china passenger vehicle sector - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

20 September 2016 Asia Pacific/Hong Kong

Equity Research Automobile Manufacturers

China Passenger Vehicle Sector Research Analysts

Bin Wang

852 2101 6702

[email protected]

Mark Mao

852 2101 6710

[email protected]

DOWNGRADE RATING

Driving out of the sweet spot

Figure 1: China passenger vehicle sales growth YoY outlook

Source: Company data, Credit Suisse estimates

■ We downgrade China's auto sector to Market Weight (from

Overweight) due to the estimated sales growth deceleration from 4Q16 and

margin pressure from 2017. Although strong Sep. sales and 3Q16 results

are likely (both will be released in Oct.), we think it is better from a risk-

reward perspective to downgrade the sector now given China auto sector

stocks have rallied 34% on average since 4Q15 when the State Council

slashed small passenger vehicles' (engine size ≤ 1.6L) purchase tax by

half, from 10% to 5%, to boost auto sales.

■ Consensus estimates the favourable vehicle purchase tax cut to

extend into 2017 given the currently weak macro-economy, but the State

Council will reduce customers' tax benefits by raising the tax rate to 7.5% -

similar to the arrangement during the previous round's auto purchase tax

cut post the 2008 global financial crisis. Due to the base effect, we

estimate China passenger vehicle (PV) sales growth to retreat to 10% YoY

in 4Q16, vs. an estimated 30% YoY growth in 3Q16. As there is likely a

wave of front-loading demand in 4Q16 due to a lower tax rate, we expected

China PV sales growth rate to further slow to 3% YoY in 1H17.

■ Meanwhile, we estimate auto makers to face margin pressure from

2017, due to (1) an increase in selling expenses as some car makers might

subsidise the 2.5% tax cut difference from their own pocket, (2) new energy

vehicle makers' price decline offsetting the 20% subsidy drop from 2017,

and (3) incremental growth in component costs due to tougher fuel efficiency

requirements, which likely add up to around Rmb3,000 per vehicle in 2017.

■ We downgrade sector proxies (i.e., Dongfeng / SAIC) from Outperform

to NEUTRAL with lower earnings estimates. We also downgrade Great

Wall to NEUTRAL, as it is the largest beneficiary of the purchase tax cut.

We also cut BYD's target price on margin concerns due to a 20% decline in

NEV government subsidy. Our pecking order is GAC > Geely > BAIC >

BYD > Dongfeng > SAIC > Great Wall > Brilliance.

15% 15%9%

12%11%

2%

20%

9%

15%

30%

10% 3%

0%

5%

10%

15%

20%

25%

30%

35%

0

2,000

4,000

6,000

1Q-14

2Q-14

3Q-14

4Q-14

1Q-15

2Q-15

3Q-15

4Q-15

1Q-16

2Q-16

3Q-16e

4Q-16e

1H17e

000 Unit

Total Passenger Vehicle Sales Sales growth YoY

20 September 2016

China Passenger Vehicle Sector 2

Focus charts and tables

Figure 2: China passenger vehicle sales growth YoY Figure 3: Auto stocks' forward P/E vs. sales growth

Source: China Auto Market, Credit Suisse estimates Source: China Auto Market, Bloomberg

Figure 4: China average fuel efficiency requirement

Figure 5: Central government new energy vehicle

subsidy

Source: MIIT Source: MIIT

Figure 6: China passenger vehicle sector comps

Source: Credit Suisse estimates

15% 15%

9%12%

11%

2%

0%

20%

9%

15%

30%

10%

3%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1Q-14

2Q-14

3Q-14

4Q-14

1Q-15

2Q-15

3Q-15

4Q-15

1Q-16

2Q-16

3Q-16e

4Q-16e

1H17e

000 Unit


7.5 7.4 7.3 7.26.9 6.7

6.46.0

5.55.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Liter /100 Km (Rmb / unit) 2016 2017 2018 2019 2020 2021

Pure Electric Vehicle

R < 100 km

100 km ≤ R < 150 km 25,000 20,000 20,000 15,000 15,000 -

150 km ≤ R < 250 km 45,000 36,000 36,000 27,000 27,000 -

R ≥ 250 km 55,000 44,000 44,000 33,000 33,000 -

PHEV 30,000 24,000 24,000 18,000 18,000 -

10 m＜ L ≤12m e-bus (Ekg<0.25)

6≤R＜20 220,000 176,000 176,000 132,000 132,000 -

20≤R＜50 260,000 208,000 208,000 156,000 156,000 -

50≤R＜100 300,000 240,000 240,000 180,000 180,000 -

100≤R＜150 350,000 280,000 280,000 210,000 210,000 -

150≤R＜250 420,000 336,000 336,000 252,000 252,000 -

R≥250 500,000 400,000 400,000 300,000 300,000 -

10 m＜ L ≤12m PHEV-bus

50≤R＜100 200,000 160,000 160,000 120,000 120,000 -

100≤R＜150 230,000 184,000 184,000 138,000 138,000 -

R≥150 250,000 200,000 200,000 150,000 150,000 -

Company Name New Old Target priceTicker Close Market CapCurrency 2016-18

Rating Rating CS Reuters 20-Sep (US$ m) Local EPS CAGR 2016 2017 2016 2017 2016 2017

PRICE_1mchg

Guangzhou Automobile Group Co Ltd O O 14.70 2238.HK 10.98 17,798 HKD 29.6% 8.1 6.7 1.4 1.2 3.8% 4.6%

Geely Automobile Holdings Ltd O O 7.70 0175.HK 7.19 8,182 HKD 47.1% 11.6 7.9 2.3 1.8 1.1% 1.6%

BAIC Motor Corp Ltd O O 8.10 1958.HK 8.24 8,069 HKD 28.7% 11.5 8.2 1.4 1.3 3.0% 4.2%

Byd Co Ltd O O 80.00 1211.HK 53.20 21,584 HKD 17.8% 24.1 28.4 2.5 2.4 1.8% 1.5%

Dongfeng Motor Group Co Ltd N O 9.20 0489.HK 8.04 8,931 HKD 1.4% 5.0 5.2 0.6 0.6 3.0% 2.9%

Great Wall Motor Co Ltd N O 8.80 2333.HK 7.93 12,324 HKD 4.4% 6.7 6.7 1.4 1.2 4.5% 4.5%

SAIC Motor Corp Ltd N O 23.00 600104.SS 21.45 35,459 CNY 9.3% 7.4 6.5 1.2 1.1 6.7% 7.7%

Brilliance China Automotive Holdings Ltd N N 8.80 1114.HK 9.06 5,884 HKD 17.2% 10.5 8.3 1.7 1.4 1.2% 1.6%

simple Avg. 10.6 9.8 1.6 1.4 3.1% 3.5%

market cap weighted Avg. 11.2 11.0 1.6 1.4 3.8% 4.3%

Dividend yieldP/E P/B (x)

20 September 2016


Driving out of the sweet spot Downgrade China Auto Sector to Market Weight

We downgrade China's auto sector to Market Weight (from Overweight) due to the

estimated sales growth deceleration from 4Q16 and margin pressure from 2017. Although

strong Sep. sales and 3Q16 results are likely (both will be released in Oct.), we think it is

better from a risk-reward perspective to downgrade the sector now given China auto

sector stocks have rallied 34% on average since 4Q15 when the State Council slashed

small passenger vehicles' (engine size ≤ 1.6L) purchase tax by half, from 10% to 5%, to

encourage auto sales. Consensus estimates the favourable vehicle purchase tax cut to

extend into 2017 given the currently weak macro-economy, but the State Council will

reduce customers' tax benefits by raising the tax rate to 7.5% - similar to the arrangement

during the previous round's auto purchase tax cut post the 2008 global financial crisis. Due

to the base effect, we estimate China passenger vehicle (PV) sales growth to retreat to 10%

YoY in 4Q16, vs. an estimated 30% YoY growth in 3Q16. As there is likely a wave of front-

loading demand in 4Q16 due to a lower tax rate, we expect China PV sales growth rate to

further slow to 3% YoY in 1H17.

Pressure on auto makers' margin from 2017

We expect auto makers to face margin pressure from 2017, due to (1) an increase in

selling expenses as some car makers might subsidise the 2.5% tax cut difference from

their own pocket. A sensitivity analysis shows the 2.5% tax subsidy could lower

automakers' earnings by up to 20%. (2) new energy vehicle makers' price decline

offsetting the 20% government subsidy drop from Jan. 2017, which is hard to be totally

compensated for by the decline in NEV component costs in the short term. (3) incremental

growth in component costs due to tougher corporate fuel efficiency requirements

(tightened 4.5% YoY from 2016's 6.7L/100km to 2017's 6.4L/100km), which will likely add

an additional ~Rmb3,000 for each vehicle.

Downgrade Dongfeng / SAIC / GWM to NEUTRAL

We downgrade sector proxies (i.e., Dongfeng / SAIC) from Outperform to NEUTRAL with

a lower earnings estimate. We also downgrade Great Wall to NEUTRAL as it is the largest

beneficiary of the purchase tax cut and its share price has approached our target price.

We also cut BYD's target price on margin concerns due to a 20% decline in NEV

government subsidy. For detailed earnings, target price and rating changes, please see

Figure 17 on page 9. We continue to rate Chinese local brand names, i.e., Geely and GAC

at OUTPERFORM, which are bottom-up, cross-cycle secular stories. Our new pecking

order is GAC > Geely > BAIC > BYD > DFM > SAIC > Great Wall > Brilliance.

Risks

Upside risk: If the government rolls over the 5% purchase tax cut policy to 2017 (i.e., the

same tax rate as 2016's), we forecast the China passenger vehicle sales to increase 10%

YoY in 2017.

Downside risk: If the government withdraws the 5% purchase tax cut policy in 2017 (i.e.,

raise the auto purchase tax rate back to 10%), we would see a stronger front-loading

demand at end-2016 but a weaker-than-expected auto demand in 2017 (estimate no YoY

growth).

We downgrade China's auto sector to Market

Weight (from Overweight) due to the estimated sales growth deceleration from 4Q16

and margin pressure from 2017

We downgrade sector proxies (i.e., Dongfeng / SAIC) from Outperform

to NEUTRAL with a lower earnings

estimate. We also downgrade Great Wall

to NEUTRAL as the largest beneficiary of the purchase tax cut

20 September 2016


Figure 7: Regional auto comps


CS CS Reuters 20-Sep (US$ m) 2016 2017 2016 2017 2016 2017 2016 2017

PRICE_1mchg

China Passenger Vehicle maker

Guangzhou Automobile Group Co Ltd OUTPERFORM 14.70 2238.HK 10.98 17,798 8.1 6.7 1.4 1.2 18% 19% 3.8% 4.6%

Geely Automobile Holdings Ltd OUTPERFORM 7.70 0175.HK 7.19 8,182 11.6 7.9 2.3 1.8 22% 26% 1.1% 1.6%

BAIC Motor Corp Ltd OUTPERFORM 8.10 1958.HK 8.24 8,069 11.5 8.2 1.4 1.3 13% 16% 3.0% 4.2%

Byd Co Ltd OUTPERFORM 80.00 1211.HK 53.20 21,584 24.1 28.4 2.5 2.4 13% 9% 1.8% 1.5%

Dongfeng Motor Group Co Ltd NEUTRAL 9.20 0489.HK 8.04 8,931 5.0 5.2 0.6 0.6 13% 11% 3.0% 2.9%

Great Wall Motor Co Ltd NEUTRAL 8.80 2333.HK 7.93 12,324 6.7 6.7 1.4 1.2 22% 19% 4.5% 4.5%

SAIC Motor Corp Ltd NEUTRAL 23.00 600104.SS 21.45 35,459 7.4 6.5 1.2 1.1 17% 18% 6.7% 7.7%

Brilliance China Automotive Holdings LtdNEUTRAL 8.80 1114.HK 9.06 5,884 10.5 8.3 1.7 1.4 17% 19% 1.2% 1.6%

China auto makers' simple Avg. 10.6 9.8 1.6 1.4 17% 17% 3.1% 3.5%

China auto makers' market cap weighted Avg. 11.2 11.0 1.6 1.4 17% 16% 3.8% 4.3%

Global Passenger Vehicle maker

Hyundai Motor Co OUTPERFORM 175,000 005380.KS 138,500 27,250 6.3 5.7 0.6 0.5 10% 10% 2.9% 3.4%

Kia Motors Corp OUTPERFORM 50,000 000270.KS 44,400 16,076 6.8 5.7 0.7 0.6 11% 12% 2.9% 3.4%

Toyota Motor Corp NEUTRAL 6,150 7203.T 5,952 175,786 8.0 11.2 1.1 1.1 14% 10% 3.5% 3.5%

Honda Motor Co Ltd NEUTRAL 3,100 7267.T 2,961 52,463 15.5 10.9 0.8 0.8 5% 7% 3.0% 3.0%

Nissan Motor Co Ltd NEUTRAL 1,100 7201.T 1,009 39,467 8.1 8.0 0.9 1.0 11% 12% 4.2% 4.8%

Suzuki Motor Ltd OUTPERFORM 4,000 7269.T 3,355.00 14,554 14.3 11.4 1.5 1.5 10% 13% 1.0% 1.0%

Mazda Motor Ltd NEUTRAL 1,650 7261.T 1,581.00 28,238 7.0 9.3 1.0 0.9 15% 10% 1.9% 2.2%

Mitsubishi Motors Co UNDERPERFORM 400 7211.T 460.00 4,447 6.2 (4.8) 0.7 0.9 11% -20% 3.5% 2.2%

Maruti Suzuki India Ltd OUTPERFORM 6,000 MRTI.BO 5,483.60 24,722 36.2 25.8 6.1 5.2 18% 22% 0.6% 0.9%

Tata Motors Ltd NEUTRAL 510 TAMO.BO 553.50 23,849 17.1 11.7 2.3 1.9 16% 18% 0.0% 0.2%

Global auto makers' simple Avg. 12.1 9.2 1.5 1.4 11% 8% 2.6% 2.7%

Global auto makers' market cap weighted Avg. 8.3 7.9 0.9 0.8 11% 10% 3.0% 3.3%

20 September 2016


Downgrade Auto Sector to Market Weight We downgrade China's auto sector to Market Weight (from Overweight) due to the

estimated sales growth deceleration from 4Q16 and margin pressure from 2017. HK-listed

China auto stocks have rallied 34% on average during the past 12 months on the back of

a favourable policy, i.e., vehicle purchase tax cut. On 29 September 2015, the State

Council slashed small passenger vehicles' (engine size ≤ 1.6L) purchase tax by half, from

10% to 5% for 4Q15 and 2016, to encourage auto sales as part of its latest efforts to boost

consumption and help prop up the economy. As small passenger vehicles accounted for

~70% of total China passenger vehicle sales, growth rebounded to 20%/16% YoY in

4Q15/YTD16 (Jan. to Aug. 2016), from 0%/2% YoY growth in 3Q15/2Q15.

Figure 8: HK-listed auto stocks' price performance

since 4Q15

Figure 9: China passenger vehicle monthly sales

growth YoY

Source: Bloomberg Source: China Auto Market

As the 5% purchase tax cut policy is scheduled to expire at end-2016, there are different

views from different entities regarding whether and how the tax incentives should be

extended. The China Association of Automobile Manufacturers (CAAM) proposed

maintaining the 5% tax cut policy in 2017 in order to sustain auto demand. However, the

government tax bureau is inclined to withdraw the 5% tax cut (i.e., raise the auto purchase

tax rate back to 10%) in 2017 due to a tightening fiscal budget. The China Passenger Car

Association (CPCA) and consensus forecast a 2.5% tax cut in 2017 (i.e., the tax rate

increasing to 7.5% in 2017 from 5% in 2016, thus customers paying 2.5% more tax than in

2016). If so, it will be similar to how the government adjusted the auto purchase tax cut

post the 2008 global financial crisis.

■ On 14 January 2009, the State Council announced that it would slash small passenger

vehicles' (engine size ≤1.6L) purchase tax by half from 10% to 5%, from 20 January

2009 to 31 December 2009. As a result, PV sales volume jumped 47% YoY in 2009.

■ On 9 December 2009, the government announced that it would extend the tax cut into

2010, but reduce the amount from 5% to 2.5%. In order to take advantage of the higher

price discounts, a lot of front-loading demand came into 4Q09 and sales growth spiked

to 82% YoY in 4Q09. For 2010 overall, full-year sales growth decelerated to 34% YoY,

with the 2.5% purchase tax cut policy.

■ On 28 December 2010, the government announced to cancel the tax cut policy from

2011. Sales growth further decelerated to 8% YoY in 2011.

Based on consensus policy assumption (7.5% tax payment for customers), we expect a

wave of front-loading demand in 4Q16 followed by a decelerated auto sales growth in

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16

Geely GAC Dongfeng Brilliance

BYD GWM BAIC

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

500

1,000

1,500

2,000

2,500

Dec-14

Feb-15

Apr-15

Jun-15

Aug-15

Oct-15

Dec-15

Feb-16

Apr-16

Jun-16

Aug-16

000 Unit


Vehicle purchase tax cut started

20 September 2016


2017. In other words, we forecast China passenger vehicle sales growth to slow down

from an estimated 30% YoY in 3Q16 to 10% YoY in 4Q16 (due to a high base effect), then

further slow to 3% YoY in 1H17. Looking ahead, we forecast 7% growth YoY for full-year

2017 followed by 2.4% YoY drop in 2018. Along with the estimated deceleration in auto

sales growth, a sector-wide derating is likely to happen. Historically, the auto sector's

stepped-down sales growth YoY has caused investor concerns about its earnings

momentum, thus resulting in a lower valuation, whereas accelerating sales growth YoY

has been accompanied by an increase in valuation; this suggests a close correlation

between sales growth YoY and valuation. HK-listed China auto stocks have rallied 34% on

average during the past 12 months, and seem to have already factored in the market's

optimism about the decent sales growth. Looking ahead, although strong Sep. sales and

3Q16 results are likely (both will release in Oct.), we think it is better from a risk-reward

perspective to downgrade the sector now due to decelerating sales growth and potential

valuation multiple contraction from 4Q16.

Figure 10: China passenger vehicle sales growth

YoY Figure 11: Quarterly growth in last round tax cut

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

Figure 12: HK-listed auto stocks' forward P/E vs. China auto sales growth

Source: China Auto Market, Bloomberg

15% 15%

9%12%

11%

2%

0%

20%

9%

15%

30%

10%

3%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1Q-14

2Q-14

3Q-14

4Q-14

1Q-15

2Q-15

3Q-15

4Q-15

1Q-16

2Q-16

3Q-16e

4Q-16e

1H17e

000 Unit


23%

13%

-2%-3%

2%

38%

74%

82%78%

29%

21%25%

13%7%

11%5%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1Q-08

2Q-08

3Q-08

4Q-08

1Q-09

2Q-09

3Q-09

4Q-09

1Q-10

2Q-10

3Q-10

4Q-10

1Q-11

2Q-11

3Q-11

4Q-11

000 Unit


3

4

5

6

7

8

9

10

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%Weighted 12m forward P/E Sales growth

20 September 2016


Pressure on auto makers' margin from 2017 We expected auto makers to face margin pressure from 2017, due to (1) an increase in

selling expenses as some car makers might subsidise the 2.5% tax cut difference from

their own pocket, (2) new energy vehicle makers' price decline offsetting the 20%

government subsidy drop from Jan. 2017, (3) incremental growth in component costs due

to tougher corporate fuel efficiency requirements (tightened 4.5% YoY from 2016's

6.7L/100km to 2017's 6.4L/100km), which likely add an additional ~Rmb3,000 / unit.

The China Passenger Car Association (CPCA) and consensus forecast a 2.5% vehicle

purchase tax cut in 2017 (i.e., the tax rate increasing to 7.5% in 2017 from 5% in 2016,

thus customers paying 2.5% more tax than in 2016). We expect some car makers will

subsidise the 2.5% difference from their own pocket. A sensitivity analysis shows the 2.5%

tax subsidy could lower automakers' earnings by up to 20%, as (1) small passenger

vehicles (engine size ≤1.6L) accounted for 70% their total sales; (2) automakers' net

margin is generally 8-10%. Thus a blended 1.75% margin drop can lead to around 20%

earnings drop.

We think the new energy vehicle makers' 2017 margin will decline due to the selling price

drop, which is hard to be totally offset by NEV component costs decline in the short term.

Chinese governments, both central and local, are pushing for adoption of NEVs with

strong policy support owing to the worsening air pollution and traffic conditions, as well as

petroleum resource independence. In 2016, the Chinese government subsidised the

purchase of pure electric vehicles by up to Rmb55,000 per unit and of plugin hybrid

electric vehicles by up to Rmb30,000 per unit. Many local governments provide the same

amount of subsidy as the central government. As a result, customers are willing to buy

NEV because of its lower life-cycle cost than conventional ICE vehicles, especially in

vehicle purchase quota control cities, such as Beijing and Shanghai. China's NEV sales

more than quadrupled in 2015, leading China to surpass the United States to become the

world's largest market for electric cars. Because of falling costs in battery / electric motor /

electronic control backed by rising NEV sales volume, China plans to gradually phase out

subsidies. Specifically, the government will cut subsidies by 20% from 2017 and another

20% from 2019, eliminating them altogether after 2021. We expected NEV makers to

lower their selling price in 2017 to offset the 20% government subsidy drop.

Figure 13: China central government subsidy for new energy passenger vehicle


Meanwhile, we also see incremental growth in component costs from 2017 due to tougher

corporate fuel efficiency requirements. China was self-sufficient in oil until 1995, but

soaring auto demand pushed China to import around 61% of oil currently, 60% of which is

shipped from potentially unstable South China Sea. Given the concerns about its heavy

reliance on imported oil, China is implementing a stringent auto fuel economy standard -

increasing the average car fuel economy from 6.9 L/100 km in 2015 to 5.0 L/100 km by

2020. Those who are unable to meet this fuel-economy standard will be banned from

manufacturing any new vehicle or expanding any new capacity. Thus automakers will

need to add substantial new component costs to improve fuel efficiency, such as

(Rmb / unit) 2016 2017 2018 2019 2020 2021

Pure Electric Vehicle

R < 100 km

100 km ≤ R < 150 km 25,000 20,000 20,000 15,000 15,000 -

150 km ≤ R < 250 km 45,000 36,000 36,000 27,000 27,000 -

R ≥ 250 km 55,000 44,000 44,000 33,000 33,000 -

PHEV 30,000 24,000 24,000 18,000 18,000 -

20 September 2016


Turbocharging, Gasoline Direct Injection (GDI), Variable Valve Timing (VVT), Cool

Exhaust-Gas Recirculation (EGR), Start-Stop system (SSS), 8-10 Speed Automatic

Transmissions, Dual Clutch Transmissions (DCT), Electric Power Steering (EPS), etc.

Looking into 2017, the average corporate average fuel efficiency (CAFE) requirement will

increase 4.5% YoY from 2016's 6.7L/100km to 2017's 6.4L/100km, which likely add to

about Rmb3,000 / unit per our estimate.

Figure 14: China average fuel efficiency requirement Figure 15: China's oil import as a % of total consumption

Source: MIIT Source: CEIC

Figure 16: Average power train (engine + transmission) cost rise for conventional cars

Source: US EPA, Credit Suisse estimates

7.5 7.4 7.3 7.26.9 6.7

6.46.0

5.55.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Liter /100 Km

32%

39% 40%43%

45% 46%50%

53% 54% 56% 57%59% 61%

0%

10%

20%

30%

40%

50%

60%

70%

0

100

200

300

400

500

600

700

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ton mn

Total Crude oil consumption Import as % of total

2013 Turbo GDI VCT EGR Start -

Stop

8/9 –

Spd…

DCT EPS Others 2020

27,500

850

700150

450

1,000150

200450 200

33,450

Gas Direct Inject

Est. content / vehicle 1,600

Fuel economy boost 5-7%

Variable Cam Timing

Est. content / vehicle 400

Fuel economy boost 2.0-2.5%

Cool EGR



Turbo



Start-Stop



8-10 Speed Trans



Dual-Clutch Trans



Electric Power Steer



Aluminum engine parts



Alu.

parts

1,800

20 September 2016


Downgrade Dongfeng / SAIC / Great Wall Considering the estimated sales growth deceleration and margin pressure from 4Q16, we

downgrade sector proxies Dongfeng / SAIC from Outperform to NEUTRAL with a lower

earnings estimate. We also downgrade Great Wall to NEUTRAL as it is the largest

beneficiary of the purchase tax cut and its share price has approached our target price.

We also lower BYD's target price on margin concerns due to a 20% decline in NEV

government subsidy. We continue to rate Chinese local brand names, i.e., Geely and GAC

at OUTPERFORM, which are bottom-up, cross-cycle secular stories. Our new pecking

order is GAC > Geely > BAIC > BYD > DFM > SAIC > Great Wall > Brilliance.

Figure 17: BYD, Dongfeng, SAIC and Great Wall changes' summary


■ Dongfeng (489 HK) & SAIC (600104 CH): We downgrade them from Outperform to

NEUTRAL, as their earnings risk is likely skewed to the downside from 2017 amid the

auto sector downturn as consensus forecasts a 2.5% vehicle purchase tax cut in 2017

(i.e., tax rate increasing to 7.5% in 2017 from 5% in 2016, thus customers paying 2.5%

more tax in 2017 than 2016). Meanwhile, we expect some car makers may subsidise

the 2.5% difference from their own pocket to protect their volume and market share. A

sector-wide derating is also likely to happen as stepped-down growth causes investor

concerns about earnings momentum, resulting in a lower valuation. As the sector proxy,

Dongfeng and SAIC should feel the pain. We thus reduce Dongfeng's 2016-18

earnings estimates by 8-15% with a lower margin assumption, resulting in a lower

target price of HK$9.2 (from HK$13.9), based on 6x 2017E P/E. We reduce SAIC's

2016-18 earnings estimates by 1-4% with lower local brand margin assumption,

resulting in a lower target price of Rmb23 (from Rmb27.4), based on 7x 2017E P/E.

■ Great Wall (2333 HK): We see rising price pressure from peers' new launches. For

example, Geely Boyue and SAIC RX5's volume ramped up very quickly along with >3

months waiting list thanks to a superior design language. Geely / SAIC guided Boyue /

RX5 volume to double from their current 10,000 units monthly volume to 20,000 units

at Dec. 2016. Meanwhile, the current 5% vehicle purchase tax might be revised up to

7.5% from 2017 and some car makers might subsidise the 2.5% tax difference from

their own pocket. As the largest beneficiary of the currently favourable purchase tax

reduction, Great Wall should feel the pain. We thus downgrade Great Wall to

NEUTRAL (from Outperform) after revising down 2016-18 earnings estimates by 3-5%

with a lower margin assumption, resulting in a new target price of HK$8.8 (from HK$9.1).

■ BYD (1211 HK): BYD's new energy vehicle volumes hit a new historical high in August

(up 212% YoY to 12,014 units). We expect its new energy vehicle volume to rise

further due to a combination of seasonal demand peak and some front-loading demand

in 4Q16, as the government's cash subsidy will decline 20% from 1 Jan. 2017. We

expect BYD to lower its new energy vehicle selling price from 2017 to offset the 20%

government subsidy drop. Meanwhile, BYD announced it had spent Rmb5.0 bn on

R&D capex for its new "straddle monorail" business. Though BYD's penetration into

the monorail market sounds strategically right, it will increase near-term R&D and

intangible asset amortisation costs. We thus lower BYD's 2016-18 earnings estimate

by 1-8% leading to a lower TP of HK$80 (from HK$83).

New New New Old Old Old

Company Name Ticker New Rating Old Rating New TP Old TP 2016 EPS 2017 EPS 2018 EPS 2016 EPS 2017 EPS 2018 EPS

BYD 1211.HK OUTPERFORM OUTPERFORM 80.00 83.00 1.90 1.61 1.86 1.92 1.75 2.01

Dongfeng Motor 0489.HK NEUTRAL OUTPERFORM 9.20 13.90 1.38 1.32 1.40 1.49 1.55 1.59

Great Wall Motor 2333.HK NEUTRAL OUTPERFORM 8.80 9.10 1.02 1.01 1.01 1.05 1.06 1.05

SAIC Motor 600104.SS NEUTRAL OUTPERFORM 23.00 27.40 2.89 3.29 3.53 2.93 3.41 3.55

20 September 2016


Risks Upside risk

If the government rolls over the 5% purchase tax cut policy into 2017 (i.e., same tax rate

as 2016's), we forecast the China passenger vehicle sales to increase 10% YoY in 2017.

Policy has generally played a very important role in influencing China auto demand. On 29

September 2015, the State Council slashed small passenger vehicles' (engine size ≤ 1.6L)

purchase tax by half, from 10% to 5%, for 4Q15 and 2016 to encourage auto sales. Sales

growth had rebounded to 20%/16% YoY in 4Q15/YTD16 (Jan. to Aug. 2016), from flattish

0%/2% YoY in 3Q15/2Q15. Looking into 2017, there is an upside risk the government rolls

over 5% purchase tax cut. This is because the current China government administration

will host its elections for the next five years in 2017 and the central government might try

to maintain a healthy GDP growth number via stimulus or tax cuts, in order to facilitate the

elections. As China auto industry contributes to 10% of the country's GDP (the second-

largest sector after property), the central government is likely to further stimulate auto

industry growth to protect the GDP growth number given the sluggish other industries. If

5% vehicle purchase tax extension can't support a healthy growth, the central government

might also consider more auto stimulus policies (besides the tax cut), e.g., cash subsidy

for rural area farmers' auto purchase or subsidy for fuel efficient vehicle purchase, etc.

Downside risk

If the government withdraws the 5% purchase tax cut policy in 2017 (i.e., the auto

purchase tax rate goes back to 10%), we would see a stronger front-loading demand at

end-2016 but a weaker-than-expected auto demand in 2017 (to an estimated ZERO YoY

growth). Air pollution and traffic congestion problems are increasingly becoming more and

more severe in China, which is partially caused by rising vehicle population. Furthermore,

petroleum resource independence issue is calling government's attention, as over 60% of

China oil demand is relying on import currently. If the government regards these concerns

(on environment and energy security) more crucial than the near-term GDP growth target,

it will impose restrictive policies on auto industry to suppress auto demand. If so, we think

it likely the central government will cancel the purchase tax benefit from 2017 (i.e., a 10%

tax rate), even at the expense of GDP growth slowdown. In addition, other policies could

be supplemented, e.g., corporate average fuel consumption tightening and emission

standard upgrading, in order to reduce pollution and imported oil.

Figure 18: China PV growth forecast in bull case Figure 19: China PV growth forecast in bear case

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

15% 15%

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20 September 2016


Asia Pacific/China Automobile Manufacturers

Dongfeng Motor Group Company

Limited (0489.HK / 489 HK) Rating (from OUTPERFORM) NEUTRAL Price (20 Sep 16, HK$) 8.04 Target price (HK$) (from 13.90) 9.20 Upside/downside (%) 14.4 Mkt cap (HK$/US$ mn) 69,274 / 8,931 Enterprise value (Rmb mn) 31,674 Number of shares (mn) 8,616 Free float (%) 91.5 52-wk price range (HK$) 11.78-7.59 ADTO-6M (US$ mn) 19.6 *Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

Research Analysts

Bin Wang

852 2101 6702

[email protected]

Mark Mao

852 2101 6710

[email protected]

DOWNGRADE RATING

Sector proxy to face auto sector down-cycle

■ We downgrade Dongfeng to NEUTRAL from Outperform, as its earnings risk

is likely skewed to the downside starting 2017, amid the auto sector downturn

as consensus forecasts a 2.5% vehicle purchase tax cut in 2017 (i.e., tax rate

increasing to 7.5% in 2017 from 5% in 2016, thus customers paying 2.5%

more tax in 2017 than in 2016).

■ We forecast China passenger vehicle sales growth to slow down from 30%

YoY in 3Q16 to 10% YoY in 4Q16 (due to a high base), further retreating to

3% YoY in 1H17. Meanwhile, we expect some car makers to subsidise the

2.5% difference from their own pocket to protect their market share. A sector-

wide derating is also likely to happen as stepped-down growth causes

investor concerns about earnings momentum, resulting in a lower valuation.

■ As a sector proxy, Dongfeng should feel the pain. We thus reduce its 2016-

18 earnings estimates by 8-15% with a lower margin assumption, resulting in

a lower target price of HK$9.2 (from HK$13.9), based on 6x 2017E P/E

considering the sector-wide derating.

■ Upside risk is PSA JV turnaround on new Peugeot 4008 SUV debut in 4Q16,

whose upgraded interior and exterior design language is quite appealing to

Chinese customers.

Share price performance

The price relative chart measures performance against the

MSCI CHINA F IDX which closed at 6,490.21 on 20/09/16.

On 20/09/16 the spot exchange rate was HK$7.76/US$1

Performance 1M 3M 12M Absolute (%) -8.7 -4.2 -12.3 Relative (%) -10.9 -19.0 -19.1

Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 126,566.0 122,043.9 132,900.0 139,649.9 EBITDA (Rmb mn) 3,806.0 3,856.4 3,595.0 3,596.0 EBIT (Rmb mn) 2,157.0 2,015.3 1,567.3 1,381.6 Net profit (Rmb mn) 11,550.0 11,861.2 11,405.5 12,029.7 EPS (CS adj.) (Rmb) 1.34 1.38 1.32 1.40 Change from previous EPS (%) n.a. (7.9) (14.5) (12.4) Consensus EPS (Rmb) n.a. 1.42 1.47 1.53 EPS growth (%) (9.7) 2.7 (3.8) 5.5 P/E (x) 5.2 5.0 5.2 5.0 Dividend yield (%) 2.9 3.0 2.9 3.0 EV/EBITDA (x) 10.1 7.5 5.9 3.4 P/B (x) 0.70 0.63 0.57 0.52 ROE (%) 14.6 13.2 11.5 11.0 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

20 September 2016


Dongfeng Motor Group Company Limited (0489.HK / 489 HK)

Price (20 Sep 2016): HK$8.04; Rating: (from OUTPERFORM) NEUTRAL; Target Price: (from HK$13.90) HK$9.20; Analyst: Bin Wang

Earnings Drivers 12/15A 12/16E 12/17E 12/18E

Sales volume 2,867,038 2,942,137 3,177,000 3,351,000 - - - - - - - - - - - - - - - -

Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E

Sales revenue 126,566 122,044 132,900 139,650 Cost of goods sold 109,637 107,064 116,963 123,229 SG & A 10,835 9,764 10,632 11,172 Other operating exp./(inc.) 2,288 1,360 1,710 1,653 EBITDA 3,806 3,856 3,595 3,596 Depreciation & amortisation 1,649 1,841 2,028 2,214 EBIT 2,157 2,015 1,567 1,382 Net interest expense/(inc.) (606) (649) (1,160) (1,358) Non-operating inc./(exp.) (417) (1,123) (1,328) (1,483) Associates/JV 11,719 12,839 12,522 13,270 Recurring PBT 14,065 14,380 13,921 14,527 Exceptionals/extraordinaries 0 0 0 0 Taxes 1,353 1,373 1,329 1,318 Profit after tax 12,712 13,007 12,592 13,209 Other after tax income 0 0 0 0 Minority interests 1,162 1,146 1,187 1,180 Preferred dividends 0 0 0 0 Reported net profit 11,550 11,861 11,405 12,030 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 11,550 11,861 11,405 12,030

Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E

Cash & cash equivalents 35,566 42,046 46,946 52,869 Current receivables 16,679 16,083 17,514 18,403 Inventories 8,665 8,355 9,099 9,561 Other current assets 20,829 20,302 21,567 22,354 Current assets 81,739 86,786 95,126 103,187 Property, plant & equip. 12,929 13,724 14,361 14,840 Investments 49,691 50,975 52,227 53,554 Intangibles 4,590 4,687 4,756 4,797 Other non-current assets 11,837 11,835 11,833 11,832 Total assets 160,786 168,008 178,304 188,210 Accounts payable 28,150 27,144 29,559 31,060 Short-term debt 6,950 5,513 4,076 2,639 Current provisions 948 948 948 948 Other current liabilities 22,588 22,588 22,588 22,588 Current liabilities 58,636 56,193 57,171 57,235 Long-term debt 7,559 5,996 4,433 2,870 Non-current provisions 0 0 0 0 Other non-current liabilities 3,107 3,107 3,107 3,107 Total liabilities 69,302 65,296 64,711 63,212 Shareholders' equity 84,650 94,732 104,427 114,652 Minority interests 6,834 7,980 9,167 10,346 Total liabilities & equity 160,786 168,008 178,304 188,210

Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E

EBIT 2,157 2,015 1,567 1,382 Net interest 0 0 0 0 Tax paid (2,020) (1,373) (1,329) (1,318) Working capital (458) 427 (1,025) (637) Other cash & non-cash items 879 2,441 1,859 2,090 Operating cash flow 558 3,511 1,072 1,516 Capex (3,795) (3,000) (3,000) (3,000) Free cash flow to the firm (3,237) 511 (1,928) (1,484) Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 336 268 268 268 Associate investments (1,424) 11,555 11,270 11,943 Other investment/(outflows) 9,129 0 0 0 Investing cash flow 4,246 8,823 8,538 9,211 Equity raised 0 0 0 0 Dividends paid (2,093) (1,779) (1,711) (1,804) Net borrowings 13,356 (3,000) (3,000) (3,000) Other financing cash flow (10,568) 0 0 0 Financing cash flow 695 (4,779) (4,711) (4,804) Total cash flow 5,499 7,554 4,900 5,923 Adjustments 0 0 0 0 Net change in cash 5,499 7,554 4,900 5,923

Per share 12/15A 12/16E 12/17E 12/18E

Shares (wtd avg.) (mn) 8,616 8,616 8,616 8,616 EPS (Credit Suisse) (Rmb)

1.34 1.38 1.32 1.40 DPS (Rmb) 0.20 0.21 0.20 0.21 BVPS (Rmb) 9.82 10.99 12.12 13.31 Operating CFPS (Rmb) 0.06 0.41 0.12 0.18

Valuation (x) 12/15A 12/16E 12/17E 12/18E

P/E 5.2 5.0 5.2 5.0 P/B 0.70 0.63 0.57 0.52 Dividend yield (%) 2.9 3.0 2.9 3.0 P/CF 106.8 17.0 55.6 39.3 EV/sales 0.3 0.2 0.2 0.1 EV/EBITDA 10.1 7.5 5.9 3.4 EV/EBIT 17.9 14.4 13.5 8.8

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue 52.3 (3.6) 8.9 5.1 EBIT 58.0 (6.6) (22.2) (11.8) Net profit (9.7) 2.7 (3.8) 5.5 EPS (9.7) 2.7 (3.8) 5.5 Margins (%) EBITDA 3.0 3.2 2.7 2.6 EBIT 1.7 1.7 1.2 1.0 Pre-tax profit 11.1 11.8 10.5 10.4 Net profit 9.1 9.7 8.6 8.6

ROE analysis (%) 12/15A 12/16E 12/17E 12/18E

ROE 14.6 13.2 11.5 11.0 ROIC 2.9 2.6 1.9 1.6 Asset turnover (x) 0.8 0.7 0.7 0.7 Interest burden (x) 6.5 7.1 8.9 10.5 Tax burden (x) 0.9 0.9 0.9 0.9 Financial leverage (x) 1.8 1.6 1.6 1.5

Credit ratios 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) (23.0) (29.7) (33.8) (37.9) Net debt/EBITDA (x) (5.53) (7.92) (10.69) (13.17) Interest cover (x) n.a. n.a. n.a. n.a.

12MF P/E multiple

12MF P/B multiple

Source: Credit Suisse, Thomson Reuters


20 September 2016



SAIC Motor Corp Ltd (600104.SS / 600104 CH) Rating (from OUTPERFORM) NEUTRAL Price (20 Sep 16, Rmb) 21.45 Target price (Rmb) (from 27.40) 23.00 Upside/downside (%) 7.2 Mkt cap (Rmb/US$ mn) 236,498 / 35,459 Enterprise value (Rmb mn) 220,251 Number of shares (mn) 11,026 Free float (%) 18.9 52-wk price range (Rmb) 24.10-16.16 ADTO-6M (US$ mn) 51.9 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Bin Wang

852 2101 6702

[email protected]

Mark Mao

852 2101 6710

[email protected]

DOWNGRADE RATING

Sector proxy to face auto sector down-cycle

■ We downgrade SAIC to NEUTRAL from Outperform, as its earnings risk is

likely skewed to the downside starting 2017, amid the auto sector downturn

as consensus forecasts a 2.5% vehicle purchase tax cut in 2017 (i.e., tax rate

increasing to 7.5% in 2017 from 5% in 2016, thus customers paying 2.5%

more tax in 2017 than in 2016).

■ We forecast China passenger vehicle sales growth to slow down from 30%

YoY in 3Q16 to 10% YoY in 4Q16 (due to a high base), further retreating to

3% YoY in 1H2017. Meanwhile, we expect some car makers to subsidise the

2.5% difference from their own pocket to protect their market share. A sector-

wide derating is also likely to happen as stepped-down growth causes

investor concerns about earnings momentum, resulting in a lower valuation.

■ As a sector proxy, SAIC should feel the pain. We thus reduce its 2016-18

earnings estimates by 1-4% with a lower local brand margin assumption,

resulting in a lower target price of Rmb23 (from Rmb27.4), based on 7x

2017E P/E considering the sector-wide derating.

■ Upside risk is a reduction in local brand operating loss on RX5 volume spike,

which currently enjoys three months' waiting list and is likely to hit 20,000

units monthly sales volume by end-2016.



Shanghai Shenzhen CSI300 index which closed at

3,263.12 on 20/09/16. On 20/09/16 the spot exchange rate

was Rmb6.67/US$1

Performance 1M 3M 12M Absolute (%) -8.8 5.2 23.8 Relative (%) -5.8 1.1 25.2


Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 670,448.2 760,731.9 827,289.3 870,389.0 EBITDA (Rmb mn) 25,761.0 34,312.8 57,068.1 85,036.7 EBIT (Rmb mn) 19,033.3 26,425.2 48,123.3 75,060.6 Net profit (Rmb mn) 29,793.8 31,917.0 36,225.6 38,877.9 EPS (CS adj.) (Rmb) 2.70 2.89 3.29 3.53 Change from previous EPS (%) n.a. (1.1) (3.6) (0.7) Consensus EPS (Rmb) n.a. 2.85 3.02 3.19 EPS growth (%) 6.5 7.1 13.5 7.3 P/E (x) 7.9 7.4 6.5 6.1 Dividend yield (%) 6.3 6.7 7.7 8.2 EV/EBITDA (x) 9.5 6.1 2.8 1.1 P/B (x) 1.35 1.23 1.11 1.01 ROE (%) 17.9 17.4 17.9 17.5 Net debt/equity (%) 4.3 Net Cash Net Cash Net Cash


20 September 2016


SAIC Motor Corp Ltd (600104.SS / 600104 CH)

Price (20 Sep 2016): Rmb21.45; Rating: (from OUTPERFORM) NEUTRAL; Target Price: (from Rmb27.40) Rmb23.00; Analyst: Bin Wang


Sales volume 5,863,166 6,197,014 6,457,700 6,652,700 - - - - - - - - - - - - - - - -


Sales revenue 670,448 760,732 827,289 870,389 Cost of goods sold 588,225 652,481 690,129 701,622 SG & A 59,813 76,073 82,729 87,039 Other operating exp./(inc.) (3,351) (2,135) (2,637) (3,308) EBITDA 25,761 34,313 57,068 85,037 Depreciation & amortisation 6,728 7,888 8,945 9,976 EBIT 19,033 26,425 48,123 75,061 Net interest expense/(inc.) (373) (342) (943) (1,618) Non-operating inc./(exp.) (228) (292) (1,420) (2,539) Associates/JV 26,631 28,657 32,525 34,907 Recurring PBT 45,810 55,132 80,172 109,046 Exceptionals/extraordinaries 0 0 0 0 Taxes 5,736 8,669 16,473 26,137 Profit after tax 40,074 46,463 63,698 82,909 Other after tax income 0 0 0 0 Minority interests 10,280 14,546 27,473 44,031 Preferred dividends 0 0 0 0 Reported net profit 29,794 31,917 36,226 38,878 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 29,794 31,917 36,226 38,878


Cash & cash equivalents 62,107 106,976 158,990 226,258 Current receivables 72,667 82,453 89,667 94,338 Inventories 37,243 41,312 43,695 44,423 Other current assets 97,913 99,716 101,045 101,905 Current assets 269,931 330,456 393,397 466,924 Property, plant & equip. 50,547 53,627 55,411 55,926 Investments 61,705 57,002 51,902 46,623 Intangibles 8,824 10,019 11,139 12,183 Other non-current assets 120,624 120,624 120,624 120,624 Total assets 511,631 571,728 632,473 702,281 Accounts payable 99,035 109,853 116,191 118,126 Short-term debt 61,557 63,316 64,157 64,674 Current provisions 0 0 0 0 Other current liabilities 97,076 105,098 109,799 111,233 Current liabilities 257,668 278,267 290,147 294,034 Long-term debt 9,607 17,636 18,761 19,886 Non-current provisions 9,869 9,869 9,869 9,869 Other non-current liabilities 23,570 23,570 23,570 23,570 Total liabilities 300,713 329,342 342,347 347,359 Shareholders' equity 175,129 192,051 212,318 233,083 Minority interests 35,789 50,335 77,808 121,839 Total liabilities & equity 511,631 571,728 632,473 702,281


EBIT 19,033 26,425 48,123 75,061 Net interest 373 342 943 1,618 Tax paid (5,736) (8,669) (16,473) (26,137) Working capital 4,439 3,979 578 (2,748) Other cash & non-cash items 7,883 16,068 18,037 20,709 Operating cash flow 25,993 38,147 51,208 68,502 Capex (16,398) (12,765) (12,765) (12,765) Free cash flow to the firm 9,594 25,381 38,443 55,737 Disposals of fixed assets 571 2,166 2,166 2,166 Acquisitions 0 0 0 0 Divestments 0 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) (1,752) 32,603 35,748 37,196 Investing cash flow (17,579) 22,004 25,149 26,597 Equity raised 0 0 0 0 Dividends paid (23,211) (24,282) (25,843) (29,331) Net borrowings 13,946 9,000 1,500 1,500 Other financing cash flow (13,092) 0 0 0 Financing cash flow (22,357) (15,282) (24,343) (27,831) Total cash flow (13,944) 44,869 52,014 67,268 Adjustments 137 0 0 0 Net change in cash (13,807) 44,869 52,014 67,268

Per share 12/15A 12/16E 12/17E 12/18E



Valuation (x) 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue 6.4 13.5 8.7 5.2 EBIT (0.2) 38.8 82.1 56.0 Net profit 6.5 7.1 13.5 7.3 EPS 6.5 7.1 13.5 7.3 Margins (%) EBITDA 3.8 4.5 6.9 9.8 EBIT 2.8 3.5 5.8 8.6 Pre-tax profit 6.8 7.2 9.7 12.5 Net profit 4.4 4.2 4.4 4.5




Net debt/equity (%) 4.3 (10.7) (26.2) (39.9) Net debt/EBITDA (x) 0.35 (0.76) (1.33) (1.67) Interest cover (x) n.a. n.a. n.a. n.a.

12MF P/E multiple

12MF P/B multiple



20 September 2016



Great Wall Motor (2333.HK / 2333 HK) Rating (from OUTPERFORM) NEUTRAL [V] Price (20 Sep 16, HK$) 7.93 Target price (HK$) (from 9.10) 8.80 Upside/downside (%) 11.0 Mkt cap (HK$/US$ mn) 95,588 / 12,324 Enterprise value (Rmb mn) 77,609 Number of shares (mn) 9,127 Free float (%) 44.0 52-wk price range (HK$) 15.27-4.96 ADTO-6M (US$ mn) 30.5 *Stock ratings are relative to the relevant country benchmark.


[V] = Stock Considered Volatile (see Disclosure Appendix)

Research Analysts

Bin Wang

852 2101 6702

[email protected]

Mark Mao

852 2101 6710

[email protected]

DOWNGRADE RATING

More margin risk from peers' new SUV launches

■ Thanks to its large exposure to small vehicles (engine size ≤ 1.6L) purchase

tax cut, Great Wall sales jumped 71% YoY in September's first two weeks.

We expect its H7 high-end SUV sales to hit a new high in September, to

more than 5,000 units given its more than one month waiting list.

■ Although Great Wall's sales momentum remains strong, we see rising price

pressure from peers' new launches. For example, Geely Boyue and SAIC

RX5 volume ramped up very quickly along with >3 months waiting list thanks

to a superior design language. Geely / SAIC guided Boyue / RX5 monthly

volume to double from the current 10,000 units to 20,000 units by Dec. 2016.

■ Looking ahead, the current 5% vehicle purchase tax might be revised up to

7.5% starting 2017 and some car makers might subsidise the 2.5% tax

difference from their own pockets. As the largest beneficiary of the currently

favourable purchase tax reduction, Great Wall should feel the pain.

■ We thus downgrade Great Wall to NEUTRAL (from Outperform) after revising

down 2016-18 earnings estimates by 3-5% with a lower margin assumption,

resulting in a new target price HK$8.8 (from HK$9.1).





Performance 1M 3M 12M Absolute (%) 5.0 21.4 -49.6 Relative (%) 2.9 6.6 -56.4


Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 73,146.9 86,449.2 92,265.2 95,023.1 EBITDA (Rmb mn) 11,781.2 13,503.5 13,763.3 14,086.9 EBIT (Rmb mn) 9,811.9 11,107.4 10,983.6 10,893.4 Net profit (Rmb mn) 8,059.3 9,268.5 9,260.9 9,175.5 EPS (CS adj.) (Rmb) 0.88 1.02 1.01 1.01 Change from previous EPS (%) n.a. (3.4) (4.3) (4.5) Consensus EPS (Rmb) n.a. 0.95 0.98 0.98 EPS growth (%) 0.2 15.0 (0.1) (0.9) P/E (x) 7.7 6.7 6.7 6.8 Dividend yield (%) 4.0 4.5 4.5 4.4 EV/EBITDA (x) 6.7 5.7 5.4 5.0 P/B (x) 1.62 1.38 1.21 1.08 ROE (%) 22.4 22.2 19.2 16.8 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash


20 September 2016


Great Wall Motor (2333.HK / 2333 HK)

Price (20 Sep 2016): HK$7.93; Rating: (from OUTPERFORM) NEUTRAL [V]; Target Price: (from HK$9.10) HK$8.80; Analyst: Bin Wang


Sales volume 846,272 933,424 997,000 1,047,000 - - - - - - - - - - - - - - - -


Sales revenue 73,147 86,449 92,265 95,023 Cost of goods sold 56,871 67,388 72,793 75,388 SG & A 6,872 8,558 9,134 9,407 Other operating exp./(inc.) (2,377) (3,001) (3,426) (3,859) EBITDA 11,781 13,504 13,763 14,087 Depreciation & amortisation 1,969 2,396 2,780 3,194 EBIT 9,812 11,107 10,984 10,893 Net interest expense/(inc.) (20) 3 (24) (83) Non-operating inc./(exp.) (241) (80) 0 (75) Associates/JV 98 116 124 127 Recurring PBT 9,689 11,141 11,132 11,029 Exceptionals/extraordinaries 0 0 0 0 Taxes 1,628 1,872 1,871 1,853 Profit after tax 8,060 9,268 9,261 9,176 Other after tax income 0 0 0 0 Minority interests 1 0 0 0 Preferred dividends 0 0 0 0 Reported net profit 8,059 9,268 9,261 9,176 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 8,059 9,268 9,261 9,176


Cash & cash equivalents 3,642 5,389 8,376 11,414 Current receivables 28,838 34,082 36,375 37,462 Inventories 4,120 4,882 5,273 5,461 Other current assets 3,791 4,480 4,782 4,924 Current assets 40,390 48,833 54,805 59,262 Property, plant & equip. 25,397 28,574 31,379 34,188 Investments 25 25 25 25 Intangibles 3,138 3,565 3,980 4,422 Other non-current assets 2,961 2,961 2,961 2,961 Total assets 71,911 83,957 93,150 100,858 Accounts payable 21,084 24,983 26,987 27,948 Short-term debt 300 300 300 300 Current provisions 0 0 0 0 Other current liabilities 10,403 11,965 12,672 12,995 Current liabilities 31,786 37,248 39,958 41,243 Long-term debt 50 0 0 0 Non-current provisions 0 0 0 0 Other non-current liabilities 1,687 1,686 1,686 1,686 Total liabilities 33,524 38,934 41,645 42,929 Shareholders' equity 38,479 44,967 51,449 57,872 Minority interests 56 56 56 56 Total liabilities & equity 71,911 83,957 93,150 100,858


EBIT 9,812 11,107 10,984 10,893 Net interest 221 83 (24) (8) Tax paid (1,628) (1,872) (1,871) (1,853) Working capital (1,101) (1,234) (275) (134) Other cash & non-cash items 2,730 2,313 2,804 3,202 Operating cash flow 10,034 10,397 11,617 12,100 Capex (4,992) (5,493) (5,493) (5,899) Free cash flow to the firm 4,581 4,397 5,617 5,656 Disposals of fixed assets 18 0 0 0 Acquisitions 0 0 0 0 Divestments 0 0 0 0 Associate investments 150 0 0 0 Other investment/(outflows) (1,289) (507) (507) (545) Investing cash flow (6,113) (6,000) (6,000) (6,444) Equity raised 0 0 0 0 Dividends paid (3,199) (2,781) (2,778) (2,753) Net borrowings 743 (50) 0 0 Other financing cash flow (1,656) 180 148 136 Financing cash flow (4,112) (2,650) (2,630) (2,617) Total cash flow (191) 1,747 2,987 3,039 Adjustments (28) 0 0 0 Net change in cash (219) 1,747 2,987 3,039

Per share 12/15A 12/16E 12/17E 12/18E



Valuation (x) 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue 21.3 18.2 6.7 3.0 EBIT 2.7 13.2 (1.1) (0.8) Net profit 0.2 15.0 (0.1) (0.9) EPS 0.2 15.0 (0.1) (0.9) Margins (%) EBITDA 16.1 15.6 14.9 14.8 EBIT 13.4 12.8 11.9 11.5 Pre-tax profit 13.2 12.9 12.1 11.6 Net profit 11.0 10.7 10.0 9.7




Net debt/equity (%) (8.6) (11.3) (15.7) (19.2) Net debt/EBITDA (x) (0.28) (0.38) (0.59) (0.79) Interest cover (x) n.a. 4172.95 n.a. n.a.

12MF P/E multiple

12MF P/B multiple



20 September 2016



BYD Co Ltd (1211.HK / 1211 HK) Rating OUTPERFORM [V] Price (20 Sep 16, HK$) 53.20 Target price (HK$) (from 83.00) 80.00 Upside/downside (%) 50.4 Mkt cap (HK$/US$ mn) 167,409 / 21,584 Enterprise value (Rmb mn) 161,667 Number of shares (mn) 2,728 Free float (%) 86.8 52-wk price range (HK$) 56.50-32.35 ADTO-6M (US$ mn) 30.9 *Stock ratings are relative to the relevant country benchmark.


[V] = Stock Considered Volatile (see Disclosure Appendix)

Research Analysts

Bin Wang

852 2101 6702

[email protected]

DOWNGRADE RATING

New monorail good for LT growth, but

increased ST cost

■ BYD's August 2016 auto sales growth hit a 77-month high to 93.2% YoY,

thanks to strong sales growth from both gasoline engine vehicles (up 66%

YoY to 27,745 units) and new energy vehicles (up 212% YoY to 12,014

units). We also highlight that BYD's new energy vehicle volume hit a new

historical high in August.

■ Looking ahead, we expect its new energy vehicle volume to rise further due

to a combination of seasonal demand peak and some front-loading demand

in 4Q16, as the government's cash subsidy will decline 20% starting 1 Jan.

2017. We also expect BYD to lower its new energy vehicle selling price in

2017 to offset the 20% government subsidy drop.

■ BYD announced that it had spent Rmb5.0 bn on R&D capex for its new

"straddle monorail" business. BYD has built an integrated supply chain from

rail way, rail bearer, electronic components, etc., and the first monorail demo

line would start operation at end-Sep. 2016.

■ Though BYD's penetration into the straddle monorail market sounds

strategically right, it will increase near-term R&D cost and intangible asset

amortisation cost. We thus lower BYD's 2016-18 earnings estimate by 1-8%

resulting in a lower TP of HK$80 (from HK$83).





Performance 1M 3M 12M Absolute (%) 3.9 14.8 44.4 Relative (%) 1.7 -0.0 37.6


Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 78,741.6 95,099.3 104,616.4 114,969.2 EBITDA (Rmb mn) 9,877.7 14,551.8 12,845.2 13,638.7 EBIT (Rmb mn) 4,564.1 8,859.2 7,016.0 7,673.0 Net profit (Rmb mn) 2,823.4 5,180.2 4,386.9 5,087.7 EPS (CS adj.) (Rmb) 1.14 1.90 1.61 1.86 Change from previous EPS (%) n.a. (1.3) (7.9) (7.4) Consensus EPS (Rmb) n.a. 1.83 2.17 2.51 EPS growth (%) 551.3 66.5 (15.3) 16.0 P/E (x) 40.1 24.1 28.4 24.5 Dividend yield (%) 0.0 1.8 1.5 1.8 EV/EBITDA (x) 17.8 10.7 11.6 10.4 P/B (x) 3.51 2.52 2.40 2.27 ROE (%) 9.8 12.7 8.6 9.5 Net debt/equity (%) 87.8 22.9 8.7 Net Cash


20 September 2016


BYD Co Ltd (1211.HK / 1211 HK)

Price (20 Sep 2016): HK$53.20; Rating: OUTPERFORM [V]; Target Price: (from HK$83.00) HK$80.00; Analyst: Bin Wang


Vehicle sales volume 450,222 488,928 592,000 630,000 - - - - - - - - - - - - - - - -


Sales revenue 78,742 95,099 104,616 114,969 Cost of goods sold 66,514 76,291 85,328 92,962 SG & A 8,283 10,081 12,554 14,601 Other operating exp./(inc.) (5,933) (5,824) (6,110) (6,232) EBITDA 9,878 14,552 12,845 13,639 Depreciation & amortisation 5,314 5,693 5,829 5,966 EBIT 4,564 8,859 7,016 7,673 Net interest expense/(inc.) 1,446 1,424 952 746 Non-operating inc./(exp.) (533) (800) (300) (300) Associates/JV 1,210 0 0 0 Recurring PBT 3,795 6,635 5,764 6,627 Exceptionals/extraordinaries 0 0 0 0 Taxes 657 995 865 994 Profit after tax 3,138 5,640 4,900 5,633 Other after tax income 0 0 0 0 Minority interests 315 459 513 545 Preferred dividends 0 0 0 0 Reported net profit 2,823 5,180 4,387 5,088 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 2,823 5,180 4,387 5,088


Cash & cash equivalents 6,011 17,312 20,706 24,088 Current receivables 26,679 32,221 35,445 38,953 Inventories 15,751 18,066 20,206 22,014 Other current assets 6,079 6,721 7,117 7,548 Current assets 54,519 74,319 83,474 92,603 Property, plant & equip. 39,039 35,503 31,874 28,154 Investments 5,026 5,026 5,026 5,026 Intangibles 7,169 6,728 6,242 5,713 Other non-current assets 9,733 10,116 10,212 10,309 Total assets 115,486 131,691 136,829 141,805 Accounts payable 30,656 35,162 39,327 42,846 Short-term debt 26,413 19,268 16,668 14,068 Current provisions 779 779 779 779 Other current liabilities 8,263 10,232 12,236 14,298 Current liabilities 66,110 65,441 69,010 71,990 Long-term debt 11,230 10,375 8,975 7,575 Non-current provisions 0 0 0 0 Other non-current liabilities 2,116 2,116 2,116 2,116 Total liabilities 79,457 77,932 80,101 81,682 Shareholders' equity 32,294 49,564 52,021 54,870 Minority interests 3,735 4,194 4,707 5,252 Total liabilities & equity 115,486 131,691 136,829 141,805


EBIT 4,564 8,859 7,016 7,673 Net interest 1,517 1,424 952 746 Tax paid (399) (605) (526) (605) Working capital (5,705) (2,063) 408 (166) Other cash & non-cash items 3,866 2,685 4,131 4,423 Operating cash flow 3,842 10,300 11,981 12,071 Capex (10,263) (4,000) (4,000) (4,000) Free cash flow to the firm (4,358) 7,100 8,781 8,871 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 1,809 1,968 1,968 1,968 Associate investments (786) 0 0 0 Other investment/(outflows) 532 40 0 0 Investing cash flow (8,708) (1,993) (2,032) (2,032) Equity raised 3,200 14,369 0 0 Dividends paid (37) (2,279) (1,930) (2,239) Net borrowings 26,026 (8,000) (4,000) (4,000) Other financing cash flow (20,440) (1,097) (624) (418) Financing cash flow 8,750 2,993 (6,554) (6,657) Total cash flow 3,884 11,301 3,395 3,382 Adjustments 203 0 0 0 Net change in cash 4,087 11,301 3,395 3,382

Per share 12/15A 12/16E 12/17E 12/18E



Valuation (x) 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue 37.6 20.8 10.0 9.9 EBIT 83.4 94.1 (20.8) 9.4 Net profit 551.3 83.5 (15.3) 16.0 EPS 551.3 66.5 (15.3) 16.0 Margins (%) EBITDA 12.5 15.3 12.3 11.9 EBIT 5.8 9.3 6.7 6.7 Pre-tax profit 4.8 7.0 5.5 5.8 Net profit 3.6 5.4 4.2 4.4




Net debt/equity (%) 87.8 22.9 8.7 (4.1) Net debt/EBITDA (x) 3.20 0.85 0.38 (0.18) Interest cover (x) 3.16 6.22 7.37 10.29

12MF P/E multiple

12MF P/B multiple



20 September 2016


Companies Mentioned (Price as of 19-Sep-2016) BAIC Motor Corporation Limited (1958.HK, HK$8.26) BYD Co Ltd (1211.HK, HK$53.3, OUTPERFORM[V], TP HK$80.0) Brilliance China Automotive Holdings Limited (1114.HK, HK$9.12) Dongfeng Motor Group Company Limited (0489.HK, HK$8.11, NEUTRAL, TP HK$9.2) Geely Automobile Holdings Ltd (0175.HK, HK$6.97) Great Wall Motor (2333.HK, HK$7.96, NEUTRAL[V], TP HK$8.8) Guangzhou Automobile Group (2238.HK, HK$10.78) Honda Motor (7267.T, ¥2,984) Hyundai Motor Company (005380.KS, W137,000) Kia Motors (000270.KS, W44,250) Maruti Suzuki India Ltd (MRTI.BO, Rs5483.6) Mazda Motor (7261.T, ¥1,602) Mitsubishi Motors (7211.T, ¥469) Nissan Motor (7201.T, ¥1,003) SAIC Motor Corp Ltd (600104.SS, Rmb21.37, NEUTRAL, TP Rmb23.0) Suzuki Motor (7269.T, ¥3,461) Tata Motors Ltd. (TAMO.BO, Rs553.5) Toyota Motor (7203.T, ¥5,866)

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 BYD Co Ltd (1211.HK)

1211.HK Closing Price Target Price

Date (HK$) (HK$) Rating

11-Mar-14 55.20 74.00 O *

25-Aug-14 50.30 71.00

12-Oct-14 50.80 *

13-Oct-14 49.90 71.00 O

12-Feb-15 26.95 72.00

25-May-15 54.50 75.00

30-Sep-15 40.85 77.00

26-Nov-15 41.55 79.00

08-Jan-16 37.75 80.00

28-Apr-16 44.90 82.00

18-Jul-16 52.65 R

04-Aug-16 48.85 82.00 O

29-Aug-16 52.25 83.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

REST RICT ED

20 September 2016


3-Year Price and Rating History for Dongfeng Motor Group Company Limited (0489.HK)



23-Oct-13 11.44 NR

10-Mar-14 9.93 12.00 O

11-Mar-14 10.42 *

31-Mar-14 10.98 12.00 O

18-Apr-14 10.90 13.50

09-Jun-14 12.82 14.00

01-Sep-14 14.56 15.00

03-Nov-14 11.50 14.50

10-Jan-15 11.30 13.30

26-Mar-15 12.16 13.60

01-May-15 12.94 14.80 N

30-Sep-15 9.65 15.00 O

29-Oct-15 10.82 15.30

30-Mar-16 9.76 13.40

25-Jul-16 9.34 13.50

27-Jul-16 9.32 13.90


N O T RA T ED

O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Great Wall Motor (2333.HK)



11-Mar-14 22.07 24.00 N *

08-May-14 21.87 20.00

21-Jul-14 19.43 19.33

09-Oct-14 21.13 20.00

12-Oct-14 21.43 *

13-Oct-14 21.47 20.00 N

23-Oct-14 21.67 19.33

27-Oct-14 20.67 32.00 O

04-Dec-14 25.47 33.33

23-Mar-15 33.97 38.67

20-Apr-15 37.33 44.00

04-Jun-15 33.10 42.00

13-Jul-15 21.97 24.67 N

30-Sep-15 8.56 38.00 O

02-Oct-15 9.68 12.67

29-Jan-16 5.91 7.80 N

07-Mar-16 7.03 7.80 O

14-Mar-16 7.03 8.00

22-Apr-16 6.20 8.10

28-Jul-16 7.84 9.10


N EU T RA L

O U T PERFO RM

20 September 2016


3-Year Price and Rating History for SAIC Motor Corp Ltd (600104.SS)

600104.SS Closing Price Target Price

Date (Rmb) (Rmb) Rating

22-Aug-14 17.03 24.50 O *

29-Apr-15 27.31 28.00 N

12-May-15 25.71 27.00

27-Aug-15 16.52 18.80

23-Sep-15 16.55 18.00

30-Sep-15 16.80 20.00 O

10-Nov-15 20.68 25.00

28-Jan-16 17.81 26.00

24-Aug-16 23.67 27.40


O U T PERFO RM

N EU T RA L

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 attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the 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 attractiv eness 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 associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in ope ration from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 53% (50% banking clients) Neutral/Hold* 29% (24% banking clients) Underperform/Sell* 18% (44% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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20 September 2016


Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for BYD Co Ltd (1211.HK)

Method: We derive our HK$80 target price for BYD from a Discounted Cash Flow-based methodology as near-term multiples can't catch BYD's decent long-term growth. Our target price implies 36x 2016E P/E (price-to-earnings), a substantial premium to the current auto peer average trading multiples. We have a non-consensus OUTPERFORM rating on BYD - the market is quite conservative on concerns over BYD's rich near-term multiples, and more importantly, EV (Electric vehicle) penetration hurdles, i.e., cost, infrastructure. BYD is China's most competitive EV manufacturer, in our view, given its technology leadership with an integrated EV solution, strong EV product pipeline and longest EV commercial operation experience.

Risk: Risks that could impede the achievement of our HK$80 target price for BYD include: bigger-than-expected EV penetration hurdles, especially infrastructure construction (charging poles). If local governments fail to deliver (or if there are delays to) what they have promised on infrastructure construction, we are concerned that it would hurt Qin, Tang, Song, Yuan PHEV's penetration. Risks to our OUTPERFORM rating include government policy change amid a low oil price environment and tight government fiscal income, resulting in the government shifting its fiscal spending from subsidizing new energy vehicles to boosting infrastructure and property FAI. The slowed than expected cost reduction in battery, electric motors and electric control systems might not able to offset the negative impact from government subsidy reduction ( down 20% since 2017).

Target Price and Rating Valuation Methodology and Risks: (12 months) for Dongfeng Motor Group Company Limited (0489.HK)

Method: Our HK$9.2 target price for Dongfeng Motor Group is based on 6x 2017E EPS (earnings per share). This is around a 14% discount to Dongfeng's historical trading multiple 7x forward P/E (price-to-earnings) due to an estimated sector-wide de-rate amid sector downturn - decelerating sales growth and potential downward margin pressure. China auto is cyclical sector and investors generally look at near-term earnings multiple, thus we have decided to value Dongfeng with forward multiple. We have an NEUTRAL rating due to a combination of of (A) our conservative judgement about China's auto demand outlook since 2017; and (B) Dongfeng's cheap valuation: 5x 2016E P/E along with a strong balance sheet - net cash accounts for 46% market cap.

Risk: Downside risk that could impede achievement of our HK$9.2 target price for Dongfeng Motor Group include worsened Sino-Japan tensions hurting its Japanese JV sales. Our base case scenario is that the Sino-Japan tensions will endure, and we do not expect the situation to ease soon, nor do we believe it will break out into a war. But if either party crosses the line, it would trigger a share price slump as Dongfeng is highly exposed to the Japanese brand cars. Upside risk is Dongfeng PSA JV sales growth turnaround thanks to its new Peugeot 308 sedan and Peugeot 4008 SUVs on the back of their excellent interior design. Downside risk to our NEUTRAL rating is weaker-than-expected sector wide demand due to sever macro-economic situation or negative policy moves, like more cities to implement car purchase quota control Upside risk is igger-than-expected tax cut, i.e. lower than tax from 2016's 5% to ZERO since 2017, or later-than-expected removal of vehicle purchase tax cut, i.e. extend the 5% vehicle purchase tax cut into 2017 and onwards.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Great Wall Motor (2333.HK)

Method: We derive our target price of HK$8.8 for Great Wall Motor from a DCF (discounted cash flow)-based methodology, implying 7.4x 2016E P/E. Great Wall's strong balance sheet cannot be fully exhibited via simple multiples, we thus prefer DCF to value the company. We rate the stock NEUTRAL due to a combination of (A) Great Wall's exposure to the high growth SUV segment with strong balance sheet, and (B) downward margin trend due to competitor strong new SUVs launches, such as Geely Boyue NL-3 / Roewe RX5, which enjoys more than three months waiting list and their ramping-up volume might put rising pressure on Great Wall margin.

Risk: Downside risks that could impede achievement of our HK$8.8 target price for Great Wall Motor include the increasing price competition in the SUV segment. Although the SUV segment's long-term picture looks rosy, we see increasing downward pressures on margins and prices. Great Wall might start to feel the pain amid a very sharp rise in supply from local peers as they adopt aggressive strategies to penetrate this high-growth/high margin market. Upside risk to our HK$8.8 target price is better than expected high-end products sales (i.e. H7) as well as stronger than expected performance of its new products - H2S and new H6. Downside risks to our NEUTRAL rating is Great Wall potential sales decline due to its key volume and profit contributor - H6 sales collapse due to peers' competition. Upside risk to our NEUTRAL rating is Great Wall successful penetration into new energy vehicle market with sizable volume.

Target Price and Rating Valuation Methodology and Risks: (12 months) for SAIC Motor Corp Ltd (600104.SS)

Method: Our Rmb23 target price for SAIC Motor Corp Ltd is based on 7x 2017E EPS (earnings per share),. This is largely in-line with SAIC's historical trading multiple 7x forward P/E (price-to-earnings). China auto is cyclical sector and investors generally look at near-term earnings multiple, thus we have decided to value SAIC with forward multiple. We have an NEUTRAL rating due to a combination of (A) our conservative judgement about China's auto demand outlook since 2017; and (B) SAIC strong balance sheet - net cash accounts for 20% market cap. along with high dividend yield of 6.8%.

20 September 2016


Risk: Downside risk that could impede achievement of our Rmb23 target price for SAIC Motor Corp Ltd include: the potential more sector wide price competition, and a potential increase in losses at its local brands operation (Roewe and MG brand PV). Upside risk is SAIC local brand operation turnaround on teh back of strong launches, such as RX5 SUV Downside risk to our NEUTRAL rating is weaker-than-expected sector wide demand due to sever macro-economic situation or negative policy moves, like more cities to implement car purchase quota control Upside risk is igger-than-expected tax cut, i.e. lower than tax from 2016's 5% to ZERO since 2017, or later-than-expected removal of vehicle purchase tax cut, i.e. extend the 5% vehicle purchase tax cut into 2017 and onwards.

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 The subject company (600104.SS, 0489.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (600104.SS, 0489.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (600104.SS, 0489.HK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (600104.SS, 2333.HK, 1211.HK, 0489.HK) within the next 3 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (MRTI.BO, TAMO.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2333.HK, 1211.HK, 0489.HK). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (0489.HK).

For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=248731&v=-3oqjq8k3n5vnmzu6bj80jh010 .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse (Hong Kong) Limited ........................................................................................................................................ Bin Wang ; Mark Mao To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ........................................................................................................................................ Bin Wang ; Mark Mao

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

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20 September 2016


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