geely automobile holdings ltd

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26 October 2015

Asia Pacific/China

Equity Research

Automobile Manufacturers

Geely Automobile Holdings Ltd

(0175.HK / 175 HK) INCREASE TARGET PRICE

Growing on rural car demand boom

■ Structural growth opportunity from inland rural consumption upgrade.

Thanks to improving rural transportation infrastructure and rapidly growing

affordability, rural customers are upgrading to cars and turning China's rural

areas into a new sales frontier for automobiles. We expect rural PV demand

to continue outpacing the overall auto market with a three-year CAGR of

20%, off a low rural auto penetration rate (estimated five to six units per 100

households). As rural customers prefer a car with reliable quality, good fuel

efficiency and, importantly, an economical price, local Chinese brands are

well positioned to capture the trend by providing high value-for-money

products and improving product quality.

■ Geely, a leading Chinese local brand, is the best proxy for this theme.

Geely, whose products are mainly sold to low-tier areas with a competitive

price, is a beneficiary of the rural car demand boom. Meanwhile, Geely is the

largest beneficiary of the recent 5% tax cut and Rmb3,000 / unit fuel-saving

car subsidy, which is very appealing to price sensitive rural customers.

■ Upgrading products on new design language thanks to new designers.

Thanks to Geely’s new design language by Peter Horbury, who was named

head of design in 2011, the sales of "Borui" - Geely's new flagship car - hit a

new high in Sep. 2015 to 4,130 units, more than triple of its closest peer.

Borui marked a breakthrough for Geely from a manufacturer of affordable

cars to refined cars, while setting a new benchmark for future products.

■ Maintain OUTPERFORM, target price HK$5.7 offers 40% upside. Key

catalyst is "NL-3" SUV debut in end-2015. Key downside risk is weaker-than-

expected sales in "Borui" sedan. Key upside risk is the Volvo asset injection.

Share price performance

40

60

80

100

120

2

3

4

5

6

Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

MSCI CHINA F IDX which closed at 6524.16 on 23/10/15

On 23/10/15 the spot exchange rate was HK$7.75/US$1

Performance Over 1M 3M 12M Absolute (%) 25.6 19.0 18.7 — Relative (%) 15.5 26.3 15.9 —

Financial and valuation metrics

Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 21,738.4 28,959.2 42,630.8 51,261.9 EBITDA (Rmb mn) 2,865.7 4,614.7 6,244.4 7,449.3 EBIT (Rmb mn) 1,992.1 3,599.5 5,045.4 6,066.9 Net profit (Rmb mn) 1,430.6 2,922.7 4,118.6 4,971.8 EPS (CS adj.) (Rmb) 0.16 0.33 0.47 0.56 Change from previous EPS (%) n.a. 0 7.5 6.8 Consensus EPS (Rmb) n.a. 0.29 0.37 0.43 EPS growth (%) -46.2 103.5 40.9 20.7 P/E (x) 20.5 10.1 7.2 5.9 Dividend yield (%) 0.6 1.2 1.7 2.1 EV/EBITDA (x) 8.7 5.2 3.6 2.8 P/B (x) 1.7 1.5 1.3 1.1 ROE (%) 8.6 15.7 19.0 19.4 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (23 Oct 15, HK$) 4.07 Target price (HK$) (from 5.30) 5.70¹ Upside/downside (%) 40.0 Mkt cap (HK$ mn) 35,823 (US$ 4,622) Enterprise value (Rmb mn) 23,914 Number of shares (mn) 8,801.75 Free float (%) 56.5 52-week price range 4.67 - 2.44 ADTO - 6M (US$ mn) 24.9

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Bin Wang

852 2101 6702

[email protected]

Mark Mao

852 2101 6710

[email protected]

26 October 2015

Geely Automobile Holdings Ltd (0175.HK / 175 HK) 2

Focus charts Figure 1: Discretionary consumption escalates in China: Rural area vs. urban area

-50%

0%

50%

100%

150%

200%

250%

0

5,000

10,000

15,000

20,000

25,000

30,000

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Rmb

Income per Capita in urban household Income per Capita in rural household Fridge sales growth YoY

Air condition sales growth YoY Passenger vehicle sales growth YoY

Air ConditionerComputerMotorcycle

CarsHouseLuxury goods

RefrigeratorWashing machineColor TV

Bicycle Radio Mono TV

Rural

Urban RefrigeratorWashing machineColor TV

Rural Rural Rural

Urban Urban UrbanAir ConditionerComputerMotorcycle


Health care

TravellingEducation

Source: NBS, CEIC, Credit Suisse estimates

Figure 2 China rural passenger vehicle sales estimate Figure 3: Car makers' exposure to 5% purchase tax cut

22%

27%

35%

30%

20%

27%

14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2011e 2012e 2013e 2014e 2015e 2016e 2017e

Unit

Estimated rural passenger vehicle demand Growth YoY

82% 80%

70% 69% 69%

56% 54%

42%

22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Kia Motor's historical volume and share price Figure 5: Geely's earnings growth outlook

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

unit

Peter Schreyer join Kia in 2006

First "Schreyer " designed car launch

13%

32%

31%

-46%

104%

41%

21%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014 2015E 2016E 2017E

Rmb Mn

Earnings YoY growth Source: Company data, Bloomberg Source: Company data, Credit Suisse estimates

26 October 2015


Growing on rural car demand boom Structural growth opportunity from inland rural

consumption upgrade

Thanks to rapidly growing affordability and improving rural transportation infrastructure,

rural customers are escalating their consumption to cars and turning China's rural areas

into a new sales frontier for automobiles. We expect rural PV demand continue to outpace

overall auto market with a three-year CAGR of 20%, off a low rural auto penetration

(estimated 5 to 6 units per 100 households). As rural customers prefer a car with reliable

quality, good fuel efficiency and, importantly, a cheap price, Chinese local brands are well

positioned to capture the trend via providing high value-for-money products along with

improving products quality.

Geely, a leading Chinese local brand, is the best

proxy for this theme

Geely, whose products are mainly sold to low-tier areas with competitive price, is a

beneficiary of the rural car demand boom. Meanwhile, Geely is the largest beneficiary of

the recent 5% purchase tax cut and Rmb3,000 per unit fuel-saving car subsidy, which is

very appealing to price sensitive rural customers.

Upgrading products on new design language thanks

to new designers

Thanks to Geely’s new design language by Peter Horbury, who was named head of

design in 2011, sales of Borui – Geely's new flagship car – hit a new high in Sep. 2015 to

4,130 units, more than triple of its closest peer. Borui marked a breakthrough for Geely

from a manufacturer of affordable cars to refined cars, while setting a new quality

benchmark for future products

Valuation

We derive our HK$5.7 target price from a DCF-based methodology, as we need to value

Geely's decent long-term growth prospects. Our DCF-based HK$5.7 TP (40% potential

upside) implies 10x 2016E P/E, in-line with its historical average of 10x forward PE.

Risks

The major upside risks: (1) China's rural car demand might rise, if the Chinese

government resumes a new round of cash subsidies for car purchases in rural areas; and

(2) 'Volvo car' potential asset injection.

The major downside risks to our investment thesis are (1) a delay in new model

launches. If the launch of Geely's new model "NL-3" SUV delayed, it would harm its

reputation and lead to a possible delay in the launch of new "NL-4" SUV as well. (2)

Weaker-than-expected sales in its upcoming new models "NL-3" SUV, which aims to gain

share from high-growth/high-margin SUV market. Geely's "NL-3" SUV might face fierce

competition as local peers are also aggressively launching new SUV models. (3) As the

macro-economic and FAI is weakening, rural workers who usually work in construction

sector might have less job opportunities and thus result in a lower consumption demand

for cars.

26 October 2015


Geely Automobile Holdings Ltd 0175.HK / 175 HK Price (23 Oct 15): HK$4.07, Rating:: OUTPERFORM, Target Price: HK$5.70, Analyst: Bin Wang

Target price scenario

Scenario TP %Up/Dwn Assumptions Upside Central Case 5.70 40.05 Downside

Key earnings drivers 12/14A 12/15E 12/16E 12/17E

Sales volume 417,851 525,000 680,000 750,000 — — — — — — — — — — — — — — — —

Income statement (Rmb mn) 12/14A 12/15E 12/16E 12/17E

Sales revenue 21,738 28,959 42,631 51,262 Cost of goods sold 17,776 23,741 34,611 41,619 SG&A 3,083 2,948 4,553 5,475 Other operating exp./(inc.) (1,986) (2,345) (2,778) (3,282) EBITDA 2,866 4,615 6,244 7,449 Depreciation & amortisation 874 1,015 1,199 1,382 EBIT 1,992 3,599 5,045 6,067 Net interest expense/(inc.) 23.7 13.1 16.5 17.9 Non-operating inc./(exp.) (57.6) (74.8) (92.4) (112.0) Associates/JV 32.5 128.6 192.5 254.3 Recurring PBT 1,943 3,640 5,129 6,191 Exceptionals/extraordinaries — — — — Taxes 494 692 975 1,176 Profit after tax 1,449 2,949 4,155 5,015 Other after tax income — — — — Minority interests 18.5 25.8 35.9 43.2 Preferred dividends — — — — Reported net profit 1,431 2,923 4,119 4,972 Analyst adjustments — — — — Net profit (Credit Suisse) 1,431 2,923 4,119 4,972

Cash flow (Rmb mn) 12/14A 12/15E 12/16E 12/17E

EBIT 1,992 3,599 5,045 6,067 Net interest — — — — Tax paid (497) (692) (975) (1,176) Working capital (960.3) 518.9 (440.6) (184.2) Other cash & non-cash items 1,498 940 1,107 1,270 Operating cash flow 2,033 4,367 4,737 5,977 Capex (2,421) (3,000) (3,000) (3,000) Free cash flow to the firm (388) 1,367 1,737 2,977 Disposals of fixed assets — — — — Acquisitions — — — — Divestments 540.2 — — — Associate investments — (128.6) (192.5) (254.3) Other investment/(outflows) 412.5 127.0 217.3 317.6 Investing cash flow (1,468) (3,002) (2,975) (2,937) Equity raised — — — — Dividends paid (319.8) (173.8) (356.6) (502.5) Net borrowings 2,506 600 600 600 Other financing cash flow (1,014) (88) (109) (130) Financing cash flow 1,172 338 135 (32) Total cash flow 1,737 1,704 1,896 3,008 Adjustments (11.9) — — — Net change in cash 1,725 1,704 1,896 3,008

Balance sheet (Rmb mn) 12/14A 12/15E 12/16E 12/17E

Cash & cash equivalents 7,251 8,954 10,851 13,858 Current receivables 16,385 15,868 23,359 28,089 Inventories 1,620 2,163 3,153 3,792 Other current assets 47.8 52.9 57.8 62.6 Current assets 25,303 27,038 37,421 45,801 Property, plant & equip. 6,992 7,750 8,427 9,022 Investments 719 847 1,040 1,294 Intangibles 4,214 5,436 6,556 7,573 Other non-current assets 51.7 — — — Total assets 37,280 41,072 53,443 63,691 Accounts payable 16,652 17,185 25,054 30,126 Short-term debt 1,057 1,668 2,441 3,152 Current provisions — — — — Other current liabilities 136.6 191.2 269.5 325.3 Current liabilities 17,845 19,045 27,764 33,603 Long-term debt 1,820 1,820 1,820 1,820 Non-current provisions — — — — Other non-current liab. 148.7 148.7 148.7 148.7 Total liabilities 19,814 21,014 29,733 35,572 Shareholders' equity 17,288 19,854 23,470 27,836 Minority interests 178.4 204.2 240.1 283.2 Total liabilities & equity 37,280 41,072 53,443 63,691

Per share data 12/14A 12/15E 12/16E 12/17E

Shares (wtd avg.) (mn) 8,801 8,835 8,835 8,835 EPS (Credit Suisse) (Rmb)

0.16 0.33 0.47 0.56 DPS (Rmb) 0.02 0.04 0.06 0.07 BVPS (Rmb) 1.96 2.25 2.66 3.15 Operating CFPS (Rmb) 0.23 0.49 0.54 0.68

Key ratios and valuation

12/14A 12/15E 12/16E 12/17E

Growth(%) Sales revenue (24.3) 33.2 47.2 20.2 EBIT (41.6) 80.7 40.2 20.2 Net profit (46) 104 41 21 EPS (46) 104 41 21 Margins (%) EBITDA 13.2 15.9 14.6 14.5 EBIT 9.2 12.4 11.8 11.8 Pre-tax profit 8.9 12.6 12.0 12.1 Net profit 6.6 10.1 9.7 9.7 Valuation metrics (x) P/E 20.5 10.1 7.2 5.9 P/B 1.70 1.49 1.26 1.06 Dividend yield (%) 0.59 1.21 1.71 2.06 P/CF 14.5 6.8 6.2 4.9 EV/sales 1.15 0.83 0.53 0.40 EV/EBITDA 8.73 5.18 3.65 2.75 EV/EBIT 12.6 6.6 4.5 3.4 ROE analysis (%) ROE 8.6 15.7 19.0 19.4 ROIC 11.7 21.1 25.8 27.0 Asset turnover (x) 0.58 0.71 0.80 0.80 Interest burden (x) 0.98 1.01 1.02 1.02 Tax burden (x) 0.75 0.81 0.81 0.81 Financial leverage (x) 2.13 2.05 2.25 2.27 Credit ratios Net debt/equity (%) (25.0) (27.3) (27.8) (31.6) Net debt/EBITDA (x) (1.53) (1.18) (1.06) (1.19) Interest cover (x) 84 275 306 339

Source: Company data, Thomson Reuters, Credit Suisse estimates.

0

2

4

6

8

10

12

14

16

18

20

2010 2011 2012 2013 2014 2015

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2010 2011 2012 2013 2014 2015

12MF P/B multiple

Source: IBES

26 October 2015


Structural growth opportunity from inland rural consumption upgrade Thanks to the rapid growing affordability and improving rural transportation infrastructure,

rural customers' are escalating their consumption to cars and turning China's rural areas

into a new sales frontier for automobiles. Thanks to the government's rural auto stimulus

plan in 2009 – 10% cash subsidy for mini passenger vehicles (engine ≤1.3L) to rural

residents, China's rural passenger vehicle (PV) population growth has started to

outperform the market-wide PV population growth. For example from Shandong province,

rural PV demand boom as low-price Low-Speed Battery Vehicle's (LSBV) – a typical rural

area car (price below Rmb40,000) booked a 45% volume CAGR during 2011-2015E.

Looking ahead, we expect rural PV demand to continue outpacing overall auto market with

a three-year CAGR of 20% off low rural auto penetration rate (estimated five to six units

per 100 households currently). As rural customers prefer a car with reliable quality, good

fuel efficiency and, importantly, a cheap price, Chinese local brands are well positioned to

capture the trend by providing high value-for-money products along with improving quality.

Figure 6: China rural passenger vehicle sales estimate Figure 7: Shandong's Low-Speed Battery Vehicle sales

22%

27%

35%

30%

20%

27%

14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2011e 2012e 2013e 2014e 2015e 2016e 2017e

Unit

Estimated rural passenger vehicle demand Growth YoY

18,221

68,203 86,709

124,550

187,400

300,000

27%

44%

50%

60%

0%

10%

20%

30%

40%

50%

60%

70%

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2010 2011 2012 2013 2014 2015e

Unit

Shandong province low-speed EV sales Growth YoY Source: Credit Suisse estimates Source: Shandong province automobile industry association

Rural area – an under-tapped demand pool

China rural areas are populous with 620 million people as of 2014 but a low car ownership

rate vs. the national average. For example, the Shaanxi / Yunnan province' rural area had

auto penetration of 3.7 units / 5.7 units per 100 households, well below their overall

provincial auto penetration of 22.5 units / 20 units per 100 households. With the rise in

rural residents' wealth, rural consumption has escalated and private cars could become a

necessary “upgrade target” for rural customers. Historically, the goal of rural household

consumption has been shifting from home appliance products of the Rmb1,000-level (e.g.,

refrigerator, washing machine and colour TV) in the early 1990s to the Rmb10,000 level

(e.g., air condition, computer and motorcycle) in the early 2000s, and further upgrading to

the Rmb100,000 level, which represents strong demand for cars, housing and travel since

2009. During the global financial crisis in 2009, the Chinese government launched the

"auto stimulus plan for rural residents" – providing 10% cash subsidy for mini-size

passenger vehicles (engine ≤1.3L) to boost auto demand in the vast countryside.

In Sep. 2015, Chinese government released another round of auto stimulus plan by cutting

purchase tax rate to 5% from 10% for smaller cars (engine ≤1.6L). Therefore, we expect

auto sales (esp. those with small-than-1.6L engines) to spike, especially in rural areas.

26 October 2015


Figure 8: Discretionary consumption escalates in China: Rural area vs. urban area

-50%

0%

50%

100%

150%

200%

250%

0

5,000

10,000

15,000

20,000

25,000

30,000

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Rmb

Income per Capita in urban household Income per Capita in rural household Fridge sales growth YoY

Air condition sales growth YoY Passenger vehicle sales growth YoY

Air ConditionerComputerMotorcycle


RefrigeratorWashing machineColor TV

Bicycle Radio Mono TV

Rural

Urban RefrigeratorWashing machineColor TV

Rural Rural Rural

Urban Urban UrbanAir ConditionerComputerMotorcycle


Health care

TravellingEducation

Source: NBS, CEIC

Historically, we noticed a 10-year gap between urban and rural home appliances

consumption upgrade. For example, first demand boom for fridge was the 1980s on strong

urban demand till urban penetration reached 40%, followed by another demand spike in

the 1990s on strong rural demand when rural penetration was between 1% to 20%. Air

conditioner first demand boom kicked off in the 1990s on strong urban demand till urban

penetration reached 30%, followed by another demand spike in the 2000s on strong rural

demand when rural penetration was between 1% to 20%. China's passenger vehicles' first

demand boom was the 2000s after China joined the WTO thanks to strong urban area

demand when urban household income per capita exceed Rmb7,000 – the tipping point.

We expect car sales in rural areas to follow home appliances' demand upgrade pattern -

10 years gap between urban and rural consumption upgrade, and see another car

demand spike in the 2010s when rural household income per capita exceed Rmb7,000 –

the tipping point. As a result, rural car penetration is likely to rise from 1% to 20% during

this period vs. the currently estimated five to six units per 100 rural households.

Figure 9: Fridge household penetration vs. growth Figure 10: Air conditioner (AC) penetration vs. growth

-50%

0%

50%

100%

150%

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250%

0

20

40

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1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013Urban fridge penetration Rural fridge penetration Fridge sales growth YoY

Units per 100 households

Urban demand spike

Rural demand spike

-20%

0%

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100%

120%

140%

160%

0

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Urban AC penetration Rural AC penetrationr AC sales growth YoY

Units per 100 households

urban demand spike

rural demad spike

Source: CEIC Source: CEIC

26 October 2015


Rapidly growing affordability

Thanks to the rising economy, incomes have grown fast in the past 10 years – urban

household income per capita has achieved a 12% CAGR and rural household income per

capita has increased even faster at 15% CAGR. Meanwhile, the Chinese government has

also launched a series of policies to reduce rural residents' financial burdens such as

abolishing agricultural taxes since 2006, expanding free education and medical insurance

coverage since 2003, etc. The solid income level growth strongly supported consumer

goods expenditure growth in the rural areas – registering a rapid growth at 16% CAGR in

2010-2015, above urban consumer goods expenditures' 14% CAGR during the same

period. We expect this trend to continue in the next few years thanks to the continuous

rural area reform, such as rural land use right reform to allow farmers to turn their land-use

rights into shares in farming enterprises, etc.

Figure 11: Rural income growth above urban since 3Q09 Figure 12: Rural consumption above urban since 2013

0%

5%

10%

15%

20%

25%

30%

1Q-07

3Q-07

1Q-08

3Q-08

1Q-09

3Q-09

1Q-10

3Q-10

1Q-11

3Q-11

1Q-12

3Q-12

1Q-13

3Q-13

1Q-14

3Q-14

1Q-15

3Q-15

Rural Household Income per Capita YoY Growth

Urban Household Income per Capita YoY Growth

Rural income growth exceed urban income

0%

5%

10%

15%

20%

25%

30%

35%

40%

1Q-11

2Q-11

3Q-11

4Q-11

1Q-12

2Q-12

3Q-12

4Q-12

1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

2Q-14

3Q-14

4Q-14

1Q-15

2Q-15

3Q-15

Rural Retail Sales of Consumer Goods YoY Growth

Urban Retail Sales of Consumer Goods YoY Growth

Rural consumer goods spending growth exceed urban

Source: CEIC Source: CEIC

Improving rural transportation infrastructure

Underdeveloped rural transportation infrastructure posed a big hurdle to car sales.

However, we noticed a substantial improvement in the past ten years, such as increasing

rural road length and quality, cancellation of rural road toll fee, and fuel tax reform (replace

road maintenance fee with fuel tax), etc.

■ Fast growing rural road length and quality: Thanks to the central government's strong financial support for rural transportation infrastructure, i.e. 2014's investment total of Rmb148 bn, double the size of 2011's Rmb 75 bn, China's rural roads increased each year by 3% CAGR to 3.88 mn kilometres by 2014. As a result, nearly all villages in China have built roads connecting nation-wide road networks currently. More importantly, 68% of nation-wide roads were paved after years' efforts and convenient for passenger vehicles to drive, which is a key driver for rural car demand spike. The government targets to pave the road for all villages by 2020.

■ Reduce car ownership cost on rural toll fee cancellation and fuel tax reform. Since 2012, many provincial governments had cancelled the non-expressway toll fee one by one to reduce the burden of private car owners, which benefit rural residents most who previously used these roads to drive across suburban areas frequently. In addition, the central government had replaced the annual fixed road maintenance fee with a variable fuel tax since 2009 (base on how much fuel burned) resulting in notable ownership cost saving. For instance, for a middle-size sedan, the owner had to pay a Rmb 3,000 vehicle tariff annually, no matter how much he drove the car during that year. Nowadays, assuming 100L fuel consumption every month, he only needs to pay Rmb 1,800 fuel tax instead (thus saving Rmb1,200). Therefore, for private car owners, car ownership costs have fallen.

26 October 2015


Figure 13: China's rural road length growth Figure 14: China's paved road percentage outlook

3.0 3.13.2

3.43.5 3.6 3.7 3.8 3.9

3.6% 3.5%3.8% 4.1%

1.6%

3.2%

2.9%

2.6%

0%

1%

2%

3%

4%

5%

6%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2006 2007 2008 2009 2010 2011 2012 2013 2014

Km million

Rural Road length YoY growth

41%44%

50%54%

58%61%

64% 66% 68%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2020E

Source: CEIC Source: CEIC, Ministry of Transport

Local brands to benefit rural car demand boom most

Rural car buyers are mainly first-time owners, who would prefer a car with reliable quality,

good fuel efficiency and, most importantly, cheap price. According to a survey conducted

by the statistics bureau of the Shaan'xi Province in mid-2015, named "Rural household car

ownership and purchase intention survey", 81% of respondents would like to purchase a

car priced below Rmb 130,000 (in particular, more than half would prefer a car priced

below Rmb80,000). We highlight that Rmb20,000 annual cash income per capita is the

tipping point when quite a significant proportion of rural residents will start thinking about

buying a car. The same survey in Shaan'xi Province shows 75% of respondents claim they

would consider purchasing a car if their annual cash income exceeded Rmb30,000 (in

particular, above 65% would consider purchasing a car when income above Rmb20,000).

The survey also showed rural residents' potential vehicle purchasing intention – 65% of

respondents are planning to purchase cars in the next three years. Thanks to their high

value-for-money products, superior fuel efficiency and improving quality, Chinese local

brands are well positioned to capture the trend.

Figure 15: Rural cash income's tipping point to buy a car Figure 16: Rural car price range preference breakdown

below Rmb 10,000,

6.4%

Rmb 10,000 - 15,000,

13.6%

Rmb 15,000 - 20,000,

28.2%

Rmb 20,000 - 30,000,

27.1%

above Rmb30,000

24.7%

Above Rmb 130,000, 18.9%

Rmb 80,000 - 130,000,

33.5%

Rmb 30,000 - 80,000,

43.4%

Below Rmb30,000,

4%

Source: Statistics bureau of Shann'xi Province Source: Statistics bureau of Shann'xi Province

26 October 2015


■ High value-for-money on the back of competitive price: Chinese local brand cars

are generally 30-40% cheaper than global brands peers due to better cost structure

and lower quality standards. Therefore, first-time rural car buyers, who are sensitive to

price, are more inclined to choose local brands. Among the top four Chinese local

brands' best-selling sedans, the most average price is below Rmb 80,000, while global

brands' top four best-selling sedans are generally priced above Rmb 80,000.

Meanwhile, as Chinese local brands are generally equipped with small engines (below

1.6L), which are eligible to 5% vehicle purchase tax cut since Oct. 1st 2015 , they are

quite appealing to price-sensitive first-time rural car buyers.

■ Superior fuel efficiency on adopting small-size turbo engines: Chinese local

brands are increasing their fuel efficiency by adopting more fuel-saving technologies,

such as turbo engines, Gasoline Direct Injection (GDI), etc. As a result, several

Chinese local brands' turbocharged high-efficient engines were ranked the "2014 Top

10 engine in China", such as Chery's "ACTECO SQRE4T16" 1.6T, Geely's "GeTec

JLβ-4G13TD" 1.3T, and BYD's "BYD 476ZQA" 1.5T. However, global brands usually

use larger-size naturally aspirated engines (Japanese brands in particular), resulting in

lower fuel efficiency. Among the top four Chinese local brands' best-selling sedans,

fuel efficiency ranges between 5.7L to 6.5L per 100 kilometres, while global brands'

top four best-selling sedans range between 5.7L to 7.5L per 100 kilometres.

■ Improving quality on upgrading component supply chain: Chinese local auto

brands are proactively looking up to their high-quality global suppliers for assistance in

modernising their vehicles, to substitute existing low-quality domestic suppliers. As a

result, Chinese local brands successfully narrowed the quality gap to only three years,

as per the J. D. Power survey – local brands "PP100" (problem per 100 vehicles) was

131 in 2014, in-line with the global brands in 2011 with the same "PP100" at 131.

According to J. D. Power's "2014 China Initial Quality Study (IQS)", Chinese local

brands are catching up with global brands in terms of quality. The gap of problems per

100 vehicles between Chinese brands and global brands has narrowed significantly

from 101 in 2011 to 36 in 2014.

Figure 17: Price range comparison of top four sedans: local brands vs. global brands

0

50,000

100,000

150,000

200,000

250,000

XinDiHao Eado F3 YueXiang Lavida Sylphy Jetta Sagitar

Rmb

Source: Company data

26 October 2015


Figure 18: Fuel efficiency comparison of top four sedans: Local brands vs. global brands

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

XinDiHao Eado F3 YueXiang Lavida Sylphy Jetta Sagitar

L/100km


Figure 19: Industry average quality trend - gap between Chinese local and global makers

Source: J.D.Power

26 October 2015


Geely, a leading Chinese local brand, is best proxy for this theme Geely, whose products are mainly sold to low-tier areas with a competitive price, is a

beneficiary of the rural car demand boom. Meanwhile, as a fuel-saving technology leader

with advanced 1.3L turbo engine (via Volvo's technology support), Geely is the largest

beneficiary of the recent 5% purchase tax cut and Rmb3,000 per unit fuel-saving car

subsidy, which is very appealing to price sensitive rural customers.

Figure 20: 2014 "Top 10 engine" in China Figure 21: Geely's eligible models for 5% purchase tax cut

Car Maker Engine name Engine size sample car model

Mazda Skyactiv -G 2.5L Atenza

Volvo VEP4 2.0T XC60

Kia Theta II 2.0T K5

Citroen EP6CDT 1.6T C5

Qoros SQRE4T16 1.6T Qoros 3

Suzuki G-InnoTec 1.6L 1.6L S-cross

GM EcoTec 1.4T 1.4T Cruze

Geely JLβ-4G13T 1.3T EC7

Ford Ecoboost 1.0T 1.0T Ecosport

BYD BYD 1.5T Qin

Model Engine size Average monthly sales

Panda 1.0 1,867

Free Cruiser 1.0 1,029

Vision 1.3 8,980

EC7 1.5 15,581

King Kong 1.5 4,831

GC9 1.8 1,850

GX7 1.8 5,112

EC8 2.0 269 Source: Auto Sports EVO Source: Company data

Largest beneficiary of 5% purchase tax cut

The China State Council announced that it would slash small passenger vehicles' (engine

size ≤ 1.6L) purchase tax by half – from 10% to 5 – mption and help the economy. As

small passenger vehicles accounted for 68% of YTD 2015 total PV sales, we estimate that

this tax reduction should boost around 3.0 mn units incremental PV demand annually,

similar to the impact during the previous round's 5% auto purchase tax cut amid the 2009

financial crisis. We now forecast China's 2015/16 PV demand growth at 7.5%/15% YoY.

Among different HK-listed auto makers, Geely is the largest beneficiary as 82% of Geely's

volume is eligible for this purchase tax cut.

Figure 22: China passenger vehicle sales outlook Figure 23: Car makers' exposure to 5% purchase tax cut

82% 80%

70% 69% 69%

56% 54%

42%

22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Source: China Auto Market, Credit Suisse estimates Source: Company data, Credit Suisse estimates

26 October 2015


Also key beneficiary of fuel saving small car subsidy

Historically, the Rmb3,000 / unit fuel-saving car subsidy had substantially boosted small

car sales (whose engine size below was 1.6L). Currently, to be eligible for a Rmb3,000 /

unit cash subsidy, car models need to meet the three requirements:

■ Engine size below 1.6L,

■ Fuel consumption around 34% below current regulations.

■ Compliant to Euro 5 emission standard.

Geely was the biggest beneficiary among the HK-list auto names with nine models eligible

to get this cash subsidy (accounting for around 70% of Geely's YTD2015 sales volume),

thanks to its "GeTec" 1.3L turbocharged high-efficient engine (code: JLβ-4G13T). This

1.3L turbo engine could generate max. torque of 190 N.m and 98 kw power, and was

ranked the "2014 Top 10 engine in China". We highlight that the RMB3,000 / unit is around

5% of Geely vehicles' price. With nine models were added to the list, this subsidy program

could substantially boost Geely's sales volume and help Geely's share gains.

Figure 24: Fuel-efficient car subsidy eligible model list (1st

& 2nd

batch lists)

Subtotal

BYD (1211 HK) F0 / F3 / L3 / Speed / G5 5

Brilliance China (1114 HK) 5

Brilliance Zhonghua V3 / H330 / H530 / H230 / H220

Geely (175 HK) Panda / SC6 / Vision / GC7 / SC7 /EC7 /King Kong Cross /SC5 /New Vision 9

Dongfeng (489 HK) 9

DF Fengsheng S30 / H30 / A60 / A30 / H30 Cross 5

Dongfeng PSA 308S /408 /C4L 3

Dongfeng Nissan Sunny 1

Great Wall (2333 HK) C30 / C50 / M4 3

GAC (2238 HK) 2

GAC Honda Fit 1

GAC Toyota Levin 1

BAIC (1958 HK) 4

BAIC Motor Wevan /E130 /Senova D50 /Senova D20 4

SAIC (600104 CH) 18

SVW Lavida / Passat / New Santana /SuperB / Octavia / Rapid Lamando /Polo 8

SGM Cruze / Aveo / Sail / Verano / New Cruze / Excelle 6

SAIC Motor MG3 / MG GT 2

SAIC GM Wuling Baojun 630 / 610 2

Chang'an (000625 CH) 18

CA Ford Ecosport / Fiesta / Focus 3

CA Mazda Axela 1

CA Suzuki Alto / S-Cross / SX4 / Alivio 4

Chang'an Yuexiang V3 / V5 / CS35 / EADO / 10

JAC (600418 CH) Heyue A30 / S30 / A20 / Yueyue 4

Lifan (601777 CH) 320 / 620 / 530 / 720 / Fengshun / 6

DF Yueda Kia (600805 CH) K3 1

FAW Xiali (000927) 5

FAW Toyota Vios / Corolla 2

FAW Xiali N7 / N5 / Weizhi 3

FAW Haima (000572 CH) Haima 2 / Family 2

FAW VW Sagita / Golf / Audi A3 /Jetta 4

Beijing Hyundai Langdong 1

Chery Carry Youyou / QQ / QQ3 / Qiyun 9

Changhe Suzuki Wagon R e+ /Wagon R /Wagon R X5 /Liana 4

Soueast V3 / V5 / V6 3

Total eligible models 112

Ticker / car maker Eligible models# of eligible models

Source: MIIT

26 October 2015


Upgrading products on new design language thanks to new designers Our bullish view on Geely is mainly derived from its upgraded new products (such as the

'Borui GC9' – Geely's new flagship car), designed by Peter Horbury. We highlight the

importance of the excellent work from Peter Horbury, who was named Geely’s head of

design in 2011 after Zhejiang Geely, the parent company of Geely (175 HK) acquired

Volvo where Horbury was the head designer with over 35-year experiences. Obviously

Geely’s previous product line-up needed a level of quality that it does not possess yet,

both in engineering and design. With Peter's help, Geely has been transforming itself from

a manufacturer of affordable cars to refined cars, while setting a new quality benchmark

for its future products as well. A good example is the Borui GC9 large-size sedan, whose

sales hit a new high in Sep. 2015 to 4,130 units, more than a triple of its closest peer,

thanks to Geely’s new design language by Peter. Geely's "Boyue NL-3" middle-size SUV,

the second product designed by Peter is set to launch at December 2015, which will be a

key growth driver for Geely's 2016 sales performance.

Figure 25: Geely's "Borui GC9" large-size sedan Figure 26: Geely's "Boyue NL-3" middle-size SUV

Source: Company data Source: Company data

Figure 27: Geely's product line-up's design language comparison

Geely (0175.HK)

CMA CX11 SUV (4Q16)

FE-6 Cross (1H16)

FE-5 sedan(1H16)

NL-4 SUV (1H16)

NL-3 SUV (4Q15)

Peter Horbury’s design

Borui GC9 sedan(Apr. 2015)

PandaMini sedan

Free CruiserSmall sedan

XinYuanJing (Vision)Medium sedan

GX7SUV

XinDiHao (EC7)Medium sedan

King KongSmall sedan

Previous design

Source: Company data,

26 October 2015


Kia's example

A successful product upgrading could lead a brand to thrive in the long term, just as Kia

experienced after hiring Peter Schreyer as its Chief Designer in 2006. Peter Schreyer was

a long-time Volkswagen and Audi designer and contributed to the distinct appearance of

several models including the Volkswagen Passat and the Audi TT. At Kia, Schreyer

created a new design-led product strategy and led Kia’s design transformation. Schreyer

was given carte blanche to shape the brand’s styling direction, such as the 'tiger-nose

grille'. With the complete restyling of the line-up, since 2009, Kia enjoyed a multi-year

double-digit sales growth and a share price rally in 2009-2012 (up almost ten times).

Figure 28: Kia's product line-up's design language comparison

Kia Motors

Rio (K2)Small sedan

SportageSUV

Optima (K5)Large sedan

Cerato (K3)Medium sedan

Peter Schreyer’s designPrevious design

Rio (K2)Small sedan

Cerato (K3)Medium sedan

SportageSUV

Optima (K5)Large sedan

Source: Company data, Credit Suisse estimates

Figure 29: Kia motor's historical sales volume and share price

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

unit

Peter Schreyer join Kia in 2006

First "Schreyer " designed car launch


26 October 2015


Valuation We derive our HK$5.7 target price from a DCF-based methodology, implying 10x 2016E

P/E, in-line with its historical average of 10x forward PE.

Figure 30: Geely historical 12-month forward P/E

0

2

4

6

8

10

12

14

16

18

20

10.0x

13.1x

6.9x

Source: Bloomberg

Why discounted cash flow (DCF)?

Geely is still a long-term growth company which means the earnings power of its business

model cannot be fully exhibited within the next several years via simple multiples. We thus

prefer DCF to value the company. In our DCF model, we apply a WACC of 9.6% for our

equity valuation. Key assumptions include a 6.8% cost of debt, a 3.5% risk free rate, 0.92

beta, a 19% income tax rate, and an 87% equity-to-"equity+debt" ratio.

Figure 31: Geely—DCF valuation (Rmb mn) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Revenue 28,959 42,631 46,382 50,186 54,000 57,780 61,478 65,043 68,426 71,573 74,436 76,967 79,122 80,863 82,156 82,978

YoY Grow th 47.2% 8.8% 8.2% 7.6% 7.0% 6.4% 5.8% 5.2% 4.6% 4.0% 3.4% 2.8% 2.2% 1.6% 1.0%

NOPAT 2,833 3,978 4,189 4,382 4,553 4,699 4,815 4,899 4,949 4,962 4,937 4,874 4,773 4,635 4,463 4,259

NOPAT Margin 9.8% 9.3% 9.0% 8.7% 8.4% 8.1% 7.8% 7.5% 7.2% 6.9% 6.6% 6.3% 6.0% 5.7% 5.4% 5.1%

Add: Depreciation 1,015 1,199 1,391 1,599 1,824 2,064 2,321 2,593 2,879 3,180 3,493 3,817 4,150 4,492 4,840 5,192

less: Chg in w orking capital 519 (441) (121) (123) (123) (122) (119) (115) (109) (101) (92) (82) (69) (56) (42) (26)

less: Capex (3,000) (3,000) (3,264) (3,532) (3,800) (4,066) (4,326) (4,577) (4,815) (5,037) (5,238) (5,416) (5,568) (5,690) (5,781) (5,839)

Free cashflow 1,367 1,737 2,196 2,328 2,454 2,575 2,691 2,800 2,904 3,003 3,099 3,193 3,286 3,381 3,480 3,585

% chg 27.0% 26.4% 6.0% 5.4% 4.9% 4.5% 4.1% 3.7% 3.4% 3.2% 3.0% 2.9% 2.9% 2.9% 3.0%

Discounted FCF 1,473 1,707 1,969 1,905 1,833 1,756 1,674 1,590 1,504 1,420 1,337 1,257 1,181 1,109 1,041 979

Sum of DFCF 23,735 WACC & Growth Assumptions

PV of terminal value 11,525 Equity / (Equity +Debt) Ratio 87.3%

Value of core operations 35,259

minority interest 220 Risk free rate 3.5%

Net debt/(cash) (6,241) Market risk premium 7.0%

Equity value 41,281 Beta 0.92

No. of shares (mn) 8,802 Borrow ing cost 8%

Value per share (Rmb) 4.7 Tax Rate 19%

Value per share (HKD) 5.7 WACC 9.6%

Revenue Grow th YoY 10.0%

Terminal grow th rate 1.0% Source: Company data, Credit Suisse estimates

26 October 2015


Figure 32: Auto sector valuation comparison

Bloomberg Close Market Cap 2015-17

Ticker 23-Oct (US$ m) EPS CAGR 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E

H share Passenger Vehicle maker

Geely Automobile Holdings Ltd 175 HK 4.07 4,622 38.4% 11.4x 9.0x 1.5x 1.3x 5.8x 4.6x 13.5% 14.8%

Great Wall Motor Co Ltd 2333 HK 9.95 15,388 9.9% 8.0x 7.2x 1.8x 1.5x 7.4x 6.3x 24.6% 22.8%

Dongfeng Motor Group Co Ltd 489 HK 10.98 12,207 1.4% 6.4x 6.0x 0.9x 0.8x 20.5x 18.5x 15.2% 14.6%

Byd Co Ltd 1211 HK 47.25 20,987 86.5% 47.8x 40.8x 3.1x 2.8x 19.7x 17.4x 7.5% 6.5%

Guangzhou Automobile Group Co Ltd 2238 HK 6.80 14,572 15.6% 10.2x 8.6x 0.9x 0.9x 88.2x 71.6x 10.0% 11.1%

Brilliance China Automotive Holdings Ltd 1114 HK 10.58 6,861 2.5% 11.1x 8.9x 2.2x 1.8x -154x -219x 21.0% 21.7%

BAIC Motor Corp Ltd 1958 HK 7.05 6,909 10.3% 9.0x 7.0x 1.2x 1.1x 7.8x 5.6x 12.8% 14.9%

H-share auto makers' simple Avg. 14.9x 12.5x 1.7x 1.4x -0.7x -13.6x 15.0% 15.2%

H-share auto makers' market cap weighted Avg. 19.0x 16.1x 1.8x 1.6x 13.3x 3.5x 14.3% 14.1%

A share Passenger Vehicle maker

SAIC Motor Corp Ltd 600104 CH 17.77 30,851 4.8% 6.9x 6.4x 1.2x 1.1x 8.8x 7.6x 17.0% 17.0%

Chongqing Changan Automobile Co Ltd000625 CH 15.44 10,887 19.8% 7.1x 6.1x 2.1x 1.7x 29.5x 24.6x 32.2% 29.3%

Guangzhou Automobile Group Co Ltd 601238 CH 19.00 14,573 26.5% 31.5x 24.8x 3.2x 2.9x 75.7x 66.1x 9.7% 11.3%

Great Wall Motor Co Ltd 601633 CH 12.02 15,388 8.8% 12.5x 10.6x 3.3x 2.8x 7.4x 6.2x 24.8% 23.7%

FAW CAR Co Ltd 000800 CH 16.08 4,121 110.2% 24.5x 19.5x 2.7x 2.4x 14.5x 11.6x 6.8% 11.7%

Anhui Jianghuai Automobile Co Ltd 600418 CH 14.39 3,316 53.6% 16.6x 11.8x 2.4x 2.0x 12.7x 9.1x 14.3% 18.1%

Byd Co Ltd 002594 CH 62.69 20,988 107.4% 64.6x 50.6x 5.3x 4.6x 18.9x 15.5x 9.3% 9.6%

Jiangsu Yueda Investment Co Ltd 600805 CH 12.24 1,640 16.6% 9.9x 8.0x 1.6x 1.4x 12.8x 10.5x 12.0% 13.4%

A share PV makers' simple Avg. 21.7x 17.2x 2.7x 2.4x 22.5x 18.9x 15.8% 16.8%

A share PV makers' market cap weighted Avg. 24.3x 19.5x 2.8x 2.5x 22.9x 19.5x 16.6% 16.8%

Global Passenger Vehicle maker

Hyundai Motor Co 005380 KS 158000 30,940 2.1% 6.2x 5.8x 0.7x 0.6x 7.6x 7.1x 11.0% 10.8%

Kia Motors Corp 000270 KS 53500 19,280 5.3% 7.3x 6.6x 0.9x 0.8x 5.1x 4.5x 12.7% 12.5%

Toyota Motor Corp 7203 JP 7522.00 213,486 9.1% 9.6x 9.0x 1.3x 1.2x 10.1x 9.6x 13.9% 13.3%

Honda Motor Co Ltd 7267 JP 4063.00 61,113 13.2% 12.3x 10.9x 1.0x 0.9x 8.2x 7.7x 8.4% 8.6%

Nissan Motor Co Ltd 7201 JP 1240.50 46,566 13.4% 9.7x 8.7x 1.0x 0.9x 3.8x 3.6x 10.6% 11.0%

Maruti Suzuki India Ltd MSIL IN 4380.90 20,386 33.6% 25.8x 20.1x 4.7x 3.9x 15.1x 12.5x 20.9% 22.9%

Tata Motors Ltd TTMT IN 383.00 19,171 15.6% 8.7x 6.9x 1.6x 1.3x 3.8x 3.2x 20.6% 20.8%

General Motors Co GM US 35.42 55,120 48.1% 7.5x 6.7x 1.6x 1.3x 3.0x 2.7x 21.0% 22.0%

Ford Motor Co F US 15.58 61,819 37.6% 9.2x 8.1x 2.1x 1.8x 4.8x 4.0x 29.1% 24.9%

Tesla Motors Inc TSLA US 211.72 27,575 -224% -232.7x 102.6x 34.8x 25.8x 113.5x 32.0x -20.4% 24.5%

Renault SA RNO FP 82.65 27,164 23.2% 8.5x 7.1x 0.9x 0.8x 4.8x 4.4x 10.6% 11.6%

Peugeot SA UG FP 16.19 14,536 -220% 11.7x 9.3x 1.2x 1.1x 2.6x 2.4x 10.9% 12.9%

Volkswagen AG VOW GR 123.90 62,086 -0.6% 11.7x 8.1x 0.7x 0.6x 1.8x 1.4x 7.8% 7.0%

Bayerische Motoren Werke AG BMW GR 93.10 66,750 4.5% 10.1x 9.8x 1.5x 1.3x 7.6x 7.4x 15.2% 14.5%

Global auto makers' simple Avg. -6.7x 15.7x 3.8x 3.0x 13.7x 7.3x 12.3% 15.5%

Global auto makers' market cap weighted Avg. 0.9x 12.4x 2.6x 2.1x 10.9x 7.3x 13.4% 14.7%

P/E (x) P/B (x) EV/EBITDA (x) ROE (%)

Source: Bloomberg consensus

26 October 2015


Financial forecasts Earnings up 104% / 41% / 21% YoY in 2015/16/17E to Rmb2.9 bn / 4.1 bn / 5.0 bn

We estimate Geely’s 2015/16/17E earnings to grow at 104% / 41% / 21% YoY to Rmb2.9

bn / 4.1 bn / 5.0 bn, driven by its decent sales volume growth – up 26% / 29% / 16% YoY.

In 2015, volume growth is mainly driven by "Vision" and "XinDiHao", who are the key

beneficiaries of the 5% purchase tax cut and Rmb3,000 per unit fuel-saving car subsidy.

Looking into 2016, growth mainly comes from new product – new "Boyue NL-3" / "NL-4"

SUVs as well as the new generation Emgrand sedan and Emgrand Cross. Meanwhile,

after three years of strong growth (an 80% CAGR) over 2011-13, Geely’s exports

decelerated notably since 2014 due to unfavourable forex movements and lower overseas

demand on weak commodity prices. In particular, Geely suffered a lot from the

appreciation of the RMB, depreciation of the JPY and the target markets' local currencies,

like the Russian Ruble. We expect this trend to reverse thanks to the recent RMB

depreciation vs the USD and Geely's improved product competitiveness.

Figure 33: Geely's earnings growth outlook Figure 34: Geely's volume growth outlook

13%

32%

31%

-46%

104%

41%

21%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014 2015E 2016E 2017E

Rmb Mn

Earnings YoY growth

1%

15%14%

-24%

26%

29%

16%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2011 2012 2013 2014 2015E 2016E 2017E

unit

Volume YoY growth

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 35: Geely sales volume assumption by model (unit) Sales volume (unit) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2015 YoY 2016 YoY 2017 YoY

Panda 28,500 40,588 43,208 31,411 35,085 24,770 16,000 10,000 10,000 -35% -38% 0%

Free Cruiser 110,700 95,189 82,630 65,619 37,857 17,406 14,000 -20%

Vision 52,702 63,421 51,269 31,706 36,590 25,140 110,000 100,000 100,000 338% -9% 0%

GC7 138 14,948 35,589 13,178

GX7 49 32,393 64,300 61,713 65,000 55,000 55,000 5% -15% 0%

NL-3 100,000 120,000 20%

NL-4 20,000 60,000 200%

Emgrand Cross 30,000 40,000 33%

EC7 EV 10,000 10,000 0%

EC7 XinDiHao 10,198 71,360 91,548 142,564 192,226 164,745 213,000 240,000 240,000 29% 13% 0%

EC8 1,300 15,528 12,770 10,284 3,186 3,000 -6%

GC9 Borui 25,000 40,000 40,000 60% 0%

GX9 1,587 3,000 5,000 5,000 89% 67% 0%

SC3 12,952 12,241 1,585

SC5 RV 432 4,890 2,144 1,090 743

King Kong 83,590 85,063 84,837 79,306 51,247 70,248 70,000 70,000 70,000 0% 0% 0%

SC6 11,377 27,607 7,168 1,000 -86%

SC7 39,814 57,360 46,453 45,569 45,306 26,382 5,000 -81%

TX4 263 1,033 780 725 96

Subtotal 326,710 415,843 421,385 483,483 549,518 417,851 525,000 680,000 750,000 26% 30% 10% Source: Company data, Credit Suisse estimates

26 October 2015


Margins: Dip 0.2 ppt to 18% in 2015E and recover since 2016 on better product mix

We expect Geely’s gross margin to decline slightly by 0.2 ppt to 18% in 2015 due to fierce

price competition among the Chinese local brand sedan market. Thanks to improving

product mix – high-end large-size sedan "Borui GC9" and high price / high margin SUV

products "NL-3" and "NL-4", we expect Geely's gross margin to improve by 0.8ppt YoY to

18.8% / 18.8% in 2016/17E.

Figure 36: Geely's revenue growth outlook Figure 37: Geely's margin outlook

4%

17% 17%

-24%

33%

47%

20%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-

10,000

20,000

30,000

40,000

50,000

60,000

2011 2012 2013 2014 2015E 2016E 2017E

Rmb Mn

Revenue YoY growth

7.4%8.3%

9.3%

6.6%

10.1% 9.7% 9.7%

18.2% 18.5%20.1%

18.2% 18.0%18.8% 18.8%

11.5% 11.2% 11.9%

9.2%

12.4% 11.8% 11.8%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015E 2016E 2017ENet margin Gross margin Operating margin

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 38: Geely income statement

P&L (Rmb mn) 2011 2012 2013 2014 2015 2016 2017 2015 YoY 2016 YoY 2017 YoY

Revenues 20,965 24,628 28,708 21,738 28,959 42,631 51,262 33.2% 47.2% 20.2%

Cost of sales (17,145) (20,069) (22,942) (17,776) (23,741) (34,611) (41,619) 33.6% 45.8% 20.2%

Gross profit 3,820 4,559 5,766 3,963 5,218 8,019 9,643 31.7% 53.7% 20.2%

Distribution (1,359) (1,483) (1,705) (1,250) (1,724) (2,538) (3,051) 37.8% 47.2% 20.2%

Admin (1,100) (1,398) (1,769) (1,832) (1,225) (2,016) (2,424) -33.2% 64.6% 20.2%

Interest income 44 42 59 58 75 92 112 29.9% 23.5% 21.2%

Other income 997 1,048 1,062 1,055 1,255 1,487 1,787 19.0% 18.5% 20.2%

Operating profit 2,402 2,768 3,413 1,992 3,599 5,045 6,067 80.7% 40.2% 20.2%

Finance cost (211) (237) (99) (81) (88) (109) (130) 8.1% 23.9% 19.3%

Profit/loss of Associate (7) (2) (10) 32 129 193 254 295.8% 49.7% 32.1%

PBT 2,183 2,529 3,304 1,943 3,640 5,129 6,191 87.3% 40.9% 20.7%

Tax (467) (479) (624) (494) (692) (975) (1,176) 40.0% 40.9% 20.7%

PAT 1,716 2,050 2,680 1,449 2,949 4,155 5,015 103.5% 40.9% 20.7%

Minority interest (172) (10) (17) (19) (26) (36) (43) 39.3% 39.0% 20.2%

Net profit 1,543 2,040 2,663 1,431 2,923 4,119 4,972 104.3% 40.9% 20.7%

Margins 2011 2012 2013 2014 2015 2016 2017 2015 YoY 2016 YoY 2017 YoY

Gross margin 18.2% 18.5% 20.1% 18.2% 18.0% 18.8% 18.8% -0.2% 0.8% 0.0%

Distribution/sales -6.5% -6.0% -5.9% -5.8% -6.0% -6.0% -6.0% -0.2% 0.0% 0.0%

Admin/sales -5.2% -5.7% -6.2% -8.4% -4.2% -4.7% -4.7% 4.2% -0.5% 0.0%

Interest income/sales 0.2% 0.2% 0.2% 0.3% 0.3% 0.2% 0.2% 0.0% 0.0% 0.0%

Other expenses/sales 4.8% 4.3% 3.7% 4.9% 4.3% 3.5% 3.5% -0.5% -0.8% 0.0%

Operating margin 11.5% 11.2% 11.9% 9.2% 12.4% 11.8% 11.8% 3.3% -0.6% 0.0%

Finance costs/sales -1.0% -1.0% -0.3% -0.4% -0.3% -0.3% -0.3% 0.1% 0.0% 0.0%

Income from Asso/sales 0.0% 0.0% 0.0% 0.1% 0.4% 0.5% 0.5% 0.3% 0.0% 0.0%

PBT margin 10.4% 10.3% 11.5% 8.9% 12.6% 12.0% 12.1% 3.6% -0.5% 0.0%

Tax rate 21.4% 19.0% 18.9% 25.4% 19.0% 19.0% 19.0% -6.4% 0.0% 0.0%

PAT margin 8.2% 8.3% 9.3% 6.7% 10.2% 9.7% 9.8% 3.5% -0.4% 0.0%

MI/PAT -10.0% -0.5% -0.6% -1.3% -0.9% -0.9% -0.9% 0.4% 0.0% 0.0%

Net margin 7.4% 8.3% 9.3% 6.6% 10.1% 9.7% 9.7% 3.5% -0.4% 0.0% Source: Company data, Credit Suisse estimates

26 October 2015


Figure 39: Geely balance sheet

Balance sheet (Rmb mn) 2010 2011 2012 2013 2014 2015 2016 2017

Cash & deposits 4,393 3,030 4,189 5,478 7,203 8,907 10,803 13,811

Pledged bank deposits 243 354 314 105 47 47 47 47

Inventories 987 1,358 1,822 1,784 1,620 2,163 3,153 3,792

Trade and other receivable 9,913 12,215 13,476 14,785 16,385 15,868 23,359 28,089

Prepaid land lease payments 34 38 38 30 29 34 39 44

Others 115 12 16 69 19 19 19 19

Current assets 15,684 17,006 19,855 22,251 25,303 27,038 37,421 45,801

PPE 5,797 6,796 7,008 6,209 5,861 6,417 6,899 7,309

Prepaid land lease payments 1,368 1,480 1,461 1,166 1,131 1,333 1,527 1,713

Intangible assets 1,449 2,222 2,814 3,220 4,208 5,430 6,549 7,567

Goodw ill 6 6 6 6 6 6 6 6

Available-for-sale f inancial assets 4 4 14 28 28 28 28

Investment in JV/asso 84 195 673 691 819 1,012 1,266

Defer tax asset 37 59 52

LT assets 8,619 10,591 11,525 11,348 11,977 14,034 16,022 17,889

Total assets 24,304 27,597 31,380 33,599 37,280 41,072 53,443 63,691

ST borrow ing 1,097 2,532 1,379 966 692 1,292 1,892 2,492

Account and bills payable 10,543 12,114 15,183 16,075 17,017 17,562 25,603 30,787

Current income tax liability 174 339 131 197 137 191 269 325

Others

Current liabilities 11,813 14,985 16,693 17,237 17,845 19,045 27,764 33,603

convertible bond 1,483 1,527 849 - - - -

LT borrow ing 1,562 843 525 - 1,820 1,820 1,820 1,820

Deferred income tax liabilities 367 92 109 133 149 149 149 149

LT liabilities 3,413 2,462 1,483 133 1,969 1,969 1,969 1,969

Total liabilities 15,226 17,447 18,176 17,370 19,814 21,014 29,733 35,572

Total share equity 8,022 9,582 12,887 16,068 17,288 19,854 23,470 27,836

Share capital 139 140 153 161 161 161 161 161

Other Reserves 7,883 9,443 12,734 15,907 17,127 19,693 23,309 27,674

Retained earnings

Minority interest 1,056 568 317 162 178 204 240 283

Total liab. & equity 24,304 27,597 31,380 33,599 37,280 41,072 53,443 63,691 Source: Company data, Credit Suisse estimates

26 October 2015


Figure 40: Geely cash flow statement

Cash flow statement (Rmb mn) 2011 2012 2013 2014 2015 2016 2017

PBT 2,183 2,529 3,304 1,943 3,640 5,129 6,191

D&A 642 860 1,078 874 1,015 1,199 1,382

Impairment 5 1

Share of profits/loss of associates 7 2 10 (32) (129) (193) (254)

Finance cost (net) 167 195 40 24 13 16 18

Others 136 60 184 681

Operating cash b/f WC 3,136 3,646 4,620 3,490 4,540 6,152 7,337

Change in WC (1,647) 1,503 (449) (960) 519 (441) (184)

Change in A/R (2,322) (1,347) (1,726) (1,938) 517 (7,491) (4,729)

Change in inventories (363) (465) (49) 98 (543) (990) (638)

Change in A/P 1,038 3,314 1,325 880 545 8,041 5,184

-

Tax paid (281) (711) (610) (497) (692) (975) (1,176)

Net cash flow fr operating 1,208 4,438 3,562 2,033 4,367 4,737 5,977

Investment in PPE (CapEx) (2,197) (1,922) (2,022) (2,421) (3,000) (3,000) (3,000)

Proceeds from sales of PPE 301 125 1,264 540 - - -

Investment in subs/asso (398) - - (129) (193) (254)

Interests received 44 42 59 58 75 92 112

Increase in deposits (111) 40 208 58 - - -

Others (593) (356) (375) 297 52 125 206

Net cash flow fr investing (2,953) (2,071) (865) (1,468) (3,002) (2,975) (2,937)

Free cash flow (989) 2,515 1,540 (388) 1,367 1,737 2,977

Proceeds from borrow ing 1,943 2,463 848 2,506 600 600 600

Repayment of borrow ing (1,227) (3,924) (1,778) (966)

Dividend paid (170) (170) (264) (320) (174) (357) (502)

Interests paid (166) (193) (85) (48) (88) (109) (130)

Net capital increase/decrease 14 24 11 -

Others - 594 (98) -

Net cash flow fr financing 393 (1,206) (1,366) 1,172 338 135 (32)

Net cash flow (1,352) 1,160 1,330 1,737 1,704 1,896 3,008

Effect of foreign exchange rate changes (10) (2) (41) (12)

Beg. Cash account 4,393 3,030 4,189 5,478 7,203 8,907 10,803

End. Cash account 3,030 4,189 5,478 7,203 8,907 10,803 13,811 Source: Company data, Credit Suisse estimates

26 October 2015


Risks Downside risks

The major downside risks to our investment thesis are (1) a delay in new model launches.

If Geely delays launch of its new model "NL-3" SUV, it would harm its reputation and lead

to a possible delay of the launch of new "NL-4" SUV as well. (2) Weaker-than-expected

sales in its upcoming new model "NL-3" SUV, which aims to gain share from the high-

growth/high-margin SUV market. Geely's "NL-3" SUV might face fierce competition as

local peers are also aggressively launching new SUV models. (3) As the macro-economic

situation and FAI is weakening, rural workers who usually work in construction sector

might have less job opportunities and thus lower consumption demand for cars.

Upside risks

The major upside risks are (1) China's rural car demand may rise if the Chinese

government resumes a new round of subsidies for car purchases in rural areas such as

providing 10% cash subsidy for mini passenger vehicles (engine ≤1.3L) to rural residents.

(2) 'Volvo''s potential asset injection – a potential 49% of Volvo car's global operation stake

purchase from two Chinese local governments. These moves could turn Geely into an

attractive proxy on Volvo's China growth story. Volvo is gaining market share in the China

luxury segment because of its localisation efforts and strong new models. Volvo opened its

two plants in China (Chengdu and Daqing) to produce the S60L long-wheelbase sedan,

XC60 SUV and XC classic SUV. Meanwhile, Volvo has adopted very aggressive new

model strategies – to locally produce the new generation S90L large long-wheelbase

sedan and the new generation XC90 large-size SUV in 2016 as well as the new

generation S60L sedan, the new generation XC60 middle-size SUV and the XC40 small

SUV in 2018, which should all be able to further boost its market share.

Figure 41: Volvo car China operational structure

R&D center

Daqing Municipal State

Assets Management Co. Ltd

Shanghai Jiading

District Government

37% 12%

Volvo Car Global

Zhejiang Geely

HoldingPublic shareholder

51%49.7%

Geely Auto Holdings

(175 HK)

Volvo Car China operation

Zhangjiakou Plant(325,000 unit)

Daqing Plant(80,000 unit)

Chengdu Plant(100,000 unit)

Shanghai R&D Center

Engine plant Auto plant

50%

50%

50.3%


26 October 2015


Companies Mentioned (Price as of 23-Oct-2015)

BAIC Motor Corporation Limited (1958.HK, HK$7.05) BMW (BMWG.DE, €90.35) BYD Co Ltd (1211.HK, HK$47.25) BYD Co Ltd (002594.SZ, Rmb62.69) Brilliance China Automotive Holdings Limited (1114.HK, HK$10.58) China Anhui Jianghuai Automobile Co., Ltd. (600418.SS, Rmb14.39) Chongqing Changan Automobile Company Limited (000625.SZ, Rmb15.44) Dongfeng Motor Group Company Limited (0489.HK, HK$10.98) Faw Car (000800.SZ, Rmb16.08) Ford Motor Company (F.N, $15.58) Geely Automobile Holdings Ltd (0175.HK, HK$4.07, OUTPERFORM, TP HK$5.7) General Motors Corp. (GM.N, $35.42) Great Wall Motor (2333.HK, HK$9.95) Great Wall Motor (601633.SS, Rmb12.02) Guangzhou Automobile Group (2238.HK, HK$6.8) Guangzhou Automobile Group (601238.SS, Rmb19.0) Honda Motor (7267.T, ¥4,063) Hyundai Motor Company (005380.KS, W158,000) Kia Motors (000270.KS, W53,500) Maruti Suzuki India Ltd (MRTI.BO, Rs4381.45) Nissan Motor (7201.T, ¥1,240) Renault (RENA.PA, €81.17) SAIC Motor Corp Ltd (600104.SS, Rmb17.77) Tata Motors Ltd. (TAMO.BO, Rs382.95) Tesla Motors Inc. (TSLA.OQ, $211.72) Toyota Motor (7203.T, ¥7,522) Yueda Invt (600805.SS, Rmb12.24)

Disclosure Appendix

Important Global Disclosures

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.

3-Year Price and Rating History for Geely Automobile Holdings Ltd (0175.HK)

0175.HK Closing Price Target Price

Date (HK$) (HK$) Rating

08-Jan-13 4.07 3.50 U *

12-Mar-13 3.99 3.15

20-Mar-13 3.90 3.50 N

23-Oct-13 3.84 NR

11-Mar-14 2.63 3.00 N *

21-Jul-14 2.91 2.80

16-Dec-14 3.12 2.50 U

20-Jan-15 2.89 4.10 O

04-Mar-15 3.31 4.30

18-Mar-15 3.60 4.40

02-Apr-15 4.19 4.80

08-Apr-15 4.20 5.00

19-Aug-15 3.00 5.10

30-Sep-15 3.69 5.30

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

N EU T RA L

N O T RA T ED

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total

26 October 2015


return relative to the analyst's coverage universe which consists of all companies covered by the ana lyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; 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 attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of asso ciated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.

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Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 59% (34% banking clients)

Neutral/Hold* 26% (35% banking clients)

Underperform/Sell* 13% (23% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most c losely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Price Target: (12 months) for Geely Automobile Holdings Ltd (0175.HK)

Method: We derive our HK$5.70 target price for Geely Automobile Holdings Ltd from a DCF (discounted cash flow)-based methodology, implying 10x 2016E P/E (price-to-earnings). In our DCF model, we apply a WACC (weighted average cost of capital) of 9.6% for our equity valuation. Key assumptions include a 6.8% cost of debt, a 3.54% risk free rate, 0.92 beta, a 19% income tax rate, and an 87% equity-to-equity+debt ratio.

Risk: Risks that could impede achievement of our HK$5.70 target price for Geely Automobile Holdings Ltd include the following: The major downside risk to our investment thesis are (i) weaker-than-expected sales in its "Borui" GC9 high-end sedan. (ii) potential foreign exchange loss due to negative foreign exchange movements.

Please refer to the firm's disclosure website at https://rave.credit-suisse.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

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0175.HK) within the next 3 months.

26 October 2015


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Credit Suisse may have interest in (MRTI.BO, TAMO.BO)

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Credit Suisse (Hong Kong) Limited ........................................................................................................................................ Bin Wang ; Mark Mao

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26 October 2015


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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