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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, 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.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
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
Mark Mao
852 2101 6710
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
CarsHouseLuxury goods
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 3
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) 4
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 5
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 6
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
CarsHouseLuxury goods
RefrigeratorWashing machineColor TV
Bicycle Radio Mono TV
Rural
Urban RefrigeratorWashing machineColor TV
Rural Rural Rural
Urban Urban UrbanAir ConditionerComputerMotorcycle
CarsHouseLuxury goods
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%
200%
250%
0
20
40
60
80
100
120
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%
20%
40%
60%
80%
100%
120%
140%
160%
0
20
40
60
80
100
120
140
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 7
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 8
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 9
■ 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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 10
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
Source: Company data
Figure 19: Industry average quality trend - gap between Chinese local and global makers
Source: J.D.Power
26 October 2015
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 11
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 12
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 13
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 14
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
Source: Company data
26 October 2015
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 15
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 16
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 17
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 18
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 19
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 20
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 21
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%
Source: Company data
26 October 2015
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 22
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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 23
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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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
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 24
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Credit Suisse may have interest in (MRTI.BO, TAMO.BO)
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26 October 2015
Geely Automobile Holdings Ltd (0175.HK / 175 HK) 25
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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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