china / hong kong company focus baic motor corp enhance the value chain, the jv ventured into engine...

ed-TH / sa- JY

BUY (Initiating coverage)

Last Traded Price ( 12 Oct 2016):HK$8.15 (HSI : 23,407) Price Target 12-mth: HK$9.60 (18% upside) Potential Catalyst: Competitive new models to drive earnings Where we differ: Our earnings forecast slightly higher than consensus Analyst Rachel MIU +852 2863 8843 [email protected] Price Relative

Forecasts and Valuation FY Dec (RMB m) 2015A 2016F 2017F 2018FTurnover 84,112 109,769 130,773 143,334 EBITDA 8,266 8,676 10,696 11,525 Pre-tax Profit 8,321 12,180 14,551 15,733 Net Profit 3,319 5,082 6,197 6,708 Net Pft (Pre Ex) 3,319 5,082 6,197 6,708 EPS (RMB) 0.44 0.67 0.82 0.88 EPS (HK$) 0.50 0.77 0.94 1.02 EPS Gth (%) (37.8) 53.1 21.9 8.2 Diluted EPS (HK$) 0.50 0.77 0.94 1.02 DPS (HK$) 0.17 0.27 0.33 0.36 BV Per Share (HK$) 5.32 6.09 7.03 8.05 PE (X) 16.2 10.6 8.7 8.0 P/Cash Flow (X) 5.2 4.3 3.9 3.6 P/Free CF (X) nm 39.7 13.6 11.3 EV/EBITDA (X) 8.7 8.5 6.8 6.1 Net Div Yield (%) 2.1 3.3 4.0 4.4 P/Book Value (X) 1.5 1.3 1.2 1.0 Net Debt/Equity (X) 0.1 0.1 CASH CASH ROAE (%) 9.7 13.5 14.3 13.5 Earnings Rev (%): New New New Consensus EPS (RMB) 0.65 0.79 0.87 Other Broker Recs: B: 12 S: 1 H: 6

ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: BAIC produces and sells a variety of passenger vehicles in China Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Benz's new look wins over younger drivers • Mercedes-Benz the fastest growing luxury brand with

sleek looking new models • Various business entities launching new vehicles to boost

sales • Golden opportunity for company to implement the new

energy vehicle strategy • Initiate coverage with BUY rating and TP of HK$9.60

Benefits arising from vehicle refresh programmes. Beijing Benz is becoming a fast-growing auto company after changing its products and sales strategy 2-3 years ago. The newer models are more appealing to younger car buyers. Since 2013, Mercedes-Benz's car sales have been growing at a rapid rate and the trend is expected to continue following the launch of new models recently. It has also ventured into car engine production to further enhance profitability. Korean JV expected to turn around soon. The Korean JV is expected to post modest earnings expansion in FY17/18 as sales of new products start to ramp up and on lower A&P expense after the older models are completely phased out. Strong cash generation on profit expansions. The healthy profit growth is generating strong cashflows for the company. This not only supports capex plans but also allows higher dividend payout for shareholders. Valuation: Undemanding valuation. We project FY16-17F earnings to grow at c.15% per year to support valuation expansion. Our HK$9.60 TP is pegged to FY17F PE of 10x, benchmarked to global luxury auto brands, factoring in the company’s underlying fundamentals. Key Risks to Our View: Poor quality control. Profit could decline sharply and reputation damaged by defective products which may cause serious injuries or deaths. Its self-brand may suffer a bigger operating loss if cost control is weak.

At A Glance Issued Capital - H shares (m shs) 2,101 - Non H shrs (m shs) 5,495 H shs as a % of Total 28 Total Mkt. Cap (HK$m/US$m) 61,902 / 7,984 Major Shareholders

Beijing Automotive Group (%) 45.0 Beijing Shougang (%) 13.5

Major H Shareholders (%) Daimler AG (%) 38.2

H Shares-Free Float (%) 61.8 3m Avg. Daily Val. (US$m) 4.2

55

75

95

115

135

155

175

195

215

4.3

5.3

6.3

7.3

8.3

9.3

10.3

11.3

12.3

Dec-14 May-15 Oct-15 Mar-16 Aug-16

Relative IndexHK$

BAIC Motor Corp (LHS) Relative HSI (RHS)

DBS Group Research . Equity 13 Oct 2016

China / Hong Kong Company Focus

BAIC Motor Corp Bloomberg: 1958 HK Equity | Reuters: 1958.HK Refer to important disclosures at the end of this report


BAIC Motor Corp

Page 38

INVESTMENT THESIS

Profile Rationale

BAIC Motor has tie-ups with Daimler AG and Hyundai Motor to assemble and sell Mercedes-Benz and Hyundai cars in China. It also has the Beijing proprietary brand, which currently has three product series – Senova, BJ and Wevan. The group’s passenger vehicles comprise sedans, SUVs, MPVs and Crossovers.

• Product refresh cycle to boost sales. BAIC, through various entities, has planned for several new models to drive future volume sales and revenue.

• Luxury brand generating strong earnings. The launch of

the new flagship E-Class model which has a strong appeal is expected to create a solid earnings stream.

• Undemanding valuation. Upside potential is supported

by good earnings stream, which is not factored in the share price yet.

Valuation Risks

Our valuation is based on earnings multiples and benchmarked to listed luxury automakers globally. Our valuation has factored in the growth prospects, stage of product upgrade cycle, as well as its financial health. Based on FY17 earnings and target 10x PE, we arrive at our target price of HK$9.60.

• Overcapacity. Car sales in China are projected to slow in coming years while new capacity coming on stream could result in severe market competition.

• A steep climb for Chinese auto brands. The domestic

brands have been facing rising competition from the sino-foreign brands. BJ Motor may experience rising operating losses if its products are not competitive.

• Losses at Beijing Electric Vehicle Co may widen. Demand

sentiment for NEVs may drop after the cut-back in government subsidy, thus affecting the company sales.

• Anti-sales policy. With more cities mulling the

implementation of sales restrictions, BAIC may suffer slower deliveries across the various auto brands.

Source: DBS Vickers


BAIC Motor Corp

9

Benefits from reorganising luxury car business

Company Background

Corporate history. BAIC Group is the fifth largest automobile group in China (based on 2015 volume sales). The auto business was set up in 1958 under Beijing Automobile Factory. The company was renamed as BAIC Group which apart from engaging in automobile and related businesses, also had education, investment, financing and developed emerging industries. On September 2010, the automobile business was carved out under the umbrella of BAIC Motor (BAIC). The company was subsequently listed on the HK Stock Exchange on 19 December 2014. BAIC Group currently holds 44.98% in BAIC. The second largest shareholder is Shougang Ltd which has a 13.54% stake. Daimler, a strategic partner, holds 10.08%

(H-share stake is 36.46%), the first for an international automaker to have a direct stake in a listed Chinese automobile company.

Principal business. BAIC is engaged in the design, manufacture and sales of passenger vehicles. It has the Beijing proprietary brand as well as foreign brands under the Beijing-Benz JV with Daimler and Beijing-Hyundai. The Beijing-Benz is a 51%-owned subsidiary of the company, while it has a 50% share in Beijing-Hyundai.

The range of vehicles comprises sedans, SUVs, MPVs and crossovers, covering various engine sizes. The cars are sold through appointed dealerships under the respective brands.

Corporate structure

Other DomesticShareholders

ShougangShares BAIC Group

Daimler AG(H Share

Shareholders)

H Share publicShareholders

Beijing Branch

Beijing Automotive

Powertrain Co., Ltd.

BAIC Motor Sales Co. Ltd.

BAIC (Hong Kong)

Investment Co., Ltd.

Beijing Benz

Beijing Mercedes-Benz

Sales Service Co., Ltd.

Zhuzhou Branch

Guangzhou Branch

Zhuzhou (BAIC) Motor Sales Co.,

Ltd.

Beijing Beinei Engine Parts and

Components Co., Ltd.

BAIC Investment

Beijing Hyundai

BAIC Motor Corp

13.82% 13.54% 44.98%

100%

10.08% 17.58%

100% 100% 100% 51% 49%

100% 100% 100% 50% 97.95%

50%

Source: Company 2015 Annual Report


BAIC Motor Corp

0

Earnings of key operating units

Beijing-Benz: a cash cow. BAIC raised its stake in Beijing Benz (BJ Benz) to 51% from 50% in November 2013. It produces vehicles under the premium German marquee, licensed to Beijing Benz by its owner, Daimler AG. The JV has an operating term of 50 years which will expire in 2033. In FY15, the JV produced an operating profit of Rmb7.8bn, up from Rmb3.3bn the previous year. The JV generated cash of Rmb10bn last year. We expect the earnings strength to continue after it changed the business strategy in China, including faster new model implementation and sales network reorganisation.

Business strategy change key reason for earnings improvement. Together with Daimler, the company has restructured its distributor and dealership network to improve sales efficiency as well as intensified its product renewal cycle, by launching new models more frequently. Mercedes-Benz is currently one of the best-selling brands in China. The JV produces the C-Class, E-Class, and two SUV models - GLA & GLC. In August 2016, the JV launched the new E-Class, an important catalyst for the JV’s future growth. The new E-Class (sedan) is an important volume and profit driver. This model has also incorporated the latest autonomous and safety features.

To enhance the value chain, the JV ventured into engine production in 2013 in China. The plant has an annual capacity of 300,000 units. In mid-2014, BJ Benz began exporting engine cylinder blocks, cylinder heads, crankshafts and other parts to Daimler’s engine plants in Germany.

The vehicle assembly capacity has more than doubled to 250,000 units in 2016 since 2013. Besides, its dealership network is widening too, from 166 outlets in 2010 to 502 shops by 2015.

To consolidate its business in China, BAIC acquired a 35% stake in Fujian Benz from Fujian Motor in September 2016, further strengthening its long-term partnership between the company and Daimler. Fujian Benz manufactures minivans, MPVs and special purpose vehicles.

Sales volume of Beijing Benz

0

50,000

100,000

150,000

200,000

250,000

300,000

2011 2012 2013 2014 2015 9M15 9M16

unit

CAGR: 28%

29%

Source: Company

Beijing Benz network in China

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30

35

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400

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2010 2011 2012 2013 2014 2015

Number of outlets (LHS) YoY growth (RHS)

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Source: Company


BAIC Motor Corp

Page 41

Beijing Benz - Revenue

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Revenue (LHS) YoY growth (RHS)

RMB m %

Source: Company, DBS Vickers

Beijing Benz – Gross Profit and Margins

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Sales volume of Beijing Benz C-class & E-class

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Ma y

/14

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/14

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Ma y

/15

Jul/1

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Sep/

15

Nov

/15

Jan/

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Mar

/16

Ma y

/16

Jul/1

6

Beijing Benz E-class Beijing Benz C-class

units

Source: CAAM

Note: Drop in E-class related to the old model

Beijing Benz SUV monthly sales

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

Jan/

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Mar

/14

May

/14

Jul /1

4

Sep/

14

Nov

/14

Jan/

15

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/15

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/15

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Sep/

15

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/15

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16

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/16

May

/16

Jul /1

6

Beijing Benz GLA Beijing Benz GLC

Beijing Benz GLK

units

Source: CAAM

Note: GLC to replace GLK

Beijing-Hyundai: recovery insight. Beijing Hyundai (BJ Hyundai) produces largely mid-end cars and is positioned slightly below the Japanese players in term of pricing. The JV was set up in 2002 and annual sales had crossed the 1m mark in 2013. The key product lines are the Sonata (sedan), Elantra (sedan), Mistra (entry level compact sedan), ix35 (SUV), and Santa Fe (mid-sized SUV). The JV also has some NEV models, including the Sonata Hybrid.


BAIC Motor Corp

Page 42

Old models phase-out dampened FY15 earnings. The Beijing Hyundai JV is one of the major contributors to BAIC’s earnings. However, its FY15 earnings fell 28%, which we attribute to a weak product portfolio and partly to old models phase-out exercise. Volume sales at the JV fell by 5.1% y-o-y in 2015 and the management is forecasting sales to increase by 5.4% this year. This growth projection looks decent since it has achieved 70% of its full-year budget in 8M16.

The JV’s earnings trend is expected to improve next year at a modest rate, supported by new models in the pipeline. A new compact passenger vehicle “Verna” is scheduled for launch in 4Q16. The new Elantra, Santa Fe (facelift) and Santa Fe Sport are expected to lift future earnings. The Elantra series account for 30-40% of the JV volume sales per year and hence a model revamp will be crucial for its earnings outlook. New energy vehicle strategy is also part of the JV’s plan to enrich its product competitiveness.

To handle the new model roll-out plans, the JV has expanded capacity to 1.25m units, up from 1.05m units last year.

Sales volume of Beijing Hyundai

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2011 2012 2013 2014 2015 9M15 9M16

unitCAGR: 9%

7%

Source: Company

Beijing Hyundai - Revenue

(10)

(8)

(6)

(4)

(2)

0

2

4

6

96,000

98,000

100,000

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104,000

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108,000

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114,000



RMB m %


Beijing Hyundai – Operating Profit & Margins

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RMB m %



BAIC Motor Corp

Page 43

Sales volume of Beijing Hyundai

Source: Company

New Hyundai Elantra (2017)

Source: Company

New Santa Fe Sport (2017)

Source: Company

Average selling price of Beijing Hyundai cars

M odel A SP (RM B)Elantra Lingdong 99,800

Sonata hybrid 209,800

Sonata 174,800Elantra Langdong 105,800

Mistra 129,800

V erna (three boxes) 73,900V erna (two boxes) 72,900

Elantra Yuedong 99,800

Moinca 116,800

Elantra 89,800Tucson 159,900

ix25 119,800

New Santa Fe 224,800ix35 149,800

Source: Company

Beijing Motor: still loss-making. The self-brand is held under Beijing Motor (BJ Motor), which has three product series – Senova series (mid- to high-end passenger vehicles), BJ and Wevan series (mainly economic vehicles). BAIC started the Wevan in 2011 and followed with Senova and BJ in 2013 to diversify its product lines. The Senova product series are mainly based on the Saab derived technology, which BAIC acquired in 2009 for US$207m. The deal includes the architecture for three Saab models, two turbo engines and two transmissions and other related core technologies and intellectual property rights.

Senova's current models include five sedans and four SUVs, of which two new SUVs (X55 and X35) were introduced in 1H16. The BJ series have military appeal and are largely cross-country vehicles. Recently, to soften the appeal, the company introduced a light urban jeep to attract city drivers. Wevan's target customers are small and micro businesses, as well as individuals, thus this line produces mini-MPVs and economical SUVs.

The small car segment currently benefits from the government's favourable tax policy (vehicles below 1.6L capacity are entitled to a 50% reduction in vehicle purchase tax). Once the favourable tax policy expires at end-2016, we see some uphill tasks for the Chinese automakers.

While the favourable tax policy helps, BJ Motor is still growing its scale and has to incur development and promotion costs to raise brand awareness. Coupled with intense market competition from the other Chinese and Sino-foreign brands, BJ Motor has being incurring huge operating losses, which amounted to Rmb3.3bn in FY15, up from Rmb1.9bn in FY14. We project operating losses to remain high because of new vehicle developments (covering from traditional and NEVs), on-going sales network expansion and high promotion and marketing expenses. The potential swing factor is the level of subsidy from the government on its NEV development.

0

200

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600

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1,000

1,200

2014 2015

Elantra Mistra Sonata Tucson Others

'000 units


BAIC Motor Corp

Page 44

Sales volume of Beijing Brand

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2011 2012 2013 2014 2015 9M15 9M16

unit

CAGR: 93%

51%

Source: Company

Beijing Motor - Revenue

0 5 10 15 20 25 30 35 40 45 50

0

5,000

10,000

15,000

20,000

25,000

30,000



RMB m %


Beijing Motor – Operating Losses

(4,000)

(3,500)

(3,000)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0


RMB m


Market share of China brand PV manufacturers by sales volume (2015)

Shanghai Auto23%

Changan13%

Dongfeng9%

Great Wall9%

Beijing Auto

Works7%

Geely6%

Chery6%

BYD5%

Jianghuai4%

FAW4%

Others14%

Source: CAAM

NEV strategy. Apart from gasoline-based cars, the company also develops and sells new energy vehicles (NEV), in line with the Beijing government’s promotion of the NEV industry. The EV series include E150EV, EV160, EV200, EU260 and ES210 models. New models for 2016 include EX200 (first pure electric car) and EH400 sedan.

In 2015, the company sold slightly over 20,000 units of NEV, a y-o-y expansion of 270%. This sales performance is decent, compared to market peers such as BYD. For 8M16, its NEV sales shot up 160% y-o-y.


BAIC Motor Corp

Page 45

BAIC NEV monthly sales

Source: Company

To widen its NEV presence, BAIC had subscribed for 208m shares or a 6.5% stake in Beijing Electric Vehicle Co Ltd (BJEV) for Rmb532.48min March 2016 to enhance its exposure in the NEV business. The largest shareholder is BAIC Corp, which has a 60% interest. The other shareholders in BJEV are Beijing

Industrial Development Investment Management Co Ltd, Beijing State-owned Capital Management Centre, and Beijing Electronics Holding Co Ltd. BJEV collaborates with Atieva, Siemens, SK Group and others to strengthen its technology and R&D capabilities.

EV series (E150 EV)

Source: Company

BJEV is still a loss-making entity. In FY15, after-tax losses amounted to approximately Rmb251.2m, some 15% lower than FY14.

0

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p

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unit


BAIC Motor Corp

Page 46

Critical earnings drivers

High product refresh rate. This comes from the various auto brands. BJ Benz's new E-Class should continue to drive sales in the next two years while BJ Hyundai also has the mid-size sedan (Elantra) and SUV (Santa Fe) to boost sales prospect. For BJ Motor, the new models are primarily focused on SUVs and a front-wheel drive mini-MPV for families. In the NEV field, new models for 2016 include EX200 (first pure electric car) and EH400 sedan.

To be the top three self-brand players by 2020. To achieve this goal from the current 8th position, the company plans to develop more quality vehicles that are competitive in the market. It will strengthen the Senova series that focuses on the mid- to high-end sedans, SUVs and MPVs. As the western regions develop, BAIC expects car consumption to rise. Hence, Wevan and BJ will be the two key product lines that target these markets. It comprises durable and economy sedans, mini MPVs, and small SUVs. To address the quality issue, the company will tap into its three major research centres in China, Germany and the US to raise its car development standard. The sales target by 2020 is 800,000 units, meaning a substantial jump from 300,000-400,000 sales units in the near term.

Capacity expansion. BAIC is expanding capacity in anticipation of rise in demand. At BJ-Benz JV, total designed capacity is 300,000 units per annum, although it is currently running at 250,000 units capacity. Based on the five-year plan, BJ Hyundai intends to increase capacity to 1.65m units by 2020. BJ Motor's total production capacity has reached 450,000 units this year.

BAIC EV to challenge rivals. Being close to the central government does give BAIC some advantage to pursue the NEV strategy. For 8M16, sales of NEV have surpassed the volume achieved in 2015. With the Beijing government’s more relaxed policy toward NEV car buyers, volume sales are expected to stay high. To expand the range of NEV models, the company will have to rely on the three R&D centres on power trains and core electrical and electronics parts development. BAIC EV is a potential threat to the incumbent in the NEV market.

Tighter cost control on its loss-making unit. Production efficiency and better sales strategy should help to reduce the losses at BJ Motor. This unit has turned in a gross profit of about Rmb400m in 1H16, though small relative to its revenue size of Rmb10bn. We expect the profitability to gradually improve over time.

Financial Projections

Revenue and volume sales supported by new models. The main revenue drivers are the strong Mercedes-Benz models, which are helping volume growth during the forecast period. Despite the high sales expansion, we still project volume to expand at 33%/20% for FY16/17F. The BJ Benz JV contributes the bulk of top-line expansion for BAIC. For the self-brand, we estimate mid-single-digit volume expansion in FY17, following the expiry of the favourable vehicle purchase tax policy. However, the NEV business should remain robust on government support.

Therefore, we forecast BAIC to post 30%/19%/10% revenue expansion for FY16/17/18 respectively.

Group profit margins trends. We estimate GP margins of around 21-22% over the forecast period, due to strong profit margins from BJ Benz, while BJ Motor is expected to post a small profit as its business scale is still small. As such, gross profit trend is stable. Overall, we expect operating margins to hover around 8% during FY16-18F as operating costs are projected to increase in tandem with volume and business growth.

BJ Hyundai modest recovery trend. We estimate BJ Hyundai to post a 10% drop in FY16 earnings. However, the new models in the pipeline should lift FY17/18F profits at a high-single-digit growth. But challenges remain as competition in the mid-market segment stays fierce in the coming years.

Profits from foreign brands offset by operating losses at self-brand. We estimate FY16-18F net profit CAGR of c.15% because of continual operating losses at its self-brand unit from the termination of the favourable vehicle tax policy and high NEV spending to build this business.

Improvement in current ratio should help its balance sheet. The company has leveraged on the suppliers’ credit and short-term borrowings to support its operations. In the past three years, its net current liabilities have been on the rise to Rmb15.4bn last year. However, we expect this trend to reverse as the company expands its business operations and manages its trade payables. Hence, its current ratio is projected to range between 0.8x and 1x over 2016-2018. Meanwhile, net gearing is low and likely to turn net cash in the coming 1-2 years.

Good operating cashflow outlook. We project robust operating cashflow on strong profits from BJ Benz. In fact, the company has achieved positive free cashflow in 2015 and the trend is expected to sustain. BAIC has to maintain a high level of capex for its new product developments. The ability to generate strong cashflow should also support a good dividend policy.


BAIC Motor Corp

Page 47

Group revenue breakdown

Profit margins

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400

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FY13 FY14 FY15 FY16F FY17F FY18F

Beijing Motor (LHS) Beijing Benz (LHS)

YoY, % (RHS)

RMB m

0

5

10

15

20

25

FY14 FY15 FY16F FY17F FY18F

Gross margin Operating margin

Net margin

%

Group net profit

Net gearing

(40)

(20)

0

20

40

60

80

0

1,000

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4,000

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8,000


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RMB m %

(15)

(10)

(5)

0

5

10

15

20

25


%

Operating cashflow

Capex

(4,000)

(2,000)

0

2,000

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6,000

8,000

10,000

12,000

14,000

16,000


RMBm

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


RMBm



BAIC Motor Corp

Page 48

Valuation

Benchmarked to peers. Our valuation is based on earnings multiples and makes reference to HK-listed and luxury automakers globally. The global luxury brand players are trading at FY17F PE of 5-23x, while Brilliance China (1114 HK) is valued at about 9x. BAIC's trading history is relatively short and its

historical average PE is about 11x. We forecast 2-year EPS growth of c.15% (FY16-18F).

Our forward PE of 10x has considered its growth outlook, stage of product upgrade cycle, as well as its financial health (both balance sheet and cashflows). We arrive at target price of HK$9.60 per share. Initiate with a BUY rating.

Peers valuation – luxury stocks

M k t PE PE Y ield Y ield P/Bk P/Bk EV /EB IT DA RO E RO ECurrenc y Pric e Cap F isc al 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F

Company Code Loc al$ US$m Y r x x % % x x x x % %Brilliance China* 1114 HK HKD 8.79 5,711 Dec 10.6 8.6 1.0 1.0 1.6 1.4 11.1 9.0 16.7 17.3BAIC Motor 'H'* 1958 HK HKD 8.15 7,984 Dec 10.6 8.7 3.3 4.0 1.3 1.2 8.5 6.8 13.5 14.3BMW BMW GR EUR 77.63 56,117 Dec 7.9 7.9 4.3 4.5 1.1 1.0 2.9 2.9 14.5 13.2Porsche PAH3 GR EUR 47.538 16,023 Dec 6.3 4.5 2.9 4.1 0.5 0.4 n.a. n.a. 6.3 9.4Daimler DAI GR EUR 64.475 75,916 Dec 8.0 7.6 5.1 5.3 1.2 1.1 3.4 3.3 15.4 15.4Audi NSU GR EUR 619.4 29,313 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.F errari (Mil) RACE IM EUR 48.21 10,024 Dec 25.5 23.2 1.1 1.3 37.3 17.5 10.2 9.5 300.2 96.2V olvo 'B' V OLV B SS SEK 97.95 23,604 Dec 15.0 13.7 3.2 3.5 2.2 2.0 6.4 6.0 15.4 16.0

Source: Thomson Reuters, *DBS Vickers

Share price performance. BAIC's trading history is short, as it was listed only in late December 2014. Looking at the share price chart, the key share price movers are:-

1) The HK-Shanghai connect helped to lift its share price from Mar-May15

2) The A-share market meltdown sent the share price down south from May-Aug15

3) Its share price recovered in 4Q15 after the central government announced the 50% reduction in vehicle purchase

tax to 5% which benefits many of the domestic automakers, effective from 1 October 2015 to 31 December 2016.

4) However, the broad market correction in early 2016 again sent the share price lower.

5) Subsequently, its share price moved up in 3Q16 following the strong industry vehicle volume sales numbers as well as decent interim earnings growth, contributed largely by Beijing Benz.

Share price of BAIC vs sales volume

(30)

(20)

(10)

0

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-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep-

16

BAIC (LHS) BJ Benz & BJ Hyundai sales growth (RHS)

HK$ %

1

2 3

4 5

Source: Thomson Reuters Note: Beijing Benz and Beijing Hyundai sales


BAIC Motor Corp

Page 49

Key Risks

Overcapacity. Car sales in China are projected to slow in coming years, as the industry is heading towards maturity. However, the new capacity coming on stream by various automakers is quite alarming, which could result in severe market competition.

A steep climb for Chinese auto brands. The domestic brands have been facing rising competition from the sino-foreign brands. BJ Motor may see its operating losses widen in the coming years if its products are not competitive.

Losses at BJEV may widen. Although the losses were relatively small in 2015, with the cutback of NEV subsidies by the government, the demand for NEV may drop and thus affect sales. BJEV's losses may increase substantially as a result.

Slowdown in car purchases. More c ities may implement sales restrictions and the Chinese economy could head south. These may cause the car purchase to slow down and in turn impact BAIC’s sales.


BAIC Motor Corp

Page 50

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

Beijing-Benz sales ('000 units)

116.0 145.5 250.2 332.8 392.6 443.7

Beijing - Hyundai sales ('000 units) 1,030.8 1,120.0 1,062.9 1,120.3 1,198.7 1,258.6 Self brand ('000 units) 202.3 309.6 337.1 389.2 417.2 444.8 Source: Company, DBS Vickers

Segmental Breakdown (RMB m)

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Revenues (RMB m) Beijing Motor 6,847 12,434 17,849 21,639 23,661 24,718 Beijing Benz 5,934 43,937 66,263 88,130 107,113 118,617 Total 12,782 56,370 84,112 109,769 130,773 143,334 Segment Gross Profit (RMB m) Beijing Motor (978) (69) (1,420) 649 473 618 Beijing Benz 1,393 9,052 16,697 22,914 27,849 30,129 Total 415 8,983 15,277 23,563 28,322 30,747 Segment Gross Profit Margins (%) Beijing Motor (14.3) (0.6) (8.0) 3.0 2.0 2.5 Beijing Benz 23.5 20.6 25.2 26.0 26.0 25.4 Total 3.2 15.9 18.2 21.5 21.7 21.5 Source: Company, DBS Vickers


BAIC Motor Corp

Page 51

Income Statement (RMB m) Margins Trend FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

Revenue 12,782 56,370 84,112 109,76 130,77 143,33 Cost of Goods Sold (12,367 (47,387 (68,835 (86,206 (102,45 (112,58 Gross Profit 415 8,983 15,277 23,563 28,322 30,747 Other Opng (Exp)/Inc (2,899) (7,562) (10,798 (14,887 (17,626 (19,222 Operating Profit (2,484) 1,422 4,479 8,676 10,696 11,525 Other Non Opg (Exp)/Inc 0 0 0 0 0 0 Associates & JV Inc 6,022 5,809 4,257 4,011 4,378 4,767 Net Interest (Exp)/Inc (474) (533) (416) (506) (523) (559) Dividend Income 0 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 3,065 6,698 8,321 12,180 14,551 15,733 Tax (114) (857) (1,999) (3,105) (3,866) (4,167) Minority Interest (237) (1,331) (3,003) (3,993) (4,488) (4,858) Preference Dividend 0 0 0 0 0 0 Net Profit 2,714 4,511 3,319 5,082 6,197 6,708 Net Profit before Except. 2,714 4,511 3,319 5,082 6,197 6,708 EBITDA (1,666) 3,786 8,266 8,676 10,696 11,525 Growth Revenue Gth (%) 263.2 341.0 49.2 30.5 19.1 9.6 EBITDA Gth (%) N/A N/A 118.3 5.0 23.3 7.7 Opg Profit Gth (%) N/A N/A 215.0 93.7 23.3 7.7 Net Profit Gth (%) (20.6) 66.2 (26.4) 53.2 21.9 8.2 Margins & Ratio Gross Margins (%) 3.2 15.9 18.2 21.5 21.7 21.5 Opg Profit Margin (%) (19.4) 2.5 5.3 7.9 8.2 8.0 Net Profit Margin (%) 21.2 8.0 3.9 4.6 4.7 4.7 ROAE (%) 13.7 15.8 9.7 13.5 14.3 13.5 ROA (%) 4.6 4.6 2.8 3.7 4.0 3.9 ROCE (%) (5.7) 1.9 4.4 7.5 8.0 7.7 Div Payout Ratio (%) 83.8 50.5 34.3 35.0 35.0 35.0 Net Interest Cover (x) (5.2) 2.7 10.8 17.2 20.5 20.6 Source: Company, DBS Vickers

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2014A 2015A 2016F 2017F 2018F

Operating Margin % Net Income Margin %


BAIC Motor Corp

Page 52

Interim Income Statement (RMB m) Margins Trend FY Dec 2H2013 1H2014 2H2014 1H2015 2H2015 1H2016

Revenue 10,488 25,127 31,243 36,522 47,589 49,039 Cost of Goods Sold (9,759) (21,712) (25,675) (30,337) (38,498) (38,284) Gross Profit 729 3,415 5,568 6,185 9,091 10,754 Other Oper. (Exp)/Inc (2,169) (3,366) (4,196) (3,474) (7,324) (6,725) Operating Profit (1,441) 49 1,373 2,712 1,767 4,030 Other Non Opg (Exp)/Inc 0 0 0 0 0 0 Associates & JV Inc 3,059 2,813 2,996 2,035 2,222 1,979 Net Interest (Exp)/Inc (267) (233) (300) (409) (7) (255) Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 1,351 2,629 4,069 4,338 3,983 5,754 Tax (105) (318) (538) (847) (1,152) (1,334) Minority Interest (183) (530) (801) (1,320) (1,683) (2,009) Net Profit 1,064 1,781 2,730 2,171 1,148 2,411 Net profit bef Except. 1,064 1,781 2,730 2,171 1,148 2,411 Growth Revenue Gth (%) N/A 995.4 197.9 45.4 52.3 34.3 Opg Profit Gth (%) N/A N/A N/A 5,436.8 28.7 48.6 Net Profit Gth (%) N/A 7.9 156.6 21.9 (58.0) 11.1 Margins Gross Margins (%) 6.9 13.6 17.8 16.9 19.1 21.9 Opg Profit Margins (%) (13.7) 0.2 4.4 7.4 3.7 8.2 Net Profit Margins (%) 10.1 7.1 8.7 5.9 2.4 4.9 Source: Company, DBS Vickers

-60%

-40%

-20%

0%

20%

40%

60%

80%

1H

13

2H

13

1H

14

2H

14

1H

15

2H

15

1H

16

Operating Margin % Net Income Margin %


BAIC Motor Corp

Page 53

Balance Sheet (RMB m) Asset Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 24,755 34,218 38,353 43,457 46,983 49,832 Invts in Associates & JVs 12,649 14,066 14,582 17,234 19,973 22,828 Other LT Assets 14,228 17,255 22,221 23,576 24,890 26,149 Cash & ST Invts 16,794 21,923 23,946 28,657 35,230 42,882 Inventory 7,479 11,068 9,871 10,858 11,944 13,138 Debtors 6,004 6,422 10,949 12,043 13,248 14,573 Other Current Assets 3,486 4,905 7,471 8,480 9,712 11,227 Total Assets 85,396 109,859 127,393 144,305 161,979 180,629 ST Debt 7,833 15,983 21,280 21,280 21,280 21,280 Creditors 11,112 14,978 21,382 23,521 25,873 28,460 Other Current Liab 17,975 20,539 24,965 28,501 31,962 35,263 LT Debt 15,122 13,935 8,986 10,986 11,986 12,986 Other LT Liabilities 2,300 2,455 3,711 3,872 4,049 4,244 Shareholder’s Equity 23,692 33,355 35,010 40,092 46,290 52,998 Minority Interests 7,362 8,614 12,059 16,053 20,541 25,398 Total Cap. & Liab. 85,396 109,859 127,393 144,305 161,979 180,629 Non-Cash Wkg. Capital (12,118) (13,121) (18,057) (20,641) (22,931) (24,785) Net Cash/(Debt) (6,161) (7,995) (6,320) (3,609) 1,964 8,616 Debtors Turn (avg days) 93.2 40.2 37.7 38.2 35.3 35.4 Creditors Turn (avg days) 199.2 105.8 102.0 95.1 88.0 88.1 Inventory Turn (avg days) 131.4 75.2 58.7 43.9 40.6 40.7 Asset Turnover (x) 0.2 0.6 0.7 0.8 0.9 0.8 Current Ratio (x) 0.9 0.9 0.8 0.8 0.9 1.0 Quick Ratio (x) 0.6 0.6 0.5 0.6 0.6 0.7 Net Debt/Equity (X) 0.2 0.2 0.1 0.1 CASH CASH Net Debt/Equity ex MI (X) 0.3 0.2 0.2 0.1 0.0 (0.2) Capex to Debt (%) 31.5 39.4 39.8 34.1 30.1 29.2 Z-Score (X) NA NA NA NA NA NA Source: Company, DBS Vickers

Net Fixed Assets -38.7%

Assocs'/JVs -15.4%

Bank, Cash and Liquid

Assets -25.5%

Inventory -9.7%

Debtors -10.7%


BAIC Motor Corp

Page 54

Cash Flow Statement (RMB m) Capital Expenditure

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 3,065 6,698 8,321 12,180 14,551 15,733 Dep. & Amort. 818 2,364 3,787 4,541 5,160 5,893 Tax Paid (258) (1,365) (1,674) (1,999) (3,105) (3,866) Assoc. & JV Inc/(loss) (6,022) (5,809) (4,257) (4,011) (4,378) (4,767) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 Chg in Wkg.Cap. (45) 1,282 4,649 1,639 1,706 1,748 Other Operating CF (15) (907) (460) 0 0 0 Net Operating CF (2,457) 2,262 10,365 12,351 13,934 14,741 Capital Exp.(net) (7,236) (11,785) (12,052) (11,000) (10,000) (10,000) Other Invts.(net) 10,176 (2,370) 0 0 0 0 Invts in Assoc. & JV (7,248) (1,129) (1,541) (2,000) (1,500) (1,500) Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF 7,240 5,343 5,149 3,359 3,139 3,411 Net Investing CF 2,933 (9,941) (8,444) (9,641) (8,361) (8,089) Div Paid (285) (2,793) (2,780) 0 0 0 Chg in Gross Debt 7,194 7,396 343 2,000 1,000 1,000 Capital Issues 6,132 7,910 613 0 0 0 Other Financing CF 214 309 1,897 0 0 0 Net Financing CF 13,254 12,822 74 2,000 1,000 1,000 Currency Adjustments (3) (9) 28 0 0 0 Chg in Cash 13,727 5,133 2,023 4,711 6,573 7,652 Opg CFPS (RMB) (0.43) 0.15 0.75 1.41 1.61 1.71 Free CFPS (RMB) (1.73) (1.48) (0.22) 0.18 0.52 0.62 Source: Company, DBS Vickers

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

RMBm


BAIC Motor Corp

Page 55

Appendix

PE chart

PB chart

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Dec

-14

Mar

-15

Jun

-15

Au

g-1

5

No

v-1

5

Feb

-16

Ap

r-1

6

Jul-

16

Oct

-16

x

Avg: 10.7x

+1SD: 14.5x

-1SD: 7x

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

Dec

-14

Mar

-15

Jun

-15

Au

g-1

5

No

v-1

5

Feb

-16

Ap

r-1

6

Jul-

16

Oct

-16

x

Avg: 1.2x

+1SD: 1.6x

-1SD: 0.9x

Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers


BAIC Motor Corp

Page 56

Products & ASP Beijing BenzModel New E-Class C-class GLC GLAASP (RMB) 436,800 - 499,800 369,000 - 479,000 396,000 - 579,000 269,800 - 398,000

Source: Company


BAIC Motor Corp

Page 57

Key management team

Name A ge Posit ion / T it le

Mr. Xu Hey i 58Mr. Xu is the chairman of the Board, as well as the secretary of the party committee and a non-executiv eDirector of the Company . He has more than 30 y ears of experience in the industry and inmanagement.

Mr. Zhang Xiy ong 52Mr. Zhang is a non-executiv e Director of the Company . He has more than 30 y ears of experience in theindustry and in management.

Mr. Li Zhili 60Mr. Li is a non-executiv e Director of the Company . He has more than 30 y ears of experience in the industryand in management.

Mr. Li F eng 52Mr.Li is the executiv e Director, president and deputy secretary of the party committee of the Company . Hehas more than 30 y ears of experience in the industry and in management.

Mr. Ma Chuanqi 60Mr. Ma is a non-executiv e Director of the Company . He has more than 30 y ears of experience in financeand management.

Mr. Qiu Yinfu 48Mr. Qiu is a non-executiv e Director of the Company . He has more than 20 y ears of experience in theindustry and in management.

Mr. Hubertus Troska 56Mr. Troska is a non-executiv e Director of the Company . He has nearly 30 y ears of experience in theautomobile industry .

Mr. Bodo Uebber 56Mr. Uebber is a non-executiv e Director of the Company . He has 30 y ears of experience in finance andmanagement.

Ms. Wang J ing 44Ms. Wang is a non-executiv e Director of the Company . She has more than 20 y ears of experience in theindustry and management.

Mr. Yang Shi 60Mr. Yang is a non-executiv e Director of the Company . He has more than 30 y ears of experience in the lawindustry and management.

Mr. Li J ikai 51Mr. Li is a v ice president of the Company responsible for the operation center production and technologycenter and v arious manufacturing bases of the Company .

Mr. Wu Xuebin 50Mr. Wu is the v ice president of the Company with responsibility ov er research and dev elopment of newenergy products, and is also the head of the automotiv e research institute of the Company .

Mr. Chen Bao 54Mr. Chen is a v ice president of the Company , and mainly responsible for procurement center and qualitycenter.

Mr. Zhou Yanming 58Mr. Zhou is a v ice president of the Company , responsible for the planning and dev elopment, capitalmanagement and inv estment management.

Mr. Chen Hongliang 50Mr. Chen is a v ice president and also the senior executiv e v ice-president and the secretary of the partycommittee of Beijing Benz, responsible for the human resource management, IT management, companyaffairs and legal work of Beijing Benz.

Mr. Liu Zhifeng 43Mr. Liu is a v ice president of the Company , and is also a standing deputy general manager of BeijingHy undai.

Mr. Wang Zhang 52Mr. Wang is a v ice president of the Company . He is also the general manager of the off-road branchcompany .

Mr. Chen Guixiang 53 Mr. Chen is the v ice president of the Company and is also the general manager of the Wev an business unit.

Mr. Cai J ianjun 42Mr. Cai is the v ice president of the Company with responsibilities ov er BAIC Motor Sales Co. Ltd. where heis also the party secretary of the party committee, executiv e Director and general manager.

Mr. Gu Lei 56Mr Gu is a v ice president of the Company . He is also the general manager of the technical center ofMBtech.

Mr. J iang Xiaodong 46Mr. J iang is a v ice president of the Company with responsibility ov er the finance and economic center ofwhich he is a director.

Mr. Yun Tae Hwa 52Mr. Yun is a v ice president of the Company and the head of the production and technology center, withresponsibility ov er production and technology management.

Mr. Zhang Huaxie 60 Zhang is a v ice president of the Company .

Mr. Liang Guofeng 44Mr. Liang is a v ice president of the Company with responsibility ov er the product center where he is also asuperv isor.

Mr. Xie Wei 46Mr. Xie is the v ice president of the Company with responsibility ov er the management center where he isalso the director.

Mr. Yan Xiaolei 40 Mr. Yan is the secretary to the Board of the Company and the company secretary of the Company .

Source: Company

Industry Focus

China Auto Sector

Page 110

DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 13 Oct 2016 21:45:05 Dissemination Date: 13 Oct 2016 23:09:25

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Industry Focus

China Auto Sector

Page 111

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended/mentioned in this report as of 12 Oct

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2. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Baic Motor Corporation Limited (1958 HK), Astra International Terbuka (ASII IJ) and Dah Chong Hong Holdings Limited (1828 HK) as of 30 Sep 2016. DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Baic Motor Corporation Limited (1958 HK) in the past 12 months, as of 30 Sep 2016. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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Industry Focus

China Auto Sector

Page 112

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china / hong kong company focus baic motor corp enhance the value chain, the jv ventured into engine...

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