Driving in the fast lane; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Automobiles & Components Company BAIC Motor Date 25 January 2015 Initiation of Coverage Driving in the fast lane; initiating with Buy Reuters Bloomberg Exchange Ticker 1958.HK 1958 HK HSI 1958 Forecasts And Ratios Year End Dec 31 2012A 2013A 2014E 2015E 2016E Sales (CNYm) 3,519.7 12,781.9 55,880.1 85,632.7 100,911.2 EBITDA (CNYm) 356.6 -1,593.8 2,915.3 7,399.2 10,468.6 Reported NPAT (CNYm) 3,417.4 2,776.4 4,217.9 7,123.8 9,386.7 DB EPS FD (CNY) 0.70 0.49 0.66 0.94 1.24 DB EPS growth (%) 21.6 -29.3 32.6 43.0 31.8 PER (x) – – 10.9 7.6 5.8 EV/EBITDA (x) – – 17.7 7.2 4.6 Yield (net) (%) – – 1.6 2.6 3.5 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Omnipresent in both Chinese high-end and low- to mid-end auto segments ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. Price at 22 Jan 2015 (HKD) 8.89 Price target - 12mth (HKD) 11.30 52-week range (HKD) 9.10 - 8.20 HANG SENG INDEX 24,523 Vincent Ha, CFA Research Analyst (+852) 2203 6247 vincent.ha@db.com Fei Sun, CFA Research Associate (+852) 2203 6130 fei.sun@db.com Price/price relative 8.08.48.89.29.612/14BAIC MotorHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -0.6 – – HANG SENG INDEX 4.8 4.8 6.2 Source: Deutsche Bank Stock data Market cap (HKDm) 67,523 Market cap (USDm) 8,709 Shares outstanding (m) 7,595.3 Major shareholders BAIC Group (45%) Free float (%) 18 Source: Deutsche Bank Key indicators (FY1) ROE (%) 15.0 Net debt/equity (%) 5.7 Book value/share (CNY) 4.40 Price/book (x) 1.6 Net interest cover (x) 1.5 Operating profit margin (%) 1.4 Source: Deutsche Bank BAIC Motor is China's fifth largest passenger vehicle (PV) manufacturer in terms of sales volume. We think the company will enjoy robust, above-market sales volume and earnings growth on: 1) premium auto market share gains by the Beijing Benz JV with more new models, 2) the rollout of more Beijing Motor local brand models with advanced Saab technologies, 3) consistent earnings contributions from the Beijing Hyundai JV, and 4) relatively high operating leverage. We initiate coverage with a Buy rating and HKD11.30 target price. Beijing Hyundai the foundation, Beijing Benz and Beijing Motor the drivers We believe Beijing Hyundai, contributing 70% of BAIC Motor’s FY14E sales volume, should continue its stable growth on product renewals. For Beijing Benz, FY14 sales grew by 25% YoY following the E Class sedan facelift in late FY13 and the launch of the new long-wheel base C Class sedan in August last year, and we expect the strong growth to continue with more new models in FY15. For Beijing Motor, we envision a 36% FY13-16E three-year sales volume CAGR driven by new models, mostly based on the Saab technology platform. Anticipated turnaround in growth prospects We expect BAIC Motor to record a FY13-16E EPS CAGR of 36% due to strong earnings growth at Beijing Benz and narrowing losses at Beijing Motor amid robust sales growth. This is in stark contrast to the company’s -4% EPS CAGR in FY11-13, when strong growth from Beijing Hyundai was offset by the widening of Beijing Motor’s loss (amid the rollout of new capacity and the costs related to the adoption of the Saab technologies), while Beijing Benz experienced a profit decline amid deep discounting on aging products. Target price implies 9.7x FY15E P/E; key risk is weak new model sales We use a sum-of-the-parts (SoTP) approach to value BAIC Motor, based on DCF-derived valuations for the company’s Beijing Benz, Beijing Hyundai and Beijing Motor businesses (see the Valuation section for details). We think that the implied target FY15E P/E of 9.7x and FY15E P/BV of 1.7x are justified, considering the 32% FY16E EPS growth and 21% FY16E ROE. Major downside risks include weak reception of new models and a failure to contain costs. 25 January 2015 Automobiles & Components BAIC Motor Page 2 Deutsche Bank AG/Hong Kong Model updated:21 January 2015 Running the numbers Asia China Automobiles & Components BAIC Motor Reuters: 1958.HK Bloomberg: 1958 HK Buy Price (22 Jan 15) HKD 8.89 Target Price HKD 1