HUAYU AUTOMOTIVE(600741)：CONSISTENT GROWTH BACKED BY SAIC; INITIATING WITH BUY

Deutsche Bank Markets Research Rating Buy Asia China Automobiles & Components Company Huayu Automotive Date 12 October 2015 Initiation of Coverage Consistent growth backed by SAIC; initiating with Buy Reuters Bloomberg Exchange Ticker 600741.SS 600741 CH SHH 600741 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 69,557.8 73,756.4 83,629.1 95,238.2 104,515.5 EBITDA (CNYm) 5,995.1 5,587.1 6,031.9 6,474.2 7,040.1 Reported NPAT (CNYm) 3,448.0 4,455.7 4,832.8 5,370.8 5,940.7 Reported EPS FD (CNY) 1.33 1.72 1.87 2.08 2.30 DB EPS FD (CNY) 1.26 1.57 1.79 1.99 2.21 DB EPS growth (%) 7.2 25.0 13.8 11.4 10.9 PER (x) 7.0 7.0 8.4 7.5 6.8 EV/EBITDA (x) 1.7 1.4 2.6 2.0 1.5 DPS (net) (CNY) 0.47 0.52 0.56 0.62 0.69 Yield (net) (%) 5.3 4.7 3.7 4.2 4.6 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 Global auto interior trim giant exploring new business opportunities ________________________________________________________________________________________________________________ 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) 124/04/2015. Price at 12 Oct 2015 (CNY) 15.00 Price target - 12mth (CNY) 19.90 52-week range (CNY) 25.19 - 11.88 Shanghai Composite 3,184 Fei Sun, CFA Research Associate (+852) 2203 6130 fei.sun@db.com Vincent Ha, CFA Research Analyst (+852) 2203 6247 vincent.ha@db.com Price/price relative 48121620242810/124/1310/134/1410/144/15Huayu AutomotiveShanghai Composite (Rebased) Performance (%) 1m 3m 12m Absolute 6.5 -21.6 19.9 Shanghai Composite -0.5 -17.9 34.1 Source: Deutsche Bank Huayu Automotive Systems is China’s largest interior trim supplier in terms of revenue. Despite the recent sales slowdown at its major customer and controlling shareholder SAIC, we believe Huayu will continue to deliver stable earnings growth in FY15-17E on 1) stable sales growth at SAIC, ensuring a solid revenue source; and 2) the acquisition of new businesses and customers. This should support a 30% dividend payout ratio. We initiate coverage on Huayu with a Buy rating and a RMB19.9 target price. Stable sales outlook at SAIC Motor provides consistent earnings support In 1H15, 72% of Huayu’s revenue was generated from SAIC Motor and its associates and JVs (such as Shanghai-Volkswagen and SAIC-GM). We think that the 7.1% FY14-17E revenue CAGR at SAIC (as a result of more new model launches and a ramp-up of SUV sales) will continue to ensure a solid revenue source for Huayu in FY15-17E. We expect Huayu to deliver a 12.3% FY14-17 gross revenue CAGR, mainly driven by the expanding overseas sales of Yanfeng – Huayu’s wholly owned interior trim subsidiary – after the set-up of the new interior trim JV with Johnson Controls. Non-SAIC customers and new business acquisitions give extra growth support We forecast a 12.5% FY14-17E CAGR in the profit contribution from Huayu’s JVs/associates and a 10.1% earnings CAGR overall for FY14-17E. Huayu has established strong relationships with some leading global auto component suppliers (Visteon, Continental, GKN, ZF, etc) through various subsidiaries and JVs, which should help it explore new customers by leveraging on global suppliers’ relationships with foreign OEMs. With RMB12.0bn net cash as of FY14, we also foresee profit growth through potential acquisitions. Target price set at 10.0x FY16E P/E; key risk is loss of market share We value Huayu Automotive at 10.0x FY16E P/E, which is about 15% below its mid-cycle P/E of 11.8x. We believe our target multiple is justified, given a 10% FY14-17E three-year EPS CAGR. Major downside risks are weaker-than-expected auto sales volume, an inability to acquire new customers, market share loss, and an unexpected increase in raw material prices. 12 October 2015 Automobiles & Components Huayu Automotive Page 2 Deutsche Bank AG/Hong Kong Model updated:07 October 2015 Running the numbers Asia China Automobiles & Components Huayu Automotive Reuters: 600741.SS Bloomberg: 600741 CH Buy Price (12 Oct 15) CNY 15.00 Target Price CNY 19.90 52 Week range CNY 11.88 - 25.19 Market Cap (m) CNYm 38,748 USDm 6,106 Company Profile Huayu Automotive Systems Company Limited (HASCO) manufactures and sells auto parts, with six core bu