Asia Pacific/China Equity Research Automobile Manufacturers Rating OUTPERFORM* Price (21 Aug 14, Rmb) 17.10 Target price (Rmb) 24.50¹ Upside/downside (%) 43.3 Mkt cap (Rmb mn) 188,537 (US$ 30,641) Enterprise value (Rmb mn) 120,157 Number of shares (mn) 11,025.57 Free float (%) 18.9 52week price range 17.7 12.3 ADTO 6M (US$ mn) 57.2 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance 20 15 Price (LHS) Research Analysts Bin Wang 852 2101 6702 bin.wang@creditsuisse.com Mark Mao 852 2101 6710 mark.mao@creditsuisse.com Rebased Rel (RHS) 10 Aug12 Dec12 Apr13 Aug13 Dec13 Apr14 160 140 120 100 80 The price relative chart measures performance against the SHANGHAI SE COMPOSITE INDEX which closed at 2230.46 on 21/08/14 On 21/08/14 the spot exchange rate was Rmb6.15/US$1 Performance over 1M 3M 12M Absolute (%) 3.4 16.6 30.6 Relative (%) 4.1 6.9 23.0 (600104.SS / 600104 CH) INITIATION Best value OEM with decent growth Initiate with OUTPERFORM and Rmb24.50 TP (43% potential upside). SAIC Motor is the largest auto group in China, with 2 market share in 1H14. Its JVs with GM and VW contribute 97% to the group's total profit. Besides its decent earnings growth (15% CAGR in 201416), we regard SAIC as the best value stock on: (1) cheap valuation: 6.6x/ 5.6x 2014/15E P/E and 1.2x P/B; (2) strong balance sheet: net cash accounts for 4 market cap; (3) high dividend yield at 7.6% the highest in the China auto universe. Aggressive new models to drive up sales and margins. After 2013's weak new product debuts (only 4 new models), SAIC entered a strong model cycle in 2014 with 10/12/13 new models lined up for 2014/15/16, especially in highmargin/highgrowth segments, i.e., SUVs, luxury brands and large sedans. In particular, Shanghai GM will add 4 new models each year, with 3 SUVs (Trax, Envision, SRX) and 4 large sedans (ATS, Plux, Malibu, Lacrosse) in 201416. Fuelsaving leader to benefit from release of list of new fuelefficient car models eligible for subsidy. The longawaited list of Rmb3,000/unit fuelefficient car models eligible for subsidy is likely to be released in 2H14 after fuel saving criteria was raised by 46% in 4Q13 by the Chinese gov t. SAIC should benefit from this, thanks to advanced technology: turbo engine and double clutch transmission (DCT) across the board GM, VW and Roewe/MG. Valuation: Our Rmb24.50 target price is based on 8x 2015E EPS (9.4x 2014E EPS), in line with HKlisted peers, justified by upcoming SHHK Stock Connect. Risks: Downside risks include a potential antimonopoly investigation, which could hurt margin, and a potential increase in losses at its local brands operation (Roewe and MG brand PV). Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 565,807.0 655,141.7 739,472.8 813,656.8 EBITDA (Rmb mn) 23,872.4 28,131.7 37,282.6 47,455.3 EBIT (Rmb mn) 18,894.8 22,485.4 30,863.9 40,212.4 Net profit (Rmb mn) 24,803.6 28,757.2 33,709.8 37,860.3 EPS (CS adj.) (Rmb) 2.25 2.61 3.06 3.43 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 2.52 2.82 3.01 EPS growth (%) 19.5 15.9 17.2 12.3 P/E (x) 7.6 6.6 5.6 5.0 Dividend yield (%) 7.0 7.6 8.9 10.0 EV/EBITDA (x) 5.5 4.3 2.8 1.6 P/B (x) 1.4 1.2 1.1 1.0 ROE (%) 19.1 19.8 21.0 21.2 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NONUS ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ClientDriven Solutions, Insights, and Access
Millions Thousands 22 August 2014 Focus charts Figure 1: GM & VW JVs' new model #, share amid globals 70 model # 25% 21% 60 17% 17% 2 48 50 1 46 15% 40 36 30 20 10 4 28 6 8 10 2013 2014E 2015E 2016E GM + VW model # Total Global brand model # GM + VW as % of total global Source: Global insight, Company data, Credit Suisse estimates 1 5% Figure 2: SAIC net profit breakdown by operation 1% 1 5% 9% 7% 8% 9% 9% 7% 6% 8% 6% 7% 46% 39% 39% 4 38% 51% 5 52% 49% 49% 13% 1 8% 6% 2012 2013 2014e 2015e 2016e others Huayu (60.1%) SAICMotor (10 stake) SAICGMWuling (50.1% stake) SAICGM (5 stake) SAICVW (5 stake) Source: Credit Suisse estimates Figure 3: SAIC net profit breakdown by model (2015 E) Tiguan, 18% Others, 35% Passat, 1 Figure 4: SAIC earnings growth forecast 40 Rmb Bn 23% 35 2 34 29 30 17% 16% 25 25 20 21 20 16 15 38 25% 2 15% 1 Regal, 3% Excelle, 3% Excelle GT / XT, GL8, Envision, Lavida, 9% Cruze, 6% Source: Global insight, Company data, Credit Suisse estimates Figure 5: SAIC sales volume growth 10 5 3% 2010 2011 2012 2013 2014e 2015e 2016e Earnings YoY Figure 6: SAIC blend ASP growth 5% 8 7 6 5 4 3 million unit 11% 4.0 3.6 4.5 1 15% 5.1 5.8 6.6 7.2 1 16% 1 1 8% 6% 98,000 96,000 94,000 92,000 90,000 88,000 Rmb 3% 90,950 87,959 92,548 94,099 2% 2% 95,614 2% 96,272 96,293 3% 3% 2% 2% 2 86,000 1% 1% 1 2% 84,000 1% 2010 2011 2012 2013 2014e 2015e 2016e Total volume YoY 82,000 2010 2011 2012 2013 2014e 2015e 2016e ASP (Rmb) YoY Source: Global insight, Company data, Credit Suisse estimates (600104.SS / 600104 CH) 2
Best value OEM with decent growth Initiate with OUTPERFORM and Rmb24.50 TP We initiate on SAIC Motor with an OUTPERFORM rating and Rmb24.50 target price (implying 43% potential upside). SAIC is the largest auto group in China with 2 market share in 1H14. Its JVs with GM and VW contribute 97% to the group's total profit. Besides its decent earnings growth (15% CAGR in 201416), we regard SAIC as the best value stock because of: (1) cheap valuation: 6.6x/5.6x 2014/15E P/E and 1.2x P/B; (2) strong balance sheet: net cash accounts for 4 market cap; (2) high dividend yield at 7.6% the highest in the China auto universe. Aggressive new models to drive up sales and margins After 2013's weak new products debut (only four new models), SAIC entered a strong model cycle in 2014 with 10/12/13 new models lined up for 2014/15/6, especially in the high margin/high growth segments, i.e., SUVs, luxury brands and large sedans. Luxury Cadillac ATS L (Aug 14), PLux (4Q15) and SRX (1Q 16) SUV Chevy Trax (Apr 14), Buick Envision (Sep 14), MG CS (Oct 14), Baojun SUV (3Q 15), VW Cross blue (3Q16) and new Skoda SUV (4Q16) Large sedan new Chevy Malibu (3Q15), new Skoda SuperB (3Q15), new VW Passat (4Q15), new Buick LaCross (1Q16) and VW Esedan (1Q16) Fuelsaving leader to benefit from release of list of new fuelefficient car models eligible for subsidy The longawaited list of Rmb3,000/unit fuelefficient car models eligible for subsidy is likely to be released in 2H14, after fuel saving criteria was raised by 46% in 4Q13 by the Chinese gov t. SAIC should benefit from the list release, thanks to advanced technology: turbo engine and double clutch transmission (DCT) across the board GM, VW and Roewe/MG. Valuation Our Rmb24.50 target price is based on 8x 2015E EPS (9.4x 2014E EPS), in line with HKlisted peers, justified by upcoming SHHK Stock Connect. Risks Downside risks include the potential antimonopoly investigation, which could hurt margin, and a potential increase in losses at its local brands operation (Roewe and MG brand PV). Upside risk is more models eligible for fuelefficient cars subsidy could boost sales volume. (600104.SS / 600104 CH) 3
600104.SS / 600104 CH Price (21 Aug 14): Rmb17.10, Rating: OUTPERFORM, Target Price: Rmb24.50, Analyst: Bin Wang Target price scenario Scenario TP %Up/Dwn Assumptions Upside Central Case 24.50 43.27 Downside Income statement (Rmb mn) 12/13A 12/14E 12/15E 12/16E Sales revenue 565,807 655,142 739,473 813,657 Cost of goods sold 491,712 567,295 634,724 692,061 SG&A 53,075 62,238 70,250 77,297 Other operating exp./(inc.) (2,852) (2,524) (2,783) (3,157) EBITDA 23,872 28,132 37,283 47,455 Depreciation & amortisation 4,978 5,646 6,419 7,243 EBIT 18,895 22,485 30,864 40,212 Net interest expense/(inc.) (266) (711) (822) (1,049) Nonoperating inc./(exp.) (3,125) (3,000) (3,000) (3,000) Associates/JV 25,456 27,911 31,624 34,836 Recurring PBT 41,493 48,108 60,310 73,097 Exceptionals/extraordinaries Taxes 5,909 6,059 8,606 11,478 Profit after tax 35,584 42,049 51,705 61,618 Other after tax income Minority interests 10,780 13,292 17,995 23,758 Preferred dividends Reported net profit 24,804 28,757 33,710 37,860 Analyst adjustments Net profit (Credit Suisse) 24,804 28,757 33,710 37,860 Cash flow (Rmb mn) 12/13A 12/14E 12/15E 12/16E EBIT 18,895 22,485 30,864 40,212 Net interest 266 711 822 1,049 Tax paid (5,909) (6,059) (8,606) (11,478) Working capital 1,767 2,073 1,160 619 Other cash & noncash items 5,584 4,832 4,673 6,240 Operating cash flow 20,603 24,042 28,913 36,642 Capex (15,659) (12,155) (12,155) (12,155) Free cash flow to the firm 4,943 11,887 16,758 24,487 Disposals of fixed assets 415.1 Acquisitions Divestments Associate investments Other investment/(outflows) 37,954 12,940 15,040 16,856 Investing cash flow 22,710 785 2,885 4,701 Equity raised Dividends paid (13,339) (13,231) (14,379) (16,855) Net borrowings 16,286 1,500 1,500 1,500 Other financing cash flow (18,629) Financing cash flow (15,682) (11,731) (12,879) (15,355) Total cash flow 27,630 13,096 18,919 25,988 Adjustments (150.6) Net change in cash 27,480 13,096 18,919 25,988 Balance sheet (Rmb mn) 12/13A 12/14E 12/15E 12/16E Cash & cash equivalents 74,278 87,374 106,293 132,281 Current receivables 52,029 60,244 67,999 74,820 Inventories 30,915 35,667 39,906 43,511 Other current assets 74,963 80,023 84,799 89,001 Current assets 232,184 263,307 298,997 339,613 Property, plant & equip. 38,131 43,874 48,786 52,816 Investments 59,526 71,829 85,733 101,019 Intangibles 5,711 5,759 5,535 5,038 Other noncurrent assets 38,089 38,089 38,089 38,089 Total assets 373,641 422,859 477,140 536,575 Accounts payable 65,469 75,533 84,510 92,145 Shortterm debt 11,230 11,914 12,598 13,282 Current provisions Other current liabilities 109,641 119,669 128,622 136,235 Current liabilities 186,340 207,116 225,730 241,662 Longterm debt 6,264 7,080 7,896 8,712 Noncurrent provisions 5,296 5,296 5,296 5,296 Other noncurrent liab. 14,009 14,009 14,009 14,009 Total liabilities 211,909 233,501 252,931 269,678 Shareholders' equity 137,757 152,092 168,947 187,877 Minority interests 23,975 37,266 55,261 79,019 Total liabilities & equity 373,641 422,859 477,140 536,575 Key earnings drivers 12/13A 12/14E 12/15E 12/16E Sales volume 5,088,93 7 5,834,21 5 6,556,21 0 7,218,71 0 Per share data 12/13A 12/14E 12/15E 12/16E Shares (wtd avg.) (mn) 11,026 11,026 11,026 11,026 EPS (Credit Suisse) 2.25 2.61 3.06 3.43 (Rmb) DPS (Rmb) 1.20 1.30 1.53 1.72 BVPS (Rmb) 12.5 13.8 15.3 17.0 Operating CFPS (Rmb) 1.87 2.18 2.62 3.32 Key ratios and 12/13A 12/14E 12/15E 12/16E valuation Growth(%) Sales revenue 17.6 15.8 12.9 10.0 EBIT (29.7) 19.0 37.3 30.3 Net profit 19.5 15.9 17.2 12.3 EPS 19.5 15.9 17.2 12.3 Margins (%) EBITDA 4.22 4.29 5.04 5.83 EBIT 3.34 3.43 4.17 4.94 Pretax profit 7.33 7.34 8.16 8.98 Net profit 4.38 4.39 4.56 4.65 Valuation metrics (x) P/E 7.60 6.56 5.59 4.98 P/B 1.37 1.24 1.12 1.00 Dividend yield (%) 7.0 7.6 8.9 10.0 P/CF 9.2 7.8 6.5 5.1 EV/sales 0.23 0.18 0.14 0.10 EV/EBITDA 5.52 4.27 2.76 1.65 EV/EBIT 6.97 5.34 3.33 1.95 ROE analysis (%) ROE 19.1 19.8 21.0 21.2 ROIC 14.6 17.4 20.4 23.0 Asset turnover (x) 1.51 1.55 1.55 1.52 Interest burden (x) 2.20 2.14 1.95 1.82 Tax burden (x) 0.86 0.87 0.86 0.84 Financial leverage (x) 2.31 2.23 2.13 2.01 Credit ratios Net debt/equity (%) (35.1) (36.1) (38.3) (41.3) Net debt/ebitda (x) (2.38) (2.43) (2.30) (2.32) Interest cover (x) (70.9) (31.6) (37.5) (38.3) Source: Company data, Thomson Reuters, Credit Suisse estimates. 35 30 25 20 15 10 5 0 2009 2010 2011 2012 2013 2014 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 12MF P/E multiple 0.0 2009 2010 2011 2012 2013 2014 Source: IBES 12MF P/B multiple (600104.SS / 600104 CH) 4
Thousands 22 August 2014 Initiate with OUTPERFORM and Rmb24.50 TP We initiate on SAIC Motor with an OUTPERFORM rating and Rmb24.50 target price (implying 43% potential upside). SAIC is the largest auto group in China with 2 market share in 1H14. Its JVs with GM and VW contribute 97% to the group's total profit. Besides its decent earnings growth (15% CAGR in 201416), we regard SAIC as the best value stock because of: (1) cheap valuation: 6.6x/5.6x 2014/15E P/E and 1.2x P/B; (2) strong balance sheet: net cash accounts for 4 market cap; (3) high dividend yield at 7.6% the highest in China auto universe. Our Rmb24.5 target price is based on 8x 2015E EPS (9.4x 2014E EPS), implying 43% upside. The valuation is in line with HKlisted auto peers, justified by upcoming SHHK Stock Connect. Figure 7: Market share by Chinese auto group (1H2014) JAC, 2% Great Wall, 3% Brilliance, 3% GAC, Others, SAIC, 2 Figure 8: SAIC net profit breakdown by operation 1% 1 5% 9% 7% 8% 9% 9% 7% 6% 8% 6% 7% 46% 39% 39% 4 38% 51% 5 52% 49% 49% Beijing Auto, 1 Chang'an, 11% FAW, 13% Source: China Auto Market, Credit Suisse estimates Dongfeng, 16% 13% 1 8% 6% 2012 2013 2014e 2015e 2016e others Huayu (60.1%) SAICMotor (10 stake) SAICGMWuling (50.1% stake) SAICGM (5 stake) SAICVW (5 stake) Figure 9: SAIC net cash growth outlook 140 Rmb Bn 57% 120 100 80 23% 27% 60 18% 40 20 13% 2010 2011 2012 2013 2014e 2015e 2016e Net cash YoY 7 6 5 4 3 2 1 1 2 Figure 10: China auto stocks' forward P/E comparison 15 14 13 12 11 10 9 8 7 6 5 SAIC Dongfeng GAC Great Wall Geely Brilliance (600104.SS / 600104 CH) 5
Aggressive new models to drive up sales and margins Our belief in SAIC's growth stems from its product competitiveness as new models are typically associated with market share gains/better profitability. After 2013's weak new products debut (only four new models), SAIC entered a strong model cycle in 2014 with 10/12/13 new models in 2014/15/16, especially in the high margin/high growth segments, i.e., SUVs, luxury brands and large sedans. Luxury Cadillac ATS L (Aug 14), PLux (4Q 15) and SRX (1Q 16) SUV Chevy Trax (Apr 14), Buick Envision (Sep 14), MG CS (Oct 14), Baojun SUV (3Q 15), VW Cross blue (3Q16) and new Skoda SUV (4Q16) Large sedan new Chevrolet Malibu (3Q15), new Skoda SuperB (3Q15), new VW Passat (4Q15), new Buick LaCross (1Q16) and VW Esedan (1Q16) Figure 11: SAIC net profit breakdown by model (2015 E) Regal, 3% Excelle, 3% Excelle GT / XT, Others, 35% GL8, Source: Credit Suisse estimates Envision, Tiguan, 18% Lavida, 9% Cruze, 6% Passat, 1 Figure 12: GM & VW JVs' new model #, share amid global 70 model # 25% 21% 60 17% 17% 2 48 50 1 46 15% 40 36 30 20 10 4 28 6 8 10 2013 2014E 2015E 2016E GM + VW model # Total Global brand model # GM + VW as % of total global Source: Global insight, Company data, Credit Suisse estimates 1 5% Figure 13: SAIC group new model plan for 201316 Model # Small (A0) Medium (A) Large (B) Luxury (C) SUV MPV 2013 4 Shanghai GM 1 XTS Shanghai VW 3 Skoda Rapid / new Santana Yeti 2014 10 Shanghai GM 4 New Cruze (Aug) ATS L (Aug) Trax (Apr) / Envision (Oct) Shanghai VW 2 New Octavia (May) / A plus (Dec) Shanghai Motor 2 MG5 GT (Sep) MG CS (Oct) Shanghai GM Wuling 2 610 (Mar) 730 (Aug) 2015 12 Shanghai GM 5 New Sail (1Q) Excelle GT (1Q) / Verano (3Q) New Malibu (4Q) Plux (4Q) Shanghai VW 3 New Fabia (2Q) New SuperB (3Q) / Passat (4Q) Shanghai Motor 1 MG3 sedan (3Q) Shanghai GM Wuling 3 BSedan (4Q) CSUV (3Q) Wuling MPV (4Q) 2016 13 Shanghai GM 6 New Aveo (4Q) Cruze L (1Q) / Cvalue (3Q) LaCrosse (1Q) SRX (1Q) New GL8 (2Q) Shanghai VW 4 ESedan (1Q) Cross Blue (3Q) / Skoda SUV (4Q) New Touran (4Q) Shanghai Motor 2 New 550 (3Q) / MG6 (4Q) Shanghai GM Wuling 1 New 630 (3Q) Source: Company data, Global insight, Credit Suisse estimates (600104.SS / 600104 CH) 6
Bullish on SUV and luxury segment's secular growth We are bullish on the China SUV and luxury brand segment, and expect 32% CAGR and 23% CAGR in 201415, respectively. This substantial market share shift stems from low penetration and rising replacement demand. 1. Huge potential from the current low penetration rate: We believe the luxury and SUV segments should enjoy marketshare gains in China given that their penetration lags other developed countries', such as the US. In 2013, China's luxury and SUV shares were 8.6% and 18.3%, well below 13. and 32.9% in the US. 2. Upgradereplacement push: Our belief in the secular growth story of China's luxury and SUV segments is derived from a low replacement demand proportion only 23% in 2013, well below mature markets 759. People generally upgrade their vehicle type (from sedan to versatile SUV) and vehicle brands (from massbrand to luxury brand) while replacing cars in China. This is a trend that has been seen in the US, with the luxury/suv market share increasing from 5% to 1 (luxury) and from 2% to 33% (SUV) in a continuous 30year upcycle. We expect auto replacement demand to spike in 2014/15, driven by 2009/10 s 47%/3 YoY total PV sales surge, given the average new car usage time is 4.8 years. Figure 14: China SUV market penetration vs US 35. 30. 25. 20. 15. 10. 5. 0. 31.5% 32. 32.9% 30.9% 29. 29.2% 27.3% 27.7% 27.5% 6.2% 5.6% 6.7% 7.9% 7.9% 14.7% 13. 11.8% 18.3% 21.1% 23.9% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e USA SUV penetration China SUV penetration Source: China auto market, Wards Auto, Credit Suisse estimates Figure 15: China luxury brands' market penetration vs USA 16. 14. 12. 10. 8. 6. 4. 2. 0. 13. 11.6% 11.9% 12.2% 12.5% 12.5% 12.7% 12. 11.9% 3.6% 3.8% 4.5% 5.2% 4.8% 6.1% 7.6% 8. 8.6% 9.2% 9.8% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e USA luxury penetration China luxury penetration Source: China auto market, Wards Auto, Credit Suisse estimates Figure 16: Demand percentage vs global peers 10 9 8 7 6 5 4 3 2 1 9% 8% 91% 92% 77% 77% 7 7 76% 5 25% 17% 6% 5% Figure 17: China usedcar average age China Global Peers 2009 2010 2011 <1 year 4.5% 3.2% 3.3% 23% 23% 26% 26% 2 5 75% 83% 9 95% 2011 2012 2013 2014e2015e2016e India Korea USA Japan UK German 1st Time Demand Replacement Demand Source: China auto market, Wards Auto, Credit Suisse estimates 12 year 11. 10.3% 11.6% 23 year 15.7% 13.1% 14.6% 34 year 14.6% 15.3% 14. 45 year 14.1% 14.2% 14.1% 56 year 11.6% 12.6% 12. 67 year 11.1% 10. 9.6% 78 year 6.8% 9.2% 7.3% 89 year 3. 5. 5.8% 910 year 2.1% 2.6% 3.2% >10 year 4.8% 4.1% 4.1% Average age 4.6 4.8 4.8 Source: iautos.cn (600104.SS / 600104 CH) 7
Strong new SUV and luxury model pipeline ahead Buoyed by the sales jump of both SUV and luxury brands (46% and 37% CAGR since 2009, respectively), most automakers, including SAIC, have adopted aggressive strategies to penetrate into these two highgrowth/highmargin markets. For SUV, SAIC plans to launch three new SUV models in 2014 (Chevrolet Trax in April, Buick Envision in September, MG CS in October), one SUV in 2015 (Baojun SUV) and three more new SUVs in 2016 (Cadillac SRX in 1Q, VW Crossblue in 3Q, new Skoda SUV in 4Q). For luxury brand, it plans to launch one Cadillac brand model each year: long wheelbase ATS L sedan in Aug2014, PLux large sedan in 4Q15 and SRX SUV in 1Q16. SAIC's rapidly expanding SUV/luxury brands product portfolio is likely to deliver positive surprises in terms of both topline and margin expansion, in our view. Figure 18: SAIC's total SUV model sales outlook 1,000,000 Unit 900,000 89% 800,000 700,000 62% 600,000 58% 5 500,000 400,000 49% 300,000 200,000 100,000 21% 2010 2011 2012 2013 2014E 2015E 2016E SAIC SUV sales volume YoY growth 10 9 8 7 6 5 4 3 2 1 Figure 19: SAIC's SUV model # and sales as % of total 16 SUV model # 13% 14 12 12 9% 10 9 8 8 6% 6 5% 5 3% 4 4 2% 3 3 2 2 2 1 1 1 1 2010 2011 2012 2013 2014E 2015E 2016E SUV model # add Total SUV model # SUV as % of total sales 1 1 8% 6% 2% Figure 20: SAIC's total luxury model sales outlook 80,000 Unit 187% 70,000 60,000 50,000 99% 40,000 7 30,000 35% 26% 43% 20,000 10,000 2010 2011 2012 2013 2014E 2015E 2016E Cadillac sales volume YoY growth 20 15 10 5 5 Figure 21: SAIC's luxury model # and sales as % of total 10 1.2% Luxury 1. model # 1. 8 0.8% 0.7% 0.8% 6 4 2 0.2% 0.1% 0.2% 1 1 1 0. 1 2 3 1 1 1 2010 2011 2012 2013 2014E 2015E 2016E luxury model # add Total luxury model # Cadillac as % of total sales 4 0.6% 0. 0.2% 0. (600104.SS / 600104 CH) 8
Fuelsaving leader to benefit from release of list of new fuelefficient car models eligible for subsidy The longawaited list of Rmb3,000/unit fuelefficient car models eligible for subsidy is likely to be released in 2H14, after fuel saving criteria was raised by 6% in 4Q13 by the Chinese gov t. Historically, fuelefficient car subsidy has substantially boosted small car sales (< 1.6L). To be eligible for a Rmb3,000/unit subsidy, car models need to meet three requirements (after raising fuel saving criteria twice in October 2011 and October 2013): Engine size below 1.6L Fuel consumption around 3 below current regulations Compliant with Euro 5 mission standards This policy encourages auto makers to adopt more fuelsaving technologies, such as Turbo engine, StartStop, Gasoline Direct Injection (GDI), Hybrid and vehicle weight reduction. As a fuelsaving technology leader, SAIC should benefit thanks to its advanced powertrain technology turbo engine with GDI and double clutch transmission (DCT) across the board, covering GM JVs, VW JV and local brands of Roewe & MG. Shanghai GM 1.2T, 1.4T, 1.5T, 1.6T engine series, for Encore, Trax, Cruze, Excelle Shanghai VW 1.0T, 1.2T, 1.4T engine series, for Polo, Santana, Lavida, Passat, Touran, Tiguan, Fabia, Octavia, SuperB, Yeti, etc. Roewe & MG 1.0 T, 1.4T, 1.5T for MG3, MG5, Roewe 350 SAIC was the biggest beneficiary among global brands during the last round of efficient car subsidy programme, with 9 models eligible or 43% of total global brands' models. We expected a similar situation in the upcoming new batch of fuelefficient car models eligible for subsidy, thereby helping SAIC's share gains. Figure 22: List of fuelefficient car models eligible for subsidy (last round) Model # Mini (A00) Small (A0) Medium (A) Large (B) SUV MPV Global Shanghai VW 6 Polo Lavida / Octavia Passat / SuperB Touran Shanghai GM 3 Aveo / Sail Excelle FAW VW 4 Sagitar / Bora / Golf Magotan Beijing Hyundai 1 Elantra Landong Chang'an Ford 1 Focus Chang'an Mazda 1 Mazda 3 Chang'an Suzuki 2 Alto SX4 DF Nissan 3 Sunny / Tiida / Sylphy Local SAIC Motor 1 MG3 SAICGMWuling 2 Lechi Baojun 630 Chang'an 7 Benben Mini Yuexiang / V3 / V5 EX30 / Eado Honor DF Liuzhou 1 Joyear BYD 6 F0 F3 / G3 / L3 / Speed G6 Geely 6 Free cruiser / Panda SC515 SC7 / EC7 / GC7 Great Wall 6 C20R C30 / C50 M2 / M4 V80 Chery 8 QQ3/ Qiyun 1 A3 / Qiyun 2 E5 / G3 / Qiyun 3 Tiggo 3 JAC 3 Yueyue Tongyue Heyue Haima 4 Haima 1 Haima 2 Familiar Premacy Lifan 3 320 520 620 Soueast 1 V3 Zhonghua 3 H230 Juejie FSV / FRV FAW Xiali 2 Xiali Weizhi Changhe Suzuki 3 Wagon R / splash Liana Source: MIIT, Credit Suisse estimates (600104.SS / 600104 CH) 9
Valuation Our Rmb24.50 target price is based on 8x 2015E EPS. We believe it is better to use a forward twoyear P/E to value growth names, given we are already in the second half. This implies 9.4x 2014E P/E, in line with the current valuation of HKlisted gasoline engine carmarkers, i.e., Dongfeng, GAC, Brilliance, Geely and Great Wall. We think the upcoming ShanghaiHong Kong Stock Connect will trigger a rerating to 8x 2015E EPS. Besides its decent earnings growth (15% CAGR in 201416), we regard SAIC as the best value stock because of: (1) cheap valuation: 6.6x/ 5.6x 2014/15E P/E and 1.2x P/B, (2) strong balance sheet: net cash accounts for 4 market cap, (3) high dividend yield at 7.6% the highest in the China auto universe. Figure 23: China auto stocks' forward P/E comparison 15 14 13 12 11 10 9 8 7 6 5 SAIC Dongfeng GAC Great Wall Geely Brilliance Source: the BLOOMBERG PROFESSIONAL service consensus 22 August 2014 Figure 24: SAIC P/B and dividend yield in past 12 months 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Aug13 Sep13 Nov13 Dec13 Feb14 Mar14 May14 Jun14 Aug14 P/B Dividend Yield Source: the BLOOMBERG PROFESSIONAL service consensus 1 1 8% 6% 2% (600104.SS / 600104 CH) 10
Figure 25: China auto sector valuation comparison Bloomberg Close Market Cap P/E (x) P/B (x) ROE (%) Divident yield Ticker 21Aug14 (US$ m) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E H share Passenger Vehicle maker Guangzhou Automobile Group Co Ltd 2238 HK 8.61 8,051 10.5x 8.1x 1.2x 1.1x 11.8% 13.5% 2.8% 3.7% Byd Co Ltd 1211 HK 51.20 18,970 82.8x 53.3x 3.9x 3.6x 5.2% 7. 0.1% 0.1% Dongfeng Motor Group Co Ltd 489 HK 13.84 15,387 7.9x 6.9x 1.3x 1.1x 17.2% 17.2% 1.8% 2.2% Great Wall Motor Co Ltd 2333 HK 30.45 13,976 8.2x 6.7x 2.1x 1.7x 28.8% 28.5% 3.6% 4.5% Brilliance China Automotive Holdings Ltd 1114 HK 14.38 9,325 12.3x 10.4x 3.3x 2.5x 30.9% 28.3% 1. 1.1% Geely Automobile Holdings Ltd 175 HK 3.03 3,441 8.6x 7.2x 1.1x 1.0x 14.1% 14.7% 1.5% 1.8% Hshare PV makers' simple Avg. (excl. BYD) 9.5x 7.9x 1.8x 1.5x 20.6% 20. 2.1% 2.7% Hshare PV makers' market cap weighted Avg.(excl. BYD) 9.3x 7.7x 1.9x 1.5x 21.9% 21.6% 2.3% 2.9% A share Passenger Vehicle maker Chongqing Changan Automobile Co Ltd 000625 CH 13.90 10,508 9.3x 7.1x 2.5x 1.9x 29.6% 28. 1.2% 1.7% Guangzhou Automobile Group Co Ltd 601238 CH 8.21 8,148 12.7x 9.3x 1.4x 1.3x 11.7% 14. 1.9% 2.5% 600104 CH 16.32 29,238 6.6x 5.9x 1.1x 1.0x 17. 17.1% 6.1% 6.6% Great Wall Motor Co Ltd 601633 CH 32.69 15,039 10.2x 7.7x 2.8x 2.1x 27.3% 27.7% 2.8% 3. FAW CAR Co Ltd 000800 CH 11.54 3,052 12.1x 10.8x 2.6x 2.4x 17.1% 18.8% 0.1% 0.1% Anhui Jianghuai Automobile Co Ltd 600418 CH 14.04 2,931 16.3x 12.7x 2.3x 2.0x 14.9% 16.8% 1.7% 2. Haima Automobile Group Co Ltd 000572 CH 4.36 1,165 11.7x 8.0x 0.9x 0.9x 7.8% 9.3% NA NA Byd Co Ltd 002594 CH 51.21 19,152 76.5x 43.5x 5.2x 4.8x 6.7% 9.9% NA NA Jiangsu Yueda Investment Co Ltd 600805 CH 10.46 1,446 6.4x 5.3x 1.4x 1.2x 22. 21.3% 1. 1.6% A share PV makers' simple Avg. (excl. BYD) 10.7x 8.3x 1.9x 1.6x 18.5% 19.1% 2.2% 2.5% A share PV makers' market cap weighted Avg. (excl. BYD) 9.2x 7.4x 1.8x 1.5x 20.5% 20.6% 3.6% 4. Global Auto maker Hyundai Motor Co 005380 KS 224,000 48,200 6.6x 6.1x 1.0x 0.9x 15.1% 14.1% 0.9% 0.9% Kia Motors Corp 000270 KS 59,000 23,363 6.5x 6.1x 1.0x 0.9x 16.7% 15. 1.2% 1.3% Toyota Motor Corp 7203 JP 5,990 197,224 9.6x 8.7x 1.2x 1.1x 13. 13.1% 3.1% 3. Honda Motor Co Ltd 7267 JP 3,580 62,460 10.1x 9.0x 1.0x 0.9x 10.2% 10.8% 2.6% 3. Nissan Motor Co Ltd 7201 JP 1,013 44,092 9.4x 8.2x 0.9x 0.8x 9.8% 10.2% 3.3% 3.8% Maruti Suzuki India Ltd MSIL IN 2750.55 13,681 23.3x 17.8x 3.5x 3.0x 15.1% 17.2% 0.5% 0.7% Tata Motors Ltd TTMT IN 512.75 25,591 8.9x 7.7x 2.0x 1.6x 25.3% 22.9% 0.5% 0.6% General Motors Co GM US 34.53 55,410 12.5x 7.6x 1.4x 1.2x 12. 16.8% 3.5% 3.7% Ford Motor Co F US 17.41 67,524 13.2x 9.0x 2.3x 1.9x 20.2% 24.6% 2.8% 2.9% Tesla Motors Inc TSLA US 255.71 31,869 235.5x 83.0x 29.4x 22.6x 17. 44. 0. 0. Renault SA RNO FP 59.89 23,493 8.8x 6.4x 0.7x 0.6x 8. 10.5% 3.3% 3.8% Peugeot SA UG FP 10.72 11,136 74.4x 12.2x 0.8x 0.8x 3.1% 7.5% 0. 0. Volkswagen AG VOW GR 172.35 108,661 8.1x 7.2x 0.9x 0.8x 11.3% 11.7% 2.9% 3. Bayerische Motoren Werke AG BMW GR 88.79 76,072 9.9x 9.4x 1.5x 1.3x 15.6% 14.6% 3.3% 3.7% Fiat SpA F IM 7.29 12,089 15.1x 7.9x 0.8x 0.7x 4.5% 10.3% 0. 0.8% Overseas Avg. 20.2x 13.8x 3.2x 2.6x 12.7% 16.2% 1.9% 2.1% Overseas market cap weighted Avg. 17.8x 11.3x 2.4x 2.0x 13.5% 15.5% 2.5% 2.8% Source: the BLOOMBERG PROFESSIONAL service consensus (600104.SS / 600104 CH) 11
Risks Downside risks Key downside risk comes from the potential antimonopoly investigation, which could hurt margin. Recent media reports (Economic Information Daily) have said that China NDRC could announce monopoly penalties for several car makers, with penalties ranging from 1% to 1 of a car maker's revenue, such as Audi and Chrysler. China State Administration for Industry & Commerce announced it would stop allowing distributors and dealers to obtain general auto sales licences, who until now were allowed to update their business licenses to general auto sales from the previous single brandspecific. We regard this policy as a step further to breaking the vertical monopoly by changing the existing Auto Brand Sales Management Approach. This Approach offers car makers strong control over dealers' pricing, sales volume and inventory, and aftersales parts and service. We think the potential breaking of the vertical monopoly could reduce the car makers' bargaining power, and thus hurt automakers profitability. Roewe and MG brand PV, SAIC's local brand operation, has suffered continuous loss in the past five years, mainly because of its high R&D expense, i.e., Rmb3.4 bn or 1 of SAIC group s total 2013 earnings. Given the lack of big volume models, SAIC Motor cannot even break even at the operating level. We forecast SAIC's local brand operation s losses to reduce sequentially on the back of upcoming new MG brands SUV (to launch in Oct2014), which is expected to sell at least 5,000 units per month. If the MG brands SUV price is too high (to overlap those of mainstream global brands' product), its sales volume might miss our monthly 5,000unit assumption. This is because highend customers' primary purpose in buying a car is to show their social status, hence they are disinclined to buy a local brand such as MG CS with a high price. Upside risks The major upside risks to our investment thesis are: (1) betterthanexpected SUV sales, as China is experiencing a SUV sector boom, and SAIC's strong new SUV portfolio might surprise on the upside; (2) More models being eligible for the upcoming cash subsidy could boost SAIC's sales volume, thanks to its leadership in the fuelsaving technology. Financial forecasts Earnings forecasts up 16% and 17% YoY in 2014 and 2015, respectively We expect SAIC's 2014 and 2015 earnings to go up 16% and 17% YoY to Rmb28.8 bn and Rmb33.7 bn, respectively. The earnings growth is derived from a combination of decent volume growth along with rising margin on improving product mix. Shanghai GM: earnings contribution up 16%/19% YoY to Rmb11.1/13.3 bn, thanks to /15% volume growth, with improving margin on SUV and luxury models launch. Shanghai VW: earnings contribution up 21%/1 YoY to Rmb15.1/16.6 bn, thanks to 1/1 volume growth and highmargin large sedan debut, like Passat and SuperB. SAICGMWuling: profit contribution +/16% YoY to Rmb1.85/2.2 bn on MPV spike. SAICMotor (Roewe and MG): loss down 2%/21% YoY, thanks to MG CS SUV debut. (600104.SS / 600104 CH) 12
Thousands Millions 22 August 2014 Figure 26: SAIC earnings growth outlook Figure 27: SAIC total volume growth outlook 40 35 30 25 20 15 Rmb Bn 16 23% 20 21 2 25 29 16% 34 17% 38 25% 2 15% 1 8 7 6 5 4 3 million unit 11% 4.0 3.6 4.5 1 15% 5.8 5.1 7.2 6.6 1 16% 1 1 8% 6% 10 5 3% 5% 2 1 2% 2010 2011 2012 2013 2014e 2015e 2016e Earnings YoY 2010 2011 2012 2013 2014e 2015e 2016e Total volume YoY (600104.SS / 600104 CH) 13
Figure 28: SAIC net profit and sales volume breakdown by operations 2012 2013 2014e 2015e 2016e 2014e 2015e 2016e Net profit (Rmb mn) YoY YoY YoY SAICGM (5 stake) 9,500 9,600 11,146 13,318 14,398 16% 19% 8% SAICVW (5 stake) 10,484 12,500 15,065 16,580 18,688 21% 1 13% SAICGMWuling (50.1% stake) 1,453 1,653 1,855 2,151 2,469 16% 15% SAICMotor (10 stake) 2,800 3,500 3,430 2,723 2,384 2% 21% Huayu (60.1%) 1,863 2,077 2,621 2,885 3,189 26% 1 11% others 252 2,473 1,500 1,500 1,500 39% Total 20,752 24,804 28,757 33,710 37,860 16% 17% as % of total SAICGM (5 stake) 46% 39% 39% 4 38% 1% 1% SAICVW (5 stake) 51% 5 52% 49% 49% 2% 3% SAICGMWuling (51% stake) 7% 7% 6% 6% 7% SAICMotor (10 stake) 13% 1 8% 6% 2% 2% Huayu (60.1%) 9% 8% 9% 9% 8% 1% 1% others 1% 1 5% 5% 1% Total 10 10 10 10 10 Sales volume (unit) PV 4,302,046 4,897,316 5,660,305 6,380,500 7,040,000 16% 13% 1 SAICGM 1,363,532 1,542,558 1,735,005 2,000,500 2,200,000 15% 1 SAICVW 1,280,008 1,525,008 1,886,000 2,100,000 2,340,000 2 11% 11% SAICGMWuling 1,458,188 1,600,550 1,817,000 2,000,000 2,200,000 1 1 1 SAICMotor 200,318 229,200 222,300 280,000 300,000 3% 26% 7% CV 159,358 191,621 173,910 175,710 178,710 9% 1% 2% Nanjing Iveco 132,013 148,528 119,500 119,500 119,500 2 SAIC Maxus 7,071 11,302 20,000 21,000 23,000 77% 5% 1 Sunwin Bus 3,256 3,783 4,410 5,210 6,210 17% 18% 19% SAICIvecoHongyan 17,018 28,008 30,000 30,000 30,000 7% Total 4,461,404 5,088,937 5,834,215 6,556,210 7,218,710 15% 1 as % of total PV 96% 96% 97% 97% 98% 1% SAICGM 31% 3 3 31% 3 1% 1% SAICVW 29% 3 32% 32% 32% 2% SAICGMWuling 33% 31% 31% 31% 3 1% SAICMotor 5% 1% CV 3% 3% 2% 1% Nanjing Iveco 3% 3% 2% 2% 2% 1% SAIC Maxus Sunwin Bus SAICIvecoHongyan 1% 1% Total 10 10 10 10 10 (600104.SS / 600104 CH) 14
Shanghai GM: To see immediate model cycle revival Shanghai GM, which historically contributed around 4 to overall SAIC earnings, is estimated to book 16%/19% earnings growth in 2014/15 to Rmb22.3/26.6 bn on the back of a wave of new models and new capacity. After a weak new model launch in 2013 (only 1 new niche model Cadillac XTS), we expect Shanghai GM to enter a new era with a strong model cycle from 2014 (4/5/6 new models in 2014 /15 /16), especially in highmargin segments like SUVs and large sedans. 2014 Trax SUV (Apr), New Cruze (Aug), Cadillac ATS L(Aug), Envision SUV (Sep) 2015 New Sail (1Q), new Excelle GT (1Q), Verano (3Q), new Malibu (3Q), Plux (4Q) 2016 Cruze L (1Q), new LaCross (1Q), SRX (1Q), GL8 (2Q), Cvalue(3Q), Aveo(4Q) Among the abovementioned models, we highlight Chevrolet Cruze, the JV's key volume and earnings contributor, will launch a newgeneration model in 2014 and boost both margin and volume. Besides the strong new model cycle push, Shanghai GM also enjoys new capacity support Shanghaibased Cadillac plant and Wuhan plant to kick off production from 2015, raising overall Shanghai GM capacity by 28% from the current 1.42 mn units to 1.82 mn units. Thus, we estimate Shanghai GM sales volume to increase by /15% in 2014/15, to 1.74/ 2.0 mn units. Figure 29: Shanghai GM earnings growth outlook Figure 30: Shanghai GM earnings by model (2015 E) 35,000 25% Cruze, 15% Rmb Mn Others, 13% 21% 30,000 19% 2 Malibu, 6% 25,000 16% Envision 15% Encore 20,000 SUV, 11% SUV, 6% 15,000 10,000 8% 5,000 1% 2010 2011 2012 2013 2014E 2015E 2016E Shanghai GM earnings YoY growth 1 5% Trax SUV, 7% Lacrosse, 7% Regal, 7% Excelle, 8% Excelle GT / XT, 11% GL8, 1 (600104.SS / 600104 CH) 15
Figure 31: Shanghai GM new model plan 2014 2015 2016 Trax (Apr) New Sail (1Q) Cruze L (1Q) Small SUV Small sedan Middle sedan New Cruze (Aug) Excelle GT (1Q) LaCrosse (1Q) Middle sedan Middle sedan Large sedan ATS L (Aug) Verano (3Q) SRX (1Q) Large sedan Middle sedan Large SUV Envision (Sep) New Malibu (4Q) New GL8 (2Q) Middle SUV Large sedan MPV Plux (4Q) Cvalue (3Q) Large sedan Middle sedan New Aveo (4Q) Small sedan Figure 32: Shanghai GM net margin outlook 12. 11.8% 12. 12.1% 10. 11.2% 11.1% 10.8% 10.7% 8. 6. 4. 2. 0. 2010 2011 2012 2013 2014E 2015E 2016E (600104.SS / 600104 CH) 16
Shanghai VW Strong growth on new Changsha plant debut Shanghai VW, which historically contributed around 5 to overall SAIC earnings, is estimated to book 21%/1 earnings growth in 2014/15 to Rmb30/33.2 bn on the back of its new Changsha plant debut, as well as new largesize sedan models. Shanghai VW currently operates at very tight capacity constraint 12 utilisation rate due to strong demand. We expected the utilisation constraint to be more severe after the release of the longawaited list of Rmb3,000/unit fuelefficient car models eligible for subsidy. Shanghai VW was clearly the biggest beneficiary among global brands camp during the last round of efficient car subsidy programme, with 6 models eligible thanks to its advanced powertrain technology: "TSI+DSG" turbo engine with GDI and double clutch transmission (DCT). We expected a similar situation in the upcoming new batch of fuelefficient car models eligible for subsidy, thereby helping Shanghai VW's share gains. Thanks to the completion of the new Changsha plant construction, overall Shanghai VW capacity is expected to rise by 2 from the current 1.55 mn units to 1.85 mn units. Thus, we estimated Shanghai VW sales volume to increase by 2/11% in 2014/15, to 1.9/ 2.1 mn units. Looking into 2016, we expected Shanghai VW's product mix to improve substantially, thanks to the launch of three highmargin products VW brands largesize sedan (1Q), VW Cross Blue SUV (3Q) and new Skoda SUV (4Q). Figure 33: Shanghai VW earnings growth outlook Figure 34: Shanghai VW earnings by model (2015 E) 40,000 35,000 30,000 Rmb Mn 38% 27% 4 35% 3 Others, 16% 25,000 20,000 15,000 19% 21% 25% 2 15% Lavida, 19% Tiguan, 36% 10,000 5,000 1 13% 1 5% Passat, 29% 2010 2011 2012 2013 2014E 2015E 2016E Shanghai VW earnings YoY growth (600104.SS / 600104 CH) 17
Figure 35: Shanghai VW new model plan 2014 2015 2016 New Octavia (May) New Fabia (2Q) ESedan (1Q) Middle sedan Small sedan Large sedan A plus (Dec) New SuperB (3Q) Cross Blue (3Q) Middle sedan Large sedan Large SUV Passat (4Q) Skoda SUV (4Q) Large sedan Middle SUV New Touran (4Q) MPV Figure 36: Shanghai VW net margin outlook 14. 12. 12.2% 12.2% 12.1% 12.1% 12.3% 10. 10.7% 9.6% 8. 6. 4. 2. 0. 2010 2011 2012 2013 2014E 2015E 2016E (600104.SS / 600104 CH) 18
SAICGMWuling: Key beneficiary of lowend MPV spike SAICGMWuling, which historically contributed around 7% to overall SAIC earnings, is estimated to book /16% earnings growth in 2014/15 to Rmb3.7/4.3 bn on the back of both new MPV model launch and new Chongqing plant debut. SAICGMWuling is China's largest mini bus and MPV maker, with 5 and 43% market share, respectively. The company's key profit contributor Wuling Hongguang MPV is derived from the minibus platform but at a much higher price (Hongguang MPV's Rmb45K80K vs mini bus' Rmb3048K), resulting in a much better margin than mini bus. After a weak model launch in 2013 (no model), we expect SAICGMWuling to see a strong model cycle from 2014 (2/3/1 new models in 2014/15/16). We expected this wave of new models to drive SAICGMWuling sales volume up 1/1 in 2014/15 to 1.8/2.0 mn units. 2014 Baojun 610 sedan (Mar), Baojun 730 MPV (Aug) 2015 Baojun CSUV (3Q), Baojun Bsedan (4Q), new Wuling MPV (4Q) 2016 new generation Baojun 630 (3Q) Figure 37: SAICGMWuling earnings growth outlook 6,000 Rmb Mn 16% 15% 5,000 1 4,000 3,000 18% 16% 1 1 8% Figure 38: SAICGMWuling net margin outlook 8. 7.2% 7. 6.7% 6. 5. 5. 5. 5.2% 5.3% 5. 4. 2,000 1,000 2010 2011 2012 2013 2014E 2015E 2016E SAICGMWuling earnings YoY growth 6% 2% 3. 2. 1. 0. 2010 2011 2012 2013 2014E 2015E 2016E Figure 39: SAICGMWuling MPV sales outlook 3,500 '000 unit 55% 6 5 3,000 5 43% 2,500 2,200 4 33% 2,000 2,000 1,817 1,458 1,601 3 1,500 1,200 22% 990 2 1,000 790 530 1 500 316 0 2012 2013 2014E 2015E 2016E SAICGMWuling MPV sales Total SAICGMWuling sales MPV as % of total volume Figure 40: SAICGMWuling new model plan 2014 2015 2016 610 (Mar) Middle sedan 730 (Aug) MPV CSUV (3Q) Middle SUV BSedan (4Q) Small Sedan Wuling MPV (4Q) MPV New 630 (3Q) Middle sedan (600104.SS / 600104 CH) 19
SAIC Motor: Reducing loss on new MG SUV debut SAIC Motor, SAIC's local brand operation, has suffered continuous losses in the past five years, mainly because of its high R&D expense, i.e., Rmb3.4 bn or 1 of SAIC group s total earnings. SAIC is one of the very few automakers that design cars from scratch and successfully design inhouse powertrains "CubeTech" turbo engine series and 7speed DCTs. Given the lack of big volume models, SAIC Motor cannot even break even at the operating level. We expect SAIC Motor to book Rmb3.4/2.7/2.4 bn loss in 2014/15/16. The lossmaking reduction mainly stems from our confidence in its upcoming new MG brands SUV (to launch in Oct2014), which is expected to sell at least 5,000 units per month, pushing the overall SAIC Motor sales volume to 223,300/280,000/300,000 units in 2014/15/16. Management guided the breakeven volume assumption to be 400K500K units, which is unlikely to be achieved before 2018, in our view. Figure 41: SAIC Motor earnings growth outlook Rmb Mn (500) (1,000) (1,500) (2,000) (2,500) (3,000) (3,500) (4,000) 25% 25% 2% 21% 2010 2011 2012 2013 2014E 2015E 2016E SAICMotor Loss YoY growth 3 2 1 1 2 3 Figure 42: SAIC Motor gross margin/net margin outlook 25% 2 15% 1 5% 5% 1 15% 2 25% 19% 9% 7% 8% 9% 1 2010 2011 2012 2013 2014E 2015E 2016E 18% 18% 22% 22% 13% Net Margin Balance sheet: To stay in net cash position in 2014 15E We expect SAIC's balance sheet to remain in a net cash position in 2014/15/16 at Rmb74.4/92/116 bn. Thanks to SAIC's decent earnings power, we expect SAIC to book sizeable free cash flow in 2014/15/16 of Rmb 9/14/22 bn. Gross margin 1 (600104.SS / 600104 CH) 20
Thousands 22 August 2014 Figure 43: SAIC net cash outlook 140 Rmb Bn 57% 120 100 80 23% 27% 7 6 5 4 3 Figure 44: SAIC free cash flow outlook 25,000 Rmb Mn 20,000 18,987 15,000 13,913 21,642 60 40 20 13% 18% 2010 2011 2012 2013 2014e 2015e 2016e Net cash Company overview Company background YoY 2 1 1 2 10,000 5,000 0 4,044 3,583 4,943 9,042 2010 2011 2012 2013 2014E 2015E 2016E SAIC Motor Corp is China s largest auto group with 2 market share in 1H14. It is the JV partner for GM and VW. SAIC's businesses cover the full auto value chain, including passenger vehicle, commercial vehicle, parts, distribution and auto financing. Figure 45: Company milestones 2012 Roewe brand E50 electric vehicle launch 2011 SAIC commercial established, launch "Maxus" brand 2007 SAIC merge Nanjing Auto group, gain "MG" brand 2007 SAICIvecoHongyan JV established 2006 SAIC group listed 2006 SAIC launch its local brand Roewe operation 2002 SAICGMWuling JV established 1997 Shanghai GM JV established 1984 Shanghai VW JV established Source: Company data, Credit Suisse (600104.SS / 600104 CH) 21
Figure 46: Company structure Yuejing Auto Shanghai Auto industry Group Corp Shanghai Auto industry Co 3.75% 74.3% 3.03% 18.9% Ashare public shareholder SAIC Motor (600104 SS) Passenger Vehicle Commercial Vehicle Components & parts Finance & service Shanghai GM manufacture (5) SAICGMWuling (50.1%) VW powertrain (4) SAIC Finance (10) Shanghai GM sales (51%) SAICIvecoHongyan (33.3%) VW Transmission (2) GMACSAIC (5) Shanghai VW manufacture (5) Shanghai VW sales (6) SAIC Motor (Roewe and MG) (10) Nanjing Iveco (5) SAIC Maxus (10) Sunwin Bus (5) Huayu Auto (600741 SS) (60.1%) Shanghai Diesel (600841.SS) (48.05%) Shanghai Huizong (10) Pan Asia Technical Automotive Center (5) Anjin auto (10) SAICGMWuling (50.1%) SAIC Tangshan Bus (51%) Nanjing Tooling (10) Anyo service (10) Source: Company data, Credit Suisse (600104.SS / 600104 CH) 22
Companies Mentioned (Price as of 21Aug2014) BMW (BMWG.DE, 89.78) BYD Co Ltd (1211.HK, HK$51.2) Brilliance China Automotive Holdings Limited (1114.HK, HK$14.38) ChangAn (000625.SZ, Rmb13.31) Dongfeng Motor Group Company Limited (0489.HK, HK$13.84) Faw Car (000800.SZ, Rmb11.54) Faw Xiali (000927.SZ, Rmb4.86) Fiat (FIA.MI, 7.28) Ford Motor Company (F.N, $17.41) Geely Automobile Holdings Ltd (0175.HK, HK$3.03) General Motors Corp. (GM.N, $34.53) Great Wall Motor (2333.HK, HK$30.45) Guangzhou Automobile Group (2238.HK, HK$8.61) HAIMA AUTO (000572.SZ, Rmb4.73) Honda Motor (7267.T, 3,580) Huayu Automotive (600741.SS, Rmb11.97) Hyundai Motor (005380.KS, W224,000) JAC (600418.SS, Rmb13.01) Jianghuai Eng (000816.SZ, Rmb4.85) Kia Motors (000270.KS, W59,000) Lifan (601777.SS, Rmb8.96) Maruti Suzuki India Ltd (MRTI.BO, Rs2750.05) Mazda Motor (7261.T, 2,487) Nissan Motor (7201.T, 1,012) Renault (RENA.PA, 60.55) (600104.SS, Rmb17.1, OUTPERFORM, TP Rmb24.5) SDEC (600841.SS, Rmb10.41) Suzuki Motor (7269.T, 3,430) Tata Motors Ltd. (TAMO.BO, Rs512.6) Tesla Motors Inc. (TSLA.OQ, $255.71) Toyota Motor (7203.T, 5,990) Volkswagen (VOWG_p.DE, 172.75) Yueda Invt (600805.SS, Rmb10.73) Important Global Disclosures Disclosure Appendix Bin Wang and Mark Mao, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stoc k s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the releva nt sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and nonjapan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, 12 month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 1015% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10 15% and 1015% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 2 or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: (600104.SS / 600104 CH) 23
Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 4 (53% banking clients) Neutral/Hold* 4 (52% banking clients) Underperform/Sell* 13% (4 banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Ne utral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for (600104.SS) Method: Our Rmb24.50 target price for is based on 8x 2015E EPS (earnings per share), justified by the upcoming Shanghai Hong Kong Stock Connect. This implies 9.0x 2014E P/E (pricetoearnings), inline with current valuation of HKlisted gasoline engine carmarkers, i.e., Dongfeng, GAC, Brilliance, Geely and Great Wall. Risk: Risks that could impede achievement of our Rmb24.50 target price for include: the potential antimonopoly investigation, which could hurt margin, and a potential increase in losses at its local brands operation (Roewe and MG brand PV). Please refer to the firm's disclosure website at https://rave.creditsuisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (600104.SS, 0489.HK, 1114.HK, 005380.KS, F.N, GM.N, VOWG_p.DE, 2238.HK, 000270.KS, 7203.T, 7267.T, TAMO.BO, RENA.PA, BMWG.DE, FIA.MI) currently is, or was during the 12month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (F.N, VOWG_p.DE, 000270.KS, 7267.T, BMWG.DE, FIA.MI) within the past 12 months. Credit Suisse provided noninvestment banking services to the subject company (005380.KS, F.N, GM.N, VOWG_p.DE, 000270.KS, 7203.T, 7267.T, TAMO.BO, RENA.PA, BMWG.DE, FIA.MI) within the past 12 months Credit Suisse has managed or comanaged a public offering of securities for the subject company (F.N, VOWG_p.DE, 7267.T, BMWG.DE, FIA.MI) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (F.N, VOWG_p.DE, 000270.KS, 7267.T, BMWG.DE, FIA.MI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (600104.SS, 7201.T, 0175.HK, 7269.T, 0489.HK, 7261.T, 1114.HK, F.N, VOWG_p.DE, 2238.HK, 000270.KS, 7203.T, 7267.T, MRTI.BO, TSLA.OQ, BMWG.DE, FIA.MI) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (005380.KS, F.N, GM.N, VOWG_p.DE, 000270.KS, 7203.T, 7267.T, TAMO.BO, RENA.PA, BMWG.DE, FIA.MI) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (7201.T, F.N, GM.N, 7203.T, 7267.T, TSLA.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0489.HK, 2238.HK, 2333.HK). (600104.SS / 600104 CH) 24