing services as well as helping Great Wall boost its sales volume, in our view. The availability of more auto financing packages should further enhance affordability in lower-tier cities With car purchase restrictions mostly falling in Tier-1 cities, OEMs are likely to continue focusing their marketing efforts on lower-tier cities which are enjoying faster growth in income levels and consumer affordability. Take BMW for example -- 60% of its new 4S shops opened in 2013 were located in Tier-4 and -5 cities. Rising affordability in lower-tier markets is indeed an increasingly critical growth driver to our forecasts. Using the past as a learning guide, we believe China s auto industry typically witnessed a boom (or a recovery) when rising incomes intersect with a decline in car prices. Notably, the auto market experienced three up-trends in 2006, 2008 and 2011, which corresponded to an affordability threshold. We had projected the fourth boom to commence around the middle of 2013 and should continue for much of 2014F when the income band of tier-4 markets again reaches the threshold. Fig. 14: China auto sales growth and levels of income Disposalble income per capita (CNY) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 Disposable income per capita in tier 1 band reached CNY18k, which triggered the first wave of strong auto sales Tier 1 Income Band (LHS) Tier 3 Income Band (LHS) Average car price (RHS) Disposable income per capita in tier 2 band reached CNY16k, this led to the 2nd up cycle Tier 2 Income Band (LHS) Tier 4 In come Ban d (LHS) Tier 3 region auto sales were pulled forward due to auto stimulus package together with increasing affordability (disposable income per capita reached CNY14k) Avg. car prices (CNY) 300, , , , ,000 10,000 5,000 0 We expect disposable income per capita in tier 4 band will reach the level that will drive next up cycle in F 2014F China PV y-y growth: 54% 30% 22% 7% 53% 33% 5% 7% 16% 13% 50,000 0 The sweet spot Source: China Auto Market, Nomura estimates Entry-level luxury models are best-positioned to capture the long-term growth trends We continue to prefer the mass mid-market / entry-level luxury segment (typically priced between CNY100,000 and CNY300,000), which should best capture these long-term trends of more auto financing and rising affordability. The market share gainers will likely be entry-level models of luxury brands (the low prices of which are approaching CNY250k only), in our view. We have seen very robust growth for luxury brands in China since 2009, with Germany s big three brands -- Audi, BMW and Mercedes -- taking the lion s share of the luxury segment. From 2009 to 2013, luxury brands new car sales volume has recorded a 11

12 Nomura China autos and auto parts 9 July 2014 CAGR of 37%, outperforming the total market s CAGR of 13%. Luxury brands combined market share in China has risen from 2.6% in 2009 to 5.7% in The luxury segment has reached a matured stage in the US, with its market share relatively stable over the past five years, standing at 6.9% in If we take 6.9% as the market share level, which luxury brands can also repeat in China, this would imply a CAGR of 17% for luxury brands sales volume during F. An upside surprise is possible if affordability and auto financing are to grow stronger than our expectations. Fig. 15: Luxury brands market share in China, US and Japan We expect luxury brands sales volume in China to record a 17% CAGR during F before matching the 6.9% market share level seen in the US 9% 8% 7% 6% China US Japan 17% CAGR 6.5% 6.1% 5.4% 5.7% 6.9% 5% 4.4% 4% 3% 2.6% 3.3% 2% 1% 0% F 2015F 2016F Source: JAMA, Autodata, China Auto Market, Nomura estimates Fig. 16: Luxury brands market share breakdown China, 2013 Fig. 17: Luxury brands market share breakdown US, 2013 Fig. 18: Luxury brands market share breakdown Japan, 2013 Lexus 6% Land Rover 6% Mercedes-Benz Merced es-benz 19% 19% Lexus 25% Land Rover 2% Merced es- Mercedes-Benz Benz 29% Lexus 26% Land Rover 2% Merced es- Benz Mercedes-Benz 30% 30% Audi 39% BMW 30% Audi 15% BMW 29% Audi 16% BMW 26% Source: China Auto Market, Nomura research Source: China Auto Market, Nomura research Source: China Auto Market, Nomura research We believe the local production of luxury models will help bring down ASP, making them more affordable to a bigger addressable market, especially in lower tier cities in China. Fig. 19: Local production of more luxury models in China, 2014F-16F Brand Model Domestic JV partner Expected year of commencement Audi A3 Sportback (HB) FAW 2014 Audi A3(NB) FAW 2014 Audi A4L 45 TFSI FAW 2014 Audi Q3 1.4T FAW 2014 Mercedes New C-Class BAIC 2014 Mercedes New E-Class BAIC 2014 BMW 2 series Brilliance 2015 BMW Another model Brilliance 2016 Infiniti Q50 LWB Dongfeng 2014 Land rover Range Rover Evoque Chery 2015 Source: China Auto Market, Nomura research 12

13 Nomura China autos and auto parts 9 July 2014 Valuations: Sector P/E likely to head higher from August onwards Since our last Anchor report in January 2014 (Anchor Report: China autos - Careful climbing), China s auto sector P/E valuation has remained range-bound between 8x-10x during 1H14 as we have predicted in our report. That said, the sector average P/E did not touch the trough valuation of 7.5x seen over the past two years, as China s new PV sales volume has continued to grow at a healthy pace of 11% y-y in 5M14, which remains solid when compared with the single-digit growth rates recorded in Currently, the sector average P/E stands at 8.8x. For 2H14F, we expect the sector valuation to be re-rated higher towards 10x-11x during 2H14F, as we forecast China s new PV sales growth to remain strong at double-digits (i.e. no visible slowdown when compared with 1H14) and as monthly sales volume starts to bottom out from August onwards (see our discussions on seasonality factor below). Fig. 20: China autos sector P/E Jan-05 May-05 Sep-05 China PV sales growth (RHS) Automaker P/E (exl. BYD) (LHS) Historical average since 2005 His. avg = 9.6x Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May % 80% 40% 0% -40% Source: Bloomberg, China Auto Market, Nomura research Fig. 21: 2014 OEM share price relative performance Fig. 22: 2014 parts makers share price relative performance Dongfeng Motor Geely Brilliance China GAC Great Wall Motor SAIC Johnson Electric Nexteers Minth Xinchen Dec = Rebased to Jan 15-Jan 29-Jan 12-Feb 26-Feb 12-Mar 26-Mar 9-Apr 23-Apr 7-May 21-May 4-Jun 18-Jun Dec = Rebased to Jan 15-Jan 29-Jan 12-Feb 26-Feb 12-Mar 26-Mar 9-Apr 23-Apr 7-May 21-May 4-Jun 18-Jun Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research 13

14 Nomura China autos and auto parts 9 July 2014 Seasonality factor China s auto industry s seasonally slow summer sales (May-August) have, in our view, consistently provided investors with a good entry point since 2010, as car sales momentum typically picks up after summer and accelerates towards January (i.e. the month before Chinese New Year). Since 2010, China s auto sector s share prices have exhibited a positive correlation with this industry s seasonality with stronger performance during 2H of the year, especially from August onwards. The same course of events has repeated in 2H13; we have also seen a strong rally for the sector since July-2013, with sales rising by an average 37% until November. This was in line with our expectation and consistent with the sequentially improving monthly sales numbers during 2H13. Fig. 23: China monthly PV unit sales (units '000) ,000 1,800 1,600 1,400 Fig. 24: China auto stocks on an average better performed in 2H Index Jan 2010 = % 300% 250% 200% 150% 1, % 50% 1,000 0% 800 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Source: China Auto Market, Nomura research Source: Bloomberg, Nomura research The share price performance was typically mixed during the first-half of an year. We have witnessed a similar pattern in 1H14. However, as monthly sales volume starts bottoming out from the slow season and sequentially improves towards January, we recommend investors start positioning in the China auto sector from the second half of July onwards, to capture the sequentially stronger sales volume from August till January next year that we are anticipating. 14

15 Nomura China autos and auto parts 9 July 2014 Fig. 25: China auto sector valuations Company Name Ticker Rating TP Up/ Downside Mkt Cap PE PB ROE EPS Growth Div yield Net Gearing Closing (USDmn) 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F 2014F Brilliance China 1114 HK Equity NEUTRAL % 10, % 26% 29% 13% 1.1% 3.0% BYD 1211 HK Equity BUY % 17, % 10% 176% 61% n.a 97.1% Dongfeng Motor 489 HK Equity BUY % 15, % 19% 17% 17% 1.9% net cash Geely Automobile 175 HK Equity BUY % 3, % 14% -23% 30% 1.2% net cash Great Wall 2333 HK Equity BUY % 12, % 30% 13% 29% 3.2% net cash Guangzhou Auto 2238 HK Equity BUY % 8, % 14% 61% 28% 2.2% 0.3% Sector average % 19% 63% 32% 1.5% Sector average (excl. BYD) % 22% 23% 22% 2.1% A-share PV makers SAIC Motor CH Equity BUY % 27, % 15% 11% 11% 8.6% net cash Great Wall -A CH Equity Not rated n.a n.a 12, % 28% 22% 30% 3.4% net cash Chongqing Changan CH Equity Not rated n.a n.a 9, % 27% 93% 31% 1.3% 54.3% Guangzhou Auto -A CH Equity Not rated n.a n.a 8, % 14% 60% 32% 2.3% net cash Faw Car CH Equity Not rated n.a n.a 2, % 16% 53% 13% 0.2% 12.7% Beiqi Foton CH Equity Not rated n.a n.a 2, % 8% 30% 18% 2.9% 7.4% Haima Auto CH Equity Not rated n.a n.a 1, n.a 8% 9% 107% 47% n.a net cash Dongfeng Auto -A CH Equity Not rated n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a 18.6% Tianjin Faw Xiali CH Equity Not rated n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a 57.6% Liaoning SG Auto CH Equity Not rated n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a 62.9% Sector average % 18% 34% 21% 4.8% Dealers Zhongsheng Group 881 HK Equity NEUTRAL % 2, % 13% 20% 18% 1.6% 101.1% China Zhengtong 1728 HK Equity BUY % 1, % 14% 22% 22% 2.7% 40.1% Baoxin Auto 1293 HK Equity Not rated n.a n.a 2, % 28% 39% 32% 1.9% 203.7% Dah Chong Hong 1828 HK Equity Not rated n.a n.a 1, % 13% 21% 17% 4.8% 58.7% Yonda 3669 HK Equity Not rated n.a n.a 1, % 23% 38% 32% 1.8% 161.4% China Harmony 3836 HK Equity Not rated n.a n.a n.a 21% 22% 13% 34% 1.3% 92.5% Sunfonda 1771 HK Equity Not rated n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a 66.7% Meidong 1268 HK Equity Not rated n.a n.a n.a 34% 39% 64% 67% n.a 136.9% Sector average % 19% 27% 25% Auto-part makers Johnson Electric 179 HK Equity NEUTRAL % 3, % 12% 4% 7% 1.7% net cash Minth Group 425 HK Equity BUY % 2, % 15% 14% 16% 3.3% net cash Nexteer 1316 HK Equity BUY % 1, % 21% 11% 27% 1.8% 43.6% Xinchen 1148 HK Equity Not rated n.a n.a n.a n.a 4% 35% n.a net cash Xingda Intl 1899 HK Equity Not rated n.a n.a % 11% 19% 19% 3.9% 16.4% Sector average % 13% 9% 17% 2.1% CV makers Weichai Power 2338 HK Equity Not rated n.a n.a 6, % 15% 21% 14% 0.9% 3.8% Jiangling Motor CH Equity Not rated n.a n.a 3, % 22% 18% 39% 3.0% net cash Sinotruk HK 3808 HK Equity Not rated n.a n.a 1, % 3% 82% 31% 1.4% 27.6% Qingling Motor 1122 HK Equity Not rated n.a n.a % 6% 9% 6% 6.0% net cash Shenyang Jinbe CH Equity Not rated n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a 125.4% Sector average % 15% 25% 22% 1.8% Source: Bloomberg, Nomura estimates. Bloomberg consensus for not rated companies. Note: For Johnson Electric, "14E" refers to the fiscal year ending in March 2015, and so on. Pricing as on 4 July

16 Nomura China autos and auto parts 9 July 2014 Fig. 26: Nomura Global Auto Research peer valuation comparisons Autos Mkt Cap Current Target Potential P/ E EV / EBITDA P / BV ROE Div Yield Company Ticker ($mn) Rating Price Price Upside 14E 15E 14E 15E 14E 15E 14E 15E 14E 15E US GM GM US 63,215 Reduce $ % 11.0x 10.3x 2.8x 2.6x 1.5x 1.6x 13.4% 14.8% 2.8% 2.9% Ford F US 66,076 Neutral $ % 13.7x 13.3x 7.5x 6.8x 2.6x 2.6x 18.8% 19.4% 2.5% 2.8% Average -14% 12.4x 11.8x 5.2x 4.7x 2.0x 2.1x 16.1% 17.1% 2.7% 2.8% Median -14% 12.4x 11.8x 5.2x 4.7x 2.0x 2.1x 16.1% 17.1% 2.7% 2.8% Europe BMW BMW GY 84,689 Buy % 11.5x 11.2x 4.0x 3.9x 1.6x 1.4x 14.4% 13.5% 2.8% 2.9% Daimler DAI GY 102,025 Neutral % 11.8x 11.1x 4.7x 4.4x 2.0x 1.8x 17.7% 16.9% 3.4% 3.4% Volkswagen VOW3 GY 121,236 Neutral % 9.4x 8.8x 3.7x 3.5x 1.0x 0.9x 10.8% 10.6% 2.6% 2.6% Fiat F IM 12,936 Reduce % 33.9x 9.2x 2.5x 2.6x 1.5x 1.3x 4.1% 15.6% 0.0% 0.0% Peugeot SA UG FP 4,917 Reduce % N/A 10.0x -0.8x -1.0x 0.4x 0.4x -0.9% 3.7% 0.0% 0.0% Renault RNO FP 26,098 Neutral % 10.5x 8.3x 4.2x 3.5x 1.1x 1.1x 10.5% 13.3% 2.4% 2.8% Volvo VOLVB SS 28,514 Neutral % 19.3x 15.8x 8.0x 7.1x 2.5x 2.3x 13.2% 15.1% 3.1% Average -20% 16.1x 10.6x 3.8x 3.4x 1.4x 1.3x 10.0% 12.7% 2.1% 2.0% Median -13% 11.7x 10.0x 4.0x 3.5x 1.5x 1.3x 10.8% 13.5% 2.6% 2.7% India Ashok Leyland AL IN 1,602 Buy INR INR % 358.2x 17.2x 17.6x 9.4x 2.1x 1.9x 0.6% 11.8% 0.0% 2.1% Bajaj Auto BJAUT IN 11,098 Neutral INR 2, INR 1, % 18.8x 17.5x 12.9x 11.8x 5.9x 5.0x 33.8% 30.9% 2.3% 2.5% Hero Motocorp HMCL IN 8,608 Neutral INR 2, INR 2, % 18.9x 16.9x 12.2x 11.1x 7.0x 5.8x 40.7% 37.5% 2.2% 2.5% Mahindra & Mahindra MM IN 11,534 Buy INR 1, INR 1, % 18.4x 15.9x 11.5x 9.6x 3.5x 3.0x 20.7% 20.5% 1.2% 1.3% Maruti Suzuki MSIL IN 13,312 Buy INR 2, INR 2, % 22.3x 17.3x 10.9x 8.4x 3.3x 2.8x 15.6% 17.4% 0.6% 0.7% Tata Motors TTMT IN 24,969 Buy INR INR % 10.4x 9.3x 4.7x 4.0x 1.9x 1.6x 20.1% 18.7% 0.4% 0.4% Average -3% 67.1x 15.7x 11.6x 9.0x 4.0x 3.4x 22.0% 22.8% 1.1% 1.6% Median -5% 18.9x 17.0x 11.8x 9.5x 3.5x 2.9x 20.7% 19.6% 1.1% 1.3% China Brilliance 1114 HK 10,012 Neutral HK$ HK$ % 14.2x 12.6x 13.6x 12.0x 3.7x 2.9x 29.2% 26.0% 1.1% 1.2% BYD 1211 HK 17,580 Buy HK$ HK$ % 56.9x 35.4x 16.7x 13.7x 3.7x 3.4x 6.8% 10.0% 0.0% 0.0% Dongfeng Motor 489 HK 15,853 Buy HK$ HK$ % 7.9x 6.8x 6.8x 5.4x 1.4x 1.2x 18.2% 18.6% 1.9% 2.2% Geely Auto 175 HK 3,373 Buy HK$ 2.97 HK$ % 10.1x 7.8x 6.0x 4.3x 1.1x 1.0x 12.1% 14.0% 1.2% 1.6% Great Wall 2333 HK 12,872 Buy HK$ HK$ % 8.2x 6.4x 1.3x 1.0x 2.2x 1.7x 29.6% 30.2% 3.2% 4.2% GAC 2238 HK 8,005 Buy HK$ 9.59 HK$ % 11.5x 8.9x 3.1x 2.4x 1.3x 1.2x 12.2% 14.2% 2.2% 2.8% ZhengTong Auto 1728 HK 1,297 Buy HK$ 4.55 HK$ % 7.8x 6.3x 6.2x 5.3x 1.0x 0.9x 12.8% 14.1% 2.7% 3.2% Zhongsheng 881 HK 2,831 Neutral HK$ HK$ % 12.8x 10.8x 11.6x 11.0x 1.5x 1.3x 13.6% 13.2% 1.6% 1.9% SAIC CH 27,650 Buy CNY CNY % 6.2x 5.6x 3.4x 3.3x 1.1x 1.0x 15.9% 15.4% 8.6% 9.6% Average 22% 15.1x 11.2x 7.6x 6.5x 1.9x 1.6x 16.7% 17.3% 2.5% 3.0% Median 26% 10.1x 7.8x 6.2x 5.3x 1.4x 1.2x 13.6% 14.2% 1.9% 2.2% Korea Hyundai Motor KS 61,257 Buy KRW 228,000 KRW 280,000 23% 7.5x 6.7x 8.8x 8.6x 1.0x 0.9x 14.2% 13.9% 0.8% 0.8% Kia Motors KS 21,792 Neutral KRW 54,500 KRW 60,000 10% 6.0x 5.4x 5.7x 5.3x 0.9x 0.8x 16.9% 16.0% 1.7% 1.8% Average 16% 6.8x 6.1x 7.2x 6.9x 1.0x 0.8x 15.5% 15.0% 1.3% 1.3% Median 16% 6.8x 6.1x 7.2x 6.9x 1.0x 0.8x 15.5% 15.0% 1.3% 1.3% Japan Nissan 7201 JT 40,680 Neutral JPY 991 JPY 1,000 1% 10.0x 9.3x 9.4x 8.4x 0.9x 0.8x 9.2% 9.4% 3.3% 3.6% Toyota 7203 JT 192,335 Buy JPY 6,201 JPY 8,000 29% 10.6x 9.3x 9.4x 8.0x 1.3x 1.2x 12.4% 13.0% 2.9% 3.4% Mazda 7261 JT 14,433 Buy JPY 493 JPY % 8.4x 8.8x 5.6x 4.7x 1.8x 1.5x 23.6% 18.7% 0.6% 2.0% Daihatsu 7262 JT 7,399 Neutral JPY 1,773 JPY 1,660-6% 10.2x 10.7x 2.8x 2.5x 1.3x 1.2x 12.9% 11.3% 3.2% 3.2% Honda 7267 JT 63,017 Buy JPY 3,570 JPY 4,900 37% 10.3x 9.4x 8.9x 8.0x 1.0x 0.9x 10.1% 10.3% 2.6% 3.0% Suzuki 7269 JT 18,652 Buy JPY 3,395 JPY 3,900 15% 14.9x 13.1x 4.0x 3.3x 1.3x 1.2x 9.2% 9.7% 0.8% 1.0% Fuji Heavy Inds 7270 JT 22,465 Buy JPY 2,939 JPY 3,800 29% 9.8x 9.4x 4.3x 3.8x 2.4x 2.1x 27.2% 23.8% 2.4% 3.1% Yamaha Motors 7272 JT 6,339 Neutral JPY 1,854 JPY 1,800-3% 13.1x 12.1x 7.6x 6.9x 1.5x 1.4x 12.2% 12.1% 1.6% 1.9% Average 17% 10.9x 10.3x 6.5x 5.7x 1.4x 1.3x 14.6% 13.5% 2.2% 2.7% Median 22% 10.3x 9.4x 6.6x 5.8x 1.3x 1.2x 12.3% 11.7% 2.5% 3.0% Source: Bloomberg, Nomura estimates. Bloomberg consensus for not rated companies. Note: For the Japanese stocks, non-automotive debt is included in the calculation of EV. Where the fiscal year does not end in December, "13E" refers to the fiscal year ending in March 2014, and so on; pricing as of 4 July

17 Nomura China autos and auto parts 9 July 2014 Fig. 27: Nomura Global Auto Research peer valuation comparisons (continued) Auto Parts Mkt Cap Current Target Potential P/ E EV / EBITDA P / BV ROE Div Yield Company Ticker ($mn) Rating Price Price Upside 14E 15E 14E 15E 14E 15E 14E 15E 14E 15E US BorgWarner BWA US 15,274 N/R $ N/A N/A 16.9x 14.2x 9.1x 7.5x 3.2x 2.5x 20.0% 19.8% 0.6% 0.5% Goodyear GT US 6,922 N/R $ N/A N/A 8.6x 8.0x 4.3x 3.9x 2.6x 2.0x 34.3% 28.5% 0.8% 0.9% Johnson Controls JCI US 35,206 N/R $ N/A N/A 13.8x 11.8x 9.6x 8.4x 2.5x 2.3x 19.5% 20.3% 1.8% 2.1% Magna International MGA US 24,411 N/R $ N/A N/A 11.4x 9.9x 6.9x 6.3x 2.2x 2.1x 20.6% 21.5% 1.6% 1.6% TRW Automotive TRW US 10,406 N/R $ N/A N/A 10.6x 9.5x 5.6x 5.0x 1.9x 1.5x 19.7% 18.0% N/A N/A Average N/A 12.3x 10.7x 7.1x 6.2x 2.5x 0.8x 22.8% 85.4% 1.2% 1.3% Median N/A 11.4x 9.9x 6.9x 6.3x 2.5x 2.1x 20.0% 6.6% 1.2% 1.2% Europe Autoliv ALV US 10,198 N/R $ N/A N/A 14.9x 13.1x 7.7x 6.7x 2.2x 1.9x 15.6% 15.5% 2.1% 2.3% Continental CON GY 46,489 N/R N/A N/A 11.9x 10.9x 6.0x 5.3x 2.5x 2.3x 23.4% 22.0% 2.1% 2.4% Faurecia EO FP 4,461 N/R N/A N/A 10.5x 7.5x 3.3x 2.7x 1.8x 1.4x 18.0% 20.9% 1.8% 2.3% Michelin ML FP 22,260 N/R N/A N/A 9.9x 9.1x 4.3x 3.8x 1.4x 1.3x 15.3% 15.1% 3.5% 3.9% Valeo FR FP 10,725 N/R N/A N/A 11.9x 10.7x 5.0x 4.5x 2.3x 2.0x 21.2% 20.1% 2.5% 2.7% Average N/A 11.8x 10.3x 5.2x 4.6x 2.1x 0.7x 18.7% 50.6% 2.4% 2.7% Median N/A 11.9x 10.7x 5.0x 4.5x 2.2x 1.9x 18.0% 8.0% 2.1% 2.4% Korea Hyundai Mobis KS 27,144 Buy KRW 281,500 KRW 360,000 28% 7.0x 6.5x 6.5x 5.9x 1.2x 1.0x 17.9% 16.4% 0.7% 0.7% Hankook Tire KS 7,166 Buy KRW 58,400 KRW 74,000 27% 9.0x 8.0x 6.1x 5.0x 1.6x 1.3x 18.6% 17.7% 0.7% 0.8% Mando KS 2,264 Neutral KRW 127,000 KRW 145,000 14% 10.6x 9.3x 5.9x 5.7x 1.2x 1.1x 12.1% 12.5% 0.9% 0.9% Nexen Tire KS 1,471 Neutral KRW 15,400 KRW 15,000-3% 9.3x N/A 6.7x N/A 1.6x N/A 18.0% NA 0.5% 0.0% Average 17% 8.8x 7.6x 6.2x 5.4x 1.4x 1.1x 16.8% 15.9% 0.7% 0.6% Median 20% 9.0x 7.4x 6.1x 5.4x 1.3x 1.1x 17.9% 16.8% 0.7% 0.7% Japan Toyota Boshoku 3116 JT 2,005 Neutral JPY 1,105 JPY 1,050-5% 13.9x 11.6x 3.1x 2.7x 0.9x 0.9x 6.9% 7.9% 2.0% 2.3% Yokohama Rubber 5101 JT 2,872 Neutral JPY 880 JPY 1,100 25% 8.0x 7.7x 4.7x 4.3x 1.1x 1.0x 14.4% 13.4% 2.7% 3.0% Bridgestone 5108 JT 28,546 Neutral JPY 3,724 JPY 4,300 15% 10.3x 9.7x 4.7x 4.3x 1.5x 1.3x 15.5% 14.5% 1.6% 1.7% Sumitomo Rubber Inds 5110 JT 3,821 Neutral JPY 1,487 JPY 1,550 4% 8.3x 7.9x 4.8x 4.4x 1.1x 1.0x 13.5% 12.7% 2.7% 2.8% Unipres Corp 5949 JT 1,116 Buy JPY 2,422 JPY 2,200-9% 11.5x 8.6x 3.4x 3.0x 0.9x 0.8x 8.4% 10.2% 1.2% 1.4% NHK Spring 5991 JT 2,347 Neutral JPY 1,020 JPY 1,200 18% 9.0x 8.4x 3.5x 3.0x 1.0x 1.0x 12.3% 11.9% 2.2% 2.4% Toyota Industries 6201 JT 16,552 Neutral JPY 5,420 JPY 5,300-2% 16.0x 15.0x 9.4x 8.6x 0.9x 0.8x 5.5% 5.6% 1.5% 1.6% GS Yuasa 6674 JT 2,745 Neutral JPY 679 JPY % 17.3x 14.8x 8.9x 7.8x 1.8x 1.7x 11.1% 11.8% 1.5% 1.8% Denso Corp 6902 JT 37,734 Buy JPY 4,805 JPY 5,550 16% 13.8x 12.8x 5.2x 4.5x 1.3x 1.2x 9.9% 10.0% 2.1% 2.3% Stanley Electric 6923 JT 4,481 Neutral JPY 2,696 JPY 2,450-9% 15.0x 13.1x 5.6x 4.8x 1.6x 1.5x 11.2% 11.7% 1.3% 1.5% Musashi Seimitsu 7220 JT 809 Buy JPY 2,649 JPY 3,000 13% 10.6x 9.7x 4.7x 4.2x 1.2x 1.1x 12.1% 11.9% 1.9% 2.1% Nissin Kogyo 7230 JT 1,306 Neutral JPY 2,059 JPY 2,400 17% 10.9x 10.1x 3.4x 2.9x 1.2x 1.1x 11.4% 11.3% 2.2% 2.4% Tachi-S 7239 JT 582 Buy JPY 1,753 JPY 1,800 3% 14.2x 9.0x 5.2x 3.4x 0.9x 0.8x 6.0% 9.4% 0.9% 1.1% NOK Corp 7240 JT 3,547 Neutral JPY 2,116 JPY 2,000-5% 12.4x 11.3x 4.6x 4.0x 1.0x 0.9x 8.5% 8.7% 1.2% 1.4% Keihin Corp 7251 JT 1,187 Neutral JPY 1,639 JPY 1,700 4% 9.9x 9.3x 2.6x 2.2x 0.7x 0.7x 7.8% 7.8% 2.1% 2.3% Aisin Seiki 7259 JT 11,124 Buy JPY 4,030 JPY 4,800 19% 11.8x 10.7x 3.1x 2.8x 1.1x 1.0x 9.3% 9.6% 2.5% 2.7% Koito Mfg 7276 JT 4,248 Neutral JPY 2,699 JPY 2,600-4% 14.4x 12.9x 4.7x 4.0x 1.8x 1.6x 13.0% 13.0% 1.3% 1.5% Exedy Corp 7278 JT 1,457 Buy JPY 3,090 JPY 3,200 4% 12.5x 11.4x 4.2x 3.8x 1.0x 0.9x 7.9% 8.2% 2.4% 2.6% Toyoda Gosei 7282 JT 2,703 Neutral JPY 2,133 JPY 2,100-2% 11.7x 11.1x 3.1x 2.9x 0.9x 0.9x 8.2% 8.2% 2.6% 2.7% Nifco 7988 JT 1,788 Buy JPY 3,455 JPY 3,400-2% 15.2x 13.1x 6.6x 5.7x 1.6x 1.5x 10.9% 11.7% 2.0% 2.5% F.C.C. Co. Ltd JT 959 Neutral JPY 1,951 JPY 2,000 3% 10.5x 9.9x 3.6x 3.4x 0.9x 0.8x 8.9% 8.8% 2.2% 2.3% Takata Corp 7312 JT 1,808 Neutral JPY 2,220 JPY 2,450 10% 9.5x 8.2x 3.5x 2.9x 1.0x 0.9x 10.6% 11.2% 1.6% 1.8% TS Tech Co 7313 JT 2,094 Buy JPY 3,145 JPY 3,100-1% 8.9x 8.4x 2.5x 2.1x 1.2x 1.1x 14.9% 14.0% 2.1% 2.2% Average 4% 12.0x 10.6x 4.6x 4.0x 1.2x 1.1x 10.4% 10.6% 1.9% 2.1% Median 3% 11.7x 10.1x 4.6x 3.8x 1.1x 1.0x 10.6% 11.2% 2.0% 2.3% Hong Kong Johnson Electric 179 HK 3,297 Neutral HKD 7.14 HKD % 15.2x 14.2x 8.8x 7.9x 1.7x 1.6x 12.0% 11.7% 1.7% 2.0% Minth Group 425 HK 2,194 Buy HKD HKD % 12.2x 10.5x 8.9x 7.7x 1.6x 1.5x 14.3% 15.1% 3.3% 3.8% Nexteer 1316 HK 1,769 Buy HKD 5.49 HKD % 10.9x 8.6x 5.6x 4.7x 2.0x 1.7x 19.6% 21.1% 1.8% 2.3% Average 18% 12.7x 11.1x 7.8x 6.8x 1.8x 1.6x 15.3% 16.0% 2.3% 2.7% Median 20% 12.2x 10.5x 8.8x 7.7x 1.7x 1.6x 14.3% 15.1% 1.8% 2.3% Taiwan Cheng Shin Rubber 2105 TT 8,232 Neutral TWD 76 TWD 92 21% 12.1x 11.3x 7.5x 6.9x 2.8x 2.4x 24.2% 22.7% 3.4% 3.6% Indonesia Astra International ASII IJ 25,448 N/R IDR 7,350 N/A N/A 12.4x 11.3x 10.5x 9.5x 2.7x 2.4x 23.4% 22.7% 3.5% 3.8% Indomobil Sukses International IMAS IJ 1,159 N/R IDR 4,900 N/A N/A 11.7x 10.3x 13.8x 11.6x 1.8x 1.6x 16.4% 16.4% 1.3% 2.4% Average N/A 12.1x 10.8x 12.1x 10.6x 2.3x 2.0x 19.9% 19.5% 2.4% 3.1% Median N/A 12.1x 10.8x 12.1x 10.6x 2.3x 2.0x 19.9% 19.5% 2.4% 3.1% Source: Bloomberg, Nomura estimates. Bloomberg consensus for not rated companies. Note: For the Japanese stocks, non-automotive debt is included in the calculation of EV. Where the fiscal year does not end in December, "13E" refers to the fiscal year ending in March 2014, and so on; for Johnson Electric, "14E" refers to the fiscal year ending in March 2015, and so on; pricing as of 4 July

18 Nomura China autos and auto parts 9 July 2014 Investment risks New car sales restrictions potentially more cities in 2H14F and 2015F but share price impact increasingly limited Currently, Beijing, Shanghai, Guangzhou, Tianjin and Guiyang have new car sales restrictions in place through a quota and/or bidding system for new car licence plates. Considering the government s focus on air pollution issues, along with increasing traffic congestion, we believe the risk of more cities adopting new car sales restriction has risen, which may pose downside risks to China s new car sales. The latest city to adopt new car sales restrictions has been Tianjin. According to a notice issued by the city government on 15 December, Tianjin will restrict traffic and issue new car license plates via bidding and lottery in a drive to fight traffic jams and air pollution. The city started to impose the quota on its new car plates on 16 December, requiring buyers to join the lottery or bid in auctions to win a plate. The notice did not give details on the quota or how many plates will go for lottery compared with auction. More details will be separately announced later. Measures suggested in the past include restricting the number of vehicles per household, limiting auto penetration growth, or reducing licence registration through a lottery system. Tianjin will also follow Beijing's step in adopting a similar traffic restriction scheme, which blocks cars from streets depending on the last digit of their plates, with two numbers banned each workday, said Miao Hongwei, head of the city s traffic management bureau. The ban has taken effect since 1 March Moreover, the city has also banned vehicles with non-local plates from driving into the city's outer ring road during morning and evening rush hours on workdays, Miao said. According to the MEP (Ministry of Environmental Protection), 34 of 74 major cities in China did not qualify under the MEP s AQI (Air Quality Index) survey in October We notice that within these 34 cities, most are tier-one and tier-two cities, and concentrated around the Hebei Province. Fig. 28: List of cities selected in EV program and their air quality status Most polluted Most polluted city city rank City name Total (units) rank City Total (units) 13 Beijing 北 京 35,020 Xiangyang 襄 阳 5,000 Shenzhen 深 圳 35, Taiyuan* 太 原 5,000 6 Tianjin 天 津 12,000 Jincheng* 晋 城 5, Xi an 西 安 11,000 Ningbo* 宁 波 5, Wuhan 武 汉 10,500 Zhangzhutan* 长 株 潭 5, Shanghai 上 海 10,000 Haikou* 海 口 5,000 Guangzhou 广 州 10, Chengdu* 成 都 5, Chongqing 重 庆 10,000 Kunming* 昆 明 5,000 9 Zhengzhou 郑 州 5,500 8 Lanzhou* 兰 州 5, Qingdao 青 岛 5,200 1, 2, 3, 5, 7, 10, Hebei 15, 20, 27 河 北 省 城 市 群 13,141 Guanhu 莞 湖 5,100 31, 34 Zhejiang 浙 江 省 城 市 群 10,100 Dalian 大 连 5,000 Fujian 福 建 省 城 市 群 10,000 Hefei 合 肥 5, Jiangxi 江 西 省 城 市 群 5,000 Xinxiang 新 乡 5,000 Guangdong 广 东 省 城 市 群 10,000 Total EV 257,561 Note: Ranked in order of most polluted city in China. Source: d1ev, MEP, Nomura research Tianjin accounted for 2% of China s total new car sales in Back in July 2013, the China Association of Automobile Manufacturers (CAAM) reported that there might be more cities in China planning to curb auto purchases to fight pollution and congestion, highlighting eight possibilities -- Tianjin, Chengdu, Chongqing, Hangzhou, Qingdao, Shenzhen, Shijiazhuang and Wuhan. We estimate that these eight cities account for 11% of China s total new car sales, and if we assume a 30% cut in sales in these cities (based on past experience), China s total new car sales could be reduced by 3.3%. 18

19 Nomura China autos and auto parts 9 July 2014 Over the next few months, we believe that the market will continue to anticipate and price in similar restrictions spreading into more cities (especially in Tier-1 and 2 cities in northern China where air pollution is more severe), thereby capping the valuation upside for the sector in the near-term at or below its long-term average of 10x P/E. Fig. 29: China PV sales volume by province Shandong 9% Chongqing 2% Jiangsu 8% Fujian 2% Guangdong 8% Guangxi 2% Zhejiang 7% Heilongjiang 2% Hebei 6% Inner Mongolia 2% Henan 5% Jiangxi 2% Beijing 4% Jilin 2% Sichuan 4% Tianjin 2% Anhui 3% Xinjiang 2% Hubei 3% Yunnan 2% Hunan 3% Gansu <1% Liaoning 3% Guizhou <1% Shaanxi 3% Hainan <1% Shanghai 3% Ningxia <1% Shanxi 3% Qinghai <1% Tibet <1% Source: China Auto Market, Nomura research Investors are aware of the possibility of more cities imposing new car sales restrictions based on our survey among investors. However, we believe the market might start to anticipate similar restrictions spreading into more cities (especially tier-one and tier-two cities in northern China, where air pollution is more severe), thereby creating an overhang on auto share prices in the very near term, i.e., the industry risk has risen. The impact to actual sales volume of OEMs and dealers should be manageable, since their sales efforts have been focusing on lower-tier cities where restriction possibility is much lower. In the near- term, new car sales might actually benefit from the bringing forward of demand from buyers on worries over likely more restrictions later. However, sales momentum might taper off during 2Q14F and through summer months, which also coincided with the industry s slow season. More extreme anti-corruption measures likely We have been cautious on the near- to medium-term sales outlook for the high-end luxury segment (see our last anchor report dated 30 July, 2013, Fork in the road), owing to the anti-corruption measures taken by China s new leadership. China's anti-waste battle started in December 2012, when the new leadership pledged to improve the Party work style and to end extravagance and bureaucracy. In June 2013, China's leaders launched a one-year "mass-line" campaign to boost ties between the Communist Party of China (CPC) members and the people, while cleaning up the undesirable work styles characterised by formalism, bureaucracy, hedonism and extravagance. We believe this initiative has legs and will likely persist into 2014F. Recently, on 25 November 2013, Chinese authorities announced that they will cancel all official cars for general use and only keep "necessary" official vehicles for law enforcement, confidential communications, emergency services and other uses under stipulation. The move comes as part of the latest written regulations to standardise fund management and ban Party and government extravagance. It regulated that general official travel will be carried out through public transportation, and officials may receive transportation subsidies. The regulation, issued by the CPC Central Committee and the State Council, China's cabinet, outlined the proper management of funds for various uses, including official travel, receptions, meetings and buildings. It is meant to guide the Party and government organs in practicing frugality and rejecting extravagance, and is 19

20 Nomura China autos and auto parts 9 July 2014 an important move in the spirit of the recently concluded Third Plenary Session of the 18th CPC Central Committee. Institutions have also been ordered to be transparent in their spending and publicise in detail their use of funds, assets and public resources, except in cases that involve national secrets. However, the November regulation is the first time the rules were issued as a legal document in order to rein in power and kill extravagance at its root. Do note that government purchases of vehicles should account for approximately 1% of total new car sales, based on industry estimates. Moreover, since we have already been cautious on our outlook on high-end luxury car sales, any further downside risks to our forecasts will come from further stringent anti-waste measures than we have already been anticipating. Potential impact of Sino-Japan tensions The controversial visit to the Yasukuni Shrine by Japanese Prime Minister Shinzo Abe on 26 December has renewed the geopolitical tensions between China and Japan. Given concerns over a possible disruption to Japanese brands auto sales, share prices of Dongfeng and GAC, the two major local JV partners for Japanese brands, both declined 4% in subsequent two trading days. Among the two, Dongfeng is the one with a relatively smaller exposure to Japanese brands thanks to its JV with PSA (UG FP) and larger commercial vehicle contribution (see figure below), although we would recommend GAC as the recovery play should tensions begin to fade. On the other hand, if the tensions worsen, we believe Great Wall Motor could be the biggest beneficiary. Fig. 30: Dongfeng s (LHS) and GAC s (RHS) sales volume breakdown, 5M14 Others 15% GAMC 13% Others 4% CV 15% DF Honda 11% DF Nissan 34% DF PSA 25% GAC Fiat 7% GAC Mitsubishi 5% GAC Toyota 36% GAC Honda 35% Source: Companies, Nomura research Looking back, the impact of previous political disputes on Japanese brands sales volume has been short-lived. Practical values such as quality, design, durability, and value-for-money remain the most influential factors in the decision-making process. Once the political tensions faded, Japanese brands sales volume typically managed to recover within a year. The latest example has been this year s recovery after the anti- Japan protests in September 2012 over disputed islands. 20

21 Nomura China autos and auto parts 9 July 2014 Fig. 31: Impact on Japanese brands auto sales post anti-japanese protests 200% 150% 100% Anti-Japan protest in 2005: rejecting Japan's bid to become a permanent member of the UN security Council Anti-Japan protest in 2010: Chinese fishing boat collides with a Japanese vessel 50% 0% -50% -100% Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Source: China Auto Market, Nomura research Anti-Japan protests in 2012 following dispute over islands So far we have not heard of any disruption to Japanese auto sales resulting from Abe s shrine visit. While it is difficult at this point to determine if there will indeed be any impact in the future, we estimate that for every 1% reduction in Japanese brands sales volume, our Dongfeng s and GAC s 2014F EPS estimates will be cut by approximately 1%. 21

22 Nomura China autos and auto parts 9 July 2014 Appendix 1 New models in 2H14 Fig. 32: Honda new compact SUV (2H14) Fig. 33: Honda New Odyssey (4Q14) Source: Nomura research Source: Nomura research Fig. 34: Honda Spirior (4Q14) Fig. 35: Toyota Levin (3Q14) Source: Nomura research Source: Nomura research Fig. 36: Toyota Ranz (2H14) Fig. 37: Toyota Crown Majesta (4Q14) Source: Nomura research Source: Nomura research 22

23 Nomura China autos and auto parts 9 July 2014 Fig. 38: Mitsubishi Outlander (4Q14) Fig. 39: Peugeot 408 (3Q14) Source: Nomura research Source: Nomura research Fig. 40: Fiat Viaggio hatchback (4Q14) Fig. 41: Fiat Freemount (2H14) Source: Nomura research Source: Nomura research Fig. 42: Haval H2 (3Q14) Fig. 43: Chevrolet Cruze (4Q14) Source: Nomura research Source: Nomura research 23

24 Nomura China autos and auto parts 9 July 2014 Appendix 2 Market share trends Luxury segment Germany s big 3 still the dominant force Fig. 44: China s entry-level luxury market share, 5M14 Fig. 45: China mid-end luxury market share, 4M14 Volvo C30/C70/S 40/S60, 7% Lexus IS/CT, 3% Cadillac XTS, 6% Volvo S60/S80, 6% Acura TL, 0% MB A/B/C/CLK/ SLK, 17% BMW 1,3 Series, 34% Audi A3/A4L, 39% Lexus ES/GS, 9% MB E- Class, 12% BMW 5 Series, 30% Audi A5/A6L, 37% Source: LMC automotive, Nomura research Source: LMC automotive, Nomura research Fig. 46: China premium luxury market share, 5M14 Fig. 47: China luxury SUV market share, 5M14 Infiniti FX/M/G, 9% Porsche Panamera, 8% Jaguar XF/XJ, 16% Audi A8, 16% Source: LMC automotive, Nomura research Lexus LS, 0% MB S/CLS, 29% BMW 7 Series, 22% Porsche Cayenne, 5% Cadillac Escalade/S RX, 5% Volvo XC, 5% BMW X Series, 19% MB ML/G/GL/G LK/R, 12% Lexus RX/LX/GX, 4% Source: LMC automotive, Nomura research Infiniti QX/EX, 1% Audi Q Series, 34% Land Rover, 15% Fig. 48: China entry-level luxury market share trend Low price (CNY'000) Source: LMC automotive, Nomura research High price (CNY'000) YTD-14 1 Audi A3/A4L % 38% 42% 43% 44% 39% 2 BMW 1,3 Series % 27% 25% 26% 31% 34% 3 MB A/B/C/CLK/SLK % 26% 24% 19% 16% 17% 4 Volvo C30/C70/S40/S % 5% 7% 6% 5% 7% 5 Lexus IS/CT % 4% 3% 6% 4% 3% 24

25 Nomura China autos and auto parts 9 July 2014 Fig. 49: China mid-end luxury market share trend Low price (CNY'000) Source: LMC automotive, Nomura research High price (CNY'000) YTD-14 1 Audi A5/A6L % 48% 41% 45% 40% 37% 2 BMW 5 Series % 19% 27% 32% 31% 30% 3 MB E-Class % 16% 19% 12% 11% 12% 4 Lexus ES/GS % 12% 8% 7% 9% 9% 5 Cadillac XTS % 0% 0% 0% 5% 6% 6 Volvo S60/S % 5% 6% 5% 4% 6% 7 Acura TL % 0% 0% 0% 0% 0% Fig. 50: China premium luxury market share trend Low price (CNY'000) Source: LMC automotive, Nomura research High price (CNY'000) YTD-14 1 MB S/CLS % 37% 33% 41% 28% 29% 2 BMW 7 Series , % 36% 34% 24% 25% 22% 3 Audi A , % 8% 11% 15% 17% 16% 4 Jaguar XF/XJ , % 4% 5% 6% 15% 16% 5 Porsche Panamera 1, , % 3% 7% 7% 6% 8% 6 Infiniti FX/M/G , % 10% 8% 8% 8% 9% 7 Lexus LS 1, , % 2% 1% 0% 0% 0% Fig. 51: China luxury SUV market share trend Low price (CNY'000) Source: LMC automotive, Nomura research High price (CNY'000) YTD-14 1 Audi Q Series % 28% 27% 31% 31% 34% 2 Land Rover , % 12% 11% 16% 14% 15% 3 MB ML/G/GL/GLK/R % 16% 19% 14% 13% 12% 4 BMW X Series % 19% 17% 15% 22% 19% 5 Porsche Cayenne , % 5% 4% 5% 5% 5% 6 Volvo XC % 6% 6% 6% 5% 5% 7 Cadillac Escalade/SRX 1, , % 5% 6% 6% 5% 5% 8 Lexus RX/LX/GX % 7% 8% 6% 4% 4% 9 Infiniti QX/EX 1, , % 2% 2% 1% 1% 1% 25

26 Nomura China autos and auto parts 9 July 2014 Mid-size segment Fig. 52: China mid-size market share 5M14 Volkswagen Passat NMS, 14.7% Others, 31.6% Volkswagen Magotan, 11.3% Buick Lacrosse, 3.9% Mazda Mazda6, 4.0% Buick Regal, 5.1% Ford Mondeo, 5.3% Hyundai Mistra, 6.4% Chevrolet Malibu, 6.0% Toyota Camry NG, 6.0% Nissan Teana, 5.7% Source: LMC automotive, Nomura research Fig. 53: China mid-size market share trend Low price (Rmb'000) Source: LMC automotive, Nomura research High price (Rmb'000) YTD-13 YTD-14 1 Volkswagen Passat NMS % 6.2% 12.5% 12.1% 14.7% 2 Volkswagen Magotan % 5.5% 10.3% 10.0% 11.3% 3 Hyundai Mistra % 0.0% 0.0% 0.9% 6.4% 4 Chevrolet Malibu % 0.0% 3.1% 5.3% 6.0% 5 Toyota Camry NG % 0.0% 7.0% 7.1% 6.0% 6 Nissan Teana % 9.9% 5.3% 5.7% 5.7% 7 Ford Mondeo % 0.0% 0.0% 1.9% 5.3% 8 Buick Regal % 5.0% 5.1% 4.6% 5.1% 9 Mazda Mazda % 5.8% 5.1% 5.0% 4.0% 10 Buick Lacrosse % 6.5% 5.1% 4.8% 3.9% 26

27 Nomura China autos and auto parts 9 July 2014 Compact and subcompact segments Competition remains intense Fig. 54: China compact market share, 5M14 Fig. 55: China subcompact market share, 5M14 Volkswagen Lavida, 7.6% Volkswagen Santana, 4.4% Volkswagen Sagitar NCS, 4.2% Others, 24.6% Chevrolet Sail, 14.6% Volkswagen Jetta Series, 4.2% Buick Excelle, 4.1% Nissan Livina, 3.8% Hyundai Verna, 13.1% Others, 58.3% Hyundai Elantra Langdong, 3.1% Volkswagen New Bora, 3.4% Ford Focus NG, 3.7% Buick Excelle XT/GT, 3.6% Chevrolet Cruze, 3.5% Chery E3, 4.0% Toyota Yaris, 4.6% Changan Yuexiang V3, 4.8% Beijing E Series, 5.1% Toyota Vios, 7.7% Volkswagen Polo, 8.7% Kia K2, 9.1% Source: LMC automotive, Nomura research Source: LMC automotive, Nomura research Fig. 56: China compact market share trend Low price (Rmb'000) Source: LMC automotive, Nomura research High price (Rmb'000) YTD-14 1 Volkswagen Lavida % 4.8% 4.3% 6.2% 7.6% 2 Volkswagen Santana % 1.9% 1.8% 2.6% 4.4% 3 Volkswagen Sagitar NCS % 0.0% 3.1% 3.9% 4.2% 4 Volkswagen Jetta Series % 4.2% 4.2% 3.8% 4.2% 5 Buick Excelle % 4.9% 4.8% 4.2% 4.1% 6 Ford Focus NG % 0.0% 2.5% 3.6% 3.7% 7 Buick Excelle XT/GT % 2.6% 3.0% 2.9% 3.6% 8 Chevrolet Cruze % 4.3% 4.0% 3.5% 3.5% 9 Volkswagen New Bora % 4.0% 3.9% 3.4% 3.4% 10 Hyundai Elantra Langdong % 0.0% 1.4% 3.0% 3.1% Fig. 57: China subcompact market share trend Low price (Rmb'000) Source: LMC automotive, Nomura research High price (Rmb'000) YTD-14 1 Chevrolet Sail , % 12.5% 12.9% 14.6% 2 Hyundai Verna , % 9.1% 9.3% 13.1% 3 Kia K , % 6.4% 6.7% 9.1% 4 Volkswagen Polo % 7.0% 7.2% 8.7% 5 Toyota Vios , % 0.4% 1.3% 7.7% 6 Beijing E Series , % 0.9% 2.9% 5.1% 7 Changan Yuexiang V % 0.7% 3.6% 4.8% 8 Toyota Yaris , % 0.5% 0.6% 4.6% 9 Chery E , % 0.0% 1.4% 4.0% 10 Nissan Livina % 3.9% 3.2% 3.8% 27

28 Nomura China autos and auto parts 9 July 2014 SUV segment Fig. 58: China SUV market share 5M14 Others, 63.8% Haval H6, 6.5% Volkswagen Tiguan, 6.1% Honda CR-V, 4.3% Hyundai ix35, 3.4% Ford Kuga, 3.0% Toyota RAV4, 2.9% Audi Q5, 2.5% BYD S6, 2.4% Changan CS35, 2.5% Nissan Qashqai, 2.5% Source: LMC automotive, Nomura research Fig. 59: China SUV models market share trends Low price (Rmb'000) Source: LMC automotive, Nomura research High price (Rmb'000) YTD-14 1 Haval H % 0.5% 6.3% 5.9% 6.5% 2 Volkswagen Tiguan % 6.5% 7.1% 5.7% 6.1% 3 Honda CR-V % 7.7% 6.5% 5.2% 4.3% 4 Hyundai ix % 5.0% 4.2% 4.3% 3.4% 5 Ford Kuga % 0.0% 0.0% 2.6% 3.0% 6 Toyota RAV % 4.8% 3.8% 3.2% 2.9% 7 Audi Q % 2.9% 3.6% 2.9% 2.5% 8 Changan CS % 0.0% 0.3% 2.1% 2.5% 9 Nissan Qashqai % 5.3% 4.1% 3.4% 2.5% 10 BYD S % 2.9% 3.4% 2.5% 2.4% 28

29 Nomura China autos and auto parts 9 July 2014 Appendix 3 - China auto parts industry Overview Auto parts include any component used to assemble a vehicle, and normally include non-core external parts such as trim, body structure and tires, as well as core components such as the gear box and other motion systems. The former is typically characterised by lower-value products that OEMs tend to outsource without hesitation of the leakage of technological patents and licenses. In contrast, the latter usually involves high-precision products, which OEMs tend to develop themselves and are reluctant to delegate to third-party producers. Along with the strong growing momentum of the country's automotive industry, demand for spare parts, components and accessories has also picked up correspondingly in the past 10 years. According to Wind, the sector has been recording a CAGR of 28% since 2004, outperforming the automotive sector s 19% growth. We estimate that the sector currently accounts for 37% of China s entire auto industry. Compared to other developed market such as the US and Japan, of which the contribution of the auto-parts industry ranges from 60% to 70%, we still see ample room for China s auto-parts industry to grow. In the first four months of this year, the auto-parts industry s revenue grew at 11.8% y-y, and remains strong and comparable to that of whole vehicles. Fig. 60: Industry revenue Fig. 61: Revenue growth for auto and auto-parts industry (CNY bn) 3,000 2,500 2,000 1,500 1, , , ,227 1, , M14 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Automotives Auto-parts 40% 42% 37% 37% 25% 26% 26% 20% 27% 29% 21% 24% 13% 12% 11% 9% 9% 8% Source: Wind, Nomura research Source: China Auto Market, Wind, Nomura research Interestingly, we note that most of the industry growth in the past was derived from domestic players instead of foreign players, as opposed to what has been happening in the whole vehicle segment. However, until today, China remains a net importer of autoparts, despite the fact that OEMs in China are localising their production in order to fulfil the regulatory requirement and to lower production cost. 29

30 Nomura China autos and auto parts 9 July 2014 Fig. 62: Import growth for whole vehicle vs. auto parts Fig. 63: China is still a net importer of auto parts 120% 100% 80% 60% 40% 20% 0% -20% Motor vehicles Auto-parts 99.0% 46.4% 45.5% 46.3% 38.7% 40.6% 19.7% 33.5% 15.0% 10.2% 7.6% 2.5% -4.5% 10.4% 19.3% 1.4% -10.3% -1.4% USD bn Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 Source: China Auto Market, Nomura research Source: Wind, Nomura research Competitive landscape Despite the strong revenue growth, industry profitability, as indicated by its gross margins, is gradually declining. With low brand identity and high economies of scale, the low entry barriers have attracted thousands of newcomers rushing into the market over the past 10 years. According to Wind, the number of players increased from around 3,500 in 2003 to over 10,955 in 4M14. Potential price pressure exerted by OEMs Downstream OEMs have traditionally gained stronger bargaining power in pricing negotiation over upstream component producers. The former are generally not obligated to accept a price increase as they often reserve the ultimate right to terminate their purchase orders. Even when part suppliers successfully pass on a price increase, in most cases there will be delays before they could do so effectively. OEMs will also periodically request discounts from part suppliers, typically 1-3% per year, according to Nexteer, when the price protection period is over for their new models. Fig. 64: Number of enterprises in the auto-parts industry Fig. 65: Gross margins for auto and auto-parts industry Units No. of enterprises y-y growth 14,000 12,000 10,000 8,000 6,000 4,000 2, % 27% 17% 16% 11,583 23% 10,468 13% 8,303 7,171 11% 5,415 6,142 4, ,396 9,341-28% ,955 10,333 11% 11% M14 30% 20% 10% 0% -10% -20% -30% -40% Gross margins (%) autos auto-parts Feb 08 Jun 08 Oct 08 Feb 09 Jun 09 Oct 09 Feb 10 Jun 10 Oct 10 Feb 11 Jun 11 Oct 11 Feb 12 Jun 12 Oct 12 Feb 13 Jun 13 Oct 13 Feb 14 Source: Wind, Nomura research Source: Wind, Nomura research 30

31 Nomura China autos and auto parts 9 July 2014 Fig. 66: Porter s 5 forces model for the China auto-parts industry High risk from new entrants: - Low brand identity for parts producers - High economies of scale and easily achievable - Relatively low capital requirment - No absolute cost advanage over peers New entrants High buyer power: - Lower OEM concentration vs parts suppliers in China - OEMs buy in bulk - Capability of backward integration - Low switching costs given low brand identity for auto parts Suppliers Peer competition High intensity of rivalry Buyers Medium supplier power: - Mostly trade through an exchange and material supplier with long-term contract - The use of financial derivatives mitigates price risks - Unlikely for parts producers to move into a more capital and regulated indutry Substitutes Medium threats from substitutes: - Low propensity to self production (OEMs) given possible cost economies achieved from outsourcing Source: Nomura research Future development More of the design process to be transferred to tier-1 suppliers. We have been seeing OEMs involve their tier-1 suppliers in the vehicle design and customisation process where suppliers are required to tailor-make their own solutions to automakers to improve product design. We expect tier-1 suppliers to shoulder more responsibilities in the process should OEMs continue to see margins pressure. More local players to be admitted to automakers global purchase systems. Some international OEMs such as Nissan constantly add in new suppliers to their worldwide purchase systems, which enables players to bid for contracts on a global basis once they are admitted. Chinese parts producers have always enjoyed cost advantages compared to most of their global peers. With improving production technology and better quality control, we expect more local players to gain admission to the systems and be able to capture more overseas opportunities. Industry consolidation looks inevitable. With over 10,000 parts producers supplying only c120 automakers, we believe the industry is overcrowded. Smaller and inefficient suppliers are likely to be phased out in the near term, in our view. Higher cost efficiency is desired. Lower product pricing and rising production costs have continuously put pressure on parts suppliers profit margins. We expect industry players to adopt more cost-efficiency measures to maintain profitability and survive. 31

32 Nomura China autos and auto parts 9 July 2014 Appendix 4 Global auto market outlook Becoming more positive on Europe: a 4% growth likely in both 2014F/15F Our auto analyst Masataka Kunugimoto now expects the region to grow by 4.3% y-y to 14.34mn units in 2014F and by a further 3.9% to 14.90mn units in 2015F. He thinks the European auto market has not only bottomed, but has also started to recover due to three reasons: 1) six consecutive years of declining sales leading to an aging vehicle fleet and thus creating associated pent-up demand, 2) improving macro, and 3) strongerthan-expected YTD sales. (For details please see Global autos outlook - It s a brave new world) China, Europe and India to be the new growth drivers China, the US and Southeast Asia have been driving growth for carmakers over the past three years. In the following three years, apart from China, we expect Europe and India to replace the US and Southeast Asia as the new growth drivers. We look at Japanese and Korean carmakers as the ones who most benefited from the growth in China, the US and Southeast Asia, as they were (and still are) highly exposed to these three markets. However, as Europe and India emerge as new growth frontiers, select carmakers such as Mazda, Suzuki and Hyundai would benefit more compared to the others. Fig. 67: Global demand forecast (million units) CY E 2015E 2016E US yoy change -2.6% -2.5% -18.0% -21.2% 11.1% 10.3% 13.4% 7.6% 2.6% 1.9% 1.8% Western Europe (PC) yoy change 1.8% 0.2% -8.3% 0.8% -5.0% -1.3% -8.1% -1.9% 4.0% 3.5% 3.5% Eastern Europe (PC) yoy change 3.6% 14.6% -2.6% -27.2% -4.8% -2.2% -5.9% 1.1% 10.0% 10.0% 8.0% Total Europe (PC) yoy change 1.9% 1.2% -7.9% -1.5% -5.0% -1.4% -8.0% -1.7% 4.4% 3.9% 3.8% Total Europe (LCV) yoy change 0.8% 6.6% -10.6% -29.4% 8.6% 7.5% -12.9% -0.4% 4.0% 3.5% 3.5% Total Europe yoy change 1.8% 1.8% -8.2% -4.8% -3.8% -0.5% -8.5% -1.6% 4.3% 3.9% 3.8% Japan yoy change -1.9% -6.7% -5.1% -9.3% 7.5% -15.1% 27.5% 0.1% -1.2% -2.1% -1.9% South Korea change yoy 5.5% 5.7% -4.5% 19.6% 7.0% 1.5% -2.4% -0.1% 2.5% 2.0% -0.1% Brazil change yoy 13.1% 27.8% 14.1% 12.6% 10.6% 2.9% 6.1% -1.5% -5.0% 2.0% 4.0% Russia change yoy 24.1% 35.4% 12.4% -49.7% 30.5% 38.7% 10.7% -5.5% -7.0% 2.0% 3.0% India* change yoy 22.1% 12.1% -0.6% 28.0% 28.1% 7.6% 3.9% -6.3% 9.8% 15.6% 12.0% China change yoy 24.8% 22.3% 6.6% 45.5% 32.5% 2.7% 4.2% 13.9% 10.4% 9.5% 9.0% Thailand change yoy -3.0% -7.5% -2.5% -10.8% 45.8% -0.8% 80.9% -7.3% -28.6% 17.6% 7.1% Indonesia change yoy -40.3% 36.2% 39.9% -20.0% 57.3% 16.9% 24.8% 10.3% 11.0% 14.0% 13.0% Malaysia change yoy -10.9% -0.7% 12.5% -2.1% 12.8% -0.8% 4.6% 4.5% 3.5% 3.5% 3.0% Argentina change yoy 14.5% 23.5% 8.5% -19.1% 42.5% 26.2% -6.2% 15.9% -19.6% 9.1% 8.3% South Africa change yoy 14.4% -5.2% -21.6% -26.3% 20.6% 16.8% 8.6% 21.0% -15.7% 5.3% 12.5% Turkey change yoy -13.7% -5.2% -15.3% 10.4% 40.2% 12.5% -10.3% 10.5% -17.3% 9.1% 8.3% Emerging markets yoy change 14.9% 19.7% 6.8% 16.3% 29.7% 6.7% 6.8% 7.6% 4.2% 9.0% 8.5% RoW change yoy 6.1% 10.5% -5.7% -18.2% 12.7% 8.9% 1.2% 0.8% -1.2% 0.4% 0.6% Global Registrations Change 3.8% 5.6% -5.8% -3.9% 14.0% 4.5% 5.0% 4.5% 2.8% 5.0% 4.8% Source: LCMA, Autodata, Fourin, ACEA, KAMA, KAIDA, JAMA, SIAM, AEB, ANFAVEA, Nomura estimates 32

33 Brilliance China 1114.HK 1114 HK EQUITY: AUTOS & AUTO PARTS Upgrade to Neutral; new TP of HKD15.1 Near-term headwinds abated; LT growth roadmap remains intact on more entry-level luxury models Action: Upgrade to Neutral; would turn even more constructive upon more attractive valuations and/or growth surprises After briefly touching our previous TP of HKD9.30 in March, Brilliance s share price has rallied since then, underpinned by strong sales volumes YTD (+33% y-y in 5M14) and the extension of the BMW-Brilliance JV (by 10 years to 2028), as per BMW Group s (BMW GY) Greater China CEO Karsten Engel (Xinhua News, 23 Jun 2014). While we still project that growth in 2H14F will likely be slower than 1H14F (partly owing to the launch of Mercedes new C Class in August), the better-than-expected YTD data suggest that Brilliance should be able to meet its 30% sales volume growth target for FY14F (vs. our previous assumption of 25%). More importantly, our long-term positive view on BMW s entry-level models remains intact (fitting in well with our sector themes of replacement demand and rising affordability), upon the likely addition of more entry-level models for local production during 2015F-17F. Hence, we feel that the arguments underpinning our previous Reduce rating have become less relevant. With the shares already trading at par with the LT average P/E of 13x, we rate Brilliance as Neutral. We would turn more positive on the stock if risk-reward improves on the back of either better-than-expected earnings growth in 2H14F or more attractive valuations. We raise our 2014F- 16F EPS by 11%-12% owing to higher sales volume assumptions (14F sales volume growth at 30% now, in line with company target) and margins. Catalysts: Sales volumes; new models for local production Valuation: TP revised up to HKD15.1 As our concerns have been alleviated, our previous target P/E of 9.5x (-1 SD below mean) is no longer appropriate. We rebase our TP back to the long-term average of 13x (mid-15f EPS: CNY0.92) and, along with our EPS revisions, this results in an upgrade of our TP to HKD15.1. Global Markets Research 9 July 2014 Rating Up from Reduce Neutral Target price Increased from 9.30 HKD Closing price 4 July 2014 HKD Potential downside -2.2% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our FY14F EPS is in line with consensus but we are 4% below for FY15F. Research analysts China Autos & Auto Parts Benjamin Lo - NIHK [email protected] Joseph Wong - NIHK [email protected] Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 6,103 6,276 6,276 6,471 6,471 6,669 6,669 Reported net profit (mn) 3,374 3,919 4,369 4,412 4,927 5,052 5,666 Normalised net profit (mn) 3,374 3,919 4,369 4,412 4,927 5,052 5,666 FD normalised EPS 66.87c 77.67c 86.58c 87.45c 97.64c FD norm. EPS growth (%) FD normalised P/E (x) 18.3 N/A 14.2 N/A 12.6 N/A 10.9 EV/EBITDA (x) 17.7 N/A 13.6 N/A 12.0 N/A 10.3 Price/book (x) 4.7 N/A 3.7 N/A 2.9 N/A 2.4 Dividend yield (%) 0.6 N/A 1.1 N/A 1.2 N/A 1.4 ROE (%) Net debt/equity (%) net cash Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

34 Nomura Brilliance China 9 July 2014 Key data on Brilliance China Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (HKD) M cap (USDmn) 10,012.4 Absolute (USD) Free float (%) 57.5 Rel to MSCI China mth ADT (USDmn) 13.9 Income statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Revenue 5,916 6,103 6,276 6,471 6,669 Cost of goods sold -5,220-5,417-5,563-5,723-5,884 Gross profit SG&A ,008-1,036-1,068-1,101 Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs 2,526 3,641 4,634 5,189 5,923 Other income Earnings before tax 2,295 3,325 4,303 4,861 5,602 Income tax Net profit after tax 2,237 3,316 4,294 4,853 5,594 Minority interests Other items Preferred dividends Normalised NPAT 2,301 3,374 4,369 4,927 5,666 Extraordinary items Reported NPAT 2,301 3,374 4,369 4,927 5,666 Dividends Transfer to reserves 2,301 2,980 3,713 4,188 4,816 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) na Price/cashflow (x) na na na na Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA na na na na Normalised EPS Normalised FDEPS Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Dec in other LT assets -2,668-2,577-3,352-3,756-4,284 Inc in other LT liabilities Adjustments 2,681 3,370 4,642 5,201 6,092 CF after investing acts ,172 Cash dividends Equity issue Debt issue Convertible debt issue Others CF from financial acts Net cashflow Beginning cash ,030 1,265 Ending cash ,030 1,265 1,642 Ending net debt Balance sheet (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents ,030 1,265 1,642 Marketable securities 1,112 1,213 1,213 1,213 1,213 Accounts receivable 1,812 2,220 2,282 2,354 2,426 Inventories Other current assets 1,818 1,418 1,418 1,418 1,418 Total current assets 6,417 6,524 6,835 7,169 7,647 LT investments Fixed assets 1,745 1,686 1,652 1,618 1,582 Goodwill Other intangible assets ,152 1,353 Other LT assets 6,902 9,479 12,831 16,587 20,871 Total assets 16,058 18,990 22,875 27,158 32,085 Short-term debt 1,119 1,528 1,528 1,528 1,528 Accounts payable 3,120 2,991 3,071 3,160 3,249 Other current liabilities 2,618 2,274 2,309 2,347 2,386 Total current liabilities 6,857 6,793 6,908 7,035 7,163 Long-term debt Convertible debt Other LT liabilities Total liabilities 6,859 6,849 6,964 7,091 7,219 Minority interest ,023-1,095 Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves 9,619 12,619 16,464 20,693 25,565 Total shareholders' equity 10,015 13,015 16,859 21,089 25,961 Total equity & liabilities 16,058 18,990 22,875 27,158 32,085 Liquidity (x) Current ratio Interest cover Leverage Net debt/ebitda (x) na na na na na Net debt/equity (%) net cash Per share Reported EPS (CNY) 45.80c 67.14c 86.92c 98.03c 1.13 Norm EPS (CNY) 45.80c 67.14c 86.92c 98.03c 1.13 FD norm EPS (CNY) 45.61c 66.87c 86.58c 97.64c 1.12 BVPS (CNY) DPS (CNY) Activity (days) Days receivable Days inventory Days payable Cash cycle

35 Nomura Brilliance China 9 July 2014 Fig. 68: BMW-Brilliance Monthly and annual sales volume (units) Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May F 2015F 2016F X1-20,483 3,308 6,722 6,134 6,148 3,547 2,612 3,882 4,684 3,963 22,312 44,624 53,549 62,920 3 series 42,290 34,768 14,172 17,954 14,325 14,503 8,186 6,573 8,081 7,692 7,977 60,954 88, , ,750 5 series 65, ,598 30,568 32,968 32,557 27,367 12,252 9,646 12,279 12,390 12, , , , ,577 Total 107, ,849 48,048 57,644 53,016 48,018 23,985 18,831 24,242 24,766 24, , , , ,248 y-y growth X1 n.a n.a 79.7% -26.7% 7.6% 63.0% 195.8% 348.8% 154.2% 126.2% 64.8% 8.9% 100.0% 20.0% 17.5% 3 series 42.6% -17.8% 141.6% n.m n.m 65.1% 29.8% 124.4% 63.7% 34.3% 20.1% 75.3% 45.0% 30.0% 22.5% 5 series 58.7% 62.2% 47.3% 15.0% 8.8% 4.2% 6.1% 16.5% 14.4% 10.9% 10.7% 16.9% 11.0% 9.0% 7.5% Total 51.9% 49.8% 68.9% 51.2% 28.5% 23.7% 25.8% 59.7% 41.0% 30.6% 20.3% 28.5% 30.6% 17.7% 14.6% Sales mix X1 0.0% 12.7% 6.9% 11.7% 11.6% 12.8% 14.8% 13.9% 16.0% 18.9% 16.5% 10.8% 16.5% 16.8% 17.3% 3 series 39.4% 21.6% 29.5% 31.1% 27.0% 30.2% 34.1% 34.9% 33.3% 31.1% 33.2% 29.5% 32.7% 36.2% 38.6% 5 series 60.6% 65.7% 63.6% 57.2% 61.4% 57.0% 51.1% 51.2% 50.7% 50.0% 50.4% 59.7% 50.7% 47.0% 44.1% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Fig. 69: BMW-Brilliance 2013 sales breakdown by variants Fig. 70: BMW-Brilliance 2013 sales breakdown by region 520, 13% X1, 11% 328, 2% South, 19% East, 34% 320, 26% 525, 39% 316, 1% North, 27% 530, 7% 535, 1% West, 20% Source: Company data Source: Company data Fig. 71: Luxury brands market share in China, 5M14 Fig. 72: Mercedes sales volume growth has bottomed since the middle of 2013 and has begun to outpace BMW and Audi JLR 8% Lexus 5% 100% 80% Mercedes-Benz BMW Audi Benz 18% BMW 31% 60% 40% 20% 0% -20% -40% Audi 38% May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Source: LMC Automotive, Nomura research Source: LMC Automotive, Nomura research During 2H14F to 1H15F, we anticipate more intense competition, predominantly coming from a rejuvenated Mercedes model line-up which will likely put pressure on sales volumes and ASPs of the BMW-Brilliance JV, which has no new models until 2H15F. Mercedes is launching new models (e.g. CLA and GLA) as well as new versions of its A, C and S classes from 2013 to This has already started to have an impact on 35

36 Nomura Brilliance China 9 July 2014 Mercedes sales volumes since 3Q13. With more new models lined up for 2H14F (GLA and the new C Class long version), along with full-year contributions from CLA, E and S Class, we believe Mercedes sales momentum will persist and pose a threat to BMW. Fig. 73: Key estimate changes 2013 Actual New 2014F Old % diff New 2015F Old % diff New 2016F Old % diff BMW-JV BMW unit sales 206, , , % 317, , % 364, , % EBIT margins 13.4% 13.5% 12.6% 0.9 ppt 13.0% 12.0% 1.0 ppt 12.9% 11.8% 1.1 ppt Net margins 9.4% 9.8% 9.2% 0.6 ppt 9.7% 8.9% 0.8 ppt 9.7% 8.9% 0.8 ppt Brilliance Net profit (CNY mn) 3,374 4,369 3, % 4,927 4, % 5,666 5, % EPS (CNY) % % % Valuation and risks We rebase our TP back to the long-term average of 13x (mid-15f EPS: CNY0.92) and, along with the EPS revisions, this results in an upgrade of our TP to HKD15.1.The benchmark index for the stock is MSCI China. Upside risks: 1) margin surprise on the upside due to better-than-expected cost management; 2) stronger-than-expected sales volumes; and 3) unexpected delays or drop-off of new models by major competitors. Downside risks: 1) delays in the proposed listing of BAIC; 2) margin disappointment on the downside should the retail discount widen; and 3) unexpected strong competition in the luxury car segment. Fig. 74: P/E chart Fig. 75: P/B chart (x) SD 19.7x +1SD 16.3x LT avg = 12.7x -1SD 9.5x (x) SD 6.5x +1SD 5.5x LT avg = 4.5x -1SD 3.5x 6 2 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research 36

37 Dongfeng Motor 0489.HK 489 HK EQUITY: AUTOS & AUTO PARTS Upgrade to Buy with a new TP of HKD16.6 New models to help drive earnings growth, but not a multi-year re-rating story yet Action: Growth momentum looks to pick up; upgrade to Buy Dongfeng Motor (DFM) has been a laggard in the auto sector for the past two years, until May this year upon the successful launch of Nissan X-Trail SUV and strong PV sales volumes (+21% y-y in 5M14). We believe 1H14F should likely be strong on both volume and margin gains (more SUVs and maiden contributions from new models), although 2H14F might look less robust in the absence of major new launches. In 2015F, we should see a steady flow of new models again, including the Nissan Qashqai, Infiniti Q50L, Honda Spirior and a new compact SUV. Its investment into PSA has become less controversial since Europe auto sales have begun to bottom out. Combining these positive factors has led us to upgrade our FY14F-15F EPS by 24-32% owing to our expected 5% higher sales volumes and 2pp higher gross margins in FY14F-15F (reflecting new models and better sales mix). We now look for total PV sales volume growth of 17%/13% in 14F/15F, to drive a 14% EPS CAGR during F, comparing favourably with flat earnings during We therefore feel comfortable upgrading DFM to Buy. Catalysts: new model launches, strong 1H14F, dividend upside 1) launch of new models; 2) strong 1H14F interim results (August) we expect over-20% y-y EPS growth; 3) potential upside in dividend payout (currently at 15%, but has potential to be raised given net cash position). Valuations: New TP based on LT-average 8.5x P/E; not a multi-year rerating story yet, in our view Following our EPS revisions and roll-forward to mid-15f, we upgrade our TP to HKD16.6, still based on the long-term average 8.5x P/E (mid-15f EPS: CNY1.55). However, we do not see a multi-year re-rating story (hence we do not assign a double-digit target P/E). We feel that the pick-up in near-term earnings growth is mostly driven by the timing of new models, but DFM s brands are not premium brands and in the long run are unlikely to be marketshare gainers in the Chinese auto market. Global Markets Research 9 July 2014 Rating Up from Neutral Buy Target price Increased from HKD Closing price 4 July 2014 HKD Potential upside +16.4% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our 2014F/15F EPS estimates are 7% above consensus, following our earnings revisions. Research analysts China Autos & Auto Parts Benjamin Lo - NIHK [email protected] Joseph Wong - NIHK [email protected] Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 37, ,035 58, ,751 65,539 72,207 Reported net profit (mn) 10,528 9,958 12,307 10,964 14,442 15,738 Normalised net profit (mn) 10,528 9,958 12,307 10,964 14,442 15,738 FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) 9.3 N/A 7.9 N/A 6.8 N/A 6.2 EV/EBITDA (x) 7.7 N/A 6.8 N/A 5.4 N/A 4.6 Price/book (x) 1.5 N/A 1.4 N/A 1.2 N/A 1.0 Dividend yield (%) 1.6 N/A 1.9 N/A 2.2 N/A 2.4 ROE (%) Net debt/equity (%) net cash net cash net cash net cash net cash net cash Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

38 Nomura Dongfeng Motor 9 July 2014 Key data on Dongfeng Motor Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (HKD) M cap (USDmn) 15,853.3 Absolute (USD) Free float (%) 33.1 Rel to MSCI China mth ADT (USDmn) 23.3 Income statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Revenue 6,090 37,263 58,876 65,539 72,207 Cost of goods sold -5,736-32,582-49,750-55,053-60,654 Gross profit 354 4,681 9,126 10,486 11,553 SG&A -2,211-6,509-9,891-10,814-11,770 Employee share expense Operating profit -1,857-1, EBITDA -1, ,319 1,615 Depreciation ,171-1,462-1,647-1,831 Amortisation EBIT -1,857-1, Net interest expense Associates & JCEs 10,064 11,429 12,106 13,849 14,818 Other income ,030 Earnings before tax 9,152 10,712 12,523 14,694 16,013 Income tax Net profit after tax 9,107 10,603 12,395 14,545 15,850 Minority interests Other items Preferred dividends Normalised NPAT 9,092 10,528 12,307 14,442 15,738 Extraordinary items Reported NPAT 9,092 10,528 12,307 14,442 15,738 Dividends -1,292-1,551-1,813-2,128-2,319 Transfer to reserves 7,800 8,977 10,494 12,314 13,420 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) na na Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA na na Normalised EPS Normalised FDEPS Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA -1, ,319 1,615 Change in working capital -8,318 2,059 1, Other operating cashflow 7,412-25,338 1,392 14,823 15,997 Cashflow from operations -2,554-23,936 3,508 16,588 18,334 Capital expenditure ,364-1,750-1,750-1,750 Free cashflow -3,109-25,300 1,758 14,838 16,584 Reduction in investments 343 4,093-8, Net acquisitions 0 0 5,715 6,053 6,925 Dec in other LT assets Inc in other LT liabilities Adjustments 4,981 15, CF after investing acts 2,215-5,954-1,076 20,908 23,529 Cash dividends -1,551-1,422-1,682-1,970-2,223 Equity issue Debt issue -3,225 3, Convertible debt issue Others 7,450 7,602-1,212-13,869-15,907 CF from financial acts 2,674 9,753-2,894-15,840-18,130 Net cashflow 4,889 3,799-3,969 5,068 5,399 Beginning cash 13,051 17,940 21,739 17,770 22,838 Ending cash 17,940 21,739 17,770 22,838 28,237 Ending net debt 7,986-15,864-11,895-16,963-22,362 Balance sheet (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 17,940 21,739 17,770 22,838 28,237 Marketable securities 108 2,543 2,543 2,543 2,543 Accounts receivable 4,067 25,266 39,920 44,438 48,959 Inventories 1,198 4,245 6,482 7,173 7,902 Other current assets 3,587 3,829 3,829 3,829 3,829 Total current assets 26,900 57,622 70,544 80,821 91,471 LT investments Fixed assets 2,430 9,418 9,293 9,128 8,921 Goodwill 212 1,587 1,587 1,587 1,587 Other intangible assets 330 2,718 3,131 3,400 3,525 Other LT assets 32,494 44,653 58,915 64,952 71,856 Total assets 62, , , , ,360 Short-term debt 2,302 5,875 5,875 5,875 5,875 Accounts payable 3,943 34,750 53,060 58,716 64,689 Other current liabilities 2,012 8,064 8,064 8,064 8,064 Total current liabilities 8,257 48,689 66,999 72,655 78,628 Long-term debt Convertible debt Other LT liabilities 106 3,275 3,275 3,275 3,275 Total liabilities 8,363 51,964 70,274 75,930 81,903 Minority interest ,090 1,202 Preferred stock Common stock 15,486 16,731 16,731 16,731 16,731 Retained earnings 37,140 44,853 53,665 64,009 75,206 Proposed dividends 1,292 1,551 1,813 2,128 2,319 Other equity and reserves Total shareholders' equity 53,918 63,135 72,209 82,868 94,255 Total equity & liabilities 62, , , , ,360 Liquidity (x) Current ratio Interest cover na na na na na Leverage Net debt/ebitda (x) na na net cash net cash net cash Net debt/equity (%) 14.8 net cash net cash net cash net cash Per share Reported EPS (CNY) Norm EPS (CNY) FD norm EPS (CNY) BVPS (CNY) DPS (CNY) Activity (days) Days receivable Days inventory Days payable Cash cycle

39 Nomura Dongfeng Motor 9 July 2014 Key charts and tables Fig. 76: Monthly and annual sales volumes (Units) 1Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May F 2015F 2016F DF Nissan 171, , , ,637 75,624 54,361 82,652 91,806 83, ,229 1,023,377 1,168,377 1,272,377 DF Honda 62,774 76,614 75, ,590 24,653 21,470 28,240 32,219 26, , , , ,500 DF PSA 142, , , ,046 65,033 40,089 60,036 60,068 60, , , , ,000 Others 88,182 71,467 68,486 92,671 48,459 23,617 35,435 32,749 29, , , , ,910 PV 465, , , , , , , , ,451 2,118,451 2,470,625 2,798,185 3,070,787 DFM total 565, , , , , , , , ,332 2,567,655 2,887,625 3,232,185 3,521,787 y-y growth DF Nissan -22.3% -4.4% 26.9% 118.7% -0.8% 60.7% 34.8% 23.9% 9.3% 19.8% 10.5% 14.2% 8.9% DF Honda -11.5% -3.9% 12.2% 80.3% 0.0% 63.8% 12.9% 27.9% 10.5% 13.9% 13.4% 19.2% 11.5% DF PSA 31.0% 34.6% 17.1% 17.9% 19.5% 2.1% 22.5% 32.6% 31.0% 25.0% 26.7% 8.3% 9.3% Others 35.6% 18.4% 13.9% 44.5% 29.5% 15.0% 17.3% 20.8% 22.4% 30.7% 20.2% 14.1% 11.0% PV -0.1% 6.8% 20.1% 67.6% 10.9% 30.8% 24.6% 26.3% 17.2% 21.7% 16.6% 13.3% 9.7% DFM total -4.2% 10.1% 17.8% 60.2% 7.0% 28.2% 18.9% 17.0% 10.1% 19.1% 12.5% 11.9% 9.0% Source: Company data, Nomura research Fig. 77: DF Honda four-week moving average sales Fig. 78: DF Nissan four-week moving average sales 1,600 1,400 1,200 1, Dongfeng Honda May 12 W2 Jun 12 W3 Aug 12 W1 Sep 12 W2 Oct 12 W4 Dec 12 W2 Jan 13 W4 Mar 13 W1 Apr 13 W3 May 13 W5 Jul 13 W2 Aug 13 W3 Oct 13 W1 Nov 13 W3 Jan 14 W1 Mar 14 W1 Apr 14 W3 Jun 14 W1 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Dongfeng Nissan May 12 W1 Jun 12 W2 Jul 12 W4 Sep 12 W1 Oct 12 W3 Dec 12 W1 Jan 13 W3 Feb 13 W4 Apr 13 W2 May 13 W4 Jul 13 W1 Aug 13 W2 Sep 13 W4 Nov 13 W2 Dec 13 W4 Feb 14 W4 Apr 14 W2 May 14 W4 Source: China Auto Market, Nomura research Source: China Auto Market, Nomura research Fig. 79: New models pipeline 2014F and 2015F OEM Brand Model Year Month DF Nissan Venucia e H2 DF Nissan Venucia SUV 2015 n.a DF Nissan Nissan Xtrail 2014 Q1 DF Nissan Nissan Murano 2015 n.a DF Nissan Nissan Qashqai 2015 n.a DF Nissan Infiniti Q50L Q DF Nissan Infiniti Compact SUV 2015 n.a DF Honda Honda Spiror 2014 Nov DF Honda Honda Civic 2014 Jun DF Honda Honda Civic (Si) 2014 Q4 DF Honda Honda Compact SUV 2015 n.a DF Renault Renault Captur 2016 n.a DF PSA Peugeot Apr DF PSA Peugeot Jul Source: Company data, Nomura research 39

40 Nomura Dongfeng Motor 9 July 2014 Fig. 80: Honda Spirior (4Q14) Fig. 81: Infiniti Q50L (4Q14) Source: Nomura research Source: Nomura research A few words on accounting treatment in mid-2013, DFM reorganised its commercial vehicle (CV) business via buying out its CV partner. The whole CV business has since been consolidated into DFM s P&L since then, hence the step up in revenue/cogs in 2013 (half-year impact during 2H13) and further in 2014F (full-year impact). However, since the CV business is only modestly profitable by our estimate, the impact of the reorganisation on DFM s bottom line is immaterial. Separately, at 2013 annual results, DFM has also changed the way it accounted for its major JVs (with Nissan, Honda and PSA) in its P&L, from a 50% proportional consolidation in the past, to equity accounting as jointly-controlled entities. This is a change in accounting treatment which has no impact on DFM s net profit line. Valuation and risks Following our EPS revisions and roll-forward to mid-15f, we upgrade our TP to HKD16.6, still based on the LT average 8.5x P/E (mid-15f EPS: CNY1.55). Risks: 1) lingering tensions between China and Japan may hamper the pace of recovery of Japanese-brand autos; 2) delay or cancellation of new model launches; and 3) lacklustre CV sales owing to continued weakness in the commercial vehicles segment. Fig. 82: P/E chart (x) SD 13.3x 12 +1SD 10.9x 10 LT avg = 8.5x 8 6-1SD 6.0x Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Source: Bloomberg, Nomura research Fig. 83: P/B chart (x) SD 3.3x SD 2.6x 2.5 LT avg = 2.0x SD 1.3x Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Source: Bloomberg, Nomura research 40

41 Geely Automobile 0175.HK 175 HK EQUITY: AUTOS & AUTO PARTS Upgrade to Buy with a new TP of HKD3.76 Global Markets Research Bad news in the price; buy for 2H recovery although still too early for a LT re-rating story 9 July 2014 Rating Up from Neutral Buy Action: Risk-reward improving; Buy for 2H recovery Following a share price decline of c27% YTD and a close-to-trough P/B valuation (<1x, or -1.5 SD below mean), we feel that much of the bad news is already in the price, as the share price has stopped reacting to poor monthly sales data in 2Q14. While sales volumes YTD have plummeted 32% owing to a restructuring of branding and dealer network (consolidating three brands into one single Geely brand), we have just begun to see sequential m-m improvements in sales volumes. We believe that the worst is already behind us (in terms of the rate of volume decline), and forecast a 2H recovery (>40% improvement over 1H) on the back of new model launches via a revamped network. A good time to accumulate the stock could be around the interim results in August, which should be poor reflecting the volume decline YTD and potential restructuring costs, but we consider these to be backward-looking and would recommend buying on a potential 2H recovery. That said, we still find it challenging to build a multi-year LT re-rating story at this point, owing to a lack of execution track record and the challenges of improving brand recognition. Future potential co-operation with the parent company s Volvo might prove to be a major breakthrough, but we believe this remains over 12 months away. We revise down our 2014F net profit estimate by 15% to reflect a 15% cut to our sales volume forecast. Our 15F/16F forecasts remain largely unchanged. Catalysts: Interim results (earnings overhang cleared post results); improving monthly sales data; new model launches (GX9 SUV and EC7 upgraded version 2H14F) Valuation: new TP of HKD3.76 Our TP continues to be based on 1.3x P/B (end-15f FD BVPS: CNY2.30) representing -1 SD below the historical mean, but has been raised to HKD3.76 reflecting the roll-forward from end-14f to end-15f BVPS. Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 28,708 28,701 23,624 31,494 30,923 33,234 33,961 Target price Increased from 3.38 HKD 3.76 Closing price 4 July 2014 HKD 2.97 Potential upside +26.6% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our FY14F/15F EPS is 22%/13% below consensus, as we factor in lower sales volumes than the Street. Consensus is likely behind the curve pending more future data. Research analysts China Autos & Auto Parts Benjamin Lo - NIHK [email protected] Joseph Wong - NIHK [email protected] Reported net profit (mn) 2,663 2,417 2,054 2,646 2,669 2,894 2,954 Normalised net profit (mn) 2,663 2,417 2,054 2,646 2,669 2,894 2,954 FD normalised EPS 30.42c 27.46c 23.34c 30.07c 30.33c 32.88c 33.56c FD norm. EPS growth (%) FD normalised P/E (x) 7.7 N/A 10.1 N/A 7.8 N/A 7.0 EV/EBITDA (x) 4.9 N/A 6.0 N/A 4.3 N/A 3.5 Price/book (x) 1.2 N/A 1.1 N/A 1.0 N/A 0.9 Dividend yield (%) 1.6 N/A 1.2 N/A 1.6 N/A 1.8 ROE (%) Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

42 Nomura Geely Automobile 9 July 2014 Key data on Geely Automobile Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (HKD) M cap (USDmn) 3,372.9 Absolute (USD) Free float (%) 57.4 Rel to MSCI China mth ADT (USDmn) 13.9 Income statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Revenue 24,628 28,708 23,624 30,923 33,961 Cost of goods sold -20,069-22,942-19,135-24,800-27,101 Gross profit 4,559 5,766 4,489 6,123 6,860 SG&A -2,881-3,474-2,961-3,828-4,219 Employee share expense Operating profit 1,678 2,291 1,528 2,294 2,641 EBITDA 2,538 3,369 2,775 3,753 4,334 Depreciation ,078-1,247-1,459-1,693 Amortisation EBIT 1,678 2,291 1,528 2,294 2,641 Net interest expense Associates & JCEs Other income 1,048 1,062 1,015 1,015 1,015 Earnings before tax 2,529 3,304 2,549 3,312 3,665 Income tax Net profit after tax 2,050 2,680 2,067 2,687 2,973 Minority interests Other items Preferred dividends Normalised NPAT 2,040 2,663 2,054 2,669 2,954 Extraordinary items Reported NPAT 2,040 2,663 2,054 2,669 2,954 Dividends Transfer to reserves 1,779 2,343 1,808 2,349 2,599 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 2,538 3,369 2,775 3,753 4,334 Change in working capital 1, Other operating cashflow Cashflow from operations 4,201 3,403 2,307 3,558 3,846 Capital expenditure -2, ,500-2,750-3,000 Free cashflow 2,159 3, Reduction in investments Net acquisitions Dec in other LT assets Inc in other LT liabilities Adjustments CF after investing acts 2,789 2, ,388 Cash dividends Equity issue Debt issue -1, Convertible debt issue Others CF from financial acts -1,631-1, Net cashflow 1,158 1, ,051 Beginning cash 3,030 4,189 5,478 5,207 5,717 Ending cash 4,189 5,478 5,207 5,717 6,768 Ending net debt -1,436-4,512-4,242-4,752-5,803 Balance sheet (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 4,189 5,478 5,207 5,717 6,768 Marketable securities Accounts receivable 13,476 14,785 11,351 14,859 16,319 Inventories 1,822 1,784 1,488 1,928 2,107 Other current assets Total current assets 19,855 22,251 18,251 22,709 25,398 LT investments Fixed assets 7,008 6,209 6,785 7,454 8,194 Goodwill Other intangible assets 2,814 3,220 3,836 4,399 4,910 Other LT assets 1,693 1,487 1,538 1,587 1,635 Total assets 31,380 33,599 30,843 36,582 40,569 Short-term debt 1, Accounts payable 15,183 16,075 11,474 14,871 16,251 Other current liabilities Total current liabilities 16,693 17,237 12,672 16,033 17,396 Long-term debt Convertible debt Other LT liabilities Total liabilities 18,176 17,370 12,829 16,165 17,517 Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves 12,734 15,907 17,678 20,063 22,680 Total shareholders' equity 12,887 16,068 17,839 20,225 22,841 Total equity & liabilities 31,380 33,599 30,843 36,582 40,569 Liquidity (x) Current ratio Interest cover na na na Leverage Net debt/ebitda (x) net cash net cash net cash net cash net cash Net debt/equity (%) net cash net cash net cash net cash net cash Per share Reported EPS (CNY) 27.05c 31.74c 24.48c 31.81c 35.20c Norm EPS (CNY) 27.05c 31.74c 24.48c 31.81c 35.20c FD norm EPS (CNY) 26.34c 30.42c 23.34c 30.33c 33.56c BVPS (CNY) DPS (CNY) Activity (days) Days receivable Days inventory Days payable Cash cycle

43 Nomura Geely Automobile 9 July 2014 Fig. 84: Monthly and annual sales volumes (units) Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May F 2015F 2016F Export 39, ,908 24,334 26,104 30,221 38,253 3,667 3,162 6,480 9,048 6, ,912 95, , ,500 Domestic 382, , ,552 94,554 82, ,455 29,768 18,253 28,277 26,598 24, , , , ,033 Total 421, , , , , ,708 33,435 21,415 34,757 35,646 30, , , , ,533 y-y growth Export 92.7% 157.3% 44.0% 12.7% -1.4% 22.7% -56.5% -53.6% -28.7% 18.2% -31.2% 16.7% -20.1% 21.1% 10.0% Domestic -3.4% -0.1% 16.7% 17.1% 15.7% 5.5% -46.0% -26.0% -27.1% -27.8% -24.9% 12.8% -18.6% 25.8% 10.6% Total 1.4% 14.7% 20.6% 16.1% 10.6% 8.9% -47.4% -31.9% -27.4% -19.9% -26.3% 13.7% -18.9% 24.8% 10.5% Fig. 85: Export sales growth Fig. 86: Domestic sales growth 700% Export sales y-y growth 80% Domestic sales y-y growth 600% 60% 500% 400% 300% 200% 100% 40% 20% 0% -20% 0% -40% -100% -60% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Source: Company data, Nomura research Source: Company data, Nomura research Fig. 87: Monthly sales volume y-y growth by brands Fig. 88: Margins trend 100% 80% Gleagle Englon Emgrand 25% Gross Margin Net Margin EBIT Margin 60% 40% 20% 18.1%18.4% 18.2% 18.5% 20.1% 19.0% 19.8% 20.2% 20% 0% -20% -40% -60% -80% 15% 10% 5% 8.9% 8.4% 6.8% 7.4% 8.3% 9.3% 8.7% 8.6% 8.7% 6.5% 6.5% 6.8% 8.0% 6.5% 7.4% 7.8% Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 0% F 2015F 2016F 43

44 Nomura Geely Automobile 9 July 2014 Fig. 89: Financial analysis Fig. 90: Top export destinations y-y Sales of vehicles (CNY m) 27,828 23, % Average unit price (CNY) 50,646 47, % Return on equity 16.6% 15.8% 0.8 ppt Gross margin 20.1% 18.5% 1.6 ppt Operating margin 12.0% 11.4% 0.6 ppt Selling expenses (% of T/O) 5.9% 6.0% -0.1 ppt Admin. expenses (% of T/O) 5.9% 5.4% 0.5 ppt Accounts receivable days days Accounts payable days days Inventory days days Source: Company data, Nomura research Russia Ukraine Saudi Arabia Iran Egypt 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Source: Company data, Nomura research Valuation and risks Our TP continues to be based on 1.3x P/B (end-15f FD BVPS: CNY2.30) representing - 1 SD below historical mean, but has been raised to HKD3.76 reflecting the roll-forward from end-14f to end-15f BVPS. The benchmark index for the stock is MSCI China. Risks: 1) lower export sales; 2) CNY depreciation; 3) failure of its brand restructuring exercise; and 4) delays in the launch of new models. Fig. 91: P/E chart Fig. 92: P/B chart (x) (x) SD 20.6x +1SD 15.7x LT avg = 10.9x SD 4.4x +1SD 3.4x LT avg = 2.3x 5 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Source: Bloomberg, Nomura estimates -1SD 6.1x 1 0 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Source: Bloomberg, Nomura estimates -1SD 1.3x 44

45 Great Wall Motor 2333.HK 2333 HK EQUITY: AUTOS & AUTO PARTS No room for more hiccups; maintain Buy Cheaper valuations alone not enough; new model launches critical for re-rating Action: In the process of regaining investor confidence; maintain Buy 2014 has been a very bumpy year for Great Wall Motor (GWM) so far, and we believe is likely to be critical if GWM aims to cement its competitive position in the SUV segment. While investors have grown uncomfortable with GWM s execution ability after two delays to the launch of the high-end SUV H8, we notice that GWM s core product H6 remains the best-selling SUV in China (averaging 23.7k units in 5M14). GWM is still enjoying strong profit levels, free cash flows, net cash, and sustainable dividend payments. Valuations have already been de-rated by almost half from the 4Q13 peak on earnings downgrades and a slower growth outlook. The catalysts below, if materialise, should help dispel investors concerns of further earnings downside and induce at least a partial valuation mean-reversion by end-2014f, in our view. Catalysts: H2 launch (end-july); H6 additional capacity (August- September); H8 re-launch (unclear but we assume to be by end-14f) The key for a re-rating from the current 7.3x P/E (near the trough since 2010) remains the successful launch of new SUV models to rejuvenate its growth trajectory. While we expect GWM s interim result (by end-august) to be flattish y-y (owing to overall flat sales volumes and the booking of running costs at its new Xushui plant), its earnings will likely stage a h-h recovery in 2H14F thanks to the launch of the new compact SUV H2 (end-july) as well as an additional 5k per month of production capacity for H6 (August-September). The timeline for H8 re-launch remains unclear pending further announcement from GWM. We trim our FY14F-16F EPS by 5-10% to reflect our lower sales volume assumptions (lower sedan sales, and zero contribution from H8 in 14F), and hence slightly lower our margins estimate. Valuation: TP cut to HKD40.0 on lower EPS and target P/E Following our EPS revisions, and assigning a lower target P/E of 9x (from the LT average of 11x to -1 SD below mean, given the H8 uncertainty) (mid-15f EPS at CNY3.51), we cut our TP to HKD40.0. Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 56,784 72,676 69,703 92,009 91, , ,812 Reported net profit (mn) 8,224 10,369 9,331 12,651 12,036 14,587 13,597 Normalised net profit (mn) 8,224 10,369 9,331 12,651 12,036 14,587 13,597 FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) 9.3 N/A 8.2 N/A 6.3 N/A 5.6 EV/EBITDA (x) 1.5 N/A 1.3 N/A 1.0 N/A 0.8 Price/book (x) 2.7 N/A 2.2 N/A 1.7 N/A 1.4 Dividend yield (%) 3.3 N/A 3.2 N/A 4.2 N/A 4.7 ROE (%) Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash Global Markets Research 9 July 2014 Rating Remains Buy Target price Reduced from HKD Closing price 4 July 2014 HKD Potential upside +26.4% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our EPS estimate is in line with consensus for FY14F, but 6% higher for FY15F. Our FY14F sales volume assumption of 874k is 2% below management's target of 890k. Research analysts China Autos & Auto Parts Benjamin Lo - NIHK [email protected] Joseph Wong - NIHK [email protected] Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

46 Nomura Great Wall Motor 9 July 2014 Key data on Great Wall Motor Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (HKD) M cap (USDmn) 4,219.3 Absolute (USD) Free float (%) 44.0 Rel to MSCI China mth ADT (USDmn) 46.6 Income statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Revenue 43,160 56,784 69,703 91, ,812 Cost of goods sold -31,562-40,538-50,186-65,695-75,391 Gross profit 11,598 16,246 19,517 26,186 30,421 SG&A -3,400-4,643-6,134-8,729-10,581 Employee share expense Operating profit 8,198 11,604 13,383 17,458 19,840 EBITDA 9,148 12,768 14,820 19,230 21,949 Depreciation ,165-1,437-1,773-2,109 Amortisation EBIT 8,198 11,604 13,383 17,458 19,840 Net interest expense Associates & JCEs Other income -1,465-1,779-2,233-3,036-3,541 Earnings before tax 6,841 9,920 11,256 14,518 16,401 Income tax -1,119-1,688-1,915-2,470-2,790 Net profit after tax 5,722 8,232 9,341 12,048 13,611 Minority interests Other items Preferred dividends Normalised NPAT 5,692 8,224 9,331 12,036 13,597 Extraordinary items Reported NPAT 5,692 8,224 9,331 12,036 13,597 Dividends -1,734-2,495-2,482-3,202-3,617 Transfer to reserves 3,958 5,729 6,849 8,834 9,980 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 9,148 12,768 14,820 19,230 21,949 Change in working capital -1,627-1,194-2,900-4,616-4,969 Other operating cashflow -3,183-3,217-3,993-4,414-6,440 Cashflow from operations 4,337 8,357 7,927 10,200 10,539 Capital expenditure -9,703-5,549-6,288-6,288-6,288 Free cashflow -5,366 2,808 1,638 3,911 4,251 Reduction in investments Net acquisitions Dec in other LT assets Inc in other LT liabilities Adjustments 5, CF after investing acts 341 2,469 1,834 3,188 4,760 Cash dividends ,114-2,488-2,842-3,409 Equity issue Debt issue Convertible debt issue Others CF from financial acts -1,112-1,816-2,518-2,874-3,443 Net cashflow ,316 Beginning cash 7,107 6,337 6,991 6,306 6,620 Ending cash 6,337 6,991 6,306 6,620 7,936 Ending net debt -6,337-6,808-6,144-6,478-7,814 Balance sheet (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 6,337 6,991 6,306 6,620 7,936 Marketable securities Accounts receivable 16,744 21,219 25,972 35,494 42,325 Inventories 2,695 2,764 5,225 6,840 7,849 Other current assets Total current assets 25,848 31,026 37,556 49,006 58,163 LT investments Fixed assets 14,009 18,646 23,276 27,576 31,546 Goodwill Other intangible assets 2,214 2,443 2,668 2,884 3,093 Other LT assets Total assets 42,569 52,605 64,057 80,103 93,532 Short-term debt Accounts payable 18,727 21,954 26,124 32,398 35,113 Other current liabilities ,095 1,250 Total current liabilities 19,319 22,839 27,134 33,635 36,486 Long-term debt Convertible debt Other LT liabilities 1,607 1,757 1,757 1,757 1,757 Total liabilities 20,926 24,597 28,891 35,392 38,243 Minority interest Preferred stock Common stock 3,042 3,042 3,042 3,042 3,042 Retained earnings 11,799 18,225 25,068 34,261 44,449 Proposed dividends Other equity and reserves 6,673 6,729 7,034 7,373 7,749 Total shareholders' equity 21,514 27,996 35,144 44,677 55,241 Total equity & liabilities 42,569 52,605 64,057 80,103 93,532 Liquidity (x) Current ratio Interest cover na na na na na Leverage Net debt/ebitda (x) net cash net cash net cash net cash net cash Net debt/equity (%) net cash net cash net cash net cash net cash Per share Reported EPS (CNY) Norm EPS (CNY) FD norm EPS (CNY) BVPS (CNY) DPS (CNY) Activity (days) Days receivable Days inventory Days payable Cash cycle

47 Nomura Great Wall Motor 9 July 2014 Fig. 93: Monthly and annual sales data (units) Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun F 2015F 2016F Pick - up 121, ,694 34,906 32,607 30,257 29,036 11,563 8,996 11,682 11,493 11,199 10, , , , ,000 SUV 147, ,956 92,797 93, , ,872 41,386 30,297 42,321 39,445 35,993 35, , , , ,000 Sedans 187, ,256 62,621 51,094 45,156 51,136 16,677 10,797 14,036 8,331 4,643 2, , , , ,000 Others 6,161 5, ,734 6,000 6,000 6,000 Total sales 462, , , , , ,055 69,628 50,091 68,042 59,273 51,837 48, , ,000 1,077,000 1,184,000 y-y growth Pick - up 23.3% 12.3% 3.5% -5.7% -3.9% -21.3% -12.4% 2.7% -9.7% 24.9% -5.1% -12.2% -0.4% 2.8% 3.6% 3.4% SUV 7.6% 90.0% 101.1% 55.8% 41.6% 25.7% 17.3% 22.6% 29.0% 31.9% 12.0% 12.8% 50.1% 37.5% 36.9% 12.9% Sedans 52.6% 6.3% 36.4% 28.5% -8.0% -20.7% -30.3% -47.0% -23.5% -58.4% -73.5% -81.5% 3.1% -27.0% -10.0% 0.0% Others 22.9% -10.2% n.a. n.a. n.a. n.a. n.a n.a 0.0% -20.0% -66.7% -71.4% n.a -31.3% 0.0% 0.0% Total sales 27.3% 34.3% 50.3% 31.1% 16.2% 0.6% -3.8% -7.0% 6.2% 0.3% -15.7% -14.8% 24.0% 13.4% 23.2% 9.9% Fig. 94: Quarterly results summary, 2013 and 1Q14 (units) 1Q13 2Q13 3Q13 4Q Q14 y-y q-q Pick-up trucks and others 34,912 32,625 30,269 47, ,866 32, % -31.5% SUV 92,797 93, , , , , % -6.4% Sedan 62,621 51,094 45,156 46, ,451 41, % -10.9% Total sales volume 190, , , , , , % -12.8% CNY mn Total Operating Revenue 12,755 13,662 14,358 16,009 56,784 14, % -8.0% Total operating costs (10,514) (11,065) (11,833) (13,756) (47,168) (12,318) 17.2% -10.5% Operating costs (9,169) (9,597) (10,198) (11,574) (40,538) (10,604) 15.7% -8.4% Business tax and surcharges (468) (487) (521) (581) (2,057) (511) 9.2% -12.0% Selling expenses (410) (445) (483) (557) (1,895) (447) 9.0% -19.7% Administrative expenses (483) (551) (643) (1,071) (2,747) (780) 61.7% -27.1% Financial expenses % -25.8% Impairment loss on assets 5 (5) (9) (6) (14) % % Add: Gains from changes in fair value 11 (6) (8) (4) (7) (13) % 194.5% Investment income % -74.2% Including: share of profit of associates and JCE % -45.9% Operating Profits 2,269 2,604 2,531 2,264 9,668 2, % 6.4% Add: Non-operating income % -79.8% Less: Non-operating expenses % -25.3% Including: Loss from disposal of non-current assets % -35.6% Total pre-tax profits 2,290 2,641 2,560 2,429 9,920 2, % 0.4% Less: Income tax expenses (392) (448) (473) (375) (1,688) (432) 10.3% 15.2% Net Profits 1,898 2,193 2,087 2,053 8,232 2, % -2.3% Minority interests (2) (2) (2) (2) (8) % % Net profit attributable to shareholders 1,896 2,191 2,085 2,051 8,224 2, % -2.2% Basic earnings per share (CNY) % -2.2% Gross margins 28.1% 29.8% 29.0% 27.7% 28.6% 28.0% -0.1 ppt 0.3 ppt Operating margins 17.8% 19.1% 17.6% 14.1% 17.0% 16.3% -1.4 ppt 2.2 ppt Net margins 14.9% 16.0% 14.5% 12.8% 14.5% 13.6% -1.3 ppt 0.8 ppt Selling exp as a % of revenue 3.2% 3.3% 3.4% 3.5% 3.3% 3.0% -0.2 ppt -0.4 ppt Admin exp as a % of revenue 3.8% 4.0% 4.5% 6.7% 4.8% 5.3% 1.5 ppt -1.4 ppt SG&A as a % of revenue 7.0% 7.3% 7.8% 10.2% 8.2% 8.3% 1.3 ppt -1.8 ppt Source: Company data, Nomura research 47

48 Nomura Great Wall Motor 9 July 2014 Fig. 95: 2014F Sales volume breakdown Fig. 96: SUV sales volume y-y comparisons Sedan 17% H8 0% Others 18% H6 36% M series 17% H2 5% H3&H5 7% Units 2013 (LHS) 2014 (LHS) y-y (RHS) 45,000 40,000 35,000 32% 29% 30,000 25,000 23% 20,000 17% 13% 15,000 10,000 12% 5,000 0 Jan FebMar Apr MayJun Jul Aug Sep Oct NovDec 35% 30% 25% 20% 15% 10% 5% 0% Source: Company, Nomura estimates Source: Company, Nomura research Fig. 97: Key changes to our assumptions 2014F 2015F 2016F (units) New Old % diff New Old % diff New Old % diff Pick-up and others 146, , % 151, , % 156, , % Sedan 150, , % 135, , % 135, , % SUV 578, , % 791, , % 893, , % Total sales volume 874, , % 1,077,000 1,074, % 1,184,000 1,220, % (CNY mn) Total revenues 69,703 72, % 91,882 92, % 105, , % Gross profits 19,517 20, % 26,186 26, % 30,421 31, % GP margins 28.0% 28.6% -0.6%-pt 28.5% 28.8% -0.3%-pt 28.8% 29.0% -0.3%-pt Net profits 9,331 10, % 12,036 12, % 13,597 14, % NP margin 13.4% 14.3% -0.9%-pt 13.1% 13.7% -0.7%-pt 12.9% 13.5% -0.6%-pt Source: Nomura estimates Valuation and risks Following our EPS revisions, and assigning a lower target P/E of 9x (from the LT average of 11x to -1 SD below mean given the H8 uncertainty) (mid-15f EPS of CNY3.51), we cut our TP to HKD40.0. The benchmark index for this stock is MSCI China. Risks: 1) delays or cancellation of new product launches; 2) worse-than-expected cost controls; and 3) a slowdown in industry SUV sales as a result of the possible change in government policy towards private vehicle ownership. Fig. 98: P/E chart (x) LT avg = 10.8x Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Source: Bloomberg, Nomura estimates +2SD 14.8x +1SD 12.8x -1SD 8.8x -2S D 6.8x Fig. 99: P/B chart (x) Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Source: Bloomberg, Nomura estimates +2SD 4.1x +1SD 3.4x LT avg = 2.7x -1SD 2.0x 48

49 Guangzhou Auto 2238.HK 2238 HK EQUITY: AUTOS & AUTO PARTS Buy maintained with new TP of HKD11.5 Strong earnings growth story intact on new models and margin expansion Action: We expect a strong 2H14F; reaffirm Buy We have had a positive view on GAC since July We remain constructive on the stock, and believe that current valuation at 9x forward P/E (broadly in line with the sector average) is compelling considering its expected F EPS CAGR of 39% (sector average: 19%). Such strong growth is likely to be driven by: 1) our forecast for further total sales volume growth of 16% y-y in 2014F; 2) its strong new model pipeline, in particular Honda s new compact SUV (4Q14F) and the Toyota Levin (end-july 2014) should be well-received by the market; and 3) continued gross margin expansion of GAC s own brands thanks to scale economies on sales volume growth of 24% y-y. Looking beyond 2014F, GAC still has a number of new models in the pipeline, including the Toyota Highlander SUV in 2015 and the commencement of local production for a Fiat Jeep SUV towards the end of We trim our FY14-15F EPS forecasts by 3%/2% each to reflect slower-thanexpected sales volumes of the Honda Accord YTD. That said, in 2H14F, we expect the GAC-Honda JV to benefit from the launches of the new Fit and new compact SUV, hence we don t expect further deterioration in the remainder of the year, following its 1% sales volume decline in 5M14. Catalysts: New models and above-industry monthly sales data 1) New models including Honda s new Fit (just launched), Honda s new compact SUV (4Q14F), and the Toyota Levin (end-july 2014); and 2) Monthly sales volume data, which should continue to beat the industry average. Valuation: TP of HKD11.5 based on 12.1x one-year forward P/E Still based on a target P/E of 12.1x (LT average) but rolling forward to mid- 2015F EPS of CNY0.76, we revise our TP to HKD11.5 (from HKD10.5). Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 18,824 21,501 21,307 22,497 22,407 23,012 Reported net profit (mn) 2,653 4,389 4,271 5,610 5,474 6,929 Normalised net profit (mn) 2,653 4,389 4,271 5,610 5,474 6,929 FD normalised EPS 41.23c 68.98c 66.37c 88.16c 85.07c 1.08 FD norm. EPS growth (%) FD normalised P/E (x) 18.5 N/A 11.5 N/A 8.9 N/A 7.1 EV/EBITDA (x) 4.2 N/A 3.1 N/A 2.4 N/A 1.8 Price/book (x) 1.5 N/A 1.3 N/A 1.2 N/A 1.1 Dividend yield (%) 2.1 N/A 2.2 N/A 2.8 N/A 3.5 ROE (%) Net debt/equity (%) net cash net cash net cash Global Markets Research 9 July 2014 Rating Remains Buy Target price Increased from HKD Closing price 4 July 2014 HKD 9.59 Potential upside +19.9% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our 2014F/15F EPS forecasts are in line with consensus, as the Street has upgraded forecasts and caught up with our estimates. Research analysts China Autos & Auto Parts Benjamin Lo - NIHK [email protected] Joseph Wong - NIHK [email protected] Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

50 Nomura Guangzhou Auto 9 July 2014 Key data on Guangzhou Auto Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (HKD) M cap (USDmn) 2,738.7 Absolute (USD) Free float (%) 41.2 Rel to MSCI China mth ADT (USDmn) 6.7 Income statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Revenue 12,964 18,824 21,307 22,407 23,012 Cost of goods sold -12,274-16,830-18,750-19,382-19,560 Gross profit 690 1,994 2,557 3,025 3,452 SG&A -2,147-2,784-3,090-3,316-3,475 Employee share expense Operating profit -1, EBITDA ,194 Depreciation ,076-1,217 Amortisation EBIT -1, Net interest expense Associates & JCEs 2,637 4,020 5,385 6,345 7,419 Other income Earnings before tax 1,000 2,629 4,379 5,636 7,051 Income tax Net profit after tax 1,065 2,529 4,228 5,529 7,143 Minority interests Other items Preferred dividends Normalised NPAT 1,134 2,653 4,271 5,474 6,929 Extraordinary items Reported NPAT 1,134 2,653 4,271 5,474 6,929 Dividends ,030-1,068-1,369-1,732 Transfer to reserves 555 1,623 3,203 4,106 5,196 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) na na Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA na na Normalised EPS Normalised FDEPS Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA ,194 Change in working capital 2, Other operating cashflow -1,450-1, Cashflow from operations -43-1, Capital expenditure -2,932-1,647-2,482-2,482-2,482 Free cashflow -2,975-3,094-2,357-2,160-1,725 Reduction in investments ,786-1,796-2,262 Net acquisitions Dec in other LT assets -1, Inc in other LT liabilities Adjustments 6,296 3,044 5,136 6,280 7,573 CF after investing acts 2, ,259 3,512 Cash dividends -1, ,068-1,369-1,732 Equity issue Debt issue 38 4, Convertible debt issue Others CF from financial acts -1,215 3, ,322-1,707 Net cashflow 1,077 4, ,805 Beginning cash 8,239 9,316 14,083 14,074 15,010 Ending cash 9,316 14,083 14,074 15,010 16,815 Ending net debt ,643 Balance sheet (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 9,316 14,083 14,074 15,010 16,815 Marketable securities 6,227 4,956 5,145 5,050 5,098 Accounts receivable 3,303 4,725 5,348 5,624 5,776 Inventories 1,397 2,036 2,269 2,345 2,367 Other current assets Total current assets 20,274 26,514 27,548 28,743 30,769 LT investments 16,984 18,618 20,215 22,105 24,320 Fixed assets 5,927 7,366 8,691 9,900 10,995 Goodwill Other intangible assets 3,076 3,084 3,230 3,352 3,450 Other LT assets 3,172 2,262 2,407 2,519 2,618 Total assets 49,434 57,843 62,091 66,619 72,151 Short-term debt 2,515 9,397 9,397 9,397 9,397 Accounts payable 6,376 8,637 9,623 9,947 10,039 Other current liabilities Total current liabilities 9,030 18,059 19,041 19,362 19,458 Long-term debt 7,776 4,775 4,775 4,775 4,775 Convertible debt Other LT liabilities ,044 1,070 Total liabilities 17,370 23,727 24,814 25,181 25,302 Minority interest ,032 Preferred stock Common stock 6,435 6,435 6,435 6,435 6,435 Retained earnings 14,517 16,313 19,516 23,622 28,818 Proposed dividends Other equity and reserves 10,190 10,563 10,563 10,563 10,563 Total shareholders' equity 31,142 33,311 36,514 40,620 45,816 Total equity & liabilities 49,434 57,843 62,091 66,619 72,151 Liquidity (x) Current ratio Interest cover Leverage Net debt/ebitda (x) na net cash net cash Net debt/equity (%) net cash net cash Per share Reported EPS (CNY) 17.82c 41.23c 66.37c 85.07c 1.08 Norm EPS (CNY) 17.82c 41.23c 66.37c 85.07c 1.08 FD norm EPS (CNY) 17.82c 41.23c 66.37c 85.07c 1.08 BVPS (CNY) DPS (CNY) Activity (days) Days receivable Days inventory Days payable Cash cycle

51 Nomura Guangzhou Auto 9 July 2014 Fig. 100: GAC monthly sales volumes (units) Q13 2Q13 3Q13 4Q13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun F 2015F 2016F GAC Honda 362, ,405 77,606 99, , ,038 30,834 19,388 31,412 26,178 33,701 40, , , , ,000 GAC Toyota 274, ,088 64,692 74,520 78,698 85,178 30,226 22,366 33,885 30,032 30,780 29, , , , ,000 GAC Mitsubishi - 2,574 6,351 7,684 11,490 17,510 3,800 2,650 4,306 4,780 6,616 7,386 43,035 54,400 64,800 77,200 GAC Fiat - 11,288 9,207 9,320 13,262 16,586 4,610 3,207 9,353 3,922 5,842 6,103 48,375 54,000 72, ,000 Others 103, ,880 35,594 39,879 34,477 64,687 13,022 9,960 13,542 17,580 15,314 13, , , , ,132 Total GAC 740, , , , , ,999 82,492 57,571 92,498 82,492 92,253 96,430 1,004,615 1,160,150 1,372,491 1,554,332 y-y growth GAC Honda -6.1% -12.7% 7.6% 0.4% 49.1% 120.3% 36.5% 2.5% -13.0% -25.9% 10.1% 19.0% 37.6% -1.3% 26.7% 7.5% GAC Toyota 1.9% -8.9% -5.5% 11.6% 9.8% 79.8% 34.3% 50.6% 24.0% 29.0% 30.5% 4.9% 21.2% 34.6% 10.3% 8.2% GAC Mitsubishi n.a n.a n.a n.a n.a n.a n.a n.a 75.5% 150.9% 189.4% 111.5% n.a. 26.4% 19.1% 19.1% GAC Fiat n.a n.a n.a n.a n.a n.a n.a n.a 187.9% 30.5% 91.2% 87.3% 328.6% 11.6% 33.3% 90.3% Others 50.5% 27.3% 42.6% 10.5% -8.0% 88.6% 14.0% -10.5% 3.8% 36.9% 18.2% -1.4% 32.4% 22.4% 12.6% 11.0% Total GAC 2.2% -3.8% 16.9% 14.3% 34.6% 105.6% 31.3% 18.8% 12.6% 8.0% 27.3% 17.4% 41.1% 15.5% 18.3% 13.2% Fig. 101: GAMC sales volume and GAC gross margins Fig. 102: New product pipeline (units) GAMC sales volume GAC's gross margins 180, , % 140, % 10.6% 120, , , , % 80, , % 60,000 45,432 40,000 24,267 20, M12 6M F 2015F 16% 14% 12% 10% 8% 6% 4% 2% 0% OEM Model Year Month GAC Honda Crosstour 2014 Apr GAC Honda Fit 2014 Jun GAC Honda Odessy 2014 Q4 GAC Honda Jazz 2014 n.a GAC Honda City 2015 n.a GAC Honda Concept V 2015 n.a GAC Fiat Vaggio 2014 Q4 GAC Fiat Freemount 2014 n.a GAC Mitsubishi Outlander 2014 Q4 GAC Mitsubishi Mirage 2015 n.a GAMC GS Q4 GAMC Fangzhou 2014 H2 GAMC GA n.a GAC Toyota A Sedan(SAI) 2014 Jul GAC Toyota Levin 2014 Jul GAC Toyota C-Sedan 2014 Aug GAC Toyota B Sedan(Avalon) 2014 Q4 GAC Toyota E'Z 2014 H2 GAC Toyota New Camry 2015 H1 GAC Toyota Highlander 2015 n.a Source: Nomura research Fig. 103: GAC Honda 4-week moving average sales Fig. 104: GAC Toyota 4-week moving average sales 3,000 2,500 2,000 1,500 1, May 12 W2 Jun 12 W3 Aug 12 W1 Sep 12 W2 Oct 12 W4 Dec 12 W2 Jan 13 W4 Mar 13 W1 Apr 13 W3 May 13 W5 Jul 13 W2 Aug 13 W3 Oct 13 W1 Nov 13 W3 Jan 14 W1 Mar 14 W1 Apr 14 W3 Jun 14 W1 Source: China Auto Market, Nomura research GAC-Honda 1,800 1,600 1,400 1,200 1, Source: China Auto Market, Nomura research GAC-Toyota May 12 W1 Jun 12 W1 Jul 12 W2 Aug 12 W3 Sep 12 W3 Oct 12 W4 Dec 12 W1 Jan 13 W2 Feb 13 W2 Mar 13 W3 Apr 13 W4 May 13 W5 Jul 13 W1 Aug 13 W1 Sep 13 W2 Oct 13 W3 Nov 13 W4 Jan 14 W1 Feb 14 W4 Apr 14 W1 May 14 W2 Jun 14 W3 51

52 Nomura Guangzhou Auto 9 July 2014 Fig. 105: Toyota Levin Fig. 106: New Honda compact SUV Source: Nomura research Source: Nomura research Valuation and risks Still based on a target P/E of 12.1x (LT average) but rolling forward to mid-2015f EPS of CNY0.76, we revise our TP to HKD11.5 (from HKD10.5. The benchmark index for this stock is MSCI China. Risks: 1) All of GAC's production is located in Guangdong province, where we believe it will continue to face pressure from rising labour and component costs; 2) lingering tension between China and Japan may hamper the pace of the recovery for Japanesebrand sales; and 3) delays/postponement of new model debuts/upgrades. Fig. 107: P/E chart Fig. 108: P/B chart (x) Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 +2SD 18.2x +1SD 15.2x LT avg = 12.1x -1SD 9.1x Aug-13 Nov-13 Feb-14 May-14 (x) SD 1.7x +1SD 1.5x LT avg = 1.2x -1SD 1.0x Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research 52

53 SAIC Motor SS CH EQUITY: AUTOS & AUTO PARTS Initiate at Buy; 40%+ upside with dividends Global Markets Research Hidden gem a high quality, blue-chip OEM offered at 6x FY14F P/E, 9% FY14F dividend yield 9 July 2014 Rating Starts at Buy Action: Initiate at Buy on the best value OEM in the China auto universe SAIC is the biggest OEM in China, in terms of sales volume (2013: 5.1mn units) and market cap (USD27bn). Despite its scale, it is not short of growth potential, in our view sales volumes at its two major JVs, Shanghai-VW (SVW) and Shanghai-GM (SGM), have outpaced industry volume growth over the past three years, and we look for sustainable strength (on well-recognised brands, new models) to drive a 12% EPS CAGR over F. While this may not be considered high growth, we believe that SAIC offers sustainable profitability and that its shares have been over-penalised with its P/E of 6x (30% discount to H-share OEM average) and sector-high dividend yield of 9% supported by positive free cashflow and net cash. Catalyst: Shanghai-HK through train (by end-2014) While SAIC s monthly sales data and results should remain solid, we consider the most important catalyst to be implementation of the Shanghai-HK through train, which will allow foreign investors to buy domestic A-shares directly. We believe SAIC s low valuations have a lot to do with inefficiency in the A-share market, as local investors tend to prefer high-growth stocks. With further opening of the A-share market to foreign investors, we expect SAIC s belowsector valuations to gradually align with the non-domestic H-share average. Valuations: Potential upside of 45% including dividends Our TP of CNY21.2 is based on the LT average P/E of 8x (mid-2015f EPS of CNY2.65). We believe increased foreign investor interest will see SAIC s P/E normalise. We also consider 8x P/E to be reasonable compared to its closest peer, H-share-listed Dongfeng Motor (489 HK, Buy), which has a similar LT growth profile and a LT average P/E of 8.5x. Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 563,346 N/A 640,552 N/A 707,852 N/A 788,644 Reported net profit (mn) 24,804 N/A 27,635 N/A 30,810 N/A 34,764 Normalised net profit (mn) 24,804 N/A 27,635 N/A 30,810 N/A 34,764 FD normalised EPS 2.25 N/A 2.51 N/A 2.79 N/A 3.15 FD norm. EPS growth (%) 19.5 N/A 11.4 N/A 11.5 N/A 12.8 FD normalised P/E (x) 6.9 N/A 6.2 N/A 5.6 N/A 4.9 EV/EBITDA (x) 3.5 N/A 3.4 N/A 3.3 N/A 3.2 Price/book (x) 1.2 N/A 1.1 N/A 1.0 N/A 0.9 Dividend yield (%) 7.7 N/A 8.6 N/A 9.6 N/A 10.8 ROE (%) 16.2 N/A 15.9 N/A 15.4 N/A 15.2 Net debt/equity (%) net cash N/A net cash N/A net cash N/A net cash Target price Starts at CNY Closing price 4 July 2014 CNY Potential upside +36.2% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus We are 2% above consensus on both FY14F/FY15F EPS. The stock is also mostly covered by domestic local brokers. Research analysts China Autos & Auto Parts Benjamin Lo - NIHK [email protected] Joseph Wong - NIHK [email protected] Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

54 Nomura SAIC Motor 9 July 2014 Key data on SAIC Motor Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (CNY) M cap (USDmn) 27,641.2 Absolute (USD) Free float (%) 17.3 Rel to MSCI China mth ADT (USDmn) 42.7 Income statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Revenue 478, , , , ,644 Cost of goods sold -402, , , , ,120 Gross profit 76,395 73,775 83,272 92, ,524 SG&A -50,321-56,195-64,625-71,960-80,710 Employee share expense Operating profit 26,073 17,581 18,647 20,061 21,814 EBITDA 32,575 22,439 23,755 25,543 27,670 Depreciation -5,394-3,955-4,124-4,417-4,710 Amortisation -1, ,065-1,146 EBIT 26,073 17,581 18,647 20,061 21,814 Net interest expense Associates & JCEs 15,548 23,022 26,198 29,445 33,498 Other income -1, Earnings before tax 40,156 41,493 45,061 49,731 55,529 Income tax -6,628-5,909-6,417-7,082-7,908 Net profit after tax 33,528 35,584 38,644 42,649 47,621 Minority interests -12,776-10,780-11,009-11,839-12,857 Other items Preferred dividends Normalised NPAT 20,752 24,804 27,635 30,810 34,764 Extraordinary items Reported NPAT 20,752 24,804 27,635 30,810 34,764 Dividends -6,615-13,231-14,741-16,434-18,544 Transfer to reserves 14,136 11,573 12,894 14,375 16,220 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) 46.9 na Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 32,575 22,439 23,755 25,543 27,670 Change in working capital -25,718 4,793-8,283-18,191-19,741 Other operating cashflow -3,198-30,546 16,636 18,707 21,048 Cashflow from operations 3,659-3,314 32,108 26,060 28,977 Capital expenditure -16,009-15,659-15,000-15,000-15,000 Free cashflow -12,350-18,974 17,108 11,060 13,977 Reduction in investments -21,122-4, Net acquisitions Dec in other LT assets 5,062-8, Inc in other LT liabilities Adjustments 15,045 50, CF after investing acts -13,365 19,396 17,108 11,060 13,977 Cash dividends -4,962-9,923-13,986-15,588-17,489 Equity issue Debt issue 3,639 15, Convertible debt issue Others 3,375 3,045-2,400 3,880 4,759 CF from financial acts 2,052 8,856-16,386-11,707-12,730 Net cashflow -11,312 28, ,247 Beginning cash 72,159 60,846 89,098 89,820 89,173 Ending cash 60,846 89,098 89,820 89,173 90,420 Ending net debt -22,292-34,810-35,533-34,885-36,132 Balance sheet (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 60,846 89,098 89,820 89,173 90,420 Marketable securities Accounts receivable 50,260 51,795 54,403 56,240 58,338 Inventories 24,951 30,915 33,589 37,119 41,355 Other current assets 53,097 60,378 72,453 86, ,332 Total current assets 189, , , , ,446 LT investments 69,264 73,594 82,594 91, ,594 Fixed assets 32,826 38,131 43,813 44,395 44,685 Goodwill Other intangible assets 5,612 5,711 6,681 6,616 6,470 Other LT assets 20,347 24,021 24,021 24,021 24,021 Total assets 317, , , , ,216 Short-term debt 37,607 48,023 48,023 48,023 48,023 Accounts payable 72,805 92, , , ,623 Other current liabilities 45,939 45,815 37,463 22,518 6,418 Total current liabilities 156, , , , ,064 Long-term debt 947 6,264 6,264 6,264 6,264 Convertible debt Other LT liabilities 14,898 19,305 19,305 19,305 19,305 Total liabilities 172, , , , ,633 Minority interest 22,669 23,975 34,984 46,823 59,680 Preferred stock Common stock 11,026 11,026 11,026 11,026 11,026 Retained earnings 111, , , , ,878 Proposed dividends Other equity and reserves Total shareholders' equity 122, , , , ,903 Total equity & liabilities 317, , , , ,216 Liquidity (x) Current ratio Interest cover na na na na na Leverage Net debt/ebitda (x) net cash net cash net cash net cash net cash Net debt/equity (%) net cash net cash net cash net cash net cash Per share Reported EPS (CNY) Norm EPS (CNY) FD norm EPS (CNY) BVPS (CNY) DPS (CNY) Activity (days) Days receivable Days inventory Days payable Cash cycle

55 Nomura SAIC Motor 9 July 2014 SAIC stands out among China OEMs SAIC is a large-cap, blue-chip OEM listed on the Shanghai A-share market. Its sales volume growth has consistently outpaced (or at least has been at par) with industry average growth. Yet the shares trade at the lowest P/E multiple and offer the highest dividend yield among listed A- and H-share OEMs. Fig. 109: SAIC has the largest market cap among China OEMs Fig. 110: SVW has consistently outperformed industry PV sales volume growth, while SGM has been mostly in line (USDmn) 30,000 25,000 80% 60% China PV SVW SGM 20,000 40% 15,000 10,000 5,000 20% 0% 0 SAIC BYD Dongfeng Great Wall Brilliance Changan GAC Geely Faw Car Beiqi Foton Haima Auto Faw Xiali Liaoning SG -20% -40% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Source: Bloomberg, Nomura research Source: China Auto Market, Nomura research Fig. 111: SAIC ranks cheapest on 2014F P/E Fig. 112: and offers the highest 2014F dividend yield P/E (x) BYD Brilliance Beiqi Foton GAC Faw Car Haima Auto Dongfeng Changan Geely Great Wall SAIC 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% SAIC Beiqi Foton Great Wall GAC Changan Dongfeng Geely Brilliance Faw Car Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research 55

56 Nomura SAIC Motor 9 July 2014 Financial analysis We expect SAIC s sales volumes to continue to grow steadily with a relatively strong product cycle in the coming two years: 1) in SVW, an A+ compact sedan (at a higher price than the Lavida) will be launched in 2H14, a full-size sedan (C-sedan) and a midsize SUV(B-SUV) may be launched in 2015/2016; 2) in SGM, further volume growth from the newly launched Chevrolet Trax SUV, the new Buick compact SUV to be launched in 4Q14, the new Sail and the localised Cadillac ATS in 2H14, and potential new Regal/Lacross launches in 2015/2016. Nevertheless, we think, SGM s existing model sales might come under pressure due to fierce competition. We hold a constructive view on SAIC s volume and profitability on a sustainable basis, with steadily rising margins attributable to scale, well-recognised JV brands, and a strong product line-up (see figure below). Fig. 113: SAIC: Sales volume breakdown, F (units) F 2015F 2016F General Motor 1,038,988 1,231,539 1,392,658 1,575,167 1,694,600 1,818,600 1,941,600 Volkswagen 1,001,357 1,165,827 1,280,008 1,525,008 1,794,000 2,038,500 2,361,000 SAIC Motor 160, , , , , , ,100 SAIC Wuling 1,234,508 1,301,118 1,458,188 1,600,550 1,760,000 1,932,000 2,112,000 Others 150, , , , , , ,317 Total sales 3,585,141 4,011,800 4,490,211 5,105,836 5,702,749 6,295,418 6,985,017 y-y growth General Motor 42.8% 18.5% 13.1% 13.1% 7.6% 7.3% 6.8% Volkswagen 37.5% 16.4% 9.8% 19.1% 17.6% 13.6% 15.8% SAIC Motor 78.1% 1.1% 23.5% 15.0% 13.8% 12.7% 14.6% SAIC Wuling 8.5% 5.4% 12.1% 9.8% 10.0% 9.8% 9.3% Others 31.6% 0.8% 5.3% 9.9% 9.9% 9.9% 9.9% Total sales 28.2% 11.9% 11.9% 13.7% 11.7% 10.4% 11.0% Sales mix General Motor 29.0% 30.7% 31.0% 30.9% 29.7% 28.9% 27.8% Volkswagen 27.9% 29.1% 28.5% 29.9% 31.5% 32.4% 33.8% SAIC Motor 4.5% 4.0% 4.5% 4.5% 4.6% 4.7% 4.8% SAIC Wuling 34.4% 32.4% 32.5% 31.3% 30.9% 30.7% 30.2% Others 4.2% 3.8% 3.5% 3.4% 3.4% 3.4% 3.3% Total sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 56

57 Nomura SAIC Motor 9 July 2014 Fig. 114: SAIC: New model line-up Source: Company data, Nomura research Brand Model Year Month SAIC VW VW Polo 2014 Q2 SAIC VW VW A-Plus 2014 Q4 SAIC VW Skoda Octavia 2014 May SAIC VW Skoda Octavia classics 2014 H2 SAIC VW Skoda Spaceback 2014 Apr SAIC VW Skoda Xtreme City 2014 H2 SAIC GM Buick GL Apr SAIC GM Chevrolet Cruze 2014 Q4 SAIC GM Chevrolet Trax 2014 Apr SAIC GM Cadillac ATS-L 2014 Q2 SAIC GM Wuling Baojun Apr SAIC GM Wuling Baojun H2 SAIC Motor MG MG5(NB) 2014 H2 Given its scale and sustainable sales volume growth, we have witnessed a stable ROE performance for SAIC since it began to recover from the GFC in Its ROE averaged 17% during , and we expect a still-steady 15.4% average for F. Since 2011, SAIC has also accumulated a strong net cash position on its balance sheet, standing at over CNY30bn as at end Considering the consistently robust free cashflows generated, SAIC has modified its dividend policy, raising its dividend payout to 53% in SAIC intends to maintain the high payout and, by our estimates, this is sustainable as the dividend payments will be matched by our estimated free cashflows for F. Fig. 115: SAIC has maintained a consistent ROE since recovering from the GFC in 2008 Fig. 116: SAIC has had a consistent track record in dividends 25% 20% 15% 10% 5% 0% 21.4% 18.8% 16.2% 15.9%15.4% 15.2% 15.5% 14.9% 1.6% F2015F2016F (CNY) DPS (LHS) Payout ratio (RHS) % 53% 53% % % 32% % % 13% F 2015F 2016F 60% 50% 40% 30% 20% 10% 0% Source: Bloomberg, Nomura estimates 57

58 Nomura SAIC Motor 9 July 2014 Fig. 117: Strong net cash position, F Fig. 118: Dividends supported by free cashflows, F (CNYmn) 50,000 (CNYmn) FCF Dividend proposed 25,000 40,000 20,000 30,000 15,000 20,000 10,000 10,000 5, (10,000) (5,000) (20,000) (10,000) (30,000) (15,000) F 2015F 2016F F 2015F 2016F 58

59 Nomura SAIC Motor 9 July 2014 Valuation methodology and risks Our TP of CNY21.2 is based on the LT average P/E of 8x and our mid-2015f EPS forecast of CNY2.65. We believe that increased foreign investor interest should help SAIC s P/E multiple re-rate back to its norm. We also consider 8x P/E to be reasonable when compared with its closest peer, H-share-listed Dongfeng Motor (489 HK, Buy), which has a similar LT growth profile and a LT average P/E of 8.5x. The benchmark index for this stock is MSCI China. Risks:1) Delay or cancellation of the proposed Shanghai-HK through-train ; 2) margin disappointment on the downside should the retail discount widen; and 3) unexpected strong competition among overseas brands. Fig. 119: P/E chart Fig. 120: P/B chart (x) SD 11.9x +1SD 9.9x LT avg = 7.9x -1SD 5.9x (x) SD 2.9x +1SD 2.2x LT avg = 1.6x -1SD 0.9x 0 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Source: Bloomberg, Nomura research Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Source: Bloomberg, Nomura research 59

60 Nomura SAIC Motor 9 July 2014 Company background SAIC Motor is the largest auto-manufacturing group in China, and was listed as the largest auto company by market cap on the China A-share stock market in The company builds and sells passenger cars and commercial vehicles. Among them, SAIC Motor Passenger Vehicle Company, Shanghai Volkswagen, Shanghai General Motors, SAIC-GM-Wuling are the passenger car producers while SAIC Motor Commercial Vehicle Company, Nanjing Auto Corporation, Sunwin and SAIC-IVECO Hongyan Commercial Vehicle Company make vans, buses and trucks. In 2013, SAIC Motor sold 5.1mn vehicle units overall with the growth ratio reaching 13.7%. Meanwhile, with its domestic market share reaching 22.6%, SAIC Motor has maintained its leading position in the domestic auto market for eight consecutive years. Fig. 121: SAIC corporate structure chart Shanghai government 100% Shanghai Automotive Industry (Group) Corp. 74.3% Yuejin Automobile Shanghai Automoive Industry Co Ltd Public investors 3.75% 3.03% 18.92% SAIC Motor ( CH) SGM (50% JV) SAIC-GM-Wuling (50.1% JV) Huayu Auto (600741CH; 60.1% JV) SAIC Finance (100%) Other co. SVW (50% JV) SGM Sales Co (51% JV) Other auto parts co. GMAC-SAIC (50%) SVW Sales Co (60% JV) SAIC Motor (100%) Consolidation Equity accounting Other PV/CV Co. Source: Company data, Nomura research Fig. 122: SVW model details and sales volume breakdown Brand Model Sub-Segment Price Range (CNY) 2013 YTD 14 Skoda Fabia Sub-Compact Car 78.9k-115.9k 33,554 9,116 Skoda Octavia Compact Car 122k-210.9k 120,246 32,764 Skoda Rapid Compact Car 79.9k-116.9k 36,052 30,054 Skoda Superb Midsize Car 171.9k-243.9k 37,258 9,201 Skoda Yeti Compact SUV 165.8k-241.8k 4,090 6,380 Volkswagen Lavida Compact Car 107.6k-166.9k 433, ,165 Volkswagen Passat Midsize Car 183.8k-322.8k 23 1 Volkswagen Passat NMS Midsize Car 183.8k-322.8k 227,240 99,311 Volkswagen Polo Sub-Compact Car 85.9k-158.9k 154,235 53,885 Volkswagen Santana Compact Car 84.9k-123.8k 180, ,494 Volkswagen Santana Vista Compact Car 94.8k-99.8k 62,732 20,688 Volkswagen Tiguan Compact SUV 189.8k-315.8k 199,782 87,532 Volkswagen Touran Compact MPV/Minivan 149.8k-211.8k 35,310 12,112 Total 1,525, ,703 Source: LMCA, Nomura research 60

61 Nomura SAIC Motor 9 July 2014 Fig. 123: SGM model details and sales volume breakdown Brand Model Sub-Segment Price Range (CNY) 2013 YTD 14 Buick Encore Compact SUV 149.9k-196.9k 61,563 26,321 Buick Excelle Compact Car 96.9k-115.9k 296,183 98,953 Buick Excelle XT/GT Compact Car 129.9k-187.3k 204,274 91,704 Buick GL8 Standard MPV/Minivan 209k-399.9k 31,997 15,603 Buick GL8 NG Standard MPV/Minivan 288k-388k 38,194 14,894 Buick Lacrosse Midsize Car 226.9k-369.9k 89,279 26,842 Buick Park Avenue Fullsize Car 378k-388k Buick Regal Midsize Car 178.9k-299.9k 86,050 32,484 Cadillac SLS Medium Luxury 388.8k-828k Cadillac XTS Medium Luxury 349.9k-569.9k 19,999 9,550 Chevrolet Aveo Sub-Compact Car 81.8k-114.8k 35,509 6,791 Chevrolet Captiva Midsize SUV 219.8k-263.8k 37,601 13,172 Chevrolet Cruze Compact Car 108.9k-159.9k 246,890 84,968 Chevrolet Epica Midsize Car 108.9k-196.9k 18,290 5,723 Chevrolet Trax Compact SUV 119.9k-159.9k - 1,846 Chevrolet Malibu Midsize Car 162.9k-232.9k 100,141 39,898 Chevrolet Sail Sub-Compact Car 56.8k-79.3k 276,311 84,949 Total 1,542, ,698 Source: LMCA, Nomura research Fig. 124: SAIC Group model details and sales volume breakdown Brand Model Sub-Segment Price Range (CNY) 2013 YTD 14 Baojun Baojun 630 Compact Car 62.8k-95.8k 68,200 13,880 Baojun Lechi(Spark) Mini Car 39.8k-49.8k 32,300 11,824 Maxus Maxus Light Bus Van-Light Bus 146k-240k 11,302 4,648 MG MG3 Sub-Compact Car 69.7k-103.7k 45,101 11,725 MG MG5 Compact Car 87.7k-136.7k 9,065 1,793 MG MG6 Compact Car 124.8k-192.8k 19,423 4,933 MG MG7 Midsize Car 156.8k-288.8k Roewe Roewe 350 Compact Car 89.7k-128.7k 113,057 36,512 Roewe Roewe 550 Compact Car 99.8k-259.8k 24,481 6,165 Roewe Roewe 750 Midsize Car 162.8k-251.8k 3, Roewe Roewe 950 Midsize Car 188.9k-319.9k 3, Roewe Roewe E50 Mini Car 234.9k-234.9k Roewe Roewe W5 Midsize SUV 162.8k-298.8k 10,512 5,069 Wuling Hongguang Mini Bus 44.8k-69.8k 530, ,118 Wuling Rongguang/Xingwang Mini Bus 27.5k-57.8k 339, ,493 Wuling Sunshine Mini Bus 29.8k-48k 455, ,265 Wuling Wuling Mini Truck Mini Truck 35.8k-39k 174,984 67,031 Yuejin Yuejin Light Truck Light Truck 94k-100k 104,076 30,726 Iveco Iveco Van-Light Bus 124.9k-222k 43,333 13,649 Total 1,988, ,400 Source: LMCA, Nomura research 61

62 Nomura SAIC Motor 9 July 2014 Fig. 125: SVW Lavida Fig. 126: SVW Tiguan Fig. 127: SVW Passat Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research Fig. 128: SGM Buick Excelle Fig. 129: SGM Cruze Fig. 130: SGM Sail Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research Fig. 131: Baojun 630 Fig. 132: Roewe 950 Fig. 133: MG6 Magnette Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research 62

63 Johnson Electric Holdings 0179.HK 179 HK EQUITY: AUTOS & AUTO PARTS Maintain Neutral; TP cut to HKD6.9 Near-term margins headwind an overhang Action: Maintain Neutral on near-term margins headwind After falling 21% shortly after its FY14 results announcement, the c. 14% recovery in Johnson s share price in the past six weeks, led by strong US/EU auto sales growth YTD, does not alter our cautious view on Johnson s nearterm earnings outlook. We maintain our positive revenue growth assumption as a result of Johnson s fast-growing auto products business and its recovering industrial products business (especially in the European market). However, we note that these positives likely give in to the imminent start-up costs associated with the commencement of its new overseas production bases and rising labour costs in China, leading to a near-term margins setback, in our view. For instance, we largely maintain our revenue forecasts for FY15/16F, as opposed to a c10% cut in our net earnings forecasts to reflect the net impact of our view. While Johnson s current valuation of 15.2x FY15F P/E (EPS: USD0.06) does not seem demanding after the recent correction, it offers immaterial upside to our TP. We maintain our Neutral rating. Catalyst Positives: potential acquisitions, unexpectedly strong auto sales in the US/EU, more aggressive turnaround of its IPG business, dividend upside. Negatives: stronger margins setback. Johnson also proposed a 4-for-1 share consolidation effective July Without any material impact to its earnings, we expect the event will be neutral or slightly negative for the share price. Valuation Following the changes to our earnings assumptions, we cut our TP to HKD6.9 (from HKD7.3). Our TP is based on DCF valuation which implies FY15F 15.2x P/E (EPS: USD0.06) and 1.7x P/B (BVPS: USD0.53). The cash flows are discounted back to FY15F. Global Markets Research 9 July 2014 Rating Remains Neutral Target price Reduced from 7.30 HKD 6.90 Closing price 4 July 2014 HKD 7.14 Potential downside -3.4% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our FY15-17F net earnings are largely in line with consensus. Research analysts China Autos & Auto Parts Joseph Wong - NIHK [email protected] Benjamin Lo - NIHK [email protected] Year-end 31 Mar FY14 FY15F FY16F FY17F Currency (USD) Actual Old New Old New Old New Revenue (mn) 2,098 2,284 2,212 2,307 2,423 Reported net profit (mn) Normalised net profit (mn) FD normalised EPS 5.79c 6.81c 6.04c 6.47c 6.96c FD norm. EPS growth (%) FD normalised P/E (x) 15.8 N/A 15.2 N/A 14.2 N/A 13.2 EV/EBITDA (x) 9.4 N/A 8.8 N/A 7.9 N/A 7.0 Price/book (x) 1.9 N/A 1.7 N/A 1.6 N/A 1.5 Dividend yield (%) 1.6 N/A 1.7 N/A 2.0 N/A 2.1 ROE (%) Net debt/equity (%) net cash net cash net cash net cash net cash Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

64 Nomura Johnson Electric Holdings 9 July 2014 Key data on Johnson Electric Holdings Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (HKD) M cap (USDmn) 3,297.4 Absolute (USD) Free float (%) 39.2 Rel to MSCI HK mth ADT (USDmn) 3.9 Income statement (USDmn) Year-end 31 Mar FY13 FY14 FY15F FY16F FY17F Revenue 2,060 2,098 2,212 2,307 2,423 Cost of goods sold -1,482-1,479-1,568-1,638-1,714 Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS Cashflow statement (USDmn) Year-end 31 Mar FY13 FY14 FY15F FY16F FY17F EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Dec in other LT assets Inc in other LT liabilities Adjustments CF after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others CF from financial acts Net cashflow Beginning cash Ending cash ,072 Ending net debt Balance sheet (USDmn) As at 31 Mar FY13 FY14 FY15F FY16F FY17F Cash & equivalents ,072 Marketable securities Accounts receivable Inventories Other current assets Total current assets 1,120 1,306 1,596 1,706 1,836 LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets 2,244 2,501 2,833 2,982 3,145 Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings 1,551 1,717 1,879 2,050 2,234 Proposed dividends Other equity and reserves Total shareholders' equity 1,569 1,732 1,894 2,066 2,250 Total equity & liabilities 2,244 2,501 2,833 2,982 3,145 Liquidity (x) Current ratio Interest cover na na na na na Leverage Net debt/ebitda (x) net cash net cash net cash net cash net cash Net debt/equity (%) net cash net cash net cash net cash net cash Per share Reported EPS (USD) 5.36c 5.82c 6.07c 6.50c 7.00c Norm EPS (USD) 5.36c 5.82c 6.07c 6.50c 7.00c FD norm EPS (USD) 5.33c 5.79c 6.04c 6.47c 6.96c BVPS (USD) DPS (USD) Activity (days) Days receivable Days inventory Days payable Cash cycle

65 Nomura Johnson Electric Holdings 9 July 2014 Fig. 134: Revenue breakdown by region (FY15F) Fig. 135: We expect positive revenue growth Total Europe 44% Total Asia 34% (USDmn) 2,500 2,400 2,300 2,200 2,100 2,000 2,104 21% 2,141 2,060 2% Total revenue (LHS) y-y growth (RHS) 2,098 2% 2,212 2,307 2,423 5% 4% 5% 25% 20% 15% 10% 5% 0% 1,900-4% -5% Total USA 22% 1,800 FY11 FY12 FY13 FY14 FY15F FY16F FY17F -10% Source: Nomura estimates Source: Company, Nomura estimates Fig. 136: APG revenue breakdown by region (FY15F) Fig. 137: IPG revenue breakdown by region (FY15F) Asia 30% Europe 26% Europe 51% Asia 44% Source: Nomura estimates USA 19% USA 30% Source: Nomura estimates Fig. 138: Net cash balance ( F) Fig. 139: Dividend payment and payout ratio (USDmn) 1, FY11 FY12 FY13 FY14 FY15F FY16F FY17F (USDmn) % 24.7% 46 Dividend (LHS) Payout ratio (RHS) 26.3% % 26.3% % % FY11 FY12 FY13 FY14 FY15F FY16F FY17F 68 28% 27% 26% 25% 24% 23% 65

66 Nomura Johnson Electric Holdings 9 July 2014 Fig. 140: Key change in our earnings estimates New estimates Previous estimates Changes % USD mn FY15F FY16F FY17F FY15F FY16F FY17F FY15F FY16F FY17F APG 1,538 1,627 1,736 1,662 n.a n.a -7.4% n.a n.a IGG n.a n.a 8.4% n.a n.a Total revenue 2,212 2,307 2,423 2,284 n.a n.a -3.1% n.a n.a Gross profits n.a n.a -2.8% n.a n.a Gross margins 29.1% 29.0% 29.3% 29.0% n.a n.a 0.1% n.a n.a Operating profits n.a n.a -6.6% n.a n.a Operating margins 11.0% 11.2% % n.a n.a -0.9% n.a n.a Source: Nomura estimates Valuation and risks Following our EPS revisions and based on DCF valuation which implies FY15F 15.2x P/E (EPS: USD0.06) and 1.7x P/B (BVPS: USD0.53), we cut our TP to HKD6.9 (from HKD7.3). The benchmark index for this stock is MSCI HK. Risks: 1) uncertainty over the sustainability of US/ EU economic recovery, and auto demand recovery, and 2) rising commodity prices could exert pressure on gross margins. Fig. 141: P/E chart Fig. 142: P/B chart (x) 40 (x) SD 28.0x Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 +1SD 21.7x LT avg = 15.5x -1SD 9.2x Apr-11 Apr-12 Apr-13 Apr Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 +2SD 12.9x +1SD 8.7x LT avg = 4.6x -1SD 0.5x Apr-11 Apr-12 Apr-13 Apr-14 Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates 66

67 Minth Group 0425.HK 425 HK EQUITY: AUTOS & AUTO PARTS Maintain Buy; TP raised to HKD18.6 Global Markets Research Clouds almost cleared; remains a high quality play 9 July 2014 Rating Remains Buy Action: Maintain Buy, target price fine-tuned to HKD18.6 Following the SFC allegation in April this year, Minth has once been derated by the market and experienced a c. 20% decline in the share price. (For details, please refer to our report Quick Note - Minth Group (425 HK, Buy) - Already de-rated; wait for clouds to clear, 14 Apr 2014). However, over the past four weeks, the share price has gradually recovered to the pre-allegation level, thus reassuring investors who have grown uncomfortable with Minth s corporate governance since the event. Barring any related legal proceedings in future, we continue to view Minth as one of the high-quality plays in the China auto-parts industry, given its strong liquidity position, a c.27% market share in the domestic market and clear and visible earnings growth profile. We stick to our belief that the SFC allegation itself has no direct impact to Minth s earnings, and therefore, we only trim down our F net earnings forecasts moderately by 3.8/0.1% to incorporate the numbers of the actual 2013 results. Minth s current valuation does not seem demanding when considering its double-digit earnings growth profile and its historical long-term average of 10x. Maintain Buy. Catalysts Minth should remain a key beneficiary of healthy PV sales growth in China, with domestic sales expected to contribute 70% of its total revenue in FY14F, in our view. On the other hand, our auto analyst Masataka Kunugimoto has turned more positive on Europe auto sales thanks to encouraging data released YTD and believes sales have started to recover from its financialcrisis induced lows. We shall have more visibility on the SFC allegation on 9 July when the first hearing is held in the High Court. Valuation Following our EPS revisions and roll-forward to mid-15f EPS, we raise our TP to HKD18.6 (from HKD18.2), still based on 13.5x P/E (1 SD above historical mean; mid-15f EPS: CNY1.10). Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (CNY) Actual Old New Old New Old New Revenue (mn) 5,510 6,275 6,796 7,256 8,217 9,769 Reported net profit (mn) 971 1,154 1,111 1,284 1,286 1,481 Normalised net profit (mn) 971 1,154 1,111 1,284 1,286 1,481 FD normalised EPS 88.80c FD norm. EPS growth (%) FD normalised P/E (x) 13.9 N/A 12.2 N/A 10.5 N/A 9.1 EV/EBITDA (x) 10.9 N/A 8.9 N/A 7.7 N/A 6.6 Price/book (x) 1.8 N/A 1.6 N/A 1.5 N/A 1.4 Dividend yield (%) 2.9 N/A 3.3 N/A 3.8 N/A 4.4 ROE (%) Net debt/equity (%) net cash net cash net cash net cash net cash net cash Target price Increased from HKD Closing price 4 July 2014 HKD Potential upside +19.5% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our FY14-16F net earnings are largely in line with consensus, despite our more conservative gross margin assumptions. Research analysts China Autos & Auto Parts Joseph Wong - NIHK [email protected] Benjamin Lo - NIHK [email protected] Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

68 Nomura Minth Group 9 July 2014 Key data on Minth Group Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (HKD) M cap (USDmn) 2,194.6 Absolute (USD) Free float (%) 40.5 Rel to MSCI China mth ADT (USDmn) 5.2 Income statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Revenue 4,330 5,510 6,796 8,217 9,769 Cost of goods sold -2,896-3,692-4,600-5,595-6,682 Gross profit 1,434 1,819 2,196 2,621 3,087 SG&A ,092-1,300-1,513 Employee share expense Operating profit ,104 1,322 1,574 EBITDA 882 1,074 1,357 1,625 1,928 Depreciation Amortisation EBIT ,104 1,322 1,574 Net interest expense Associates & JCEs Other income Earnings before tax 1,044 1,225 1,401 1,622 1,869 Income tax Net profit after tax 896 1,029 1,177 1,362 1,570 Minority interests Other items Preferred dividends Normalised NPAT ,111 1,286 1,481 Extraordinary items Reported NPAT ,111 1,286 1,481 Dividends Transfer to reserves Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS Cashflow statement (CNYmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA 882 1,074 1,357 1,625 1,928 Change in working capital Other operating cashflow Cashflow from operations ,253 1,435 1,700 Capital expenditure Free cashflow Reduction in investments Net acquisitions Dec in other LT assets Inc in other LT liabilities Adjustments CF after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others CF from financial acts Net cashflow Beginning cash 3,792 4,130 4,119 3,800 3,561 Ending cash 4,130 4,119 3,800 3,561 3,466 Ending net debt -2,672-1,709-1,389-1,151-1,055 Balance sheet (CNYmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents 4,130 4,119 3,800 3,561 3,466 Marketable securities Accounts receivable 1,323 1,939 2,392 2,892 3,438 Inventories ,097 1,334 1,593 Other current assets Total current assets 6,504 7,846 8,187 8,727 9,479 LT investments Fixed assets 1,889 2,546 3,204 3,812 4,369 Goodwill Other intangible assets Other LT assets 932 1,045 1,104 1,164 1,226 Total assets 9,374 11,493 12,549 13,756 15,126 Short-term debt 1,271 2,385 2,385 2,385 2,385 Accounts payable 837 1,201 1,497 1,821 2,174 Other current liabilities Total current liabilities 2,167 3,698 4,009 4,352 4,727 Long-term debt Convertible debt Other LT liabilities Total liabilities 2,393 3,774 4,093 4,445 4,830 Minority interest Preferred stock Common stock Retained earnings 6,664 7,346 8,018 8,796 9,692 Proposed dividends Other equity and reserves Total shareholders' equity 6,774 7,457 8,129 8,906 9,802 Total equity & liabilities 9,374 11,493 12,549 13,756 15,126 Liquidity (x) Current ratio Interest cover na na na na na Leverage Net debt/ebitda (x) net cash net cash net cash net cash net cash Net debt/equity (%) net cash net cash net cash net cash net cash Per share Reported EPS (CNY) 78.10c 89.61c Norm EPS (CNY) 78.10c 89.61c FD norm EPS (CNY) 77.79c 88.80c BVPS (CNY) DPS (CNY) Activity (days) Days receivable Days inventory Days payable Cash cycle

69 Nomura Minth Group 9 July 2014 Fig. 143: Revenue and gross margins trends (CNY mn) Total Revenue Gross margins 12,000 43% Fig. 144: Breakdown of COGS FY14F Depreciation, 4% 10,000 8, % 36.6% 35.0% 9,769 8,217 6,796 40% 37% Manufacturing cost, 20% 6,000 4,000 3,576 3,889 4,330 2, % 5, % 32.3% 31.9% 34% 31.6% 31% Labour cost, 9% Direct material cost, 68% 2,000 28% F 25% Source: Nomura estimates Fig. 145: Revenue breakdown by product type, FY14F Fig. 146: Revenue breakdown by customer origin, FY14F Seat frame system, 4.2% Roof rack, 6.5% Others, 5.8% Trims, 26.5% American, 30.5% Korean, 5.9% Chinese, 6.0% Others, 0.8% Body structural parts, 25.0% European, 13.9% Decorative, 32.0% Japanese, 42.9% Source: Nomura estimates Source: Nomura estimates Fig. 147: Revenue breakdown by region 120% America Europe Asia Pacific China 100% 80% 60% 84.6% 76.5% 73.5% 69.7% 68.4% 67.0% 66.2% 65.2% 40% 20% 0% 5.6% 7.4% 7.2% 6.8% 6.2% 7.8% 7.7% 7.7% 9.0% 10.0% 11.2% 8.4% 3.4% 4.5% 5.7% 2.8% 16.3% 7.0% 12.3% 14.3% 16.5% 16.8% 17.0% 17.4% F 2015F 2016F 69

70 Nomura Minth Group 9 July 2014 Valuation and risks Following our FY14-15F EPS revisions, and still based on 13.5x (representing 1 SD above the historical mean) mid-15f P/E (EPS: CNY1.10), we raise our target price to HKD18.6 (from HKD18.2). The benchmark index for this stock is MSCI China. Risks: 1) continued pressure on profit margins; 2) deteriorating relationship with key customers; 3) heavy reliance on Japanese brands, and; 4) a slowdown in global auto production. Fig. 148: P/E chart Fig. 149: P/B chart (x) 35 (x) SD 16.3x +1SD 13.2x LT avg = 10.0x -1SD 7.0x SD 2.5x +1SD 2.0x LT avg = 1.5x -1SD 1.0x 0 Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 0 Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates 70

71 Nexteer Automotive 1316.HK 1316 HK EQUITY: AUTOS & AUTO PARTS Initiate with Buy and TP of HKD7.5 Global Markets Research Near-term negatives priced in; Buy for long-term structural growth 9 July 2014 Rating Starts at Buy Action: Initiate with Buy rating and target price of HKD7.5 We initiate coverage of Nexteer with a Buy rating as we see it as a key beneficiary of an expected long-term structural demand shift from hydraulic power steering (HPS) to electric power steering (EPS). With about 76% of future lifetime revenue likely to be derived from EPS systems (vs 41% in 2013), we believe the growing global EPS demand will see Nexteer enjoy a gradual and sustainable product mix upgrade, and thereby gross margin improvement. Coupled with the ongoing EU auto market recovery, on which we have turned more positive in our report, Global autos outlook - It s a brave new world, and the kicking in of new contract revenue in China, we expect Nexteer to deliver a strong three-year net earnings CAGR of 19% over F. The stock has corrected by c15% in the past two months mainly on a series of vehicle recalls initiated by General Motors (GM), which contributed 50%-plus of Nexteer s 2013 total revenue (see details inside). Despite this, we note that GM s post-recall fleet sales have remained robust and the relevant financial impact for Nexteer has been one-off, we believe. Should the market look past the events, the recent pull-back, in our view, should present investors an ideal opportunity to accumulate and capture Nexteer s structural growth story. Catalysts: Improving macro economic data from US/EU, where Nexteer generated 71%/15% of 2013 revenue; stronger-than-expected GM fleet deliveries; and new purchase orders from OEMs Valuation: Reasonable considering strong earnings growth prospects Nexteer shares trade at 10.9x FY14F EPS of USD0.06 and 2.0x FY14F BVPS of USD0.36, with 19.6% ROE. Our target price of HKD7.5 is based on 13x our mid-fy15f EPS forecast of USD0.07, representing its Hong Kong/China peer average given Nexteer s short trading history. In our view, the valuation is reasonable considering the company s 19% three-year EPS CAGR. Year-end 31 Dec FY13 FY14F FY15F FY16F Currency (USD) Actual Old New Old New Old New Revenue (mn) 2,387 N/A 2,660 N/A 2,972 N/A 3,335 Reported net profit (mn) 109 N/A 121 N/A 154 N/A 184 Normalised net profit (mn) 109 N/A 121 N/A 154 N/A 184 FD normalised EPS 5.85c N/A 6.48c N/A 8.25c N/A 9.84c FD norm. EPS growth (%) 72.1 N/A 10.9 N/A 27.2 N/A 19.3 FD normalised P/E (x) 12.1 N/A 10.9 N/A 8.6 N/A 7.2 EV/EBITDA (x) 6.4 N/A 5.6 N/A 4.7 N/A 4.1 Price/book (x) 2.3 N/A 2.0 N/A 1.7 N/A 1.4 Dividend yield (%) 1.7 N/A 1.8 N/A 2.3 N/A 2.8 ROE (%) 29.6 N/A 19.6 N/A 21.1 N/A 21.2 Net debt/equity (%) 48.2 N/A 43.6 N/A 35.6 N/A 29.5 Target price Starts at HKD 7.50 Closing price 4 July 2014 HKD 5.49 Potential upside +36.6% Anchor themes We remain constructive on the 2H14F outlook for new auto sales, underpinned by growing replacement demand and availability of auto financing. We prefer SUVs, entry-level luxury, and OEMs with strong new model pipelines. Nomura vs consensus Our F earnings are in 13% lower than consensus, mainly on lower top-line growth and gross margin assumptions. Research analysts China Autos & Auto Parts Joseph Wong - NIHK [email protected] Benjamin Lo - NIHK [email protected] Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

72 Nomura Nexteer Automotive 9 July 2014 Key data on Nexteer Automotive Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (HKD) M cap (USDmn) 1,769.4 Absolute (USD) Free float (%) 32.7 Rel to MSCI China mth ADT (USDmn) 3.3 Income statement (USDmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F Revenue 2,168 2,387 2,660 2,972 3,335 Cost of goods sold -1,896-2,047-2,274-2,533-2,830 Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) na Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) na ROA (pretax %) na Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS Cashflow statement (USDmn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16F EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Dec in other LT assets Inc in other LT liabilities Adjustments CF after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others CF from financial acts Net cashflow Beginning cash Ending cash Ending net debt Balance sheet (USDmn) As at 31 Dec FY12 FY13 FY14F FY15F FY16F Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets ,000 1,078 LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets 1,259 1,805 1,974 2,183 2,393 Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities 1,067 1,214 1,283 1,364 1,421 Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities 1,259 1,805 1,974 2,183 2,393 Liquidity (x) Current ratio Interest cover Leverage Net debt/ebitda (x) Net debt/equity (%) Per share Reported EPS (USD) 3.40c 5.85c 6.48c 8.25c 9.84c Norm EPS (USD) 3.40c 5.85c 6.48c 8.25c 9.84c FD norm EPS (USD) 3.40c 5.85c 6.48c 8.25c 9.84c BVPS (USD) DPS (USD) Activity (days) Days receivable Days inventory Days payable Cash cycle

73 Nomura Nexteer Automotive 9 July 2014 Investment thesis Recent negatives priced in The first half of this year saw Nexteer shares trend down from March as a result of a series of vehicle recalls by General Motors (GM), which contributed 50%-plus of Nexteer s 2013 revenue. After GM announced the first recall this year on 19 March, which involved Nexteer steering products, Nexteer shares dipped 7.3% in following few days. The share price has further corrected by 17.3% since 30 March when GM announced another recall involving Nexteer steering products for more than 2.4mn vehicles worldwide. Nexteer shares continued to respond in a similar fashion following subsequent product recalls at GM on 13 May and Ford on 29 May, falling by 9.6% and 9.0%, respectively. Following a share price decline of c15% from the peak in March this year, we feel that much of the bad news is already in the price, as the share price has started to plateau at around 9x FY14F P/E. Fig. 150: Nexteer share price performance (1H14) HKD GM recall on halfshaft with an additiional USD14mn provision GM recall on EPS system with no financial liability Ford recall on EPS systems, engaging Ford to discuss any potential liabilities GM recall on steering gears system with no expected 4.0 financial liability Mar 14 Apr 14 May 14 Jun 14 Source: Bloomberg, Nomura research Market appears to be overreacting to recall issues While we note that Nexteer faces an inherent business risk of warranty and liability claims in the event that its products fail to perform as expected, the company explained that it is not liable for material financial claims in the past four recalls. Of note, Nexteer has put aside USD14mn for potential liability claims and has recognised a USD200k expense for the half-shaft and steering gears involved in the recent recalls. Financial claims related to the other two recalls, according to the company, are largely nonmaterial and are unlikely to have any financial impact. Fig. 151: Summary of recent recalls involving Nexteer products Date OEM Event Models involved No. of vehicles affected Financial liabilities involved March GM Halfshaft recall Chevrolet Cruze 1,340,447 Recognised USD8.3mn expense and accrue another USD14mn in 1H14 March GM EPS recall Chevrolet Malibu, Malibu Maxx, Pontiac G6, Saturn Aura 2,440,524 No financial impact as the quality solution was made in 2010 May GM Steering gears recall Chevrolet Silverado, GMC Sierra, Chevrolet Tahoe 477 Recognised USD200k expense as costs of recalling May Ford Steering systems recall Escape, Mariner 915,000 No financial impact as the recalls are promiarly driven by customer design Source: Company data, NHTSA, Nomura research 73

74 Nomura Nexteer Automotive 9 July 2014 While the USD14mn (USD14mn + USD0.2mn from the 1 st and 3 rd recall, respectively) in recall-related expense may still raise investor concerns over Nexteer s near-term profit outlook, to assess the impact of this expense on the share price, we conduct the following sensitivity analysis. In the base case, we assume Nexteer will incur the full USD14mn expense in its mid-2015f net earnings, which puts the share price in the range of HKD on a target P/E range of x. In our bear case, we assume Nexteer will accrue an additional USD14mn in provisioning for possible further product liability claims (net profit of USD124mn), which implies a share price range of HKD In our bull case, we assume market participants will look past the USD14mn non-cash accrual and we expect Nexteer s share price will range from HKD6.9 to HKD9.5, implying average upside of 55% from the current level. Fig. 152: Sensitivity analysis on share price (HKD/share) Net earnings (USDmn) Bear Base Bull Target P/E Source: Nomura estimates GM s post-recall sales remain broadly in check Another investor concern over the recalls is the interruption of GM s sales, hence jeopardising Nexteer s product delivery. Despite overhang from the recall, we note that GM managed to increase its sales by 13% y-y in May 2014 to 284,694 units in the US the best monthly sales since August GM attributed the strong growth to the timing of rental customer deliveries. It also expects that May will be the company s highest fleet volume month in Hence, the impact of the recent recalls on GM appears to be relatively muted. China revenue to double by 2016F as new contracts kick in With stronger 2014F auto sales growth (10.4%, vs 2.2% for global) and lower EPS penetration (34.5%, vs 58.8% for global in 2012), China will likely continue to offer the highest growth for Nexteer relative to its US and Europe markets. The revenue from the two new EPS purchase orders signed with Shanghai GM-Wuling and DF PSA in late 2013 should kick in from 2014F. We estimate a lifetime volume of 2.5bn units and look for these vehicle programmes to offer strong and visible earnings contributions to Nexteer. We estimate China revenue will record a 31% CAGR over F, lifting the region s revenue contribution from 11.0% in 2013 to 17.7% in 2016F. Fig. 153: Revenue breakdown by region Fig. 154: China revenue forecasts 120% 100% 80% 60% 40% 20% 0% America Europe RoW China 7.2% 7.5% 8.4% 11.0% 7.0% 6.8% 13.7% 5.6% 15.9% 17.7% 12.7% 22.5% 20.3% 15.2% 5.2% 4.9% 4.5% 4.9% 12.5% 12.3% 12.1% 63.2% 65.4% 70.9% 71.1% 68.9% 67.2% 65.3% F 2015F 2016F (USD mn) 700 China (LHS) y-y (RHS) 50% % 45% 39.0% 40% % 35% 25.0% 30% 25% % 14.3% % % 10% 5% 0 0% F 2015F 2016F 74

75 Nomura Nexteer Automotive 9 July 2014 We are turning more positive in Europe With encouraging data-points released over the first five months of this year, we are now turning more positive on the European auto market and we believe that it has not only bottomed, but has also started to recover from the lows reached during the global financial crisis in Our Japan auto analyst Masataka Kunugimoto expects the region to grow by 4.3% y-y to 14.34mn units in 2014F and by a further 3.9% y-y to 14.90mn units in 2015F. He believes that six continuous years of falling sales in the region have led to an aging vehicle parc (ie, vehicle population) and have created enough underlying pent-up demand to support our estimates. For further details, please refer to the report, Global autos outlook - It s a brave new world, published 18 June. Fig. 155: SAAR for Europe (mn unit) Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: ACEA, Nomura research Western Europe (LHS) Rest of Europe (RHS) (mn units) Fig. 156: Europe auto sales forecasts (mn units) Unit sales (LHS) 20 y-y (RHS) % 3.9%3.8% % % % 2010 Source: ACEA, Nomura estimates -5.0% % % % 2014F 2015F 2016F 10% 5% 0% -5% -10% Steady US auto sales growth US SAAR stayed above 16mn for the third-straight month in May Total vehicle sales were at 1.61mn units, up 11% y-y, while passenger car sales were up 9% y-y (8.04mn SAAR, vs 7.55mn in April and 7.60mn in May 2013). Incentives for passenger cars have edged higher. Our Japan auto analyst Anindya Das believes that this has resulted from: 1) tougher competition in the compact and mid-size segment; and 2) a shift in consumer preferences toward roomier compact SUVs as their fuel economy levels approach those of compact/midsize cars at broadly similar price points. We also note that inventory levels have continued to moderate, reaching 3.54mn units at the end of May, after touching a recent high of 3.73mn in February (vs 3.19mn in May 2013). For details, please refer to the report, Japanese automakers US sales - SAAR stays above 16mn for third straight month, published 4 June Fig. 157: US production, capacity and utilisation trend Total NA Std Capacity (Only LV) Total NA Sales (Only LV) (000 units) Total NA LV Production Utilization (standard) - Total NA (RHS) 21,000 17,500 14,000 10,500 7, F 2015F 2016F 110% 100% 90% 80% 70% 60% 50% 40% Fig. 158: US auto annual sales volume and forecasts 18 Unit sales (mn) (LHS) y-y (RHS) F 2015F 2016F 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Source: Ward s, ANFAVEA, Marklines, company data, Nomura estimates Source: Ward s, ANFAVEA, Marklines, Nomura estimates 75

76 Nomura Nexteer Automotive 9 July 2014 Improving gross margins on better sales mix Global shift from HPS to EPS system accelerated since 2007 To reduce carbon emissions and ensure better fuel efficiency, local governments in the US, Europe and more recently China have enacted varied policies and tax incentives to encourage the switch from HPS to EPS systems. We note that global EPS penetration has accelerated since 2007 from 44.6% to 58.8% in The IPSOS estimates that revenue from EPS systems will continue to grow strongly and reach 70.6% of global steering system revenue in 2016F and 73.8% in 2017F. Fig. 159: Global steering system revenue breakdown 120% 100% 80% 60% 40% 20% EPS HPS Manual Others 2.1% 2.1% 2.1% 2.0% 2.0% 2.1% 6.6% 6.4% 6.4% 6.3% 6.3% 5.9% 3.7% 4.9% 4.6% 5.0% 4.9% 4.0% 3.3% 2.7% 2.2% 4.2% 46.7% 40.3% 38.5% 37.5% 35.1% 33.2% 29.9% 27.0% 24.3% 21.9% 19.7% 44.6% 51.2% 53.0% 54.2% 56.6% 58.8% 61.6% 64.4% 67.4% 70.6% 73.8% 0% F 2014F 2015F 2016F 2017F Source: Company data, IPSOS, Nomura research Strong EPS order backlog benefits Nexteer from the demand shift We believe that Nexteer is a potential beneficiary of the demand shift discussed above, as a result of an increasing earnings contribution from EPS systems. We note that EPS will contribute approximately 76% of Nexteer s future lifetime revenues, based on the booked business from the company s 16 key purchase orders. These orders have been awarded and should start to generate revenue typically within years of when the business was awarded. With such a strong order flow, we expect Nexteer s EPS revenue to grow at 22-24% during F and contribute 45-54% of total revenue. Fig. 160: Summary of key purchase orders Products offered Source: Company data, Nomura research Exp. lifetime revenue (USD bn) Customers Vehicle type Est. lifetime volume (units bn) Award Date Commencement date of production Duration (years) EPS 6.2 German OEM 1 Car 6.3 Aug-10 Sep US OEM 1 SUV, Car, Van 5.2 Apr-12 Jun US OEM 2 Pickup & Car 3.9 Jul-11 May US OEM 3 Crossover 1.6 Mar-13 Oct China OEM 1 Car 1.5 Dec-10 Aug China OEM 2 Van 1.0 Nov-11 Oct German OEM 2 Car 0.8 Jul-12 Nov HPS 0.2 US OEM 2 Pickup & SUV 0.7 Nov-12 Sep Steering columns 1.1 US OEM 2 Pickup & SUV 3.5 Jul-11 Jul US OEM 1 Van, Crossover 2.0 Jun-13 Aug US OEM 3 SUV 1.1 May-10 Jan US OEM 3 Pickup 1.0 Feb-12 Aug Halfshafts 0.9 US OEM 3 Crossover 5.6 Jan-13 Oct US OEM 3 Crossover 4.8 Oct-11 Jun US OEM 3 Car 4.8 Dec-12 Mar China OEM 3 Car 4.1 Oct-11 Jan India OEM 1 Car 1.7 Jun-13 Apr

77 Nomura Nexteer Automotive 9 July 2014 Improvement in gross margins on sales mix upgrade We expect Nexteer s gross margin to improve on: 1) a higher revenue contribution from EPS systems, which are generally priced above traditional HPS systems, from 40.9% in 2013 to 54.4% in 2016F; and 2) further upside potential in EPS ASP as a result of the strong demand. These could help improve the company s gross margin from 14.2% in 2013 to 15.1% in 2016F, we estimate. Fig. 161: Revenue contribution by type of steering system Fig. 162: Margin trends 120% EPS HPS CIS Driveline 20% Gross margins EBITDA margins 100% 80% 60% 40% 20% 0% 19.4% 19.8% 21.9% 19.7% 17.9% 16.4% 15.3% 25.6% 22.3% 22.2% 22.4% 22.3% 21.4% 20.4% 12.1% 9.9% 17.0% 14.7% 24.0% 20.6% 25.7% 29.3% 33.9% 35.3% 40.9% 45.2% 50.1% 54.4% F 2015F 2016F 16% 12% 8% 4% 0% Net margins 14.2% 14.5% 14.8% 15.1% 12.5% 12.6% 12.4% 10.3% 10.6% 11.6% 12.1% 6.4% 6.5% 4.6% 4.6% 5.2% 5.5% 2.8% 3.0% 2.6% 0.4% F 2015F 2016F Valuation Our TP of HKD7.5 is based on 13x mid-2015f P/E, benchmarking to its HK/China peer average. Instead of comparing with its own historical trading average, we believe that the peer average is more representative to accurately reflect its share price upside potential given Nexteer s short trading history. A comparison with local peers suggests our target multiple is conservative Within the Hong Kong/China auto component space, we see Johnson Electric (179 HK, Neutral) as Nexteer s closest peer. We note that both firms are exposed to similar business operating environments: engaged in internal mechanical auto component manufacturing (Johnson produces sub-motion/power-train cooling systems), have similar overseas exposure (both with ~70% revenue from the US and EU markets) and benefit from the strong growth of the China PV market. Considering also their similar FY14 divided yield of c2%, we believe our target multiple (13x FY14F, vs Johnson s trailing P/E of 15x) is conservative enough to warrant the 30%-plus upside potential implied by our target price for Nexteer. 77

78 Nomura Nexteer Automotive 9 July 2014 Fig. 163: P/E chart (x) Oct Oct-13 4-Nov Nov-13 2-Dec Dec Dec Jan Jan Feb Feb Mar Mar-14 7-Apr Apr-14 5-May May-14 2-Jun Jun Jun-14 Source: Bloomberg, Nomura estimates LT avg = 8.6x -1SD 7x +2SD 11.6x +1SD 10.1x Fig. 164: P/B chart (x) Oct Oct-13 4-Nov Nov-13 2-Dec Dec Dec Jan Jan Feb Feb Mar Mar-14 7-Apr Apr-14 5-May May-14 2-Jun Jun Jun-14 Source: Bloomberg, Nomura estimates +2SD 2.3x +1SD 2.1x LT avg = 1.8x -1SD 1.5x Fig. 165: Global auto parts supplier valuation summary Company Name Ticker Rating TP Up/ Mkt Cap PE PB ROE EPS Growth Div yield Net Gearing Closing Downside (USDm) 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F 2014F Auto-part makers Johnson Electric 179 HK Equity NEUTRAL % 3, % 12% 4% 7% 1.7% net cash Minth Group 425 HK Equity BUY % 2, % 15% 14% 16% 3.3% net cash Nexteer 1316 HK Equity BUY % 1, % 21% 11% 27% 1.8% 43.6% Xinchen 1148 HK Equity Not rated n.a n.a n.a n.a 4% 35% n.a net cash Xingda Intl 1899 HK Equity Not rated n.a n.a % 11% 19% 19% 3.9% 16.4% Sector average % 13% 9% 17% 2.1% International part makers Nidec Corp 6594 JP Equity BUY 6, % 18,601 6, % 15% 41% 11% 0.8% 7.1% Minebea 6479 JP Equity BUY 1, % 4,764 1, % 16% 41% 5% 1.1% 45.6% Mabuchi Motor 6592 JP Equity NEUTRAL 7, % 2,950 7, % 5% 1% 8% 1.9% net cash Hyundai Mobis KS Equity BUY 360, % 27, , % 16% 16% 7% 0.7% net cash Mando KS Equity NEUTRAL 145, % 2, , % 13% -2% 15% 0.9% 48.7% Hyundai Wia KS Equity BUY 220, % 4, , % 17% 14% 9% 0.4% 17.0% Hankook Tire KS Equity BUY 74, % 7,166 58, % 18% 8% 13% 0.7% 18.3% Nexen Tire KS Equity NEUTRAL 15, % 1,471 15, n.a 1.6 n.a 18% n.a 19% n.a 0.5% 76.3% Johnson Controls JCI US Equity Not rated n.a n.a 34, % 18% 82% 19% 1.7% 66.7% Magna International MG CN Equity Not rated n.a n.a 23, % 19% 21% 16% n.a net cash ThyssenKrupp Presta TKA GR Equity Not rated n.a n.a 17, % 18% -116% 166% n.a 55.3% TRW Automotive TRW US Equity Not rated n.a n.a 10, % 19% -9% 14% n.a 20.0% Lear Corp. LEA US Equity Not rated n.a n.a 7, % 19% 51% 17% 0.8% net cash Faurecia EO FP Equity Not rated n.a n.a 4, % 17% 138% 47% n.a 93.0% Gentex Corp. GNTX US Equity Not rated n.a n.a 4, % 17% 20% 7% 1.9% 153.1% Wanxiang Qianchao CH Equity Not rated n.a n.a 3, n.a n.a 15% 15% 27% 11% n.a 153.1% American Axle AXL US Equity Not rated n.a n.a 1, n.a n.a 98% 9% n.a 10.3% Zhejiang Shibao CH Equity Not rated n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a -28.0% CUB Elecparts 2231 TT Equity Not rated n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a 203.7% San Shing Fastec 5007 TT Equity Not rated n.a n.a n.a n.a n.a n.a 17% 19% n.a 161.4% International average % 17% 23% 29% Source: Bloomberg, Nomura estimates. Bloomberg consensus for NR stocks. Prices as on 4 July 2014 Catalysts Improving US macro economic data Stronger-than-expected General Motors fleet deliveries New purchase orders from OEMs. 78

79 Nomura Nexteer Automotive 9 July 2014 Investment risks Rising raw material costs could erode gross margins Similar to other auto component suppliers, Nexteer is also exposed to fluctuations in basic material prices, mainly for steel, certain rare earth materials and plastic/resins. While raw material costs normally account for c65-70% of the cost of sales of steering system providers, steel prices have in general been increasing since 2009, while steering system prices have generally remained stable. The continuous strength in steel prices, in our view, could potentially erode the gross margins of steering system providers. Fig. 166: COGS breakdown (2014F) Fig. 167: Margin trends Manufacturing cost, 30% Others, 3% 20% 16% 12% 12.6% Gross margins EBITDA margins Net margins 14.2% 14.5% 14.8% 15.1% 12.5% 12.4% 10.3% 10.6% 11.6% 12.1% Direct material cost, 67% 8% 4% 2.8% 6.4% 6.5% 3.0% 2.6% 4.6% 4.6% 5.2% 5.5% 0% 0.4% F 2015F 2016F Fig. 168: US scrap steel price trend Fig. 169: ASP trends of global steering systems (USD/mt) 700 (USD) 400 EPS system Manual system HPS system Others Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan Source: Bloomberg, Nomura research Source: Company data, IPSOS, Nomura research Slowdown in auto demand in the US An unexpected slowdown in US auto demand could significantly impair Nexteer s earning outlook, given the company will derive c65-70% of its revenue from the US in F, we estimate. According to Autodata, US LCV sales in May reached 1.6mn units, up 8.3% y-y and 4.6% m-m. This set of data was well above market expectation and was the best monthly sales number since July Despite this, the recent US consumer data have remained mixed. Employment trends remain reasonable; however, slowing disposable income growth and the apparent peaking of consumer credit growth have raised concerns over a slowdown in auto sales growth going forward. 79

80 Nomura Nexteer Automotive 9 July 2014 Potential price pressure exerted by OEMs Downstream OEMs have traditionally gained stronger bargaining power in pricing negotiation over upstream component producers. The former are generally not obligated to accept a price increase as they often reserve the ultimate right to terminate their purchase orders. Even when part suppliers successfully pass on a price increase, in most cases, there will be delays before they can do so effectively. OEMs will also periodically request discounts from part suppliers, typically 1-3% per year, according to Nexteer, when the price protection period is over for their new models. Fig. 170: Gross margins for auto and auto-parts industry Gross margins (%) autos auto-parts Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 Source: Wind, Nomura research Fig. 171: Porter s 5 force model for global steering system industry Low risk from new entrants - Capital intensive and strong technical and engineering capabilities required; - Intense competition leaves little room for economic profits for new entrants - No absolute cost advantage over peers New entrants Strong buyer bargaining power - Capability of backward integration - Ability to require steering and driveline systems manufacturers to lower prices, when the launch of a new product has passed its price protection period. Suppliers Strong supplier bargaining power - Raw material costs comprise 65-70% of COGS - Steering system producers are mainly price takers when commodities are publicly traded in the exchanges - Unlikely for parts producers to move into a more capital and regulated industry Intense rivalry among players -Competition not only based on price, but also on technology, global presence and product quality - Only suppliers with strong relationship with OEM enjoy competitive advantage Substitute Buyers Medium threats from substitutes - OEMs have low propensity to self production given possible cost economies achieved from outsourcing - Long product life cycle for global major OEMs (i.e. 4-7 years) makes switching costs for OEMs high - Long lead time and usually steering Source: Nomura research Potential liability claims on OEM recalls Nexteer is liable for OEM product recalls, not only given that OEMs may demand parts suppliers to bear the cost of recall (as suppliers assume more responsibility in the vehicle design process), but also given that the exercise would normally affect the production levels of the OEMs involved which would lead to disruption of Nexteer s sales outlook. We estimate that the cost of recall per vehicle for Nexteer could be as high as 150% of the original product price, including other related administration costs. 80

81 Nomura Nexteer Automotive 9 July 2014 Global steering industry outlook The growing global auto market has fuelled continuous demand for steering systems. According to IPSOS, global sales revenue and volume increased from USD22.8mn and 90.3mn units in 2007 to USD27.1mn and 102.3mn units in 2012, representing CAGRs of 3.4% and 2.5%, respectively. The organization also forecasts sales revenue and volume of global steering system market recorded CAGRs of 5.3% and 4.7%, respectively, during the same period. Fig. 172: Global steering systems revenue Fig. 173: Global steering systems unit sales (USD mn) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Revenue (LHS) y-y (RHS) 19.2% 4.7% 6.8% 5.3% 5.3%5.3%5.3% 5.3% 2.7% -13.6% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% (Units mn) Units (LHS) y-y (RHS) 19.8% 4.7%4.7% 4.7%4.7% 4.7% 3.2% -2.4% 3.4% -9.2% 25% 20% 15% 10% 5% 0% -5% -10% -15% F 2014F 2015F 2016F 2017F F 2014F 2015F 2016F 2017F Source: Company data, IPSOS, Nomura research Source: Company data, IPSOS, Nomura research Industry competition remains keen The global steering system industry is dominated by seven manufacturers. These players have secured strong relationships with most of the well-known OEMs around the globe and captured more than 70% market share in terms of revenue in 2012, according to IPSOS. However, competition remains keen, as it is not simply based on price, but also on technology, global presence and overall customer service, etc, in our view. Fig. 174: Market share of global steering system suppliers, 2012 Fig. 175: Market share of global driveline suppliers, 2012 Others 26% JTEKT 22% Others 37% GKN 38% Mando 5% Thyssen Krupp Presta 5% Nexteer 6% NSK 7% TRW Automotive 10% ZF Lenksysteme 19% Neapco 1% Wanxiang Qianchao 3% Nexteer 5% NTN 16% Source: Company data, IPSOS, Nomura research Source: Company data, IPSOS, Nomura research 81

82 Nomura Nexteer Automotive 9 July 2014 Average product price on a downward trend The intense competition has nevertheless driven down ASPs of steering systems, despite part makers ability to seek ASP upside through continued technology improvement and scale in production. According to IPSOS, the average prices of HPS and EPS decreased at CAGRs of approximately -0.4% and -1.6%, respectively, from 2007 to The rapidly evolving nature of the markets, as a result of the frequent launch of new OEM models and the continuous change in the regulatory environment, creates lots of opportunities for new players, especially those in low-cost countries such as China, Brazil and India, in our view. Structural change from HPS to EPS driving new demand In pursuit of higher fuel efficiency and a better driving experience, there has been a structural demand shift from hydraulic power steering systems (HPS) to electric power steering systems (EPS). Since 2007, global EPS sales revenue has recorded a CAGR of 9.3%, with the market penetration rate rising from 45% in 2007 to 59% in IPSOS expects the strong growth to continue, as countries such as the US and China are enacting more regulations and tax incentives to reduce greenhouse gas emissions and promote fuel efficiency. In our view, these efforts should provide strong incentives for OEMs to switch to EPS systems in their new vehicles. In addition to the reduction in fuel consumption, other benefits of EPS systems over HPS systems include the use of fewer components and shorter and simpler vehicle assembly, which result in a reduction in weight and increased energy efficiency. In light of this, IPSOS estimates global EPS sales revenue will record a CAGR of 10.2% from F, vs the industry at 5% over the same period. Fig. 176: Global steering system breakdown by steering system type 120% 100% 80% 60% 46.7% EPS HPS Manual Others 2.1% 2.1% 2.1% 2.0% 2.0% 2.1% 3.7% 4.2% 6.6% 6.4% 6.4% 6.3% 6.3% 5.9% 4.6% 5.0% 4.9% 4.9% 4.0% 3.3% 2.7% 2.2% 40.3% 38.5% 37.5% 35.1% 33.2% 29.9% 27.0% 24.3% 21.9% 19.7% 40% 20% 44.6% 51.2% 53.0% 54.2% 56.6% 58.8% 61.6% 64.4% 67.4% 70.6% 73.8% 0% F 2014F 2015F 2016F 2017F Source: Company data, IPSOS, Nomura research China to see the strongest EPS revenue growth On a geographical basis, the growth rate in steering system demand in emerging countries was higher than that in developed nations. Among emerging countries, IPSOS forecasts that China s EPS revenue will record a grow of 25.6% from F, owing to: 1) the strong vehicle production growth in China which should consistently provide opportunities for auto part suppliers in the near future; 2) relatively low production cost and rapid market response; and 3) a higher attention to air pollution and fuel economy standards of the Chinese government. The organization also predicts that the gradual but happening technological advances of local producers could eventually beat those of foreign JV producers and drive export sales in the more remote future. 82

83 Nomura Nexteer Automotive 9 July 2014 Growth should remain intact in the US and Europe At the same time, the organization also forecasts the steering industry in the US and Europe to maintain steady CAGRs of 2% and 1.9%, respectively, during F. Similar to the situation in China, the organization expects fuel economy to drive increased adoption of EPS in the US, when OEMs are required to adopt EPS to meet the new fuel economy regulations for the 2016 model year when new vehicle fleet averages will be required to reach 35.5 miles per gallon. Future developments Expanding international presence Steering system producers are expanding their regional footprints along with their major clients expansion. In our view, this should help the former to explore new individual local markets, and to reduce single currency and market risks. Further quality and service enhancement in EPS systems We believe that steering system manufacturers will continue to add more functionality to EPS systems to improve the driving experience. These include offsetting wind effects, mitigating hand-wheel vibration due to chassis disturbances and enabling more marketable features such as parking assist. We also note that increasing the maximum output of EPS systems would allow use in larger vehicles such as D-segment sedans, SUVs and even full-size trucks. 83

84 Nomura Nexteer Automotive 9 July 2014 Financial analysis As a beneficiary of the structural growth in EPS system demand, we expect Nexteer to: continue to record double-digit growth in sales revenue, resulting in a three-year net profit CAGR of 19% during F. have stronger FCF, which should yield upside to dividend payments. Revenue growth likely to remain in double digits in F Nexteer had a weak 2011, when: 1) it started phasing out its HPS products before fully commencing mass production of EPS products; and 2) revenue from Europe declined on market share losses by major clients PSA and Fiat attributable to the sluggish economy. However, we see solid ground for Nexteer s sales momentum to reaccelerate, thanks to: 1) the continuous launch of EPS programmes; 2) higher revenue contribution from the China market; and 3) the kicking in of new orders from the German OEMs. Specifically, we forecast Nexteer s net earnings will record a 19% three-year CAGR on continued EPS conversion (while HPS earnings decline by 7%), despite a likely flat ASP at around USD Fig. 177: Key revenue assumptions F 2015F 2016F - EPS HPS CIS Total steering Driveline Total sales volume (mn) EPS HPS CIS Average steering Driveline Average unit price (USD) EPS ,201 1,488 1,815 - HPS CIS Total steering 1,653 1,804 1,694 1,917 2,183 2,484 2,826 Driveline Total revenue (USD mn) 2,052 2,248 2,168 2,387 2,660 2,972 3,335 - EPS n.a 27.0% 0.3% 27.6% 23.1% 23.9% 22.0% - HPS n.a 2.6% -17.2% -9.2% -3.9% -7.7% -8.3% - CIS n.a -4.9% -3.7% 11.1% 10.6% 7.5% 7.0% Total steering n.a 9.1% -6.1% 13.2% 13.9% 13.8% 13.8% Driveline n.a 11.4% 6.6% -0.8% 1.5% 2.2% 4.3% Total revenue growth n.a 9.5% -3.6% 10.1% 11.5% 11.7% 12.2% 84

85 Nomura Nexteer Automotive 9 July 2014 Improving FCF suggests potential dividend upside potential Nexteer had maintained a healthy balance sheet and been at a net cash position from 2010 to However, free cashflow during the period was negative as a result of low sales coupled with aggressive capacity expansion across the globe. Should sales start improving this year, we look for positive free cashflow which would give rise to potential dividend upside. Fig. 178: Net cash and free cashflow Fig. 179: Dividend payout (USD mn) 600 Net cash FCF (100) (35) (54) (200) (115) F 2015F 2016F (USD) DPS (LHS) Payout ratio (RHS) 20.0% 20.0% 20.0% 20.0% F 2015F 2016F 35% 30% 25% 20% 15% 10% 5% 0% 85

86 Nomura Nexteer Automotive 9 July 2014 Company profile Background Founded as Jackson, Church & Wilcox in 1906, the company was purchased by Buick in 1909 and later became the business division of General Motors engaged in steering systems operations. In 1998, the business operation was transferred to Delphi Corporation which later spun off to become an independent publicly-held corporation in 1999 but filed for Chapter 11 bankruptcy protection in In 2009, GM acquired the steering operations again from Delphi and renamed it Nexteer Automotive. In 2010, PCM China, the financing and investment arm of the Beijing Municipal Government, acquired Nexteer from GM for a total consideration of USD465mn. In March 2011, AVIC acquired a 51% equity interest in PCM China with CNY408mn in an open auction and later listed Nexteer on HKEx in October Fig. 180: Shareholding structure Source: Company data, Nomura research 86

87 Nomura Nexteer Automotive 9 July 2014 Global presence and market share With 20 manufacturing plants located in the US, Mexico, China, Poland, India, Brazil and Australia, Nexteer seeks to operate its production bases in developing countries, along with major OEM customers, to minimize production and delivery costs. According to Nexteer, it also operates three vehicle performance centres, five regional application engineering centres and 10 customer service centres. This enables the company to meet customer support requirements on a timely basis and satisfy regional variations in its global OEM customers vehicle platforms. Fig. 181: Location of global production bases Source: Company data, Nomura research 87

88 Nomura Nexteer Automotive 9 July 2014 The strong global presence and solid relationship with major OEMs have enabled Nexteer to be ranked 5 th and 3 rd largest steering and driveline producers globally in 2012, according to IPSOS, with market share of 6% and 5% respectively. Fig. 182: Market share of global steering system suppliers, 2012 Fig. 183: Market share of global driveline suppliers, 2012 Others 26% JTEKT 22% Others 37% GKN 38% Mando 5% Thyssen Krupp Presta 5% Nexteer 6% NSK 7% TRW Automotive 10% ZF Lenksysteme 19% Neapco 1% Wanxiang Qianchao 3% Nexteer 5% NTN 16% Source: Company data, IPSOS, Nomura research Source: Company data, IPSOS, Nomura research Key products Nexteer s major products are mainly used in vehicles ranging from small passenger cars to full-size trucks. These include: 1) steering systems and components such as electric power steering systems (EPS systems), hydraulic power steering systems (HPS systems) and steering columns and 2) driveline systems and components such as halfshafts, intermediate drive shafts and propeller shaft joints. Fig. 184: Nexteer s product offering Source: Company data, Nomura research 88

89 Nomura Nexteer Automotive 9 July 2014 Steering systems Steering system usually refers to the components controlling the direction of the vehicle motion. It helps drivers steer by augmenting steering effort of the steering wheel. Hydraulic or electric actuators add controlled energy to the steering mechanism, so the driver only needs to supply a modest effort to steer regardless the environment outside the vehicle. Power steering also gives a continuous sense of how the wheels are interacting with the road by providing feedback of forces acting on the front wheels, where this is normally called the "rοad feel". Electric power steering uses an electric motor to assist driver steering. The EPS system monitors vehicle speed and steering angle to ensure that the steering feel is optimized for every driving situation. Electric systems have an advantage in fuel efficiency because there is no belt-driven hydraulic pump constantly running. Another major advantage is the elimination of belt-driven engine accessories, which greatly simplifies its manufacturing and maintenance process. The charts below summarize the key EPS products offered by Nexteer. Fig. 185: Column assist EPS Fig. 186: Rack assist EPS Fig. 187: Pinion assist EPS Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research Hydraulic power steering uses high pressure fluids to assist driver steering. A beltdriven power steering pump creates system pressure. The pressurized fluid is then routed into a cylinder that turns the wheels of the vehicle. Fig. 188: Steering pumps Fig. 189: Steering hoses Fig. 190: Steering gears Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research Steering column connects the steering wheel to the steering mechanism and controls steering by transferring the driver s input torque from the steering wheel. 89

90 Nomura Nexteer Automotive 9 July 2014 Fig. 191: Intermediate shafts Fig. 192: Steering columns Source: Company data, Nomura research Source: Company data, Nomura research Driveline system consists of the components that transfer power from the transmission and deliver it to the drive wheels. Nexteer s driveline system products include front wheel drive halfshafts, intermediate drive shafts and rear wheel drive halfshafts as well as propeller shaft joints. Fig. 193: Halfshafts Fig. 194: Intermediate drive shafts Fig. 195: Propeller shaft joints Source: Company data, Nomura research Source: Company data, Nomura research Source: Company data, Nomura research 90

91 Nomura China autos and auto parts 9 July

92 Nomura China autos and auto parts 9 July 2014 Appendix A-1 Analyst Certification We, Benjamin Lo and Joseph Wong, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company. Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies. Materially mentioned issuers Issuer Ticker Price Price date Stock rating Previous rating Date of change Sector rating Brilliance China 1114 HK HKD Jul-2014 Neutral Reduce 09-Jul-2014 N/A Nexteer Automotive 1316 HK HKD Jul-2014 Buy Not rated 09-Jul-2014 N/A Geely Automobile 175 HK HKD Jul-2014 Buy Neutral 09-Jul-2014 N/A Johnson Electric Holdings 179 HK HKD Jul-2014 Neutral Not Rated 13-Jan-2014 N/A Guangzhou Auto 2238 HK HKD Jul-2014 Buy Neutral 30-Jul-2013 N/A Great Wall Motor 2333 HK HKD Jul-2014 Buy Neutral 13-Jan-2014 N/A Minth Group 425 HK HKD Jul-2014 Buy Not Rated 13-Jan-2014 N/A Dongfeng Motor 489 HK HKD Jul-2014 Buy Neutral 09-Jul-2014 N/A SAIC Motor CH CNY Jul-2014 Buy Not rated 09-Jul-2014 N/A Rating and target price changes Issuer Ticker Old stock rating New stock rating Old target price New target price Brilliance China 1114 HK Reduce Neutral HKD 9.30 HKD Nexteer Automotive 1316 HK Not rated Buy N/A HKD 7.50 Geely Automobile 175 HK Neutral Buy HKD 3.38 HKD 3.76 Johnson Electric Holdings 179 HK Neutral Neutral HKD 7.30 HKD 6.90 Guangzhou Auto 2238 HK Buy Buy HKD HKD Great Wall Motor 2333 HK Buy Buy HKD HKD Minth Group 425 HK Buy Buy HKD HKD Dongfeng Motor 489 HK Neutral Buy HKD HKD SAIC Motor CH Not rated Buy N/A CNY Brilliance China: Valuation Methodology Our TP of HKD15.1 is based on the long-term average of 13x (based on mid-15f EPS: CNY0.92). The benchmark index for this stock is MSCI China. Brilliance China: Risks that may impede the achievement of the target price Upside risks: 1) margin surprise on the upside due to better-than-expected cost management; 2) stronger-than-expected sales volumes; and 3) unexpected delays or drop-off of new models by major competitors. Downside risks: 1) delays in the proposed listing of BAIC; 2) margin disappointment on the downside should the retail discount widen; and 3) unexpected strong competition in the luxury car segment. Nexteer Automotive: Valuation Methodology Our TP of HKD7.5 is based on 13x mid-2015f P/E, benchmarking to its HK/China peer average. Instead of comparing with its own historical average, we believe that the peer average is more representative to accurately reflect its share price potential given the company s short trading history. The benchmark index for this stock is MSCI China. Nexteer Automotive: Risks that may impede the achievement of the target price 1)Gross margin erosion from rising raw material costs; 2) slower-than-expected US auto sales; 3)continuous price pressure from OEMs; and 4) potential financial claims from vehicle recalls. 92

93 Nomura China autos and auto parts 9 July 2014 Geely Automobile: Valuation Methodology Our TP of HKD3.76 is based on 1.3x P/B (based on end-15f FD BVPS: CNY2.30), representing -1 SD below historical mean. The benchmark index for the stock is MSCI China. Geely Automobile: Risks that may impede the achievement of the target price 1) lower export sales; 2) CNY depreciation; 3) failure of its brand restructuring exercise; and 4) delays in the launch of new models. Johnson Electric Holdings: Valuation Methodology Our target price of HKD6.9 is based on DCF valuation which implies FY15F 15.2x P/E (EPS: USD0.06) and 1.7x P/B (BVPS: USD0.53). In our DCF model, we assume: 1) market risk premium of 4.75%, 2) risk-free rate which is based on China s 10-year bond yield of 4.2%; 3) beta of 0.9; 4) terminal growth rate of 3%; and 5) WACC of 8.3%. Cash flows are discounted back to FY15F. The benchmark index for this stock is MSCI HK. Johnson Electric Holdings: Risks that may impede the achievement of the target price 1) uncertainty over the sustainability of US/ EU economic recovery, and auto demand recovery, and 2) rising commodity prices could exert pressure on gross margins. Guangzhou Auto: Valuation Methodology Our TP of HKD11.5 is based on a target P/E of 12.1x (LT average) and our mid- 2015F EPS forecast of CNY0.76. The benchmark index for this stock is MSCI China. Guangzhou Auto: Risks that may impede the achievement of the target price Risks: 1) All of GAC's production is located in Guangdong province, where we believe it will continue to face pressure from rising labour and component costs; 2) lingering tension between China and Japan may hamper the pace of the recovery for Japanese-brand sales; and 3) delays/postponement of new model debuts/upgrades. Great Wall Motor: Valuation Methodology Our TP of HKD40 is based on -1 SD below its long-term average of 11x mid-15f EPS at CNY3.51. The benchmark index for the stock is MSCI China. Great Wall Motor: Risks that may impede the achievement of the target price 1) delays or cancellation of new product launches; 2) worse-than-expected cost controls, and; 3) a slowdown in industry SUV sales as a result of the possible change in government policy towards private vehicle ownership. Minth Group: Valuation Methodology Based on 13.5x and on mid FY14-15F P/E (EPS: CNY1.10), representing 1 SD above historical mean, our target price is HKD18.6. The benchmark index for this stock is MSCI China. Minth Group: Risks that may impede the achievement of the target price Risks include 1) continued pressure on profit margins; 2) deteriorating relationship with key customers; 3) heavy reliance on Japanese brands, and; 4) a slowdown in global auto production. Dongfeng Motor: Valuation Methodology Our TP of HKD16.6 is based on the long-term average P/E of 8.5x (based on mid- 15F EPS: CNY1.55). The benchmark index for this stock is MSCI China. Dongfeng Motor: Risks that may impede the achievement of the target price Risks: 1) lingering tensions between China and Japan may hamper the pace of recovery of Japanese-brand autos; 2) delay or cancellation of new model launches; and 3) lacklustre CV sales owing to continued weakness in the commercial vehicles segment. SAIC Motor: Valuation Methodology Our TP of CNY21.2 is based on the LT average P/E of 8x and our mid-2015f EPS forecast of CNY2.65. The benchmark index for this stock is MSCI China. SAIC Motor: Risks that may impede the achievement of the target price 1) Delay or cancellation of the proposed Shanghai-HK through-train ; 2) margin disappointment on the downside should the retail discount widen; and 3) unexpected strong competition among overseas brands. Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at or requested from Nomura Securities International, Inc., on If you have any difficulties with the website, please [email protected] for help. 93

94 Nomura China autos and auto parts 9 July 2014 The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-us analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. ( NGFP ) Nomura Derivative Products Inc. ( NDPI ) and Nomura International plc. ( NIplc ) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. 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