autos & auto parts - jefferies · pdf filemkt. cap price cons. current eps estimates...

Mkt. Cap Price Cons. Current EPS Estimates Valuation (P/E)Company Name Ticker (MM) Rating Price Target Next FY 2015 2016 2017 2016 2017 BYD Company Limited 1211 HK HK$105,477.6 HOLD HK$42.60 HK$43.00 RMB1.20 RMB0.40 RMB0.72 RMB0.85 59.2x 50.1xBYD Company Limited 002594 CH RMB156,706.0 UNPF RMB63.29 RMB36.00 RMB1.62 RMB0.40 RMB0.72 RMB0.85 87.9x 74.5xZhengzhou Yutong Bus 600066 CH RMB48,109.4 BUY RMB21.71 RMB26.00 RMB1.96 RMB1.48 RMB1.81 RMB2.04 12.0x 10.6x

Initiating Coverage

China | Industrials | Autos & Auto Parts 2 December 2015

Autos & Auto PartsChina NEV Champions Face-Off; InitiateYutong at Buy, BYD at Hold

EQU

ITY R

ESEARC

H C

HIN

A

List of technical abbreviations

NEV: New energy vehicle

PV: Passenger vehicle or car

CV: Commercial vehicle

PHEV: Plug-in hybrid electric vehicle

BEV: Pure electric vehicle

FCV: Fuel cell vehicle

CNG: Compressed natural gas

LNG: Liquefied natural gas

BMS: Battery management system

LFP: Lithium iron phosphate

LMO: Lithium manganese oxide

NCM: Nickel manganese cobalt oxide

NCA: Nickel cobalt aluminum oxide

Zhi Aik Yeo *Equity Analyst

+852 3743 8075 [email protected] Fong, CFA *

Equity Analyst+852 3743 8074 [email protected]

Yoanna Wang *Equity Associate

+852 3743 8776 [email protected] Nan *Equity Associate

+852 3743 8746 [email protected] Yu *

Equity Analyst+852 3743 8047 [email protected]

Johnson Leung *Equity Analyst

+852 3743 8055 [email protected]

* Jefferies Hong Kong Limited

Key Takeaway

A comparative study of Yutong vs. BYD leads us to prefer the former for itshealthier fundamentals, stable growth and reasonable valuation. For BYD, webelieve excessive expectations are priced in, and risks are emerging. We initiateYutong at Buy and BYD – H/A at Hold/Underperform.

NEV bus champion vs. NEV car champion. From Star Wars vs. Star Trek to Pacquiaovs. Mayweather, from Alibaba vs. Tencent to Katy Perry vs. Taylor Swift, everyone loves astory of great rivalry. Even though BYD and Yutong may only overlap in pure electric busesfor now, we have no doubt their paths will increasingly criss-cross. Yutong currently leadsin NEV buses while BYD has the pole position in NEV cars. Not only are these the defaultleaders in China's NEVs, investors often choose between them for an industry proxy. For thisreason, we conducted a comparative study of the two Chinese NEV leaders, and our analysisleads us to conclude Yutong is a better investment choice.

Prefer Yutong for stable growth. Yutong will continue to benefit from replacementdemand and government-backed rise in NEV bus penetration. Stable dividend payout, at4% yield in FY15, will sweeten the deal. We think the market had over-penalized Yutongfor impact of a subsidy cut in FY16/17. No doubt an adjustment of subsidy requirementwould be harsher on NEV buses vs. cars, but we expect NEV buses to better cushion thereduction. Local governments, who are key customers of NEV buses, are less price sensitivethan average consumers; moreover they are bounded by the NEV purchase target of 30%.Also, our calculation on the economics of NEV buses suggests the breakeven vs. diesel buswill be extended by merely ~1.5 years in FY17 upon subsidy cut. Thus from a customerperspective, it still makes economic sense to purchase an NEV bus despite the cut.

BYD is second-best. BYD lacks Yutong's financial soundness, as it is inferior in ROE,FCF yield, cash conversion, gearing and margins. Not to mention its profit included largecontributions of government grants and R&D capitalization. Meanwhile, the market haspriced in excessive expectations for the next 2 years. We are 29-35% below consensus. Ourconcerns lie firstly with volume, as the company faces: i) limited customer base as buyersmainly originate from license restricted cities ii) cannibalization between car models, as seenfrom Qin's recent lacklustre performance iii) authorities tackling the issue of consumers notusing electric mode despite buying PHEV iv) car subsidy cuts mainly affecting PHEV relativeto BEV v) intensifying competition. Meanwhile on margins, subsidy cuts in the short termand preoccupation with LFP batteries may curtail room for margin expansion. And ability toachieve long term cost reduction on battery relies on upcoming A-share placement.

Positive oil view and battery cost decline to spur adoption. We believe theindustry’s explosive growth and strong potential are well understood. Hence in this reportwe have selectively touched on the economics of NEV car/bus in China, outlook for thedecline in battery cost, challenges in consumer adoption and government policies drivingit. Importantly, we would highlight our China Oil & Gas team’s contrarian positive view onoil price, which would spur mass NEV adoption longer term.

Recommendation & Valuation. Based on SOTP valuation for both companies (and usingDCF to cross-check), we initiate Yutong (600066 CH) at Buy with TP of Rmb26.0, while weinitiate BYD - H/A shares (1211 HK, 002594 CH) at Hold /Underperform with TP of HK$43.0/Rmb36.0. At their respective TPs, Yutong represents 13x FY17 PER, while BYD is at 42x.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investmentdecision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 74 to 79 ofthis report.

Table of Contents

I. Executive Summary Executive Summary…………………………………………………………………..………… 3

II. Comparative Study of BYD vs. Yutong A comparison of their businesses and operations……………………………………. 5

Market Share

PV and Bus Market

Future Competition

Subsidy Adjustment Impact

Business Model

Technology Roadmap & Risk

Segment Breakdown

Volume & Volume Growth

Revenue & Revenue Growth

Gross Margin

Return on Equity

Working Capital

Net Gearing

Free Cash Flow

Government Grants

Capacity Utilization

Research & Development

Shareholding Structure

III. Sector Outlook An overview of the market and its development………………………….……….… 21

PV EV Adoption No Easy Task

Government Paving the Road for EVs

The Cost of Batteries Coming Down

Tesla and the GigaFactory raising the bar

IV. Company Pages Zhengzhou Yutong Bus (600066 CH) initiate at Buy …..……………………..… 34

Company Background

Management and Shareholders

Earnings Estimates

Valuation & Risks

BYD –H (1211 HK) initiate at HOLD……………………………………………….…… 41

Company Background


Earnings Estimates

Valuation & Risks

BYD –A (002594 CH) initiate at Underperform.......................................... 50

Company Background


Earnings Estimates

Valuation & Risks

V. Appendix On the Cusp of a Car Culture………………………………………………..…………… 59

Inflection Should Happen Anytime Now

Lowering Vehicle Emissions

Battery Basics

Electric Vehicle Basics

Industrials

Initiating Coverage

2 December 2015

page 2 of 79 , Equity Analyst, +852 3743 8075, [email protected] Aik Yeo

Please see important disclosure information on pages 74 - 79 of this report.

Executive Summary We conducted a comparative study on the historical performance of BYD and Yutong, two

of the highest profile NEV (new energy vehicle) players in China. BYD is the market leader in

NEV cars and pure electric buses, while Yutong specializes in NEV buses, as it dominates the

plug-in hybrid (PHEV) category and has substantial share in pure electric buses.

Based on our analysis, we favour Yutong over BYD, as we believe Yutong has sound

fundamentals and is financially strong, while BYD’s stock has excessive expectations priced

in, in our view, and we expect some risks ahead. For BYD-H, we are 29-35% below

consensus forecast on FY16/17 profit, whereas for Yutong we are slightly above.

Table 1: Summary of NEV segment comparison for both companies

BYD (H / A) Yutong

Recommendations Hold / Underperform Buy

Target Price HK$43.0/Rmb36.0 Rmb26.0

Earnings growth FY16/17 82%/18% 22%/13%

Profit forecast vs. consensus FY16/17 -29%/-35% 2%/3%

Sector fundamentals

Market Share 33% in NEV PV; 11% in NEV bus 30% in NEV bus

Competitive pressure Intense in car market Mild in bus market

Business operations

Auto volume growth 1H15 grew 17%, driven NEV growth 186% 1H15 grew 3%, driven by NEV growth 103%

Subsidy cut impact FY16/17 2%/7% price pressure 4%/11% price pressure

Government grants 29% of EBIT 6% of EBIT

Capacity utilization in 1H15 c. 70% for battery, 50% for auto c.100%

R&D as a percentage of sales FY14 8.4% 4.2%

Financials

Revenue FY11-14 CAGR 4%, 1H15 growth of 42% FY11-14 CAGR 18%, 1H15 growth of 10%

Gross Margin 1H15 15% 23%

Return on equity Low single digit Consistently maintained at 24%

Cash conversion cycle Deteriorating Improving

Net gearing Consistently net debt, 101% in 1H15 Consistently net cash

Cumulative FCF yield -12% 10%

Source: Jefferies, company data

Market share & business model. Both companies have leading positions in China’s NEV

market, ranked by volume. Yutong has 30% market share of NEV buses in FY14, while BYD

has 33% in the NEV PV and 11% in the NEV bus market, thanks to its popular PHEV

passenger vehicles and K9 pure electric bus. Meanwhile, BYD is a vertically integrated

player, with its own battery manufacturing, battery management system (BMS) and

powertrain capabilities, while Yutong outsources battery supply to external parties such as

ATL, Tianjin Lishen and Samsung SDI, but has its own BMS.

Technology roadmap. In its battery business, BYD traditionally focuses on the

manufacture of LFP (iron phosphate lithium-ion) batteries for NEV, but will shift to NCM

(nickel cobalt manganese lithium-ion) ternary batteries for its first model in 1H16. BYD’s use

of NCM in NEVs is unproven, hence we have reservations. Yutong does not inherit the same

risk. It traditionally procures LFP batteries, and will start using NCM manufactured by

Samsung SDI in 4Q15. We favour NCM over LFP as it has greater room for cost reduction

and energy density improvement. It is important to note that BYD would have to go up

against companies such as Samsung SDI, LG Chem and Panasonic/Telsa on battery

development, in order to achieve success in NEV longer term, which may prove a tall task.

Competition. Our Herfindahl index analysis indicates competition is more severe in NEV

PV than NEV bus. Consensus tends to dismiss competition as a threat for NEV PV, as

industry demand is fast growing. But we would argue FY16 may start to show cracks, with

PV OEMs starting to miss volume expectations due to intensified competition. A price war

may follow, further down the road. For reference, BYD is guiding around 120% volume

growth in FY16, assuming the mid-point of the guided range. Meanwhile, the number of

new NEV car models introduced is 90 in FY15, almost doubling the number of existing

models in the industry. For reference, the NEV PV industry is expected to grow 110% in

FY16.

List of technical abbreviations

NEV: New energy vehicle

PV: Passenger vehicle or car

CV: Commercial vehicle

PHEV: Plug-in hybrid electric vehicle

BEV: Pure electric vehicle

FCV: Fuel cell vehicle

CNG: Compressed natural gas

LNG: Liquefied natural gas

BMS: Battery management system

LFP: Lithium iron phosphate

LMO: Lithium manganese oxide

NCM: Nickel manganese cobalt oxide

NCA: Nickel cobalt aluminum oxide

Industrials

Initiating Coverage

2 December 2015



Subsidy cut. The bus sector faces a more stringent subsidy requirement in 2016

compared to PV, as the bus subsidy no longer depends only on size but also on range and

energy efficiency. A PV subsidy cut, though more subtle, will mainly affect PHEVs where

BYD strength lies. On the other hand, we expect Yutong to withstand the drop in subsidy

better than BYD as its customers are mainly local governments or corporates who are less

price sensitive than average consumers. This would essentially mean passing on some of

the subsidy cut to customers. And based on our analysis, an FY17 subsidy cut merely

extends the pay-back period of NEV buses by around 1.5 more years, from 0.5 years in

FY15. Thus it still makes economic sense to purchase an NEV bus.

Volume & revenue. BYD should see a bigger ramp in volume and revenue growth in

FY16/17 as it is heavily exposed to the under-penetrated NEV PV segment. NEV PV sales

penetration was merely 0.6% in 1H15 vs. 6.8% for NEV bus. Unsurprisingly, its profit

growth will also be superior to Yutong, according to our forecasts.

Despite the strong volume growth expected, we believe BYD would have a problem

meeting volume guidance of 120-150k units in FY16. This is due to i) limited customer base

as buyers mainly originate from license restricted cities – Shenzhen & Shanghai alone

accounted for more than 70% of volume ii) cannibalization of volume despite strong

product introductions, as seen from the recent lacklustre performance of the PHEV Qin

sedan after the introduction of Tang (PHEV SUV) iii) authorities may tackle the issue of

consumers not using electric mode despite buying a PHEV iv) preferential policy towards

BEV (battery electric vehicle), as opposed to PHEV v) intensifying competition.

Meanwhile, Yutong does not face such a problem, as we believe sales penetration of NEV

bus can grow steadily due to i) requirement that 30% of government new vehicle

purchases should be NEV ii) replacement demand from retirement of yellow label vehicles

iii) still generous cash subsidy for NEV bus purchases, despite a subsidy cut in FY16/17 iv)

extensive build-out of charging facilities.

Gross margin. Yutong has a much higher margin than BYD on auto business, as BYD

remains unprofitable for conventional vehicles. Comparatively, Yutong maintains industry-

high profitability in conventional buses and even more so in NEV buses. Going forward, we

expect BYD’s GPM to pick up from 15.8% (FY15) to 16.5% (FY17). Meanwhile, Yutong

should see GPM expand from 24.6% (FY15) to 25.4% (FY17). We are more positive than

consensus on Yutong’s GPM expansion, whereas we are more negative than consensus on

BYD, due to the above-mentioned volume concerns. Note, Yutong has a track record of

improving its GPM yearly since 2010. Also, we would expect Yutong to capitalize on the

cheaper cost of NCM battery procurement in FY17, whereas BYD battery cost reduction

would be hampered by predominant use of LFP and customization cost of new BMS. Also,

BYD’s ability to achieve long term cost reduction on battery manufacturing relies on

upcoming A-share placement, which contains risk as borrowing options are limited.

Financials. Unsurprisingly, BYD’s ROE was a mere 2% in FY14 (due to various unprofitable

segments) vs. Yutong at a high 24%. This was due to Yutong enjoying much better NPM

and asset turnover. Meanwhile Yutong had a steadily improving cash conversion cycle vs.

BYD, which had seen deterioration. And Yutong enjoys a healthy FCF yield of 10% vs. BYD

at -12%. Importantly, BYD is highly geared at 103%, while Yutong has a strong net cash

position. This is partially the reason BYD is relying on an Rmb15bn A-share placement, for

capacity expansion and pay-back of debt. Also interesting to note, in 1H15, 26% of BYD’s

EBIT comes from government grants vs. 6% for Yutong. And if we were to strip off the

government grant, BYD would make 0.5% NPM in 1H15.

Recommendation & Valuation. Based on SOTP valuation for both companies (and

using DCF to cross-check), we initiate Yutong (600066 CH) at Buy with TP of Rmb26.0,

while we initiate BYD - H/A (1211 HK, 002594 CH) at Hold / Underperform with TP of

HKD43.0/Rmb36.0. At their respective TPs, Yutong represents 13x FY17 PER, while BYD is at

42x. Risks are consumer adoption of NEV PV taking off faster than expected, and subsidy cut

having a bigger impact on NEV bus demand than we anticipated.

Industrials

Initiating Coverage

2 December 2015



Comparative Study of BYD vs. Yutong BYD is China’s market leader in the sale of NEV passenger vehicles (PV) and pure electric

buses, while Yutong is the market leader in NEV buses because it dominates the plug-in

hybrid (PHEV) category and is actively expanding pure electric offerings. Hence BYD is

commonly seen as having both NEV car and bus exposure, while Yutong is a NEV bus play.

Both companies are pioneers in the Chinese NEV market and we believe for both

companies, the performance of their NEV businesses are the key share price drivers, as seen

from historical trading. In the following pages, do a comparative study of both companies,

particularly on their NEV segments, to determine who has a stronger business proposition.

Below is a summary of the comparison.

Table 2: Summary of NEV segment comparison for both companies

BYD (H / A) Yutong

Recommendations Hold / Underperform Buy

Target Price HK$43.0/Rmb36.0 Rmb26.0

Upside / downside 0%/-43% 19%

Earnings growth FY16/17 82%/18% 22%/13%

Profit forecast vs. consensus FY16/17 -29%/-35% 2%/3%

Sector fundamentals

Market Share 33% in NEV PV; 11% in NEV bus 30% in NEV bus

Competitive pressure Intense Mild

Business operations

Auto volume growth 1H15 grew 17%, driven NEV growth 186% 1H15 grew 3%, driven by NEV growth 103%

Business model Vertically integrated, in-house battery, BMS Outsourced battery to ATL, Samsung SDI

Products NEV & conventional vehicle, batteries,

handset & electronic components

PHEV and EV bus;

conventional bus

Subsidy cut impact FY16/17 2%/7% price pressure 4%/11% price pressure

Government grants 29% of EBIT 6% of EBIT

Capacity utilization in 1H15 c. 70% for battery, 50% for auto c.100%

R&D as a percentage of sales FY14 8.4% 4.2%

Financials

Revenue FY11-14 CAGR 4%, 1H15 growth of 42% FY11-14 CAGR 18%, 1H15 growth of 10%

Gross Margin 1H15 15% 23%

Return on equity Low single digit Maintained at 24% consistently

Cash conversion cycle Deteriorating Improving

Net gearing Consistently net debt, 101% in 1H15 Consistently net cash

Cumulative FCF yield -12% 10%


Market Share BYD has a blended 28% of the China NEV market in FY14, and almost 30% share in 1H15.

This NEV market share is shared between the PV and bus segments, at 33% and 13% share

respectively (please refer to pie charts below).

BYD leads in the PHEV segment of PV, and has a front running position in pure electric

buses. BYD has quickly grown its market share in the PHEV sub-segment, due to the

popularity of its PHEV Qin sedan, and more recently the Tang (PHEV SUV).

More importantly, we believe Shenzhen’s restriction quota, introduced at year-end 14, was

a key factor of BYD strength this year. The policy stipulates that Shenzhen would have

100,000 units quota yearly, 20,000 of that for NEV, while 80,000 for conventional. The

20,000 NEV quota is entirely on lottery, while the 80,000 is half on lottery and half on

bidding. After the policy implementation, Shenzhen residents found it much easier to

purchase a NEV instead of a conventional car.

On the back of the restriction quota, and due to BYD being based in Shenzhen, we expect

the city to account for at least 35% of BYD’s NEV volume in FY15, the other big market

being Shanghai. But the quota is not going to grow, and we believe that will cap BYD’s

volume growth and consequently market share.

Market share in 1H15 had been

boosted by Shenzhen restriction

quota introduced in year-end 14

BYD has pole position in NEV PV and

exposure in pure electric bus.

Industrials

Initiating Coverage

2 December 2015



Chart 1: China NEV PV Market Share by OEM in FY14, total

volume ~52,000 units

Source: Jefferies, CPCA

Chart 2: China New Energy Bus Market Share by OEM in

FY14, total volume ~ 23,000 units

Source: Jefferies, CAAM

Meanwhile, Yutong has seen a slight market share loss in 1H15. As the largest NEV bus

manufacturer in China, Yutong achieved 32% market share in 2014, and near 30% in 1H15,

having significant exposure to both PHEV and EV bus segments. The market share loss in

1H15 was due to relative weak growth on 6-8 meters pure electric buses, as smaller players

gained share on the back of a generous subsidy for this particular category.

Yutong sold NEV buses in more than 30 cities across China, which contributed to its leading

NEV market share in China. Notably, Yutong is one of the few NEV bus manufacturers that

has broken free of local protectionism and penetrated Chinese regions outside of its home

market.

In FY14, Yutong sold over 72% of its NEV buses to cities outside of its home region. This is

the highest proportion amongst the top 8 players. There are peers that sell a higher

proportion of NEV buses outside their home regions, but these are much smaller players.

PV and Bus Markets Between the NEV passenger vehicle and bus markets, the former had shown stronger

growth in recent times. In 1H15, NEV PV grew over 320% vs. NEV bus growth of 78%. This,

we believe is due to the lesser penetration of NEV PV of merely 0.6% as a proportion of PV

sales in China. Comparatively, NEV bus penetration was at 6.8% in 1H15.

OEMs that witnessed the strong growth to date do not want to be left out in the race. That

explains the aggressive NEV product pipelines of PV OEMs in the coming months. Other

than the aggressive introduction of new models, anecdotal evidence suggests NEV PV

consumers mainly come from license restricted cities, which limits the size of the captive

audience i.e. market. These 2 factors are causing competition to intensify and should get

more severe in the coming years.

In terms of competition, the NEV bus market is less competitive vs. NEV PV. Based on the

Herfindahl index, which measures the level of competition within a sector, NEV PV is at 19%

vs. the Bus market 23% (Chart 4). The lower the percentage, the more competitive it is.

BYD, 33%

Chery, 18% Kandi, 15%

Zotye, 13%

BAIC, 10%

SAIC, 5% Others, 5%

Yutong PHEV

24%

Yutong EV

8%

Jinlong PHEV

10%

Jinlong EV

5%

BYD EV

11%

Others PHEV

31%

Other EV

11%

Yutong has leading market share in

NEV buses. The company also leads

in share of vehicles that are sold

outside its home region.

NEV car market will see stronger

growth than NEV bus due to smaller

base & lesser penetration.

But NEV PV market is more

competitive as OEMs are all gunning

for that growth

Industrials

Initiating Coverage

2 December 2015



Chart 3: Herfindahl Index (HHI) for PV and Bus markets

in 2014, PV is more competitive


Chart 4: Herfindahl Index (HHI) for NEV PV and NEV Bus

markets in 2014, NEV PV is more competitive


It is a similar story for the broader sector as a whole (Chart 3) i.e. PV market vs. Bus market.

This is hardly surprising, as even though the bus market still has many players i.e. 43 in

2014, market share is concentrated in the hands of a few big OEMs, including Yutong. On a

relative basis, PV market share is more evenly spread across the 66 players in FY14.

The market concentration ratio is very high in the bus market, which supports it being less

competitive. The combined market share of the Top 3 companies is above 41% in the

overall bus market in FY14 and has been relatively stable over the past two years. To add,

the top 5 players accounted for 54% of the market, and top 10 accounted for 75%. And

referring to the chart below, we can see that even for the different sub segments i.e. large,

medium, light bus market, the concentration among the top players remains very high.

Chart 5: Top 3 players’ market share in various bus segments - concentration is

very high

Source: Jefferies, CAAM, Company data

Future Competition The above analysis on competition is done on history, whereas if we try looking ahead into

the future, we will find PV NEV competition getting more intense. In FY15, 90 new NEV PV

models have been or would be launched locally (excluding imported models). The total

number of models will almost double from around 93 in FY14 to 183 by end-15. PHEV

models have seen significantly less competition historically, but number of car model

launches has also increased 91% from 11 (FY14) to 21 (FY15).

4.9%

10.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

PV Bus

18.8%

22.8%

0%

5%

10%

15%

20%

25%

NEV PV NEV Bus

40% 41%

56% 54%

44%

48%

55% 52%

0%

10%

20%

30%

40%

50%

60%

Total 2013 Total 2014 Large bus

2013

Large bus

2014

Medium

Bus 2013

Medium

Bus 2014

Light Bus

2013

Light Bus

2014

NEV bus market is not as competitive

as market share is dominated by a

few players…

…and it’s a similar story for the

overall bus market.

New NEV model introductions are

aggressive, expect competition to

intensify

Industrials

Initiating Coverage

2 December 2015



Chart 6: Number of new NEV car models launched every year - big jump in 2015

Source: Jefferies, CAAM, Company data

However, we believe the competition in NEV PV market has yet to see its peak. In 2014, top

10 selling NEVs were manufactured by domestic brands (the 10th being a localized version

of Nissan Leaf), and together they account for 78% market share.

This contrasts with the conventional car market, where domestic brands commanded 32%

share in 2014, vs. 68% for JVs. What this means is many foreign brands have yet to step into

the market, and we see that happening over the next couple of years. Beijing Hyundai may

launch Sonata PHEV in 2016 and we expect brands like VW, GM, Ford and PSA to join the

fight in 2017. PHEV will likely to be a focus of the JVs to address the mass market segment.

Below, we illustrate the competition that BYD e6, Qin and Tang are up against currently, by

showing comparisons with other popular NEV PV models. Compared to Geely Emgrand EV

and BAIC EV200, BYD e6 is not competitive on pricing. And even though Qin & Tang still

hold an edge over the PHEV segment for now, we are afraid it might be affected by

government’s policy/ subsidy preference for BEV.

Chart 7: Comparison of key PHEV and BEV car models in China – BYD will maintain edge in PHEV for now

Source: Jefferies, company data, Wikimedia Commons

16 23

41

80

5

6

2

10

0

10

20

30

40

50

60

70

80

90

100

2012 2013 2014 2015

EV PHEV

Model e6 Geely Emgrand EV BAIC EV200 Model S Qin Tang Roewe 550 Plug-ine6先行者帝豪EV精英型 EV200 轻秀版 85D 4dr All-wheel Drive 2015 秦双冠版新旗舰型 2015款 2.0T 四驱豪华型荣威550 PLUG-IN豪华版

OEM BYD Geely BAIC Tesla BYD BYD SAIC

MSRP (Rmb) 330,000 239,800 226,900 816,800 209,800 251,300 248,800

Subsidy (2015) 110,000 110,000 90,000 60,000 60,000 60,000

Post-subsidy Price 220,000 129,800 136,900 149,800 191,300 188,800

Type BEV BEV BEV BEV PHEV PHEV PHEV

0-100km/h accelerations (sec) 12 9.9 13 4.2 (0-60mph) 5.9 4.9 9.5

Top Speed (km/h) 140 140 125 250 (155mph) 185 180 200

Battery LFP NCM NCM NCA LFP LFP LFP

Battery Capacity (Kwh) 82 45 30 85 13 18.4 12

Electric Range (KM) 400 253 200 435 70 80 60

Battery Density 150wh/kg 81wh/kg

Weight (KG) 2283 1570 1290 2188 1720 2220 N/a

Estimated Home Charging Time 10 hrs 14hrs 9 hrs 12 hrs 8 hrs 10hrs 8hrs

Dimensions (mm)

Length 4,560 4,631 4,025 4,976 4,740 4,815 4,648

Width 1,822 1,789 1,720 1,963 1,770 1,855 1,827

Height 1,630 1,495 1,503 1,435 1,480 1,720 1,479

Wheelbase 2,830 2,650 2,500 2,959 2,670 2,720 2,705

Fuel consumption (L/100km) 0 0 0 0 1.6 2.4 1.6

Engine 1.5T 2.0T 1.5L

Warranty 6 years/150,000km 4 years/100,000km 5 years/100,000km 8 years 6 years/150,000km 6 years/150,000km 5 years/100,000km

Comparisons with the conventional

car market indicate that JV brands

have yet to step in to compete, and

it will just get more competitive in

the next few years

Industrials

Initiating Coverage

2 December 2015



Subsidy Adjustment Impact In terms of the subsidy adjustments happening in FY16/17, we believe the pricing pressure

on Yutong will be larger than BYD, as more stringent requirements are introduced for

buses. In Table 3 below, we carried out an analysis to estimate by how much vehicle prices

need to be reduced in FY16/17, given changing subsidies, assuming customers pay the

same price as FY15. Yutong will have to cut as much as 11% in 2016 and another 7-12% in

2017, while the impact for BYD is mostly in single digits.

However in reality, it depends on the bargaining power of the OEMs over the customers.

We believe consumers of NEV cars would be more price sensitive vs. local governments’

purchase of NEV buses, as they are bounded by purchase targets. It is mandated that 30%

of annual vehicle purchase must come from NEVs. Therefore we are of the view that the

eventual impact of subsidy cut will be well cushioned by Yutong.

We are forecasting overall ASP changes by 6%/-2% for Yutong vs. -8%/-2% for BYD in

FY16/17, respectively. This forecast takes into consideration factors such as EOS, ability to

adjust product mix and bargaining power over customers.

Table 3: Subsidy impact on model pricing – bus will see generally bigger

decline in subsidy vs. car models

BYD Major Models 2016 2017

K9 (12m Bus) -4% -10%

Tang (PHEV) -1% -5%

Qin (PHEV) -1% -6%

E6 (EV) 1% -7%

Yutong Major Models 2016 2017

E7 (7m) -11% -12%

E12 (12m) 0% -11%

14m PHEV (14m) 0% -7%

Source: Jefferies estimates, company data

Business Model One basic difference between the NEV businesses of both companies: BYD is a vertically

integrated NEV manufacturer, while Yutong outsources battery supply to Tianjin Lishen and

Amperex Technology Limited (ATL), mainly LFP batteries.

ATL, which started out as the main supplier for Apple in small batteries, is now trying to

enter the large battery segment and is significantly behind market leaders such as Samsung

SDI, Panasonic/Tesla and LG Chem, in our view. And Korean competitor Samsung SDI will

be contributing ternary (NCM) lithium ion batteries to Yutong starting from 4Q15.

On the other hand, BYD is the one of the most integrated OEMs globally, thanks to its

Chairman’s long-standing focus on technology and the company's history of pursuing

vertical integration. Chairman Wang has a technical background, with a bachelor’s degree

majoring in metallurgy physical chemistry.

BYD supplies its own in-house cells for its NEVs, but it is also engaged in assembling battery

packs and even designing battery management systems (BMS) and electric motor

controllers. We thus see BYD’s integrated model could help the company gain an

advantage in NEV manufacturing at the infancy stages of the industry, as it would enjoy:

Consistency in battery standards

Easier integration with own EVs

Guaranteed supply availability

Cost savings synergies with battery manufacturing

In Table 3, we calculated the impact

on selling prices in FY16/17 if

customers still pay the same, as a

result of the subsidy cut. Buses seem

more impacted than cars.

But in reality, the impact on prices

and margins depends on other

factors as well, such as bargaining

power over customers, ability to

adjust product mix and EOS.

BYD is a vertically integrated player,

while Yutong outsources battery

manufacturing.

BYD’s advantage of vertical

integration may only stand during

the early stages of industry

development and in battery supply

shortage situations.

We expect Yutong to withstand the

subsidy reduction better despite

potentially experiencing a bigger %

subsidy cut vs. BYD

Industrials

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More importantly, batteries are in shortage in China currently, based on our channel

checks. This gives the company an edge in having the security of an in-house battery

supply, at a time when the industry is taking off. At present, Chinese automakers pay a

hefty Rmb2,000/kwh (USD315/kwh) for battery packs. This, in our view, is due to the

explosive growth of NEV demand in China, and specifically the increasing prevalence of

NEV buses, which necessitates heavy battery usage.

However, we expect 2H16 will be the time when supply-demand will balance, due to

aggressive battery capacity expansion in China, and 2017 will potentially see oversupply.

And over the longer term, we adopt a cautious view on whether BYD battery technology

and cost can compete with international competitors such as LG Chem, Panasonic / Tesla

and Samsung SDI. In the sections below, we will highlight the risks BYD faces in battery

technology development.

Technology Roadmap For EV power, lithium-ion batteries have so far been the preferred choice, however they can

be sub-divided into several types of chemical configuration, with varied cost, energy

efficiency, density, safety and durability. The main ones in the market are:

Iron phosphate lithium-ion (LFP)

Manganese lithium-ion (LMO)

Nickel cobalt manganese lithium-ion (NCM)

Nickel cobalt aluminum lithium-ion (NCA)

There is an obvious trade-off between energy density and safety: the higher the energy

density, the higher the chance of fire accidents. Thus far, BYD had focused on LFP, which is

believed to be the safest material, as the core battery chemistry for existing NEVs.

However, LFP batteries have limitations in other aspects, especially energy density, which

gets translated to higher costs for the same power. On the other hand, ternary battery (NCA

or NCM), which are more prone to fire accidents, are weaker on safety but more effective in

energy density. Tesla is a big proponent of the ternary NCA batteries, which it heavily

utilizes in its car models. The market seems to be gravitating towards ternary battery, after

learning how to minimize the probability of fire accidents by improving the BMS.

BYD has said it already has capability in ternary battery, in particular NCM, apart from the

LFP. While it has made 3bn units of ternary batteries for mobile phones, it hasn’t used

ternary cells in NEVs yet, due to fears of fire accidents. This constitutes our key reservation,

as the integration remains unproven. According to the company, going forward BYD will

increasingly use LFP batteries in trucks and buses and NCM batteries in light NEVs and in

particular, small-sized SUVs.

Even though Yutong doesn’t manufacturer NEV batteries, it too focuses on use of LFP for

most of its existing products, mainly through procurement from external parties. Yutong

predominantly procures LFP batteries from companies such as ATL and Tianjin Lishen, but

will shift towards NCM batteries from Samsung SDI starting in 4Q15. Yutong expects

greater cost savings from ternary in longer term because:

Energy density is higher, hence raw material need is lower

Production cost is lower per unit energy

However ternary battery will have more security concerns, hence it requires higher

standards of electrical control technology and BMS, in which Yutong currently leads, in the

NEV bus industry. Because of better compatible infrastructure and scale, management sees

greater cost saving synergies vs. peers.

But longer term, BYD would have to

go up against the global battery

giants to have an edge in NEV, which

may prove a tall task.

Lithium ion battery is the preferred

choice of EV power, but there are

different variations of this battery

type, with different pros and cons

BYD focuses on LFP traditionally, but

wants to gradually switch to NCM

BYD use of NCM is unproven as yet

Yutong will start procuring NCM in

4Q15, has traditionally used LFP

NCM is superior to LFP in energy

density and production cost, and

importantly it provides greater room

for cost savings ahead

Industrials

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The introduction of NCM battery will not entail any change to the plant layout or

production process, according to Yutong. And the company will only need to lift safety

standards in the storage facilities to prevent fire accidents.

Technology Risk Despite prevalent media coverage and strong growth of late, the EV industry is still at its

early stages of development given the immaturity of battery technologies. EV battery is still

evolving, and its future technology track remains unclear. It is unknown which chemical

configuration will emerge as the winner for EV battery over the longer term.

Furthermore, it is not clear whether plug-in hybrids (PHEV) or pure electric NEVs will be the

ultimate solution for clean mobility. Fuel cell vehicle (FCV) technologies are advancing fast,

as seen in the Japanese market, and it is prompting consideration as the technology of

choice for future vehicles, given higher energy efficiency and better convenience of use vs.

electric vehicles.

For BYD, the technology risk is to put most eggs into LFP technology for NEVs, only

considering a diversification to NCM recently. NCM should have greater room for cost

reduction and increase in energy density vs. LFP longer term. Even though the company

did state that NCM battery is not new to them, as they have been using ternary battery in

mobile phones, we are not sure the experience is replicable to cars. Moreover, the BMS

would have to be reconfigured to match the NCM batteries, which would come in the form

of additional costs.

However, we do recognize that BYD should be a bigger beneficiary in the short term vs.

Yutong if the demand for battery overtakes supply. This is what we are seeing in the

Chinese market currently. if BYD can hedge its technology risk appropriately, the vehicles

should benefit from vertical integration in the longer run, given more seamless integration

with batteries and ability to respond to market demand quicker vs. peers that outsource.

Yutong on the other hand, does not inherit such a technology risk, as it procures battery

from external parties, including Samsung SDI, Tianjin Lishen and ATL. We see this as the

more conservative move since the risk of aligning with the wrong technology can be costly,

even with the Chinese government’s backing of electric vehicles.

Referring to our industry section on page 28, battery manufacturing cost should continue

to decline over the longer term, and competition among the battery makers should

intensify, along with the huge capacity buildout plans. Thus Yutong would benefit as

battery makers pass on the cost savings eventually.

Segmental Breakdown BYD as a company derives a much bigger portion of its revenue from businesses outside of

autos, and at times it is seen as a conglomerate instead of an auto OEM. This is the key

reason why SOTP valuation is common used and relevant for the company. Apart from core

auto business, it has a handset component/assembly arm, solar, battery and majority

holdings in BYD Electronics (285 HK, NC).

BYD’s auto business includes both conventional and NEV segments, the latter of which is

one of the most vertically integrated vs. industry peers. It has in-house battery cell

production, assembly of battery packs and even design of battery management systems

(BMS) and electric motor controllers. BYD’s NEV revenue accounted for 35% of Auto

segment revenue or 19% of total revenue in 2014.

This business model contrasts with Yutong, which specializes in the bus space of the auto

sector, and derives most of its revenue and profit in large and medium-sized buses. In FY14,

Yutong derived 22% if its bus sales revenue from NEV buses, in particular large NEV buses.

Battery technology is still evolving

Clean mobility technology track is

undecided too

We have reservations over BYD’s

competitiveness in NCM, and it

would come at the extra cost of a

new BMS that fits

With batteries in shortage in China,

BYD has an advantage, due to the

uncertainty of battery supply

Yutong does not inherit the same

technology risk, as it sources

batteries

Long term battery cost will continue

declining on the back of EOS and

capacity buildout and that would

erode BYD’s advantage

Both companies derive the biggest

portion of their revenue and profit

from auto manufacturing.

BYD’s NEV revenue was 19% in FY14

Yutong’s NEV revenue was 22% in

FY14

Industrials

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Chart 8: BYD revenue by segment


Chart 9: BYD operating profit by segment


In 1H15, BYD had 56% of revenue coming from ‘autos and related products’, and 37%

from ‘mobile handset components’, with ‘rechargeable batteries and photovoltaic’

accounting for the remainder 7%. This compares with Yutong deriving 92% of revenue

from bus sales, and only 8% from transportation services and other businesses.

BYD derives an even bigger portion of its profitability from the auto segment, with 70% of

its gross profit from the segment. Mobile handsets and rechargeable batteries contribute

around 29% and 4%, respectively. For Yutong, it’s a relatively similar picture on the profit

front vs. revenue, where Yutong derives more than 90% from bus sales.

Chart 10: Yutong revenue by segment

Source: Jefferies, company data, Before 2013, all bus combined

Chart 11: Yutong gross profit by segment

Source: Jefferies, company data Before 2013, all bus combined

Volume & Volume Growth BYD total volume growth in FY14 was down 21% y/y due to sharp drop in conventional

vehicles volume. The conventional vehicle segment was down 25% to 352,200 units. Other

than F3 and S6 which saw growth, all other models experienced significant falls in volume

y/y.

In contrast to the weak showing of the conventional vehicle segment, NEV volume spiked

8.8x to 20,807 units in the same period, albeit off a small base. This was mainly driven by i)

new product launch of Qin in late-2013, which saw a strong volume ramp-up in FY14 ii)

strong policy support from the Chinese government.

10% 10% 11% 10% 9%

44% 42% 39% 39% 44%

46% 48% 51% 51% 47%

0%

20%

40%

60%

80%

100%

120%

2010A 2011A 2012A 2013A 2014A

Automobiles and related products

Mobile handset components and assembly service

Rechargeable batteries and photovoltaic business

45% 37% 33%

54% 62%

48% 67% 79%

40% 33%

-20%

0%

20%

40%

60%

80%

100%

120%

2010A 2011A 2012A 2013A 2014A




Large Bus

62%Large Bus

60%

Medium Bus

29%Medium bus

28%

Light bus

4%Light bus

5%

Total Bus

96%

Total Bus

95%

Total Bus

95%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014

Large Medium Light Bus Service Other

Large Bus

64%Large Bus

62%

Medium Bus

27%Medium Bus

26%

Total Bus

97%Total Bus

96%Total Bus

94%

Light bus

4%Light bus

5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014

Large Medium Bus Light Service Other

We do not have clarity, but we

believe BYD’s NEV contribution to

profit is bigger than Yutong’s as

conventional car business is losing

money

BYD’s NEV volume growth in FY14

was 880%

BYD’s total volume growth was

down 21% in FY14

Industrials

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2 December 2015



Table 4: Historical volume performance: BYD delivered 186% NEV volume

growth in 1H15 (units)

BYD 2013 2014 y/y 1H2015 y/y

NEV 2,120 20,807 881% 21,645 186%

E6 1,544 3,560 131% 2,900 108%

Qin 142 14,747 10285% 16,477 208%

Tang 412

Bus 434 2,500 476% 1,856 127%

Others

Non-NEV 471,880 352,193 -25% 188,355 9%

F3 84,364 110,296 31% 76,438 62%

L3 99,450 54,531 -45% 7,709 -73%

Speed 101,152 65,312 -35% 28,710 -27%

S6 93,168 98,720 6% 12,927 -75%

S7 - 6,938 58,586

Others 93,746 16,396 -83% 3,985 -27%


Again, in 1H15, BYD’s NEV volume grew a staggering 1.9x to reach 21,645 units. The

growth rate was weaker than industry NEV growth of 240% y/y but still very strong, driven

by Tang’s (launched in May) incremental volume, and Qin’s rapid volume ramp. More

specifically, industry EV segment grew 293% while PHEV grew 205% in the same period.

BYD also became the largest NEV seller in the world for the first time in May 2015, with

strong volume growth seen in PHEV units. BYD is projected to sell 50,000-60,000 units this

year, up nearly 4x y/y. Next year the company is aiming for 120,000 -150,000 units of NEV

sales, up more than 1x y/y.

The BYD Tang (released in July this year) is selling much faster than anticipated, with

monthly sales already exceeding 5,000 units in Oct 15. Management estimates 2016 sales

at 100,000, but we are not as optimistic. Meanwhile, the volume of conventional autos

grew 9% to 190,000 units in 1H15, on the back of strong S7 SUV performance, which saw

average monthly volume of 9,500 units.

Table 5: Yutong historical volume performance ; Yutong delivered 103% NEV

volume growth in 1H15 (units)

Total 2013 2014 y/y 1H2015 y/y

Total 56,068 61,398 10% 24,079 3%

By Type

NEV 3,897 7,405 90% 3,645 103%

Non-NEV 52,171 53,993 3% 20,434 -5%

By Size

Large 25,584 27,398 7% 9338 -12%

Medium 25,020 25,880 3% 11068 11%

Light 5,464 8,120 49% 3673 31%


Meanwhile for Yutong, total bus volume grew 9.5% in FY14 to 61,400 units – Large (45%),

Medium (42%) and Small (13%). NEV bus growth was up a massive 90% to 7,400 units in

FY14. This was on the back of encouraging regulatory initiatives, subsidy programs and

replacement demand.

In 1H15, total volume was up 3% y/y to 24,100 units: Large (-12%), Medium (11%) and

Small (31%). In terms of NEV, growth accelerated further from FY14’s high growth level to

103% or 3,645 units in 1H15. Large NEV buses are expected to be stronger next year due to

government’s preferential policy for bigger, more efficient modes of transport.

BYD’s NEV volume growth was

186% in 1H15

Tang volume has done well since

launch

BYD became the largest NEV seller

globally in 2015

Yutong NEV grew 90% in FY14,

103% in 1H15

Industrials

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2 December 2015



Revenue & Revenue Growth In terms of absolute revenue, BYD is almost 3x the size of Yutong in 1H15. BYD had a top

line of Rmb30.4bn compared to Yutong’s Rmb10.4bn in 1H15. Comparing solely the auto

sales of both companies, BYD’s Rmb17bn worth of revenue was 78% larger than Yutong’s

Rmb9.6bn auto sales. BYD’s lead comes from its dominant positon in NEV passenger

vehicles; conventional passenger vehicles contributed too, albeit not profitable currently.

However, if we go back further in history, Yutong saw stronger revenue growth of 18%

CAGR between FY10-14 vs. a mere 4% for BYD. But in 1H15, the tables turned, as BYD’s y/y

revenue growth accelerated to a staggering 21% vs. 11% at Yutong. This is on the back of

42% y/y spike in auto revenue vs. mere 8% for Yutong in 1H15.

BYD’s 1H15 auto revenue growth accelerated, despite a slowdown in demand growth in

the PV industry (1.4% y/y volume growth).

Table 6: BYD and Yutong: Revenue Comparison (Rmb mn)

2010 2011 2012 2013 2014 1H15 11-14 CAGR

BYD 46,685 46,312 44,381 49,768 55,366 30,435 4%

y/y -1% -4% 12% 11% 21%

BYD Auto 21,550 22,136 22,551 25,291 26,270 16,962 5%

y/y 3% 2% 12% 4% 42%

Yutong 13,479 16,932 19,763 22,198 25,728 10,387 18%

y/y 53% 26% 17% 12% 16% 10%

Yutong Bus 12,917 16,161 18,740 21,010 23,977 9,554 17%

y/y 54% 25% 16% 12% 14% 8%


Referring to the table below, the main source of BYD’s auto revenue acceleration came

from the NEV business, where it was up 1.2x y/y in 1H15 to Rmb5,870mn, which

accounted for 35% of auto segment revenue or 19% of total revenue. In the same period,

NEV volume grew 1.9x, and in particular NEV bus grew 1.3x. Conventional volume grew

merely 9%.

Table 7: BYD historical volume performance; NEV growth was strong but

conventional cars’ growth remained weak despite stimulus (units)

2013 2014 y/y 1H2015 y/y

NEV (including Bus) 2,120 20,807 881% 21,645 186%

Bus 434 2,500 476% 1,856 127%

Conventional car 471,880 352,193 -25% 188,355 9%


Gross Margin For FY14, Yutong achieved higher gross margin of 24.3% vs. BYD’s 13.8%, a gap of

10.5ppt. If we look at the auto businesses alone, gross margin of 24.2% exceeded BYD by a

significant 7.6ppt. It is important to note that Yutong has been improving its gross margins

since 2010.

For 1H15, Yutong achieved higher gross margin of 23.4% vs. BYD 15.0%, a gap of 8.3ppt.

In auto manufacturing, gross margin of 23.0% exceeded BYD by 4.3ppt.

BYD is 3x the size of Yutong in

revenue terms

Yutong saw higher revenue growth

historically, but that changed in

1H15 when BYD overtook it

Unsurprisingly, the NEV segment

was the key contributor to BYD’s

strong revenue growth

Yutong has a clear superior GPM vs.

BYD; Yutong has consistently

improved its GPM since 2010

Industrials

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2 December 2015



Yutong’s industry-high gross margin can be explained by economies of scale in both NEV

and conventional buses segments, delivering 25.5% and 23.9%, respectively. While it’s

easy to comprehend that NEV buses benefit from a deep government subsidy that supports

its high profitability, it is also true that Yutong commands a price premium over

competitors on conventional buses, which gives it a high margin vs. peers.

Table 8: Gross Margin Summary – Yutong had been consistently improving

GPM, much superior to BYD

Gross Margin 2010A 2011A 2012A 2013A 2014A 1H15A

BYD 17.7% 14.8% 11.6% 13.1% 13.8% 15.0%

BYD Auto 21.2% 19.0% 14.4% 14.5% 16.6% 18.8%

Yutong 17.3% 18.2% 20.0% 23.1% 24.3% 23.4%

Yutong Bus 17.6% 18.2% 19.8% 22.9% 24.2% 23.0%


Even though Yutong held a substantial lead in FY14 on gross margin, the difference has

narrowed in 1H15, due to the rapid ramp-up of BYD’s PHEV and EV bus sales. Please refer

to Table 4. We believe BYD can deliver higher profitability with scale, lower battery costs

and better product mix in the coming years. The better product mix from moving into NEV

SUVs should award the company a kicker in margins, as Tang’s contribution started only in

2H15.

Return on Equity From a return on equity (ROE) perspective, Yutong is superior to BYD by a long mile.

Referring to the chart below, Yutong achieved 24% and 21% ROE in FY14/FY13,

respectively. This compares with a mere 1.7% and 2.5% for BYD in the same period.

We conducted a DuPont analysis (Table 9 below). Breaking down into its components, BYD

achieved net margin of 0.8% in FY14, along with asset turnover of 59% and leverage of

3.7x. This generated ROE of a mere 1.7%.

This compares with Yutong’s net margin of 10.2% in FY14, coupled with asset turnover of

108% and leverage of 2.2x. This generated an ROE of 24.2%.

We believe a key reason for BYD lagging ROE is due to a much lower margin vs. Yutong. In

terms of net margin, Yutong has a superior lead over BYD, achieving 10.2% in FY14 vs.

BYD’s 0.8%. This is largely due to BYD making losses on conventional autos and solar

business, which dragged on the profitability of NEV business and mobile handset segment.

Chart 12: ROE comparison – Yutong has had consistently higher ROE than BYD


14%

7%

0% 3% 2%

35% 35%

21% 24% 24%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010A 2011A 2012A 2013A 2014A

BYD Yutong

Yutong’s superior margin is due to

EOS, deep government subsidy,

price premium commanded over

peers

BYD narrowed the gap vs. Yutong in

1H15, as it turned profitable on NEV,

and conventional car business

reduced losses

Yutong is superior in ROE by a mile,

and it has remained so over the past

few years.

Yutong has a strong lead in net

margin and asset turnover, which

contributed to its higher ROE

Industrials

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2 December 2015



Table 9: ROE Breakdown – Yutong excels in net margin and asset turnover

2014 Net Margin Asset

Turnover

Asset/Equity DuPont ROE

BYD 1% 59% 3.71 2%

Yutong 10% 108% 2.20 24%


Working Capital The cash conversion cycle is a metric used to gauge the effectiveness of management and

the company’s overall health. The calculation measures how fast a company can convert

cash on hand into inventory and accounts payable, through sales and accounts receivable,

and then back into cash. Hence it indicates the efficiency of the management's ability to

employ short-term assets and liabilities to generate cash for the company.

The result, which be seen clearly from the table below, is that BYD’s cash conversion cycle

had deteriorated from 2012-14 from a negative 63 days to negative 1 day. This compares

with Yutong, which improved from 3 days in 2012 to negative 17 days in 2014.

For BYD, accounts receivable days drastically lengthened in 2014 vs. 2012, which was the

main cause of cash conversion deterioration. Although Yutong had seen a similar trend in

terms of receivable days lengthening, it was more than made up for by the expansion of

payable days. This helped Yutong improve its cash conversion cycle.

Table 10: Working capital calculation – Yutong has a superior cash conversion

cycle vs. BYD

BYD Yutong

Account Receivable Days

2012 82 73

2013 96 83

2014 148 132

Account Payable Days

2012 213 99

2013 213 97

2014 225 171

Inventory Turnover Days

2012 68 29

2013 69 29

2014 76 22

Cash Conversion Cycle

2012 (63) 3

2013 (47) 15

2014 (1) (17)


Net Gearing BYD’s net debt to equity ratio has increased over the years (getting more leveraged) due to

higher capex and unstable earnings. The ratio rose to 103% in 2014, and the company is

planning an equity raise in 2016, to carry out their capacity expansion plan.

For the company to borrow onshore from banks, total liabilities/total assets ratio is also

monitored, with 70% seen as a cap. BYD’s ratio was at 69.3% in 2014 and has not declined

in 1H15. Without replenishing the equity base or increasing asset size, this may pose risks to

their onshore borrowing ability and its liquidity situation.

Yutong’s cash conversion cycle is

better than BYD’s, which is

important to keep in mind

Yutong has seen an improving cash

cycle over the last 3 years, while BYD

has a deteriorating one

BYD’s net gearing is over 100%, and

it is relying on A-share placement to

carry out its capacity expansion plan

BYD may find it difficult to borrow

from banks

Industrials

Initiating Coverage

2 December 2015



Table 11: Leverage Comparison – BYD is highly geared while Yutong is net cash

2010A 2011A 2012A 2013A 2014A

BYD

Net Debt/Equity 65.4% 69.5% 71.4% 93.6% 103.3%

Total Liability/Total Asset 60.7% 64.1% 65.5% 68.1% 69.3%

Yutong

Net Debt/Equity -36.2% -34.4% -35.5% -42.3% -55.6%

Total Liability/Total Asset 63.4% 57.5% 48.7% 48.9% 54.4%


At the other end of the spectrum, Yutong has managed a very conservative balance sheet.

The company has maintained net cash positions for years and its liability/asset ratio has

stayed within a range of 40-60%. This is the reason why Yutong is able to carry out a

generous dividend policy with pay-out ratio at 57% in FY14. We expect the pay-out ratio to

continue, accruing nearly 4% dividend yield in FY15E. \

Free Cash Flow When free cash flow is positive, it indicates the company is generating more cash than it

uses to run the business and the excess can be reinvested to grow the business. We can use

the free cash flow yield to assess the value of a company. Since this measure uses free cash

flow, the free cash flow yield provides a better measure of the company's performance.

For the period 2011 – 1H15, BYD’s free cash flow was negative, and delivered cumulative

free cash flow yield of -9%. Comparatively, Yutong achieved cumulative positive free cash

flow yield of 9%. With the exception of 2012, all other time periods saw delivered positive

free cash flow.

We believe BYD will still find it difficult to turn FCF-positive until 2017, due to the expected

huge capital outlay in terms of building out capacity. By end 2015, battery capacity will

only reach 8GWH but 14GWH by end FY16. After that the capacity flattens out, and is

expected to gradually head into positive region. Comparatively, Yutong does not have

capacity expansion plans.

Table 12: Free Cash Flow Analysis (mn Rmb)

BYD Yutong

Operating Cash Flow

2010 3,139 1,318

2011 5,985 1,446

2012 5,555 1,372

2013 2,436 2,802

2014 38 3,205

1H15 3,022 1,861

Investing Cash Flow

2010 (12,683) (603)

2011 (8,923) (999)

2012 (4,610) (2,316)

2013 (5,851) (153)

2014 (7,901) (1,714)

1H15 (4,711) (1,999)

Financing Cash Flow

2010 9,183 (645)

2011 4,736 (10)

2012 (1,217) 2,859

2013 4,508 (1,185.57)

2014 7,271 (1,177)

1H15 921 (1,520)

Free Cash Flow

2010 (5,595) 391

Yutong is cash rich, and has a

generous dividend pay-out policy,

which will translate to 4% dividend

yield FY15E

BYD had been consistently running

on negative FCF, while Yutong had

consistently positive FCF except in

2012

BYD will have difficulty turning

positive on FCF due to plans for

huge capital outlay ahead

Industrials

Initiating Coverage

2 December 2015



Table 12: Free Cash Flow Analysis (mn Rmb)

2011 (2,688) 454

2012 (1,451) (524)

2013 (176) 1,636

2014 (4,014) 1,286

1H15 (2,108) 1,220

Cumulative FCF (16,032) 4,464

Market Cap 134,269 46,891

FCF Yield -12% 10%


Government Grants For this part, we are referring to government grants that are awarded to companies for new

energy vehicle R&D and capacity buildout, rather than the subsidies consumers eventually

receive for car purchase. This government grant is commonly found as ‘Other Income’ on a

company’s P&L, and it’s never easy to forecast due to the opaque nature of collection time

and award assessment.

Referring to the charts below, historically Yutong has received significantly less government

grants than BYD, both in absolute terms and as a percentage of operating profit (EBIT). In

FY14 and 1H15, Yutong collected government grants of Rmb157mn and Rmb55mn,

respectively, 20%/17% of what BYD received. In FY14 and 1H15, the Yutong government

grant as a percentage of EBIT was 5%/6% respectively, vs. 86% and 30% at BYD.

This, we believe is a function of BYD making abnormally thin operating margins.

Meanwhile, BYD has done substantially more R&D into NEV passenger vehicles, which

gives it very high government grants. Furthermore, BYD’s vertical integration, which

resulted in huge R&D into battery technology, BMS, and power train, has helped it gain in

this department.

Chart 13: Government grant accounted as income – BYD

has significantly greater grants from government (mn

Rmb)


Chart 14: Government grant as a % of EBIT – BYD has a

significantly larger portion of EBIT from grants (mn Rmb)


Capacity Utilization In terms of capacity utilization, Yutong is superior to BYD, having maintained utilization at

very high levels for the past few years. Despite the rapid growth anticipated in NEV bus,

Yutong does not have any capacity expansion plan in the near term, as it seeks to maintain

its existing 65,000-unit standard capacity. Both conventional and NEV buses can share

production platforms. The last time Yutong increased capacity was in 2012/13 when it

added 30k units capacity (investment was Rmb3.5bn).

0

100

200

300

400

500

600

700

800

2010 2011 2012 2013 2014 1H15

Yutong BYD

2% 5% 7% 11% 5% 6%

13% 19%

135%

59%

86%

29%

0%

20%

40%

60%

80%

100%

120%

140%

2010 2011 2012 2013 2014 1H15

Yutong BYD

Yutong received less government

grants vs. BYD, as it does not

participate in battery manufacturing

Here we refer to government grants

awarded for R&D into NEV and

capacity buildout. It’s different from

government subsidy

Yutong’s capacity utilization is

superior to BYD in both battery

manufacturing and auto assembly

Industrials

Initiating Coverage

2 December 2015



Going forward, Yutong’s capex spending is mainly maintenance capex driven, and will be

maintained at Rmb1bn for FY15/16 respectively. That is the reason why capacity utilization

will climb in the next 2 years, having crossed 100% in 1H15, according to management.

This is the key reason for the above-industry margin. Management said they can produce

80,000 – 100,000 units if their capacity is stretched.

Table 13: Capex as percentage of sales comparison – both companies are on

par (mn Rmb)

2010A 2011A 2012A 2013A 2014A

BYD Capex (8,735) (8,673) (7,006) (2,612) (4,052)

% of sales -19% -19% -16% -5% -7%

Yutong Capex (926) (992) (1,896) (921) (1,919)

% of sales -7% -6% -10% -4% -7%


Meanwhile BYD has excess capacity for vehicle manufacturing, since the utilization of

conventional vehicles is inherently low, like many other local branded PV OEMs. The

bottleneck the company faces is battery production capacity. Therefore we find it more

relevant to be looking at the trend of battery capacity utilization. BYD’s capacity utilization

is expected to climb on the back of rapid growth of NEVs demand and pure electric bus

demand.

BYD’s effective capacity utilization is expected to be around 68% in FY15/16, respectively,

down from 95% in FY14. In a 5-year period, battery capacity is expected to reach 14GWH

by 2017, growing at 72% CAGR since end-FY12. In essence, we believe BYD would have a

tough time maintaining its capacity utilization for battery production, unless its home

storage battery business can take off.

Chart 15: BYD capacity utilization (%)


Chart 16: Yutong capacity utilization (%)


Research & Development For R&D, Yutong spent substantially less vs. BYD in absolute terms and less as a percentage

of sales. In FY14, Yutong’s R&D spending of Rmb1.07bn compares with BYD’s Rmb3.7bn,

which is more than 3x.

Stripping out the R&D of BYD Electronic, total auto/battery related R&D was nearly

Rmb3bn in FY14, still substantially more than Yutong in the same period. This represents

8.4% of revenue for BYD vs. 4.2% at Yutong.

While Yutong expenses its entire R&D, BYD only expensed 51% in FY14, the rest being

capitalized. Interesting to note, BYD only capitalizes auto related R&D spending, while BYD

Electronic R&D is entirely expensed. If we strip out the R&D of BYD Electronic, nearly 40%

or Rmb1.2bn is expensed, which is similar in magnitude to Yutong’s total R&D spending.

20%

95%

68%

68%

97%

0%

20%

40%

60%

80%

100%

120%

2013A 2014A 2015E 2016E 2017E

Utilization

153%

94% 89% 91%

105%

119%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2011A 2012A 2013A 2014A 2015E 2016E

Utilization

Yutong spends less on R&D because

it does not have in-house battery

manufacturing

Yutong expenses entire R&D while

BYD capitalized 51%

Capex as a percentage of sales had

been similar in the last couple of

years

Yutong does not intend to expand

capacity, and will only look to spend

maintenance capex going forward;

BYD will be looking for aggressive

capacity expansion

Battery capacity utilization is more

relevant for BYD

Industrials

Initiating Coverage

2 December 2015



Shareholding Structure BYD was founded in 1995 by Chairman Wang Chuanfu and listed on the Shenzhen and HK

stock exchanges in 2010/2002, respectively. At present, Mr Wang holds 21% effective stake

in the company, followed by the other co-founder, Mr. Lv Xiangyang with 10% and the

Warren Buffet backed Berkshire Hathaway with 9%. Berkshire’s stake ownership is mainly

through H-shares, while Chairman Wang’s holdings are in A-shares.

Table 14: BYD Major Shareholders

A shares H shares

% of

share capital

Wang Chuanfu 512,623,820 20.70%

Lv Xiangyang 239,228,620 9.66%

Berkshire Hathaway Inc. 225,000,000 9.09%

Youngy Investment 162,681,860 6.57%

Xia Zuoquan 118,977,060 4.81%

*Updated till Sept 15


In 1997, Yutong’s A-shares were issued on the Shanghai Stock Exchange. Currently, Yutong

is majority owned by shareholder Zhengzhou Yutong Group with 37% stake, which is in

turn controlled by the Chairman Mr. Tang Yu Xiang. Other major shareholders include GIC

(1.5%), Lions Bus (4%), Pingan Insurance (2%) and China Road Machinery (2%). And since

the company is eligible for participation through the HK-Shanghai stock connect scheme,

other foreign institutions accounted for 9% through the Hong Kong Stock Clearing body.

Table 15: Yutong Major Shareholders

A shares

% of

share capital

Zhengzhou Yutong Group 823,314,023 37.19%

Hong Kong Clearing 188,255,267 8.50%

Lions Bus (100% owned by Yutong Group) 87,428,292 3.95%

China Securities Finance Corp 65,986,258 2.98%

China Pingan-Orient Securities 46,561,632 2.10%

China Highway Vehicle & Machinery Co Ltd 44,385,192 2.00%

GIC Private Limited 32,946,068 1.49%

*Updated till Sept 15


Chart 17: BYD public shareholding structure


Chart 18: Yutong public shareholding structure


A shares

Listed, 30%

A shares

Unlisted,

33%

H shares

Listed, 37%

A shares

Listed, 86%

A shares

Unlisted,

14%

Wang Chuanfu, Lv Xiangyang and

Berkshire Hathaway are BYD’s

biggest shareholders

For Yutong, it is Yutong Parent

group, Lions Bus, CSFC, Pingan-

Orient Securities

Industrials

Initiating Coverage

2 December 2015



Sector Outlook

PV EV Adoption No Easy Task Despite China’s policies on EVs, we estimate only ~294,000 electric vehicles are on the road

as at end October. Barring a sudden surge in EV sales, China will likely miss its 2015 target

with regard to both EV installed base and recharging infrastructure. China may yet see its

NEV installed base reach 5m vehicles by 2020.

Chart 19: China likely to fall short of 2015 Targets…

Source: Jefferies

Chart 20: …but could still reach the 2020 target

Source: China Association of Auto Manufacturers, Jefferies

NEV sales have accelerated in 2014, with EV sales growing by 324% YoY to ~75k units. In

2015, we believe NEV sales can grow by 150%+ to more than ~200k units. NEV would still

account for just ~1% of total PV sales in 2015 but we believe NEV sales will continue to

grow.

Chart 21: Electric Vehicles Sales pick up in 2014 and 2015

Source: China Association of Auto Manufacturers, Jefferies estimates

Forecasting 4.8m Electric Passenger Vehicles by 2020

We are forecasting China’s electrical passenger vehicles installed base to reach 4.8m

vehicles, just short of the 5mn mark. By 2020, electrical passenger vehicles sales should

reach 1.3m, accounting for just 4% of annual PV sales.

0% 20% 40% 60% 80% 100%

Charging

Poles

Charging

Stations

Electric

Vehicles 500

2,000

400

294 (59%)

636 (39%)

27 (8%)0

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

000's

2020 Target

0

50

100

150

200

250

2011 2012 2013 2014 2015E

000's

Battery Electric Vehicles

Plug-in Hybrid Electric Vehicles

Industrials

Initiating Coverage

2 December 2015



Chart 22: Electric Vehicles Sales to Just Miss 2020 Target

Source: China Association of Auto Manufacturers, Jefferies estimates

The Payback Period is Attractive with Subsidies

The fundamental EV economic equation is higher upfront costs in the form of a battery in

exchange for lower fuel costs. The more you drive, the more quickly an EV will pay off the

upfront additional cost. For that reason, EVs are a natural fit for fleet vehicles such as buses.

For individual consumers, those who drive frequently will benefit more quickly from the

savings per “tank” fill-up with an EV. For PHEVs and BEVs, the payback period is 3 and 8

years, respectively.

If we factor in the purchase subsidies and the exemption of plate numbers fees, a BEV

payback period falls to 5 months and a PHEV is actually cheaper than its ICE counterpart. In

the table below we summarize our payback period analysis.

Chart 23: Payback Period Analysis for PV BEVs

Source: Jefferies

Chart 24: Payback Period Analysis for PV PHEVs

Source: Jefferies

In the exhibits below we highlight the sensitivity of the payback period to the price

difference and average km driven per year, and price difference and price of gasoline.

Passenger Vehicles 2014 2015E 2016E 2017E 2018E 2019E 2020E

EV PV Installed base 000's 123 345 811 1,508 2,410 3,493 4,789

YoY % Change % 154.8% 180.4% 135.1% 85.9% 59.8% 44.9% 37.1%

EV as a % of PV Installed Base % 0.1% 0.2% 0.5% 0.8% 1.2% 1.5% 1.9%

EV PV Sales 000's 75 222 466 699 909 1,091 1,309

YoY % Change % 323.8% 196.9% 110.0% 50.0% 30.0% 20.0% 20.0%

EV Sales as a % of PV Sales % 0.4% 1.1% 2.1% 3.0% 3.7% 3.9% 3.9%

EV Scrappage 0 0 0 2 7 8 13

PV Installed base 000's 123,267 141,785 161,863 181,876 203,622 228,299 257,812

YoY % Change % 16.7% 15.0% 14.2% 12.4% 12.0% 12.1% 12.9%

PV Sales 000's 19,700 20,488 22,537 22,987 24,826 28,054 33,665

YoY % Change % 9.9% 4.0% 10.0% 2.0% 8.0% 13.0% 20.0%

Scrappage 000's 2,351 2,713 2,561 2,766 3,088 3,195 3,501

The upfront purchasing cost for BEV is 4.2%

higher than ICE in Shanghai, if plate number

fees are considered.

Industrials

Initiating Coverage

2 December 2015



Chart 25: Sensitivity Analysis of Price Difference and Annual Driving Distance –

payback period in years

Source: Jefferies

Chart 26: Sensitivity Analysis of Price Difference and Fuel Cost – payback

period in years

Source: Jefferies

Challenges to EV Adoption

We believe the following factors are key challenges to EV adoption in China:

Higher upfront cost: According to the US DOE, the initial purchase price plays

a more critical role in customer adoption than the levelized cost. In other words,

while NEV can yield cost savings over the lifetime of the car, consumers may still

be hesitant to make the initial investment. The purchase subsidies can help to

partially offset the higher cost of domestically produced PHEV and BEV. However,

given the higher cost of BEV, BEVs can still be 66.5% more expensive than ICE

counterparts even after factoring in the purchasing subsidy.

Lack of recharging network: Gasoline and diesel are universally available

across China, allowing vehicles to travel all corners of the country (and even

across international borders). China’s EV infrastructure is rapidly expanding but its

2015 targets, which they’ll likely miss, pale in comparison to gasoline and diesel.

There are ~50,000 gasoline/diesel service stations. By the end of 2014, China had

780 charging stations. By 2020, the government aims to construct an additional

12,000 charging stations, so still far behind gasoline stations.

Lengthy charging times: A faster charger like Tesla’s Superchargers can charge

an EV up to 80% in just 40 minutes (a 100% charge will take 75 minutes). The

alternative is a slow charger which typically requires owners to charge the EV

overnight. Hence the government’s target to build 400,000 charging poles by

2015. Most of these charging poles will likely be situated in residential apartment

complexes and office buildings.

Range anxiety: Tesla’s Model S offers a range of 253-270 miles, likely more than

sufficient for the average daily driver. However, most BEVs have a range of 100

miles or less, about one-third the range of gasoline cars.

Technology and service risk: An automobile is typically the second largest

purchase a consumer makes, after a home. With such a significant investment,

Price Difference

0.40 50,000 75,000 100,000 125,000 150,000 175,000 200,000 225,000

50,000 4.6 6.8 9.1 11.4 13.7 16.0 18.3 20.5

75,000 3.0 4.6 6.1 7.6 9.1 10.6 12.2 13.7

100,000 2.3 3.4 4.6 5.7 6.8 8.0 9.1 10.3

125,000 1.8 2.7 3.7 4.6 5.5 6.4 7.3 8.2

150,000 1.5 2.3 3.0 3.8 4.6 5.3 6.1 6.8

175,000 1.3 2.0 2.6 3.3 3.9 4.6 5.2 5.9

200,000 1.1 1.7 2.3 2.9 3.4 4.0 4.6 5.1

225,000 1.0 1.5 2.0 2.5 3.0 3.5 4.1 4.6

250,000 0.9 1.4 1.8 2.3 2.7 3.2 3.7 4.1An

nu

al

Dri

vin

g D

ista

nce

Price Difference

0.40 25,000 50,000 75,000 100,000 125,000 150,000 175,000 200,000

5.60 1.1 2.2 3.3 4.4 5.4 6.5 7.6 8.7

5.85 1.0 2.0 3.0 4.1 5.1 6.1 7.1 8.1

6.10 1.0 1.9 2.9 3.8 4.8 5.7 6.7 7.6

6.35 0.9 1.8 2.7 3.6 4.5 5.4 6.3 7.2

6.60 0.8 1.7 2.5 3.4 4.2 5.1 5.9 6.8

6.85 0.8 1.6 2.4 3.2 4.0 4.8 5.6 6.4

7.10 0.8 1.5 2.3 3.0 3.8 4.6 5.3 6.1

7.35 0.7 1.5 2.2 2.9 3.6 4.4 5.1 5.8

7.60 0.7 1.4 2.1 2.8 3.5 4.2 4.8 5.5

Fue

l C

ost

(R

mb

pe

r li

ter)

Industrials

Initiating Coverage

2 December 2015



consumers may tend toward the “tried and true” rather than take a risk on new

technology, new products, and even entirely new companies. EVs are likely to

require service from OEMs that have the specific expertise, parts, and tools. New

EVs do not yet have lengthy track records in terms of maintenance issues, battery

life, motor/drivetrain wear, etc.

Chinese market dominated by local players

BYD and Zhongtai captured 39% and 18% of NEV sales in China in the 1H15. In fact, the

top five OEMs among NEV players in 2015 and 1H14 were domestic companies. As we

mentioned above, only domestically produced EVs are eligible to be included in the MIIT

catalog and buyers can receive purchase subsidies.

Even with the effective exclusion of foreign NEV, the competition between domestic OEMs

is intense. Based on the Herfindahl index, which measures the level of competition within a

sector, NEV PV is at 19% in 2014. The lower the percentage, the more competitive the

market.

Chart 27: China NEV PV Market Share by OEM in 1H15

Source: CPCA, Jefferies

Chart 28: China NEV PV Market Share by Model in 1H15

Source: CPCA, Jefferies

Buses prove to be a different story

We believe NEVs are suited for fleet vehicles such as buses. The total lifetime costs of a

vehicle are more important in the decision making process for fleet owners than for

individual consumers. The Chinese government provides a direct subsidy of Rmb250,000-

500,000 per vehicle. Fleet vehicles’ higher utilization rates, coupled with lower

maintenance costs, translate to comparatively lower payback periods. Predictable routes

and centralized facilities limit the capital expenditure for recharging facilities and range

anxiety.

For fleet vehicles with higher utilization, there are challenges given the limited range of a

battery and lengthy charging times. We believe in these cases, PHEVs would be a better fit

than BEVs.

There are 43 players in the NEV bus market but it is relatively concentrated. The Top 3 have

a combined market share of above 41%, which has been relatively stable over the past two

years. Yutong is the largest with 32% market share in 2014.

BYD

39%

ZOTYE

18%

BAIC

12%

Chery

11%

SAIC

7%

Others

14%

Passenger Vehicle By Model Sales Market Share

BYD Qin 16,477 33%

BAIC e 5,803 11%

ZOTYE e20 4,913 10%

ZOTYE yun100 4,347 9%

SAIC ROEWE 550 3,321 7%

QQ 3,208 6%

BYD e6 2,900 6%

JAC IEV 2,591 5%

KANDI 2,547 5%

Chery eQ 2,129 4%

Others 2,391 5%

Total 50,627 100%

Domestic models enjoy more favorable

polices than imported models.

Currently, imported models do not

receive purchase subsidies.

Industrials

Initiating Coverage

2 December 2015



Chart 29: China New Energy Bus Market Share by OEM in FY14


Government Paving the Road for EVs With the potential inflection in car penetration set to exacerbate energy security and

environmental concerns, the government is intent on breaking oil’s monopoly on motor

vehicle fuel. In the Energy saving And New Energy Vehicle Plan for 2012–2020, the

government set a 2015 target of 500,000m electric vehicles, PHEV and pure EVs, on the

road. By 2020, the government is targeting electric vehicles to reach 5m.

Electric vehicles, including plug-in hybrid and pure EVs, are not the only solution though.

Natural gas vehicles (NGV) are one alternative. China already has 4.6m on the road at the

end of 2014, including 4.4m CNG vehicles. Hydrogen fuel cells are zero emission vehicles

but are considerably more expensive than electric vehicles. The government can manage

the problem by resorting to demand side management. Driving habits are indeed changing

in wealthier countries. For the purposes of this report, we focus primarily on electric

vehicles.

Government policy to encourage the NEV industry and adoption

China has long held aspirations to be a leader in New Energy Vehicles. The 8th Five-Year

Plan first mentioned New Energy Vehicles as a national science and technology project. The

government included New Energy Vehicles as a key project for the National High

Technology Research and Development Plan within the 11th Five-Year Plan.

In Jan 2009, the "10 Cities, 1,000 Vehicles plan” was launched with a target of adding 10

demonstration cities each year with 1,000 new NEVs for each demonstration city. Note, the

scheme officially ended in 2012 with 27,000 NEVs added across 25 demonstration cities,

falling short of its original targets. In March 2009, the State Council announced the

Automobile Industry Restructuring and Revitalization Plan to develop new energy vehicles

as a national strategy to industrialize BEVs, PHEVs and key components. By 2011, the sales

of NEVs should reach 5% of total sales of passenger vehicles.

In 2012, the State Council introduced the Energy Saving and New Energy Vehicle Industry

Development Plan. The Plan is targeting the NEV installed base to reach 500,000 vehicles

by 2015 and 5,000,000 by 2020. In 2020, NEV production capacity is targeted to reach

2,000,000 vehicles, with battery costs falling to Rmb1,500 per kWh. The previous “10

Cities, 1,000 Vehicles Plan” was effectively broadened.

In Sep 2013, the Ministry of Finance, Ministry of Industry and Information Technology,

National Development and Reform Commission and Ministry of Science and Technology

announced the promotion and application of NEV. There are now 88 demonstration cities

in 39 areas listed as NEVs demonstration cities. Please see Table 16 for details. Although the

latest detailed figures for 88 cities are not yet available, it appears the targets will likely not

be met.

Yutong

PHEV

24%

Yutong EV

8%

Jinlong

PHEV

10%

Jinlong EV

5%

BYD EV

11%

Others

PHEV

31%

Other EV

11%

By 2020, the government is targeting

electric vehicles to reach 5m.

China has long aspired to be a leader in

New Energy Vehicles.

Industrials

Initiating Coverage

2 December 2015



Table 16: NEVs promotion plan in 88 demonstration cities (2013 – 2015)

District Number of Cities

2013-2015

Plan

2013-Sep 2014

(Cumulative)

% of

Completion

Zhejiang province 4 10,100 5,203 52%

Beijing 1 35,020 4,762 14%

Shenzhen 1 35,000 4,189 12%

Hefei 1 5,720 4,145 72%

Shanghai 1 10,000 4,022 40%

Jiangsu province 6 18,085 3,118 17%

Tianjin 1 12,000 1,726 14%

Zhengzhou 1 5,500 1,423 26%

Guangdong province 7 10,000 1,369 14%

Guangzhou 1 10,000 1,241 12%

Chongqing 1 10,000 995 10%

Hebei province 10 13,141 803 6%

Xi'an 1 11,000 710 6%

Xiangyang 1 5,000 561 11%

Qingdao 1 5,200 510 10%

Changzhutan 3 6,100 492 8%

Taiyuan 1 5,000 489 10%

Wuhan 1 10,500 389 4%

Chengdu 1 5,000 298 6%

Wuhu 1 5,110 252 5%

Shenyang 1 5,000 232 5%

Dalian 1 5,000 225 5%

Yunnan province 4 5,000 223 4%

Weifang 1 5,500 174 3%

Linyi 1 5,690 173 3%

Guizhou 6 6,000 166 3%

Xinxiang 1 5,000 153 3%

Fujian province 10 10,000 153 2%

Ningbo 1 5,000 119 2%

Jiangxi province 7 5,300 118 2%

Zibo 1 5,000 63 1%

Luzhou 1 5,000 48 1%

Changchun 1 10,000 33 0%

Inner Mongolia 2 5,000 25 1%

Ha'erbin 1 5,000 5 0%

Jincheng 1 6,000 3 0%

Lanzhou 1 5,000 3 0%

Liaocheng 1 5,010 3 0%

Haikou 1 5,000 0 0%

Total 88 335,976 38,616 11%

Source: MIIT, Jefferies

To accomplish these goals, the government has introduced financial incentives such as

purchase subsidies and tax incentives; non-financial incentives such as exemptions from

license-registration lotteries; and the aggressive development of NEV recharging station

infrastructure.

We discuss these policies in the sections below.

Financial incentives: Purchase subsidies to lower upfront costs

According to U.S. DOE, the initial purchase price of a vehicle is an important factor for most

consumers. In September 2013, the Ministry of Finance, Ministry of Industry and

Information Technology, NDRC and Ministry of Science and Technology introduced

national purchase subsidies of Rmb35,000-60,000 to help encourage the adoption of NEV;

vehicles equipped with longer ranges (and higher price tags) are eligible for higher

purchase subsidies. Fuel Cell PVs are eligible for a purchase subsidy of Rmb200,000.

Industrials

Initiating Coverage

2 December 2015



Vehicles must be included in the Ministry of Industry and Information (MIIT) catalogue to

qualify for the national purchase subsidy; the Ministry of Finance is responsible for paying

purchase subsidies to manufacturers on a quarterly basis. Since 2009, the MIIT has

approved 75 batches of vehicles, or 183 passenger vehicles in total. Currently, only vehicles

produced by domestic OEMs or JVs have been included in the catalogue. Despite Tesla’s

global recognition and popularity, it has yet to be included in the MITT catalogue.

We summarize the national purchase subsidy in the table below.

Table 17: National Purchase Subsidies for New Energy Vehicles

Note: R stands for the range of the passenger vehicle. The range was changed from 80

km ≤ R ≤ 150 km to 100 km ≤ R ≤ 150 km beginning 2016.

Source: MOF, NDRC, MIIT, MOST, Jefferies

The purchase of NEV buses likewise benefits from purchase subsidy of Rmb250,000-

500,000 (see Table 180). For NEV buses, the length of the bus is the determining factor in

the amount of the purchase subsidy.

The national purchase subsidies were lowered by a total of 10% in 2014 and 2015.

Originally, the government proposed lowering the national purchase subsidy by 10% each

year but later relented. In April 2015, Ministry of Finance, Ministry of Industry and

Information Technology, National Development and Reform Commission and Ministry of

Science and Technology published new purchase subsidies. Most of the PV purchase

subsidies were lower than the previous purchase subsidies. The purchase subsidies in 2017

and 2018 will be 20% lower than the 2016 benchmark. The purchase subsidies in 2019 and

2020 will be 40% lower than 2016 levels.

Chart 30: Declining Purchasing Subsidies for BEV PV


Chart 31: Declining Purchasing Subsidies for PHEV PV


Likewise, the purchase subsidies for NEV buses are being reconfigured. Previously, bus

subsidies were determined according to the length of the bus. BEV Bus purchase subsidies

will be determined according to Ekg, (Electric energy per kilometre and kilogram), and

battery driving range. PHEV bus purchase subsidies will be determined according to the

range and the length of bus. We summarize the new purchase scheme effective 2016 in the

table below. In 2017, the purchases subsidies will decline by 20% from 2016 levels. In

2019, the purchase subsidies will decline by 40% from 2016 levels.

Rmb('000) 2013 2014 2015 2016 2017 2018 2019 2020

Passenger Vehicle

BEV (80 km ≤ R < 150 km) 35.0 33.3 31.5 25.0 20.0 20.0 15.0 15.0

BEV (150 km ≤ R < 250km) 50.0 47.5 45.0 45.0 36.0 36.0 27.0 27.0

BEV (R ≥ 250 km) 60.0 57.0 54.0 55.0 44.0 44.0 33.0 33.0

PHEV (R ≥ 50 km) 35.0 33.3 31.5 30.0 24.0 24.0 18.0 18.0

Fuel Cell Passenger Vehicle 200.0 190.0 180.0 200.0 200.0 200.0 200.0 200.0

0

10

20

30

40

50

60

70

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Rmb (000's)

80 km ≤ R < 150 km

150 km ≤ R < 250km

R ≥ 250 km

15

20

25

30

35

40

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Rmb (000's)

Purchase Subsidies for PHEV

Table 18: National Purchase Subsidies


Local governments will continue to

subsidize NEVs in the coming years.

In Beijing, the local subsidy will be

the same level as national subsidy for

BEV Bus until Dec 31th 2017.

Industrials

Initiating Coverage

2 December 2015



Table 19: National Purchase Subsidies for NEV Buses, Effective 2016

Note: R stands for the range Source: MOF, Jefferies

The purchase subsidy listed in the table above refers to bus length between 10 and 12

meters (including 12 meters). For PHEV, if the length of bus is below 6 meters, the purchase

subsidy will be 0.2 for each range. If the length of bus is between 6 and 8 meters (including

8 meters), the purchase subsidy will be 0.5 for each range. If the length of bus is between 8

and 10 meters (including 10 meters), the purchase subsidy will be 0.5 for each range. If the

length of bus is greater than 10 meters or double decker bus the purchase subsidy will be

1.2 for each range. For BEV, the subsidy for other lengths is also referred to Ekg and Range.

Some local provincial and city governments offer an additional purchase subsidy to further

encourage NEV adoption. For example, Shenzhen offers a one-for-one local purchase

subsidy on top of the national subsidy. However, local subsidies are subject to their own

local subsidy catalogue. The local subsidy catalogue can be different from the national

subsidy catalogue, with the former often showing preference for local manufacturers.

We highlight the purchase subsidies of select cities in the table below.

Table 20: Local Purchase Subsidies for New Energy Vehicles in 2015

Note: R stands for the range of the passenger Source: Local DRC, Jefferies

On top of national and local purchase subsidies, effective Sep 2014, the purchase of NEVs is

exempt from the 10% vehicle purchase tax. The tax exemption is scheduled to expire at

end 2017. Although the purchase subsidy has been limited to domestic or JV NEVs, the

vehicle purchase tax exemption includes imports as well. In the fifth batch of models,

BMW’s 1Z21 BEV and i3 1Z41 PHEV model were included.

Non-financial subsidies – Free Licenses

In addition to purchase subsidies and tax emptions, the government is using other

incentives to encourage NEV adoption. Some local governments have opted to hand out

license plates to purchasers of New Energy Vehicles. In several of China’s larger and more

congested cities, the government is using auctions and lotteries to issue new license plate

numbers. A free license plate is more valuable than the actual subsidy.

Type （Ekg，Wh/km·kg）

6 ≤ R ＜ 20 20 ≤ R ＜ 5050 ≤ R ＜ 100100 ≤ R ＜ 150150 ≤ R ＜ 250 R ≥ 250

BEV Ekg < 0.25 220 260 300 350 420 500

0.25 ≤ Ekg < 0.35 200 240 280 320 380 460

0.35 ≤ Ekg < 0.5 180 220 240 280 340 420

0.5 ≤ Ekg < 0.6 160 180 220 250 330 360

0.6 ≤ Ekg < 0.7 120 140 160 200 240 300

PHEV NA NA 200 230 250 250

R (km)

Rmb('000) Beijing Tianjin Taiyuan Dalian Shanghai Qingdao Guangzhou Nanchang

Passenger Vehicle

BEV (80 km ≤ R < 150 km) 31.5 31.5 20.0 25.2 40.0 35.0 35.0 25.0

BEV (150 km ≤ R < 250 km) 45.0 45.0 36.0 50.0 50.0 36.0

BEV (R ≥ 250 km) 54.0 54.0 43.2 60.0 60.0 44.0

PHEV (R ≥ 50km) 31.5 25.2 30.0 35.0 35.0 24.0

Bus

BEV (6m≤L<8m) 300.0 240.0 300.0 60.0 300.0 85.0

BEV (8m≤L<10m) 400.0 320.0 400.0 80.0 400.0 110.0

BEV (L≥10m) 500.0 400.0 500.0 100.0 500.0 150.0

PHEV (L≥10m) 200.0 250.0 50.0 250.0 80.0

In addition to central and local

purchase subsidies, purchase tax is

waived for NEVs, further reducing

the purchase costs.

Industrials

Initiating Coverage

2 December 2015



Table 21: Strict local policies on PV purchasing (excluding taxi)

Year Cities Restrictions on new plate number

1994 Shanghai Auction

2011 Beijing Lottery

2011 Guiyang Lottery

2012 Guangzhou Lottery and Auction

2013 Tianjin Lottery and Auction

2014 Hangzhou Lottery and Auction

2014 Shenzhen Lottery and Auction

Source: Local governments

In Sep 2015, State council announced that local governments should not apply such

restrictions on NEVs. Implementation will be up to individual local governments. For

example, in Beijing, license plate numbers are assigned though a lottery. In Aug 2015, only

0.5% of prospective ICE owners of total applications received a license plate number. On

Oct 2015, Beijing local governments announced that NEV buyers can receive a license plate

number directly, bypassing the lottery system. In Shanghai, license plates are auctioned off.

The success rate is just 4% and the average price is ~Rmb85k. In comparison, the national

and local purchase subsidy in Shanghai total is just Rmb61.5k.

Government a large buyer of NEVs

As part of the Announcement for government and public institution purchase new energy

vehicles implementation plan, NEVs should account for 30% of the government’s newly

purchased vehicles in demonstration cities from 2014 to 2016. In other cities, NEVs should

account for 10% in 2014, 20% in 2015 and 30% in 2016. The percentage will increase in

future years.

Encouraging the development of recharging stations

In 2015, the NDRC released the Electric Vehicle Charging Infrastructure Development

Guidelines. The plan targets recharging stations to exceed 12,000 and recharging piles to

exceed 4.8mn by 2020. In addition, the plan will look to build 800 Inter-city recharging

stations by 2020. At the end of 2014, there were only 780 refuelling stations and 31,000

recharging piles. The plan called for new residences and parking lots to include recharging

infrastructure. In public buildings, at least 10% carports should be installed with recharging

infrastructure.

Table 22: Recharging Station Subsidies in 2013-2015

2013 2014 2015

District Quantities

Subsidies

(Rmb mn) Quantities

Subsidies

(Rmb mn) Quantities

Subsidies

(Rmb mn)

Beijing, Tianjin, Hebei, 2,500 ≤ Q ＜ 5,000 20 5,000 ≤ Q ＜ 7,000 27 10,000 ≤ Q ＜ 15,000 50

Yangtze River Delta, 5,000 ≤ Q ＜ 7,000 30 7,000 ≤ Q ＜ 10,000 38 15,000 ≤ Q ＜ 20,000 70

Pearl River Delta 7,000 ≤ Q ＜ 10,000 45 10,000 ≤ Q ＜ 15,000 55 20,000 ≤ Q ＜ 25,000 90

Q ≥ 10,000 75 Q ≥ 15,000 90 Q ≥ 25,000 120

Other districts 1,500 ≤ Q ＜ 2,500 10 3,000 ≤ Q ＜ 5,000 18 5,000 ≤ Q ＜ 7,000 240

2,500 ≤ Q ＜ 5,000 20 5,000 ≤ Q ＜ 7,000 27 7,000 ≤ Q ＜ 10,000 34

5,000 ≤ Q ＜ 7,000 30 7,000 ≤ Q ＜ 10,000 38 10,000 ≤ Q ＜15,000 50

Q ≥ 7,000 50 Q ≥ 10,000 67 Q ≥ 15,000 80


The Cost of Batteries Coming Down Electric vehicles can be more than ~66.5% expensive than their ICE counterpart, making it

difficult to justify switching on economics alone. Battery costs account for ~30-40% of the

cost of an electric vehicle. If electric vehicles are to become more than a niche product, the

cost of batteries needs to decline.

One way to analyze the cost of a battery pack is to measure how much energy can be

produced per dollar spent. After all, for example, a cell costing 5x the amount of a

“standard” cell to create 10x the amount of energy (measured in kilowatt-hours) is clearly

more cost efficient and more economic.

Local governments also planned the

development of recharging

infrastructure.

Central government has a specific

plan for achieving its recharging

infrastructure target.

Industrials

Initiating Coverage

2 December 2015



Experience Curve helping to drive battery costs lower

Battery costs have already declined considerably. According to one study published in

Nature Climate Change in March 2015, Renault-Nissan and Tesla Motor battery costs have

already reached ~US$300/kWh. We believe Tesla Motor’s battery packs may be as low as

US$250/kWh. The learning rate of battery packs was observed to be 6-9% from 2007 to 2014.

Admittedly, not as large a decline as Swanson’s Law seen in solar; Richard Swanson observed

that module prices declined by 20% for every doubling of cumulative volume shipped.

What is the experience curve?

Bruce Henderson of Boston Consulting Group is credited for coining the term, the

experience curve. The experience curve, not to be confused with Moore’s Law, postulates

that learning, specialization, investment and scale leads “costs [to] decline by some

characteristic amount each time accumulated experience is doubled.” The experience curve

is often steeper in new, fast growing industries.

Labor costs should decline as the labor force become more experienced and specialized. As

an industry grows, more new production capacity is added. The incremental capital cost is

typically less than the increase in production, contributing to lower production costs. The

increased scale will also allow for greater specialization. An increase in production unit size

can lead to lower incremental capital costs and a steeper experience curve. Automation will

also contribute to scale and lower costs.

DOE setting stretch goals for 2022

The US Department of Energy (DOE)’s EV Everywhere program is targeting to reduce the

production costs, the size and weight of electric batteries. The program’s stretch goal is for

battery costs to reach US$125/kWh by 2022. Combined with the lowering the weight of

vehicles and costs of electric drive systems, the all-in cost of an electric vehicle with a 280-

mile range will be similar to a comparable ICE vehicle. Link

Skeptics argue we have already reached the limits of the experience curve

The experience curve does eventually plateau. Skeptics highlight this inevitability to argue

that, barring significant advancements in battery chemistry, lithium ion batteries are

unlikely to reach US$125/kWh in the medium term. We believe this is premature.

The battery industry is far from new and lithium-based based batteries have been

commercially available since 1991. However, the application of lithium-ion batteries in

electric vehicles is a recent event and we have not yet seen the production of lithium ion

batteries at this scale. More specifically, we believe as the production of lithium-ion

increases we can see improvements in the manufacturing process, including:

Yield. Factory yields are dependent on experience curves and employees being

able to identify and fix production process or component quality or handling issues.

Materials. Materials costs do not currently benefit from volume discounts since

the amounts ordered are for relatively small production volumes. Shifting to

higher volumes for pre-manufactured products could drop costs by multiples of

current levels, while purchasing raw materials on an exponentially larger scale

should also drive cost economies.

Efficiency and speed of throughput refers mostly to the ability to shorten the

amount of time the cell materials spend in the coating machines, thereby

increasing the throughput and lowering the capex per unit. Today coating

machines are among the most expensive machines, the most difficult to order

(from a lead time perspective) and the source of the biggest bottleneck.

Experience in other industrial manufacturing processes using the same coaters has

shown that rated speeds can often be exceeded.

Over-engineering. In some cases, the battery pack may be over-engineered,

especially for vehicle applications where safety and reliability are paramount.

Redesigning battery packs to use fewer materials (in the wiring, casing, etc.) and

lower cost materials without compromising quality or safety could reduce module

costs by possibly more than half.

In the next section, we will discuss how Tesla and other companies may be able to realize

lower battery costs in the medium term.

A battery cost of US$125/kWh, lighter

vehicles and a cheaper electric drive system

would make a 280-mile range EV

competitive with ICE vehicles

“Price and cost data show that costs decline

by some characteristic amount each time

accumulated experience is doubled.”

- Bruce Henderson of BCG

Industrials

Initiating Coverage

2 December 2015



http://energy.gov/eere/vehicles/vehicle-technologies-office-batteries

Tesla and the GigaFactory raising the bar At an estimated battery cost of US$250/kWh, Tesla has already set the bar quite high for

industry leaders. In breaking with industry norms at the time, Tesla used commodity

lithium ion battery cells and relied on engineer and manufacturing improvements to arrive

at lower battery costs. Tesla’s battery packs use 18650 format lithium ion cells, the same

type of cells found in laptop batteries and other consumer electronics. These cells are

manufactured in high volume and have a relatively low cost of $250/kWh.

Driving costs down to US$125/kWh

We believe Tesla can lower its battery costs from an estimated US$250/kWh to

US$125/kWh in 2020, exceeding the expectations of the DOE’s EV Everywhere report. The

battery costs can be divided into two categories: cell-level costs and pack-level costs.

Currently, we estimate the Tesla battery’s cell-level costs to account for ~50%, or about

$125/kWh, of all-in battery pack cost.

More specifically, we believe there are additional cost savings that could come from:

Cell architecture changes;

Economies of scale;

Supply chain optimization;

Increased automation; and

Domestication of production

Exhibit 1: Tesla Battery Costs Falling to US$125/kWh

Source: Jefferies estimates

Tesla’s First Gigafactory to further drive down the costs

Tesla’s Gigafactory will be a major factor in the company’s plans to lower battery costs. By

2020, the Gigafactory is expected to reach a production capacity of 35GW of cells and

50GWh of battery packs in 2020, producing enough battery packs for 500,000 EVs. The

company will need to source 15GWh of cells externally. The Gigafactory has already started

construction in 2014 in Nevada and is expected to start producing cells in 2016.

The company believes the Gigafactory will help the company reduce the cost of its battery

packs by more than 30% in the first year of production of the Model 3. We believe the

Gigafactory can potentially lower battery costs through economies of scale; supply chain

optimization; increased automation; and domestication of production.

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Industrials

Initiating Coverage

2 December 2015



Gigafactory to bring down pack-level costs

We expect pack-level costs to be reduced by an even greater magnitude, driven in large

part by the Gigafactory, which is expected to boost Tesla’s potential output from ~4 GWh

annually currently (i.e., 50K vehicles in 2015 at 85kWh each) to ~50 GWh. The Gigafactory

will bring advantages from scale, optimization of supply chain, increased automation, and

perhaps most importantly, domestication of production.

Tesla’s batteries (through Panasonic) are produced on Japanese soil, one of the most

expensive places to have a manufacturing plant in the world. Having the Gigafactory in

Nevada will bring about massive cost reductions, from factors such as the lower price of

electricity to put on the lights in the factory compared to Japan to the elimination of

shipping fees to bring cells to California from Japan.

Overall, we believe that the costs of quality control testing, pack frame, hardware &

circuitry, cell & pack-level labor, and warranty & other will all decrease by ~75% as a result

of the Gigafactory and greater scale. For depreciation, we stay anchored to Tesla’s 9% of

COGS, to yield a 50% cost reduction (in line with the reduction from $250/kWh to

$125/kWh for the overall battery pack).

Cell Architecture Changes to Drive 30% of the Cost Reduction

We believe Tesla can reduce cell-level costs by at least 30%, which implies a reduction from

the current cell-level cost of ~$125/kWh to ~$88/kWh. The most important components

that will reduce the overall cost are the cathode, anode, electrolyte, and electrode solvent.

In slightly more detail:

Replacement of current nickel cobalt aluminum (NCA) cathode with a more

efficient (i.e. higher capacity and higher voltage) lithium-rich nickel cobalt

manganese (LR-NCM) cathode.

Increase in the percentage of silicon in the synthetic graphene anode from 4-5%

currently to 8-10%, which increases anode lithium storage capacity and allows for

a ~20% smaller anode.

Replacement of liquid electrolyte with ionic gel eliminates the need for a

separator.

Replacement of the NMP-based electrode solvent used for the cathode with a

water-based electrode solvent, which reduces the overall electrode solvent

material cost and eliminates the electrode solvent recovery process.

Industrials

Initiating Coverage

2 December 2015



Zhengzhou Yutong Bus (600066 CH) –

Initiate at Buy Yutong will continue to benefit from product mix improvement and economies

of scale, as the policy environment remains favourable. In our view, consensus

has been overly cautious on subsidy cut – we believe Yutong can offset it by

passing it on to customers and lowering the cost of production. With a steady

dividend yield and superior products, Yutong is a Buy.

Continued mix improvement, economies of scale. Various supportive policies from

the Chinese government to promote new energy buses are expected to filter through to the

sector growth. These include i) requirement that 30% of government new vehicle

purchases should be NEV ii) exemption of vehicle purchasing tax for NEVs iii) generous cash

subsidy for new energy bus purchases (Rmb300-500k per unit) iv) extensive build out of

charging facilities v) retirement of yellow label vehicles. Although the conventional bus

market is expected to be down marginally, NEV strength is expected to offset the weakness

through mix improvement and NEV margin expansion. We expect Yutong to experience

55%/36% NEV volume growth in FY16/17, respectively.

Align with the market leader with superior products. As the largest NEV bus

manufacturer in China, Yutong has 10% of overall bus market and 32% of NEV bus market

in 2014. The company is the only electric bus manufacturer in China that has managed to

break through local protectionism and penetrate into other regions. Note that Yutong sold

over 70% of its electric buses to cities outside its home region. That is due to its strong

technological edge and competitive pricing. Yutong boasts superiority with regard to: i)

safety ii) reliability iii) fuel efficiency. In addition, Yutong electric buses are 10-20% lighter

than competing models, given better design and engineering. Due to the lighter weight

and more advanced control electronics, Yutong electric buses are also more fuel efficient

than others.

Expect margin improvement. Industry EV battery cost is expected to drop sharply,

according to our forecast, refer to page 33. This could help lower Yutong’s production cost

as the company outsources its battery. We believe battery cost could decline by more than

10% each year. Currently Yutong sources batteries from ATL and will also source from

Samsung SDI going forward. EV batteries account for ~50% of EV bus COGS. Despite the

gradual reduction of government subsidy, we believe the GPM of its NEV buses can be

sustained in the next few years, offset by battery cost decline. Overall, we expect gross

margin improvement to 24.6%/25.0% in FY16/17 respectively from 24.6% in FY15. This is

despite an expected decline in government subsidy in the next 2 years. Specifically, we

expect NEV bus to see 3%/11% price pressure in FY16/17; however, Yutong will seek to

pass it on to customers, who are mainly local governments/corporates and not as sensitive

on price.

High dividend pay-out and yield. Yutong’s 56% dividend payout in FY14 is the highest

among Chinese auto OEMs and we expect its high payout ratio to be maintained into

2015/16E, as cash position remains strong. Yutong was Rmb5.7bn net cash at the end of

1H15. Free cash flow of Rmb1.3bn at end FY14 is expected to be maintained in FY15-17,

despite decline in government subsidy. The company promised at least 45% payout for

FY15 and 16, but we expect the payout ratio to stay above 50%. Thus dividend yield would

translate to 4% FY15E.

Valuation/Risks

Our SOTP-based price target is at HK$26.0, implying 13x 2017e P/E (+1 S.D of its historical

forward P/E range). Risks include unfavourable policy shift by the government, and bigger

than expected slowdown at the conventional vehicle business.

Table 23: 600066 CH Yutong

Market Data

52 Week Range Rmb12.1 - Rmb24.8

Total Entprs. Value (Rmb M): 42,321.0

Market Cap. (Rmb M): 45,585.0

Share Out. (M): 2,216.0

Float (M): 1,076.5

Avg. Daily Vol. (M): 17.4

Source: Bloomberg as of Nov 27 2015

Chart 32: Yutong Price Performance


Industrials

Initiating Coverage

2 December 2015



Company Background Zhengzhou Yutong is principally engaged in the manufacture and sale of buses. The

company’s main product portfolio consists of new energy passenger buses, school

coaches, enterprise shuttle buses, caravans, motor homes, sightseeing buses, urban buses

as well as customized passenger buses, among others. It has the largest market share of

large and medium size buses in China and is a market leader for NEV buses. It also provides

ground passenger transportation services. Yutong sells buses domestically and overseas. In

2014, c.16% of its revenue was generated from markets outside mainland China.

Chart 33: Yutong net profit summary (Rmb mn)


Chart 34: Yutong market share summary


Management and Shareholders Mr. Tang Yuxiang is the president and major shareholder. He was selected by Forbes in

2009 as among the best CEOs of China’s listed companies, based on Yutong’s excellent

ability to generate returns for investors. He is a veteran of the firm, having joined Yutong

back in 1981 and gradually risen to the management level. He was made chairman in 2001.

Tang, together with other partners of Yutong Group, holds c. 41% of Yutong Listco.

Mr. Liu Chunzhi has been serving as Chief Financial Officer in Yutong Bus since 2012. He

has held various roles with GE China, GE Energy and GE Infrastructure, and Haier.

Mr. Niu Bo is General Manager and Director in Zhengzhou Yutong Bus Co Ltd. He has a

bachelor’s degree in auto design and joined the company in 1997 as a designer. He worked

in various roles within the firm and became deputy general manager in 2008. He was made

general manager in 2010.

Earnings Estimates FY 16

We forecast FY16 revenue to grow 16% to Rmb35.6bn. NEV bus revenue is expected to be

the key driver, growing 64% to Rmb13.6bn.

Gross margin is expected to increase to 24.6% from 24.1% (FY15E) thanks to higher

product mix of NEV. Operating margin is expected to increase slightly to 13.3%.

FY16 profit is expected at Rmb4.0bn, growing 22%.

FY 16 other key assumptions

- NEV bus volume grows 55% to 25,900 units, 33% of total bus sold

- Conventional buses volume declines 3% to 51,000 units

860

1,181

1,550

2,263

2,613

946

156 202

494 637

1,477

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

2010 2011 2012 2013 2014 1H15

Net profit Dividend Payout

11.2%

11.6%

12.1%

11.8%

11.6%

12.0%

10.6%

10.8%

11.0%

11.2%

11.4%

11.6%

11.8%

12.0%

12.2%

12.4%

0.0

10,000.0

20,000.0

30,000.0

40,000.0

50,000.0

60,000.0

70,000.0

2010 2011 2012 2013 2014 9M15

Volume Market Share

Industrials

Initiating Coverage

2 December 2015



FY 17

We forecast FY17 sales to grow 11%, as NEV bus subsidy experiences a steeper decline and

upon 2016’s larger base. Overall bus volume is expected to grow 8%. ASP slightly increases

by 2% due to a higher mix of NEV buses. Gross margin is expected to remain flattish at 25%

due to higher mix towards NEV.

Operating margin is expected to be 13.6%, thanks to larger scale and better mix. 2017

earnings growth is expected to be 13%.


- NEV bus volume grows 36% to 35,000 units, 42% of total bus sold

- Conventional buses’ volume further declines 6% to 48,000 units

Table 24: Yutong Volume Assumptions

2014A 2015E y/y 2016E y/y 2017E y/y

Bus Sales Volume 61,398 69,543 13% 77,242 11% 83,457 8%

ICE Bus 53,993 52,882 -2% 51,370 -3% 48,145 -6%

Large 21,386 21,904 2% 19,264 -12% 16,848 -13%

Medium 24,487 24,986 2% 25,616 3% 25,978 1%

Small 8,120 5,992 -26% 6,490 8% 5,319 -18%

NEV Bus 7,405 16,661 125% 25,873 55% 35,312 36%

Large 6,012 6,179 3% 10,504 70% 14,706 40%

Medium 1,393 3,483 150% 6,269 80% 8,776 40%

Small - 7,000 9,100 30% 11,830 30%


Table 25: Yutong Financial Forecasts and Key Assumptions

Rmb mn 2014 2015 2016 2017

Operating Revenue 25,728 30,626 35,565 39,383

Less: Business tax and surcharges 155 184 213 236

COGS (19,481) (23,104) (26,640) (29,378)

Gross profit 6,092 7,338 8,712 9,769

GPM% 23.8% 24.1% 24.6% 25.0%

SG&A (2,970) (3,470) (3,995) (4,463)

Operating Profit (Loss) 3,122 3,867 4,717 5,306

Operating Profit Margin 12.2% 12.7% 13.3% 13.6%

Finance cost 25 0 7 14

Net Profit Before Tax 3,051 3,825 4,682 5,278

Income Tax Expense (398) (497) (609) (686)

Net profit 2,653 3,327 4,073 4,592

Minorities (40) (50) (61) (69)

Net profit to shareholder 2,613 3,277 4,012 4,522

EPS 1.77 1.48 1.81 2.04


Industrials

Initiating Coverage

2 December 2015



Valuation We initiate on Yutong with a ‘Buy’ rating and a target price of Rmb26.0, based on 2x 2017

NEV EV/Sales and a 10x traditional business PER. We use 2X EV/Sales multiple, lower than

that of BYD due to Yutong’s lack of core battery technology. This yields a PEG ratio of 0.9.

However, due to the company’s size, it currently commands 80% of its key supplier—ATL’s

battery production, which gives it strong negotiation power in sourcing batteries. The 10X

PER for traditional business is in line with 2017 PER for heavy duty truck sector, a sector

expected to see further declining demand.

This implies 13x 17E PER for the whole company. This is an attractive multiple, especially

given Yutong’s ability to consistently achieve industry high profit margin. We appreciate its

leading position as a NEV bus manufacturer and ability to gain market share as the sector

matures. We also expect the stock to generate 15E dividend yield of 4%.

Table 26: Yutong sum of the parts (SOTP) valuation (mn Rmb)

EV/Sales 2017e Sales Multiples Value 2017e Net Debt Market Cap %

NEV segment 18,173 2x 36,347 (3,676.25) 40,023 69%

P/E 2017e Net Profit Multiples Value Market Cap

Conventional bus and other business 1,803 10x 18,028 - 18,028 31%

Total 58,051

TP Rmb 26. 0


Risks NEV market demand is highly sensitive to government subsidy. Unfavourable policies could

impact the company’s sales and earnings. Yutong also faces more competition from smaller

market players in NEV space, supported by the generous subsidy and local government

protectionism. The competition and expansion bottleneck could impact Yutong’s product

pricing and margin. The bus sector is also sensitive to China’s and global economic growth;

a slowdown could also impact Yutong’s revenue and earnings.

Chart 35: Yutong forward PER range

Source: Factset

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Industrials

Initiating Coverage

2 December 2015



Chart 36: Yutong forward PBR range

Source: Factset

Chart 37: Yutong forward EV/Sales range

Source: Bloomberg

Discounted cash flow (DCF) valuation We also use DCF analysis to cross-check the valuation for Yutong, which yields a valuation

of Rmb32 based on WACC of 8.4%. This is higher than the RMB26 generated by SOTP

method.

Cash flow forecast

Cash flow for our forecast period of 2015-2017 is based on what we have outlined in the

section Financial Forecasts and Key Assumptions.

Yutong has run a successful and relatively steady business with strong cash generation

ability, which we expect to continue in our DCF analysis. Its capex has been controlled and

there is no near term capacity expansion plan. Thus we expect

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Industrials

Initiating Coverage

2 December 2015



Top-line growth would slow significantly after 2017 as NEV volume growth slows with

steeper subsidy cut

NEV margin will start declining after 2018 as subsidy declines. Traditional bus margin

will decline after 2016 due to shrinking volume.

The company’s depreciation and working capital changes would remain in a relatively

small range as it did historically.

WACC

Our base case assumption for Yutong is 8.4%, based on the following:

The equity risk premium (ERP) is based on our strategy team’s view of ERP in China.

The risk-free rate is based on China’s 10-year bond yield

Beta used is Yutong’s historical beta. Its share has lower volatility than the general

market

We estimate the firm’s borrowing cost is low at 4.5%

Target debt to capital ratio is assumed to be 10%. The company has net cash position

historically but a moderate leverage will let it utilize its capital even more effectively.

Terminal value

We assume the free cash flow’s terminal growth rate to be around 0% after 2025. As the

Chinese economy reaches a more mature state in the long term, no growth is possible,

similar to what has been seen in other mature markets.

Industrials

Initiating Coverage

2 December 2015



Chart 38: DCF for Yutong


2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Total Revenue 25,728 30,626 35,565 39,383 40,977 41,687 42,510 43,371 43,800 44,695 45,149 46,079

NEV Bus Sales 4,795 8,292 13,613 18,173 18,750 18,988 19,782 20,404 21,047 21,710 22,394 23,100

ICE Bus Sales 19,181 20,436 19,749 18,770 19,688 20,117 20,095 20,280 20,040 20,216 19,959 20,125

Others 1,752 1,897 2,203 2,440 2,539 2,583 2,634 2,687 2,713 2,769 2,797 2,855

Total Units 61,398 69,543 77,242 83,457 89,061 92,644 93,907 95,873 97,217 99,279 100,709 102,875

NEV Units 7,405 16,661 25,873 35,312 38,108 40,013 41,350 42,733 44,162 45,641 47,170 48,751

ICE Volume 53,993 52,882 51,370 48,145 50,954 52,631 52,557 53,140 53,054 53,638 53,539 54,123

Total Gross Margin 24.3% 24.6% 25.1% 25.4% 25.1% 24.7% 24.7% 24.8% 24.8% 24.8% 24.9% 24.9%

NEV 27.0% 27.0% 27.5% 28.0% 28.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0%

ICE 23.5% 23.5% 23.5% 23.0% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5%

Total GP 6,247 7,521 8,925 10,005 10,306 10,291 10,515 10,739 10,867 11,099 11,233 11,475

NEV 1,292 2,235 3,744 5,089 5,250 5,127 5,341 5,509 5,683 5,862 6,046 6,237

ICE 4,511 4,807 4,645 4,321 4,434 4,530 4,525 4,567 4,513 4,553 4,495 4,532

EBIT 3,122 3,867 4,717 5,306 5,316 5,408 5,515 5,627 5,682 5,799 5,857 5,978

EBIT Margin 12.1% 12.6% 13.3% 13.5% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%

NOPAT 2,654 3,287 4,010 4,510 4,519 4,597 4,688 4,783 4,830 4,929 4,979 5,081

Tax Rate 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%

+ D&A 662 861 969 1,047 1,049 1,025 1,045 1,067 1,077 1,099 1,110 1,133

2.6% 2.8% 2.7% 2.7% 2.6% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

+ Chg. In Working Capital 548 (234) (1,620) (859) - 834 1,700 1,735 1,752 1,788 1,806 1,843

2.1% -8.0% -3.0% -4.0% 0.0% 2.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

- CapEx 1,919 1,436 1,385 1,746 1,816 1,848 1,884 1,922 1,941 1,981 2,001 2,042

7.5% 4.7% 3.9% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%

FCFF 1,944 2,479 1,974 2,953 3,751 4,608 5,550 5,662 5,718 5,835 5,894 6,015

27.5% -20.4% 49.6% 27.0% 22.8% 20.4% 2.0% 1.0% 2.0% 1.0% 2.1%

Assumptions Growth Rate

WACC 8.4% 32 -1.0% -0.5% 0.0% 0.5% 1.0%

NPV FCFF 31,864 6.4% 39 40 42 44 46

Terminal Growth Rate 0% 7.4% 34 35 36 37 39

Terminal Value 71,294 WACC 8.4% 30 31 32 33 34

PV of Terminal Value 31,497 9.4% 27 28 29 29 30

Total Enterprise Value 63,361 10.4% 25 25 26 26 27

Terminal Value as % of EV 50%

Net Cash (as of Dec 31, 2015) 6,931

Equity Value (RMB mn) 70,292

Shares 2,216

Implied Price (RMB) 32

Industrials

Initiating Coverage

2 December 2015



Chart 39: Financial Summary


Profit & Loss Cash flow

Rmb mn 2013 2014 2015E 2016E 2017E Rmb mn 2013 2014 2015E 2016E 2017E

Revenue 22,198 25,728 30,626 35,565 39,383 Net Profit 2,291 2,653 3,327 4,073 4,592

% change YoY 12.3% 15.9% 19.0% 16.1% 10.7% Depreciation 643 662 861 969 1,047

Gross Profit 4,980 6,092 7,338 8,712 9,769 Working Capital Chg 1,460 548 -234 -1,620 -859

Gross margin 22.4% 23.7% 24.0% 24.5% 24.8% Others -1,592 -656 0 0 0

EBITDA 3,016 3,783 4,729 5,686 6,354 Operating Cash Flow 2,802 3,205 3,955 3,422 4,780

EBITDA margin 13.6% 14.7% 15.4% 16.0% 16.1%

Operating Profit 2,372 3,122 3,867 4,717 5,306 Capital Expenditure -1,165 -1,919 -1,436 -1,385 -1,746

Operating margin 10.7% 12.1% 12.6% 13.3% 13.5% Others 807 -536 0 0 0

Net Int expense 3 25 0 7 14 Investing Cash Flow -153 -1,714 -1,536 -1,285 -1,846

LT inv. Income 36 98 98 98 98

Other Income/expense 207 -194 -141 -141 -141 Debt Raised -285 -195 144 138 175

Earnings before tax 2,618 3,051 3,825 4,682 5,278 Equity Raised 47 34 0 0 0

Tax -328 -398 -497 -609 -686 Dividends Paid -932 -922 -1,500 -1,830 -2,206

as % of EBT 12.5% 13.1% 13.0% 13.0% 13.0% Financing Cash Flow -1,186 -1,177 -1,356 -1,692 -2,032

Net profit after Tax 2,291 2,653 3,327 4,073 4,592

Net profit to shareholder 2,263 2,613 3,277 4,012 4,522 Beginning Cash 2,988 4,450 4,784 5,846 6,292

Share outstanding 1,274 1,477 2,216 2,216 2,216 Ending Cash 4,450 4,784 5,846 6,292 7,195

EPS - Reported 1.53 1.77 1.48 1.81 2.04

% change YoY -33.8% 15.6% -16.4% 22.4% 12.7% DPS (Rmb) 0.50 1.00 0.81 1.00 1.12

Balance sheet Ratio Analysis

Rmb mn 2013 2014 2015E 2016E 2017E % 2013 2014 2015E 2016E 2017E

Cash 5,613 6,016 7,075 7,521 8,423 EBITDA margin 13.6% 14.7% 15.4% 16.0% 16.1%

Fixed Assets 3,874 4,586 5,161 5,576 6,274 Operating margin 10.7% 12.1% 12.6% 13.3% 13.5%

Investment 142 0 100 0 100 Net margin 10.2% 10.2% 10.7% 11.3% 11.5%

Working Capitals -600 -1,147 -913 707 1,566 SG&A/sales -8.1% -9.9% -9.9% -11.6% -12.7%

Other Assets 1,247 2,014 2,014 2,014 2,014

Assets Employed 10,276 11,469 13,436 15,817 18,377 Revenue growth 12% 16% 19% 16% 11%

Gross profit growth 30% 22% 20% 19% 12%

Shareholders' Funds 7,315 9,478 10,804 12,582 14,763 EBITDA growth 44% 25% 25% 20% 12%

Minorities 33 56 106 168 237 Operating profit growth 32% 32% 24% 22% 12%

Short Term Debt 195 4 0 0 0 Net profit growth 46% 15% 25% 22% 13%

Long Term Debt 4 0 144 282 457

Other Liabilities 566 604 604 604 604 Net debt to equity -57% -55% -55% -48% -46%

Capital Employed 10,276 11,469 13,436 15,817 18,377 ROE 24% 24% 26% 27% 26%

ROA 14% 13% 13% 15% 16%

Total Net Debt -5,414 -6,012 -6,931 -7,238 -7,967

BVPS 7.4 7.3 5.7 6.7 7.7 PER(X) 13.9 12.0 14.3 11.7 10.4

Industrials

Initiating Coverage

2 December 2015



BYD Company - H (1211 HK); Initiate at

Hold Government encouragement and economies of scale will keep BYD on a high

growth track, but we feel that this is well priced in. We believe what consensus

has failed to recognize is the risk of volume disappointment, as a result of

competition, cannibalization and more stringent requirements for getting an

NEV. Also subsidy cuts may have a bigger impact on margin than expected.

Government encouragement and EOS remains in favour. With the rapid buildout of

charging infrastructure, and continued drop in battery cost and shortened charging time,

we believe NEV could become a much more attractive proposition longer term. But near

term, it will still be driven by consumers seeking an easier way to get a new license plate, or

a free license plate. Nonetheless, we expect BYD to see 84%/21% NEV sales volume growth

in FY16/17, respectively. This is after including the reduction of government subsidy, which

should have 2%/6.5% impact on pricing in the 2 years. And on the back of economies of

scale in batteries, we still expect gross margin improvement.

Competition intensifying of late. Various OEMs have launched EV/PHEV products, or

announced plans for equity placement to expand NEV ventures. In FY15, 90 new NEV PV

models would be launched locally (excluding imported models). The total number of

models will almost double from around 93 in FY14 to 183 by end-15. PHEV models, in

which BYD competes keenly, will also increase 91% from 11 (FY14) to 21 (FY15). In 2014,

the top 10 selling NEVs were all manufactured by domestic brands, and accounted for 78%

market share. This contrasts with the conventional car market, where domestic brands

commanded 32% share in 2014, vs. 68% for JVs. What this means is many foreign brands

have yet to step into the segment, and that should change over the next couple of years.

Recent volume momentum not as strong as it seems. The market had reacted

positively to recent volume momentum on Tang PHEV SUV. Although Tang started

shipment only in June, it is currently doing better than expectation, with monthly volume

already exceeding 3,200 units in Oct. But we also observed cannibalization on the Qin

PHEV. Ever since Tang was introduced, Qin’s volume had fallen almost 50% from the peak

of above 4,000 units. This also seems to suggest the appeal of the BYD brand is not that

strong. And interestingly, anecdotal evidence suggests most existing buyers are motivated

by the free license plate, as opposed to genuinely wanting to drive an EV. This is a loop-

hole the government may seek to close in the coming months. Shanghai has started asking

buyers to show evidence of charging facilities ownership; other cities may follow suit.

High risk, high returns. For BYD, the technology risk involved is putting too much

focus on LFP technology, only recently considering a diversification to NCM. NCM should

provide greater room for cost reduction and increase in energy density vs. the LFP, in our

view. Even though company did state that NCM battery is not new to them, we have

doubts over its immediate feasibility and the cost to customize a new BMS system to fit.

However, we do recognize that BYD should be a bigger beneficiary vs. Yutong if the

demand for battery supersedes supply, which is what we have observed in the Chinese

market at present. And if BYD is able to hedge its technology risk appropriately, it should

benefit from vertical integration in the longer run, given more seamless integration with

batteries and ability to respond to market demand quicker vs. peers that outsource.

Valuation/Risks

Our SOTP-based price target is at HK$43, implying 42x 2017e PER (average of its historical

forward PER range). Risks include unfavourable policy shift by the government, and bigger

than expected losses at the conventional vehicle business.

Table 27: 1211 HK

Market Data


Total Entprs. Value (HK$ M): 215,485.7

Market Cap. (HK$M): 151,980.8

Share Out. (M): 2,476.0

Float (M): 690.0



Chart 40: BYD (H) Price Performance


Industrials

Initiating Coverage

2 December 2015



Company Background BYD Company Limited (stock code: H Shares: 1211 HK; A Shares: 002594 CH) is principally

engaged in auto business which includes traditional fuel-engined vehicles and new energy

vehicles Other key segments include rechargeable battery and photovoltaic business,

handset components and assembly services.

The company entered automobile business in 2003 and became a pioneer in the research

and development and promotion of new energy vehicles. BYD is one of the leading

rechargeable battery manufacturers in the global arena and is a leading supplier for

handset components and assembly operations.

Chart 41: BYD Revenue Breakdown


Chart 42: BYD Net Profit Trend vs. Auto Segment

Operating Result (mn Rmb)


Management and Shareholders Mr. Wang Chuanfu is the founder, chairman and major shareholder of BYD. In 1995 he

founded Shenzhen BYD Battery Company with Lu Xiang-yang and took the position of

general manager. He led it from a small battery assembler to an NEV market leader. He has

a technical background, with a bachelor’s degree in metallurgy physical chemistry from

Central South University of Technology (currently Central South University) in 1987 and a

master’s degree in metallurgy physical chemistry from Beijing Non-Ferrous Research

Institute in the PRC in 1990. He holds around 20% of the company.

Mr. Lu Xiang-yang co- founded Shenzhen BYD Battery Company with Mr. Wang

Chuanfu. Prior to that he worked at Chaohu Centre Branch of the People’s Bank of China.

He is the Vice Chairman and a Non-Executive Director of BYD and also the chairman of

Guangzhou Youngy Management & Investment Group, a Director of Ganzi Rongda

Lithium Industry and the Vice chairman of BYD Charity Foundation. Lu is also a major

shareholder of the company.

Mr. Wu Jing-sheng Mr. Wu is a Vice President and Chief Financial Officer, and also a non-

executive director of BYD Electronic (International), a director of Shenzhen BYD Daimler

New Technology. He is also the chairman of Shenzhen BYD International Financial Leasing,

the chairman of Shenzhen BYD Electric Car Investment, vice chairman of Guangzhou

Guang Qi BYD New Energy Bus, the chairman of Shenzhen Dicheng New Energy and

chairman of BYD Charity Foundation.

10% 10% 11% 10% 9%

44% 42% 39% 39% 44%

46% 48% 51% 51% 47%

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2010A 2011A 2012A 2013A 2014A




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Industrials

Initiating Coverage

2 December 2015




We forecast FY16 revenue to grow 20% from Rmb62.9bn to Rmb75.2bn, driven by ‘Auto

and related products’ segment sales, expected to grow 31%. Among auto sales, NEV

revenue is expected to grow 69% to Rmb25.6bn.


margins achieved in the ‘Auto and related products’ segment and better product mix

generated from greater contribution of NEV. Correspondingly, operating margin is

expected to increase 0.6ppt to 4%.

As a result of the above, FY16 profit is expected at Rmb1.8bn, on the back of 82% core

earnings growth (excluding the one-off disposal gain in FY15).


- NEV auto volume grows 84% to 105,000 units

- Conventional vehicles’ volume declines 3% to 336,900 units

- Mobile handset segment revenue declines 5% y/y due to sale of subsidiary,

Shenzhen BYD Electronic Co.

- Rechargeable batteries and photovoltaic business revenue grows 10%.

FY 17

We forecast FY17 revenue to grow 5%, still driven by ‘Auto and related products’ segment

sales, expected to grow 18%. Facing subsidy cuts, we expect NEV sales to slow due to

lower pricing and larger base achieved in 2016.

Gross margin is expected to increase further to 16.4%, as NEV contributes a larger portion

of ‘Auto and related products’ segment sales. Correspondingly operating margin is

expected to increase 4.4%.

FY17 profit is expected to grow 18% to Rmb2.1bn.



- Conventional vehicles volume declines 10% to 303,182 units

- Mobile handset segment revenue grows 5% y/y


Table 28: BYD auto key assumptions

2014A 2015E y/y 2016E y/y 2017E y/y

Auto Sales Volume 373,000 405,348 9% 441,838 9% 429,751 -3%

NEV 20,807 57,090 174% 104,969 84% 126,569 21%

E6 3,560 5,130 44% 6,669 30% 8,670 30%

Qin 14,747 31,000 110% 25,000 -19% 10,000 -60%

Tang - 16,000 35,200 120% 40,000 14%

Bus 2,500 4,300 72% 6,100 42% 7,195 18%

Others - 660 32,000 4748% 60,704 90%

Non-NEV 352,193 348,258 -1% 336,869 -3% 303,182 -10%

F3 110,296 128,039 16% 121,637 -5% 109,473 -10%

L3 54,531 10,484 -81% 5,242 -50% 4,194 -20%

Speed 65,312 52,217 -20% 46,995 -10% 39,946 -15%

S6 98,720 18,016 -82% 7,206 -60% 2,883 -60%

S7 6,938 98,860 1325% 69,202 -30% 62,282 -10%

Others 16,396 40,642 148% 86,586 113% 84,405 -3%

Auto ASP

NEV 348,488 265,040 -24% 243,977 -8% 239,711 -2%

ICE 54,002 55,587 3% 58,006 4% 55,391 -5%


Industrials

Initiating Coverage

2 December 2015



Table 29: BYD Financial Forecasts and Key Assumptions

Rmb mn 2014A 2015E 2016E 2017E


Rechargeable batteries and photovoltaic business 4,980 5,478 6,026 6,327

Mobile handset components and assembly service 24,116 22,910 24,056 25,259

Automobiles and related products 26,270 34,490 45,151 47,134

COGS -47,743 -52,945 -62,870 -65,703

Gross profit 7,623 9,933 12,362 13,016

GPM% 13.8% 15.8% 16.4% 16.5%

SG&A (4,829) (5,911) (6,921) (7,006)

R&D Expense (1,865) (1,886) (2,407) (2,519)

Operating Profit (Loss) 929 2,136 3,034 3,491


Finance cost (1,397) (1,416) (1,335) (1,385)

Government Grant 798 800 850 900

Investment income (122) (150) (150) (150)

Net Profit Before Tax 874 1,502 2,470 2,868


Net profit 740 1,277 2,099 2,438

Minorities (306) (293) (308) (323)

Net profit to

shareholder

434 984 1,791 2,115

EPS 0.18 0.40 0.72 0.85


BYD (H) Valuation We initiate BYD with a ‘Hold’ and a target price of HK$43.0, based on sum of the parts

(SOTP) valuation where NEV business accounts for 65% of the company’s valuation.

We used enterprise-value-to-2017-sales to value BYD’s NEV business as it is still a fast

growing business with uncertain earnings. NEV is valued with 2.5x EV/Sales, at a slight

discount to Tesla 2017 consensus. BYD is already profitable on NEV business vs. Tesla but

we penalize it for its lesser technology edge vs. the latter.

Traditional business is valued at 0.9X EV/sales, in line with Chinese peers

BYD Battery & Solar businesses are valued using Price-Book Ratio as the business arm

supplies battery to NEV business and mobile handsets and has uncertain segment earnings

BYD Electronic (285 HK, NC) and Holitech (002271 CH, NC) are valued using current

market value

The target price implies 42x 2017E PER for the company as a whole and a PEG of 1.5. This

assumes the company’s NEV business will reach a larger scale and its battery R&D

capability will support its profit growth from here.

Table 30: BYD sum of the parts (SOTP) (mn Rmb)

EV/Sales 2017e Sales Multiples Value Net Debt % 2017e Net Debt Market Cap %

New Energy Vehicles 30,340 2.5x 75,850 80% 18,556 57,294 65%

Conventional Vehicles 16,794 0.9x 15,114 20% 4,639 10,475 12%

Parent Electronic 1,000 1x 1,000 1,000 1%

P/B 2017e Book

Value

Multiples Value

Battery & Solar 11,000 1x 11,000 11,000 12%

Market Value Market Value % Owned HKDCNY

BYD Elec (285 HK, NC) 10,770 65% 0.8 5,836 7%

HoliTech (002217 CH, NC) 3,035 3%

Total 88,641

TP HK$ 43.0


Industrials

Initiating Coverage

2 December 2015



Risks NEV market demand and profitability are highly sensitive to government policy. Any

unfavourable changes could impact the sector significantly and BYD in particular, whose

valuation is supported mainly by its NEV strength. As the sector grows more mature, it

could also face more competition, especially from foreign brands who have limited

footprint in the NEV space at the moment. Additionally, BYD’s conventional vehicle

business has been losing market share for several years and this could impact its margin

and profit outlook longer term.

Chart 43: BYD (H) forward PER range

Source: Factset

Chart 44: BYD (H) forward PBR range

Source: Factset

Average, 36.42

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Industrials

Initiating Coverage

2 December 2015



Chart 45: BYD forward EV/ Sales range

Source: Factset

Auto segment discounted cash flow (DCF) valuation We use DCF analysis to cross check the value of BYD’s auto business, which yields a price of

Rmb25 based on WACC of 8.3%. Assuming other business value remains the same, this

indicates company target price of Rmb37.8 or HK$45.5, slightly higher than the target price

generated by peer comparison method.

Cash flow forecast



From 2017 and beyond, we expect the company to settle into a more mature state than

before. Hence, the following expectations:

Capacity expansion as well as top-line growth would slow after 18 months of building

battery capacity

ASP may drop as a result of competition and declining government subsidy, thus gross

profit margin could decline

We expect efficiency gains from a larger production scale and higher utilization to offset

cost inflation, resulting in a largely unchanged operating margin.

As the company’s NEV scale improves and it relies less on government subsidy, working

capital requirement could improve as receivable turnover days decline. The company’s

scale would allow it even better procurement credit terms in the future.

WACC

Our base case assumption for BYD is 8.3%, based on the following:

As the company is dual listed in China and HK, the equity risk premium (ERP) is based

on our strategy team’s view of ERP in Hong Kong and China.

The risk-free rate is a blend of HK and China 10-year bond yields as BYD could raise

domestic or offshore debts. We assume this converges to 3% as China cuts while US raises.

Beta is benchmarked against Dongfeng, GAC and Brilliance.

Weighted average yield of debt is based on historical cost of debt for the company

Target debt to capital ratio in our assumption is 30%, close to its current level

Average, 1.56

+1 sdv, 1.96

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Industrials

Initiating Coverage

2 December 2015



Terminal value

We assume the free cash flow’s terminal growth rate to be around 3% after 2025. Most of

the free cash flow growth should come from the efficiency gains in operations and reduced

capex, as the company achieves larger battery capacity.

In the long term, car sales growth could come down to zero, as is the case in mature

economies such as the US and Japan. We expect the growth of car sales to start slowing

down as early as 2020 when penetration crosses 160 per 1,000 people as China

approaches a saturation point. This compares with the history of Japan and Korea, which

experienced sharply slower vehicle sales after the penetration rate reached 150 per 1,000

people.

Industrials

Initiating Coverage

2 December 2015



Chart 46: DCF for BYD Auto segment (mn Rmb)


BYD Auto (mn Rmb) 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Automobiles and related products rev 26,270 34,490 45,151 47,134 48,182 49,459 49,667 49,216 50,766 52,411 54,157 56,007

New energy vehicle business 7,251 15,131 25,610 30,340 32,706 34,898 35,543 36,201 38,011 39,912 41,907 44,002

Internal combustion engine vehicle business 19,019 19,359 19,540 16,794 15,475 14,561 14,124 13,015 12,755 12,500 12,250 12,005

Total Units 373,000 405,348 441,838 429,751 427,249 432,531 440,188 434,259 437,393 441,055 445,265 450,042

NEV Units 20,807 57,090 104,969 126,569 139,226 153,148 160,806 168,846 177,288 186,153 195,460 205,233

ICE Volume 352,193 348,258 336,869 303,182 288,023 279,382 279,382 265,413 260,105 254,903 249,805 244,809

Auto Gross Margin 16.6% 19.1% 19.5% 19.7% 19.4% 19.2% 19.2% 19.4% 19.5% 19.6% 19.7% 19.8%

NEV 19.3% 24.4% 23.4% 22.9% 22.0% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3%

ICE 15.6% 15.0% 14.5% 14.00% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%

Total Gross Profit 4,369 6,591 8,825 9,302 9,360 9,484 9,560 9,545 9,895 10,265 10,656 11,068

NEV 1,396 3,687 5,992 6,951 7,193 7,445 7,583 7,723 8,109 8,515 8,941 9,388

ICE 2,973 2,904 2,833 2,351 2,167 2,039 1,977 1,822 1,786 1,750 1,715 1,681

SG&A+ R&D as % of Sales 13.7% 12.0% 12.0% 11.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

EBIT 758 2,452 3,407 4,117 4,542 4,538 4,594 4,624 4,818 5,024 5,240 5,468

EBIT Margin 2.9% 7.1% 7.5% 8.7% 9.4% 9.2% 9.2% 9.4% 9.5% 9.6% 9.7% 9.8%

NOPAT 645 2,084 2,896 3,500 3,861 3,857 3,904 3,930 4,096 4,270 4,454 4,647

Tax Rate 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%

+ D&A 2,420 3,004 3,933 4,106 3,956 4,061 4,078 4,041 4,168 4,303 4,447 4,598

9.2% 8.7% 8.7% 8.7% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%

+ Chg. In Working Capital (3,152) (2,759) (1,355) (1,885) (964) - 993 984 1,015 1,048 1,083 1,120

-12% -8% -3.0% -4.0% -2.0% 0.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

- CapEx 5,061 4,920 6,441 5,310 3,983 2,604 2,615 2,592 2,673 2,760 2,852 2,949

19.3% 14.3% 14.3% 11.3% 8.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%

FCFF (5,149) (2,591) (967) 410 2,870 5,313 6,360 6,364 6,606 6,862 7,132 7,417

-50% -63% -142% 600% 85% 20% 0% 4% 4% 4% 4%


WACC 8.3% 25 2.0% 2.5% 3.0% 3.5% 4.0%

NPV FCFF 25,277 7.3% 29 31 35 40 45






Net Cash (as of Dec 31, 2015) (25,424)

Equity Value (mn RMB) 62,690

Shares 2,476

Implied Price (Rmb) 25

RMB: HKD 1.20

Industrials

Initiating Coverage

2 December 2015





Industrials

Initiating Coverage

2 December 2015



BYD Company – A (002594 CH); initiate at Underperform Government encouragement and economies of scale will keep BYD on a high

growth track, but we feel that this is well priced in. We believe what consensus

has failed to recognize is the risk of volume disappointment, as a result of

competition, cannibalization and more stringent requirements for getting an

NEV. Also subsidy cuts may have a bigger impact on margin than expected.

Government encouragement and EOS remains in favour. With the rapid buildout of

charging infrastructure, and continued drop in battery cost and shortened charging time,

we believe NEV could become a much more attractive proposition longer term. But near

term, it will still be driven by consumers seeking an easier way to get a new license plate, or

a free license plate. Nonetheless, we expect BYD to see 84%/21% NEV sales volume growth

in FY16/17, respectively. This is after including the reduction of government subsidy, which

should have 2%/6.5% impact on pricing in the 2 years. And on the back of economies of

scale in batteries, we still expect gross margin improvement.

Competition intensifying of late. Various OEMs have launched EV/PHEV products, or

announced plans for equity placement to expand NEV ventures. In FY15, 90 new NEV PV

models would be launched locally (excluding imported models). The total number of

models will almost double from around 93 in FY14 to 183 by end-15. PHEV models, in

which BYD competes keenly, will also increase 91% from 11 (FY14) to 21 (FY15). In 2014,

the top 10 selling NEVs were all manufactured by domestic brands, and accounted for 78%

market share. This contrasts with the conventional car market, where domestic brands

commanded 32% share in 2014, vs. 68% for JVs. What this means is many foreign brands

have yet to step into the segment, and that should change over the next couple of years.

Recent volume momentum not as strong as it seems. The market had reacted

positively to recent volume momentum on Tang PHEV SUV. Although Tang started

shipment only in June, it is currently doing better than expectation, with monthly volume

already exceeding 3,200 units in Oct. But we also observed cannibalization on the Qin

PHEV. Ever since Tang was introduced, Qin’s volume had fallen almost 50% from the peak

of above 4,000 units. This also seems to suggest the appeal of the BYD brand is not that

strong. And interestingly, anecdotal evidence suggests most existing buyers are motivated

by the free license plate, as opposed to genuinely wanting to drive an EV. This is a loop-

hole the government may seek to close in the coming months. Shanghai has started asking

buyers to show evidence of charging facilities ownership; other cities may follow suit.

High risk, high returns. For BYD, the technology risk involved is putting too much

focus on LFP technology, only recently considering a diversification to NCM. NCM should

provide greater room for cost reduction and increase in energy density vs. the LFP, in our

view. Even though company did state that NCM battery is not new to them, we have

doubts over its immediate feasibility and the cost to customize a new BMS system to fit.

However, we do recognize that BYD should be a bigger beneficiary vs. Yutong if the

demand for battery supersedes supply, which is what we have observed in the Chinese

market at present. And if BYD is able to hedge its technology risk appropriately, it should

benefit from vertical integration in the longer run, given more seamless integration with

batteries and ability to respond to market demand quicker vs. peers that outsource.

Valuation/Risks

Our SOTP-based price target is at Rmb36.0, implying 42x 2017e P/E (-1 S.D OF its historical

forward P/E range). Risks include unfavourable policy shift by the government, and bigger

than expected losses at the conventional vehicle business.

Table 31: 002594 CH BYD (A)

Market Data


Total Entprs. Value (RmbM): 177,424.7

Market Cap. (Rmb M): 125,329.0

Share Out. (M): 2,476.0

Float (M): 436.0



Chart 48: BYD (A) price performance


Industrials

Initiating Coverage

2 December 2015



Company Background BYD Company Limited (stock code: H Shares: 1211 HK; A Shares: 002594 CH) is principally

engaged in auto business which includes traditional fuel-engined vehicles and new energy

vehicles. Other key segments include rechargeable battery and photovoltaic business,

handset components and assembly services.

The company entered automobile business in 2003 and became a pioneer in the research

and development and promotion of new energy vehicles. BYD is one of the leading

rechargeable battery manufacturers in the global arena and is a leading supplier for

handset components and assembly operations.

Chart 49: BYD Revenue Breakdown


Chart 50: BYD Net Profit Trend vs. Auto Segment

Operating Result (Rmb mn)


Management and Shareholders Mr. Wang Chuanfu is the founder, chairman and major shareholder of BYD. In 1995 he

founded Shenzhen BYD Battery Company with Lu Xiang-yang and took the position of

general manager. He led it from a small battery assembler to an NEV market leader. He has

a technical background, with a bachelor’s degree in metallurgy physical chemistry from

Central South University of Technology (currently Central South University) in 1987 and a

master’s degree in metallurgy physical chemistry from Beijing Non-Ferrous Research

Institute in the PRC in 1990. He holds around 20% of the company.

Mr. Lu Xiang-yang co-founded Shenzhen BYD Battery Company with Mr. Wang

Chuanfu. Prior to that he worked at Chaohu Centre Branch of the People’s Bank of China.

He is the Vice Chairman and a Non-Executive Director of BYD and also the chairman of

Guangzhou Youngy Management & Investment Group, a Director of Ganzi Rongda

Lithium Industry and the Vice chairman of BYD Charity Foundation. Lu is also a major

shareholder of the company.

Mr. Wu Jing-sheng Mr. Wu is a Vice President and Chief Financial Officer, and also a non-

executive director of BYD Electronic (International), a director of Shenzhen BYD Daimler

New Technology. He is also the chairman of Shenzhen BYD International Financial Leasing,

the chairman of Shenzhen BYD Electric Car Investment, vice chairman of Guangzhou

Guang Qi BYD New Energy Bus, the chairman of Shenzhen Dicheng New Energy and

chairman of BYD Charity Foundation.

10% 10% 11% 10% 9%

44% 42% 39% 39% 44%

46% 48% 51% 51% 47%

0%

20%

40%

60%

80%

100%

2010A 2011A 2012A 2013A 2014A




2523

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81

553 434 467

1743 1898

1058 825 758

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2010 2011 2012 2013 2014 1H15Net profit Auto Segment result

Industrials

Initiating Coverage

2 December 2015




We forecast FY16 revenue to grow 20% from Rmb62.9bn to Rmb75.2bn, driven by ‘Auto

and related products’ segment sales, expected to grow 31%. Among auto sales, NEV

revenue is expected to grow 69% to Rmb25.6bn.


margins achieved in the ‘Auto and related products’ segment and better product mix

generated from greater contribution of NEV. Correspondingly, operating margin is

expected to increase 0.6ppt to 4%.

As a result of the above, FY16 profit is expected at Rmb1.8bn, on the back of 82% core

earnings growth (excluding the one-off disposal gain in FY15).



- Conventional vehicles’ volume declines 3% to 336,900 units

- Mobile handset segment revenue declines 5% y/y due to sale of subsidiary,

Shenzhen BYD Electronic Co.


FY 17

We forecast FY17 revenue to grow 5%, still driven by ‘Auto and related products’ segment

sales, expected to grow 18%. Facing subsidy cuts, we expect NEV sales to slow due to

lower pricing and larger base achieved in 2016.

Gross margin is expected to increase further to 16.4%, as NEV contributes a larger portion

of ‘Auto and related products’ segment sales. Correspondingly operating margin is

expected to increase 4.4%.

FY17 profit is expected to grow 18% to Rmb2.1bn.



- Conventional vehicles volume declines 10% to 303,182 units

- Mobile handset segment revenue grows 5% y/y


Table 32: BYD auto key assumptions

2014A 2015E y/y 2016E y/y 2017E y/y

Auto Sales Volume 373,000 405,348 9% 441,838 9% 429,751 -3%

NEV 20,807 57,090 174% 104,969 84% 126,569 21%

E6 3,560 5,130 44% 6,669 30% 8,670 30%

Qin 14,747 31,000 110% 25,000 -19% 10,000 -60%

Tang - 16,000 35,200 120% 40,000 14%

Bus 2,500 4,300 72% 6,100 42% 7,195 18%

Others - 660 32,000 4748% 60,704 90%

Non-NEV 352,193 348,258 -1% 336,869 -3% 303,182 -10%

F3 110,296 128,039 16% 121,637 -5% 109,473 -10%

L3 54,531 10,484 -81% 5,242 -50% 4,194 -20%

Speed 65,312 52,217 -20% 46,995 -10% 39,946 -15%

S6 98,720 18,016 -82% 7,206 -60% 2,883 -60%

S7 6,938 98,860 1325% 69,202 -30% 62,282 -10%

Others 16,396 40,642 148% 86,586 113% 84,405 -3%

Auto ASP

NEV 348,488 265,040 -24% 243,977 -8% 239,711 -2%

ICE 54,002 55,587 3% 58,006 4% 55,391 -5%


Industrials

Initiating Coverage

2 December 2015



Table 33: BYD Financial Forecasts and Key Assumptions

Rmb mn 2014A 2015 2016 2017


Rechargeable batteries and photovoltaic business 4,980 5,478 6,026 6,327

Mobile handset components and assembly service 24,116 22,910 24,056 25,259

Automobiles and related products 26,270 34,490 45,151 47,134

COGS -47,743 -52,945 -62,870 -65,703

Gross profit 7,623 9,933 12,362 13,016

GPM% 13.8% 15.8% 16.4% 16.5%

SG&A (4,829) (5,911) (6,921) (7,006)

R&D Expense (1,865) (1,886) (2,407) (2,519)

Operating Profit (Loss) 929 2,136 3,034 3,491


Finance cost (1,397) (1,416) (1,335) (1,385)

Government Grant 798 800 850 900

Investment income (122) (150) (150) (150)

Net Profit Before Tax 874 1,502 2,470 2,868


Net profit 740 1.277 2,099 2,438

Minorities (306) (293) (308) (323)

Net profit to

shareholder

434 984 1,791 2,115

EPS 0.18 0.96 0.72 0.85


BYD (A) Valuation We initiate BYD A with an ‘Underperform’ rating and a target price of Rmb36.0, based on

sum of the parts (SOTP) valuation method where NEV business accounts for 65% of the

company’s valuation.

We used enterprise-value-to-2017-sales to value BYD’s NEV business as it is still a fast

growing business with uncertain earnings. NEV is valued with 2.5x EV/Sales, at a slight

discount to Tesla 2017 consensus. BYD already is profitable on the NEV business vs. Tesla

remaining in loss, but we penalize it for its lesser technology edge vs. the latter.

Traditional business is valued at 0.9X EV/sales, in line with Chinese peers

BYD Battery & Solar businesses are valued using Price-Book Ratio as the business arm

supplies battery to NEV business and mobile handsets and has uncertain segment earnings

BYD Electronic (285 HK, NC) and Holitech (002271 CH, NC) are valued using current

market value

The target price implies a 42x 2017E PER for the company on a whole and a PEG of 1.5. This

assumes the company’s NEV business will reach a larger scale and its battery R&D

capability will support its profit growth from here.

Industrials

Initiating Coverage

2 December 2015



Table 34: BYD sum of the parts (SOTP) valuation summary

EV/Sales 2017e Sales Multiples Value Net Debt % 2017e Net Debt Market Cap %

New Energy Vehicles 30,340 2.5x 75,850 80% 18,556 57,294 65%

Conventional Vehicles 16,794 0.9x 15,114.34 20% 4,639 10,475 12%

Parent Electronic 1,000 1x 1,000 1,000 1%

P/B 2017e Book

Value

Multiples Value

Battery & Solar 11,000 1x 11,000 11,000 12%

Market Value Market Value % Owned HKDCNY

BYD Elec (285 HK, NC) 10,770 65% 0.8 5,836 7%

HoliTech (002217 CH, NC) 3,035 3%

Total 88,641

TP Rmb 36.0


Risks NEV market demand and profitability are highly sensitive to government policy. Any

unfavourable changes could impact the sector significantly and BYD in particular, whose

valuation is supported mainly by its NEV strength. As the sector grows more mature, it

could also face more competition, especially from foreign brands who have limited

footprint in the NEV space at the moment. Additionally, BYD’s conventional vehicle

business has been losing market share for several years and this could impact its margin

and profit outlook longer term.

Chart 51: BYD (A) forward PER range

Source: Factset

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Industrials

Initiating Coverage

2 December 2015



Chart 52: BYD (A) forward PBR range

Source: Factset

Chart 53: BYD (A) forward EV/ Sales range

Source: Factset

Auto segment discounted cash flow (DCF) valuation We use DCF analysis to cross check the value of BYD’s auto business, which yields a price of

Rmb25 based on WACC of 8.3%. Assuming other business value remains the same, this

indicates company target price of Rmb37.8, slightly higher than the target price generated

by peer comparison method.

Cash flow forecast



From 2017 and beyond, we expect the company to settle into a more mature state than

before. Hence, the following expectations:

Capacity expansion as well as top-line growth would slow after 18 months of building

battery capacity

ASP may drop as a result of competition and declining government subsidy, thus gross

profit margin could decline

-1 sdv, 2.27

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Industrials

Initiating Coverage

2 December 2015



We expect efficiency gains from a larger production scale and higher utilization to offset

cost inflation, resulting in a largely unchanged operating margin.

As the company’s NEV scale improves and it relies less on government subsidy, working

capital requirement could improve as receivable turnover days decline. The company’s

scale would allow it even better procurement credit terms in the future.

WACC

Our base case assumption for BYD is 8.3%, based on the following:

As the company is dual listed in China and HK, the equity risk premium (ERP) is based

on our strategy team’s view of ERP in Hong Kong and China.

The risk-free rate is a blend of HK and China 10-year bond yields as BYD could raise

domestic or offshore debts. We assume this converges to 3% as China cuts while US raises.

Beta is benchmarked against Dongfeng, GAC and Brilliance.

Weighted average yield of debt is based on historical cost of debt for the company

Target debt to capital ratio in our assumption is 30%, close to its current level

Terminal value

We assume the free cash flow’s terminal growth rate to be around 3% after 2025. Most of

the free cash flow growth should come from the efficiency gains in operations and reduced

capex, as the company achieves larger battery capacity.

In the long term, car sales growth could come down to zero, as is the case in mature

economies such as the US and Japan. We expect the growth of car sales to start slowing

down as early as 2020 when penetration crosses 160 per 1,000 people as China

approaches a saturation point. This compares with the history of Japan and Korea, which

experienced sharply slower vehicle sales after the penetration rate reached 150 per 1,000

people.

Industrials

Initiating Coverage

2 December 2015



Chart 54: DCF for BYD Auto segment


BYD Auto 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Automobiles and related products 26,270 34,490 45,151 47,134 48,182 49,459 49,667 49,216 50,766 52,411 54,157 56,007

New energy vehicle business Rev 7,251 15,131 25,610 30,340 32,706 34,898 35,543 36,201 38,011 39,912 41,907 44,002

Internal combustion engine vehicle business 19,019 19,359 19,540 16,794 15,475 14,561 14,124 13,015 12,755 12,500 12,250 12,005

Total Units 373,000 405,348 441,838 429,751 427,249 432,531 440,188 434,259 437,393 441,055 445,265 450,042

NEV Units 20,807 57,090 104,969 126,569 139,226 153,148 160,806 168,846 177,288 186,153 195,460 205,233

ICE Volume 352,193 348,258 336,869 303,182 288,023 279,382 279,382 265,413 260,105 254,903 249,805 244,809

Auto Gross Margin 16.6% 19.1% 19.5% 19.7% 19.4% 19.2% 19.2% 19.4% 19.5% 19.6% 19.7% 19.8%

NEV 19.3% 24.4% 23.4% 22.9% 22.0% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3%

ICE 15.6% 15.0% 14.5% 14.00% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%

Total Gross Profit 4,369 6,591 8,825 9,302 9,360 9,484 9,560 9,545 9,895 10,265 10,656 11,068

NEV 1,396 3,687 5,992 6,951 7,193 7,445 7,583 7,723 8,109 8,515 8,941 9,388

ICE 2,973 2,904 2,833 2,351 2,167 2,039 1,977 1,822 1,786 1,750 1,715 1,681

SG&A+ R&D as % of Sales 13.7% 12.0% 12.0% 11.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

EBIT 758 2,452 3,407 4,117 4,542 4,538 4,594 4,624 4,818 5,024 5,240 5,468

EBIT Margin 2.9% 7.1% 7.5% 8.7% 9.4% 9.2% 9.2% 9.4% 9.5% 9.6% 9.7% 9.8%

NOPAT 645 2,084 2,896 3,500 3,861 3,857 3,904 3,930 4,096 4,270 4,454 4,647

Tax Rate 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%

+ D&A 2,420 3,004 3,933 4,106 3,956 4,061 4,078 4,041 4,168 4,303 4,447 4,598

9.2% 8.7% 8.7% 8.7% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%

+ Chg. In Working Capital (3,152) (2,759) (1,355) (1,885) (964) - 993 984 1,015 1,048 1,083 1,120

-12% -8% -3.0% -4.0% -2.0% 0.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

- CapEx 5,061 4,920 6,441 5,310 3,983 2,604 2,615 2,592 2,673 2,760 2,852 2,949

19.3% 14.3% 14.3% 11.3% 8.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%

FCFF (5,149) (2,591) (967) 410 2,870 5,313 6,360 6,364 6,606 6,862 7,132 7,417

-50% -63% -142% 600% 85% 20% 0% 4% 4% 4% 4%


WACC 8.3% 25 2.0% 2.5% 3.0% 3.5% 4.0%

NPV FCFF 25,277 7.3% 29 31 35 40 45






Net Cash (as of Dec 31, 2015) (25,424)

Equity Value (RMB mn) 62,690

Shares 2,476

Implied Price (RMB) 25

RMB: HKD 1.20

Industrials

Initiating Coverage

2 December 2015





Industrials

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2 December 2015



Appendix Electric Vehicles Can Help Address Energy Security and Air Pollution

China has the world's largest car market with 23m vehicles sold in 2011, but the truth is,

China's passenger car penetration is a mere 7.8 vehicles per 100 people. The inflection for

China's increased car penetration and oil demand is happening now, or soon will be.

Assuming no hard landing, China's oil demand should inflect in ~2017 and plateau in

~2025.

Over this time, China would have to add or find substitutes for 24-38 mmboe/d of

transportation energy demand (~125-200% of current US oil consumption), according to

our calculations. That amounts to an average annual increase of ~2.4-3.8 mmboe/d over

the next 10 years. Such a dramatic increase in oil demand puts evermore pressure on the

policy makers to address the nation’s energy security and air pollution.

The prospect of importing an ever larger proportion of China’s oil needs from the most

politically unstable regions of the world, likely has China’s energy policy-makers and

defence establishment working on scenario analyses and defence contingencies. China will

have to break oil’s monopoly on motor vehicle fuel. We believe electric vehicles will be a

major part of the eventual solution.

On the cusp of a car culture Historically, the growth of oil consumption in rapidly developing nations is skewed by the

car ownership threshold. Oil consumption increases linearly with GDP until an inflection

point when per capita PPP GDP hits ~US$10,000/head. China’s PPP per capita GDP has

exceeded US$12,000 (World Bank 2011) in 2014, with oil demand growing 2.2% for the

year.

China’s oil demand inflection point has been delayed by its unbalanced economy. Per

capita GDP may be strong but it is skewed towards investment. Oil demand is driven by

increasing personal vehicle penetration and increased driving habits, which are functions of

per capita household consumption. That oil demand inflection occurs at a per capita PPP

household consumption of ~US$4,000, a level China has just about reached.

Pent-up demand still filling up roads

The explosion of private car ownership was (and still is) largely driven by pent-up demand,

partially divorced from income growth. Car ownership in low income provinces has surged

to levels reached by richer provinces at twice the per capita GDP. This is pent-up demand

released by massive investment in roads and liberalized licensing, which occurred at similar

times nationwide.

To be sure, rich provinces do have higher car penetration than poor provinces. But less

than their relative wealth levels would imply. Also, to be sure, with the exception of the

saturated municipalities of Beijing and Shanghai, car penetration does not appear to be

plateauing in any province, whether rich or poor.

Analysing the data

Plotting car penetration versus per capita GDP for China’s provinces and municipalities for

22 years results in the charts below. Judging by the plotted data alone, we can see that car

penetration versus per capita GDP covers a wide range over the years. Patterns for various

provinces appear to be highly variable – car penetration in poor provinces has not followed

in the footsteps of rich provinces.

On a log scale, we can see that car penetration is inflecting, but across a range of per capita

GDPs. Similarly, we have plotted car penetration versus per capita household consumption

for the past 22 years, and failed to get a materially tighter pattern.

Per capita GDP is not the only driver of car penetration. Per capita household consumption

is somewhat more indicative but ultimately of limited improvement.

Oil security is the most important part of

achieving energy security.

– Zhang Guobao, former Director of

National Energy Administration

Car penetration is driven by massive

investment in roads and liberalized

licensing.

Industrials

Initiating Coverage

2 December 2015



Chart 56: Passenger vehicle penetration vs. per capita GDP,

China provinces and municipalities1991-2013

Source: CEIC, China NBS, World Bank, Jefferies

Chart 57: Passenger vehicle penetration vs. per capita GDP,

China provinces and municipalities1991-2013 (log scale)


Chart 58: Passenger vehicle penetration vs. per household

consumption, China provinces and municipalities1991-

2013


Chart 59: Passenger vehicle penetration vs. per household

consumption, China provinces and municipalities1991-

2013 (log scale)


Inflecting at the same time but at different income levels

We find that car penetration has been inflecting across every province in China, whether

rich or poor. Poor provinces are not waiting to get richer before filling their roads with cars.

Time appears to be an important factor in car penetration. Car penetration in various

provinces surges at different per capita GDP levels but in similar years. This is pent-up

demand released by massive investment in roads and liberalized licensing, which occurred

nationwide at similar times in the past decade.

0

5

10

15

20

25

0 5 10 15 20 25

Cars/100 heads

Per capita PPP GDP ('000 2011 US$)

0

5

10

15

20

25

1 10 100

Cars/100 heads


0

5

10

15

20

25

0 1 2 3 4 5 6 7 8 9 10

Cars/100 heads


0

5

10

15

20

25

0.1 1 10

Cars/100 heads

Household consumption PPP ('000 2011 US$)

Industrials

Initiating Coverage

2 December 2015



Chart 60: Passenger car penetration vs. per capita GDP,

select provinces 1991-2013


Chart 61: Passenger car penetration vs. per capita GDP:

Low, average, high income provinces 1991-2013


Chart 62: Passenger car penetration vs. per capita GDP: low

income provinces 1991-2013


Chart 63: Passenger car penetration vs. per capita GDP:

low-middle income provinces 1991-2013


Chart 64: Passenger penetration vs. per capita GDP: high-

middle income provinces 1991-2013


Chart 65: Passenger penetration vs. per capita GDP: high

income provinces 1991-2013


0

2

4

6

8

10

12

14

16

0 2 4 6 8 10 12 14 16 18 20

Cars/100 heads


0

2

4

6

8

10

12

14

16

0 2 4 6 8 10 12 14 16 18

Cars/100 heads


2013

2012

20112010

20092008

2013

2012

2011

2010

2009

2008

2013

2012

2011

20102009

2008

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7 8 9

Cars/100 heads


0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

Cars/100 heads


0

2

4

6

8

10

12

0 2 4 6 8 10 12 14 16

Cars/100 heads

Per capita PPP GDP (2005 US$)

0

5

10

15

20

25

0 5 10 15 20 25

Cars/100 heads


Industrials

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2 December 2015



Chart 66: Passenger car penetration vs. per capita

household consumption, select provinces 1991-2013


Chart 67: Passenger car penetration vs. per capita

household consumption: Low, average, high income

provinces 1991-2013


Inflection should happen anytime now We have run regressions of car penetration and oil demand versus GDP and household

consumption for various countries as well as all provinces in China. We find that inflection

for China's increased car penetration and oil demand should happen right about now.

Year-to-date, we have seen the reversal of a three-year weak patch in China's oil demand

growth despite a slowing economy.

Assuming no hard landing, China's oil demand should inflect in ~2017 and plateau in

~2025. Over this time, China would have to add or find substitutes for 24-38 mmboe/d of

transportation energy demand (~125-200% of current US oil consumption), according to

our calculations. That amounts to an average annual increase of ~2.4-3.8 mmboe/d over

the next 10 years (see here).

Inflection: late on per capita GDP, but imminent on household consumption

China’s PPP per capita GDP exceeded US$12,000 (World Bank 2011) in 2014, with oil

demand growing 2.2% for the year. According to regression analysis for various countries,

oil demand inflection is supposed to occur at ~US$10,000.

Chart 68: Oil consumption intensity vs. Per capita PPP GDP,

1965-2013

Source: World Bank, BP, Jefferies

Chart 69: Oil consumption intensity vs. Per capita PPP GDP,

1965-2013 (log scale)


China’s oil demand inflection point has been delayed by its unbalanced economy. Per

capita GDP may be strong but it is skewed towards investment. Oil demand is driven by

increasing personal vehicle penetration and increased driving habits, which are functions of

per capita household consumption. Re-plotting the charts using per capita household

consumption on the x-axis reveals that oil demand inflection occurs at a per capita PPP

household consumption of ~US$4,000, a level China has just about reached.

0

5

10

15

20

25

0 1 2 3 4 5 6 7 8 9

Cars/100 heads

Household consumption PPP GDP ('000 2011 US$)

0

2

4

6

8

10

12

14

16

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5

Cars/100 heads

Household consumption PPP GDP ('000 2011 US$)

20132012

20112010

20092008

2013

2012

2011

2010

2009

2008

2013

2012

20112010

20092008

Japan

S. Korea

0

5

10

15

20

25

30

35

- 5 10 15 20 25 30 35 40 45 50 55

bbl/head/yr

Real PPP GDP/head (2011 US$)

1978 peak

ChinaIndia

EU

1973 peak

US1997 peak

1973 peak

Malaysia

Thailand

Hong Kong Japan

S. Korea

0

5

10

15

20

25

30

35

1 10 100

bbl/head/yr

Real PPP GDP/head (2011 US$)

China

Japan

S. Korea

India

US

EU

Hong Kong

Malaysia

Thailand

China

India

EU

US

Thailand

Hong Kong

China needs to add or find

substitutes for transportation energy.

Industrials

Initiating Coverage

2 December 2015



https://javatar.bluematrix.com/pdf/MzqoEbZ5?

Chart 70: Oil consumption intensity vs. Per capita

household consumption, 1966-2013


Chart 71: Oil consumption intensity vs. Per capita

household consumption, 1966-2013 (log scale)


Car penetration for many countries also appears to inflect at about a PPP per capita

household consumption of US$4,000. We believe the growth in China’s car penetration

was driven, in large part, by pent-up demand; it will soon be driven by growing levels of

consumption.

Chart 72: Passenger vehicle penetration vs. Per capita

household consumption, 2000-2011

Source: World Bank, Jefferies

Chart 73: Passenger vehicle penetration vs. Per capita

household consumption 2000-2011 (log scale)

Source: World Bank, Jefferies

Lowering Vehicle Emissions Despite China’s ~140m fleet of motor vehicles and the daily congestion during rush hour in

China’s major metropolises, vehicle emissions are not yet as big a source of air pollution as

they are for some other developed countries. According to the Ministry of Environmental

Protection, motor vehicles emissions, excluding motorcycles, accounted for fewer than 5%

of total particulate matter emissions and SO2 emissions. Motor vehicles emissions do

account for 26% of total NOX emissions in China though.

As China’s population becomes wealthier, per capita income increases and China develops

a middle class, we expect vehicle ownership and, in-turn, vehicle emissions to accelerate

along the S-curve. According to McKinsey, the number of high-income urban households –

those earning more than Rmb80,000 a year -- will expand greatly, to 58% in 2020, from

17% in 2011.

0

5

10

15

20

25

30

35

- 5 10 15 20 25 30 35 40

bbl/head/year

Per capita household consumption ('000 2011 US$)

US

India

EU

Hong Kong

S. KoreaJapan

Malaysia

Thailand

China

0

5

10

15

20

25

30

35

1 10 100

bbl/head/year


US

India

EU

Hong Kong

S. KoreaJapan

Malaysia

Thailand

China

0

100

200

300

400

500

- 2 4 6 8 10 12 14 16 18 20

Vehicles/1000


EU

S. Korea

Japan

Malaysia

ThailandChina

Poland

MexicoKazakhstanHong Kong

0

100

200

300

400

500

1 10 100

Vehicles/1000


EU

S. Korea

Japan

Malaysia

ThailandChina

Poland

MexicoKazakhstan

Hong Kong

Industrials

Initiating Coverage

2 December 2015



HDT and Yellow Label are today’s problems

Trucks account for 22% of China’s motor vehicles but are responsible for 78% of China’s

vehicle particulate matter emissions. Heavy duty trucks account for 60% of vehicle

particulate matter emissions despite representing only 4% of China’s motor vehicles.

However, yellow label vehicles are another headache for regulators; these are vehicles that

fail to meet GuoI for gasoline vehicles and GuoIII for diesel vehicles. Yellow label vehicles

account for 11% of China’s motor vehicle fleet, but contribute 79% of China’s vehicle

particulate matter emissions.

Chart 74: Motor Vehicle (2013)

Source: MEP, Jefferies

Chart 75: Vehicles PM Emission (2013)


Chart 76: “Yellow Label” Motor Vehicles on the Decline


Chart 77: “Yellow Label” Accounts for Most Emissions


Yellow Label vehicles are low hanging fruit

Yellow label vehicles are a significant problem for environmental regulators. The fact that

yellow label vehicles have declined from 20% of China’s motor vehicle fleet in 2010 to 11%

today would seem to be encouraging. However, yellow label vehicles’ decline in market

share is driven by the growth in motor vehicles over the past few years. In fact, yellow label

vehicles have only declined in number terms by a 2010-13 CAGR of 5%.

Eliminating yellow label vehicles is an effective way to lower air pollution in China. By 2015,

the aim is to eliminate all yellow label cars in JingJinJi, the Yangtze River Delta and the Pearl

River Delta. By 2017, the aim is to eliminate all yellow labels in China. The difficulty remains

local enforcement. One possible remedy is to offer subsidies. For example, last year, Beijing

offered subsidies of Rmb2,500-14,500 to people who turned in old vehicles; the subsidies

did not apply to vehicles that failed to meet the most basic of emission standards.

Tighter emission requirements coming to pass

Implementation of EuroIV (renamed GuoIV in China) fuel has been delayed for 3 years as

regulators and operators bicker over financing. The NDRC's subsequent pricing guidance

Mini PV3%

Small PV79%

Mid & Large PV2%

Light-Duty Truck10%

MDT2%

HDT4%

Small PV4%

Mid & Large PV18%

Light-Duty Truck10% MDT

8%

HDT60%

0%

5%

10%

15%

20%

25%

30%

13.0

13.5

14.0

14.5

15.0

15.5

16.0

2010 2011 2012 2013

% of Fleetmn

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CO HC NOX PMYellow Label Other Motor Vehicles

China aims to eliminate all yellow

labels by 2017 against air pollution

China passed stricter vehicle

emission standards against air

pollution

Industrials

Initiating Coverage

2 December 2015



for GuoIV (gasoline/diesel price increases of Rmb290/370 per ton) results in an estimated

~US$3.85/bbl increase to GRM when fully implemented, according to our calculations.

Sinopec believes costs will only increase marginally as much of the capex has already been

spent. We believe risks to refining margins are to the upside.

Euro IV finally

After a delay of +3 years, China has finally committed to implementing Euro IV fuel

standards in 2014 (Jan 1 for gasoline, yearend for diesel). From Euro III, Euro IV is the next

generation of vehicle emissions standards, implementing advanced vehicle fuel and

emissions management systems.

The technical gist

Emissions control systems on the vehicle remove nitrous oxides (NOx), carbon monoxide

(CO) and unburned hydrocarbons (HC) using computerized fuel injection, exhaust gas

recirculation and, most importantly, a three-way catalytic converter (removes NOx, CO and

HC). A catalytic converter cannot function correctly if the sulphur dioxide (SO2) content of

emissions exceeds its design parameters. The more advanced the catalytic converter, the

lower SO2 levels it can tolerate in the exhaust.

Chart 78: China and EU diesel sulfur levels

Source: European Commission, DieselNet, Jefferies

Chart 79: China and EU gasoline sulfur levels

Source: European Commission, DieselNet, Jefferies

With China’s vehicle ownership likely to accelerate in the coming years, China needs to

implement stricter emission requirements.

Exhibit 2: Implementation of Emission Standards for New Vehicles


Exhibit 3: Emission Standards for Gasoline Vehicles


-

250

500

750

1,000

1,250

1,500

1,750

2,000

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

ppm

Euro I, 2000 ppm

Euro II, 500 ppm

Euro III, 350 ppm

Euro IV, 50 ppm

Euro V, 10 ppm

ChinaEU

-

250

500

750

1,000

1,250

1,500

1,750

2,000Ja

n-9

5

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

ppm

Euro I, 2000 ppm

Euro II, 500 ppm

Euro III, 150 ppm

Euro IV, 50 ppm

Euro V, 10 ppm

ChinaEU

Car Type 2006 2007 2008 2009 2010 2011 2012 2013

Light Vehicles Diesel Vehicles Guo II Guo III

Gasoline Vehicles Guo II Guo III Guo IV

Gas fueled Vehicles Guo II Guo III Guo IV

Heavy Vehicles Diesel Vehicles Guo II Guo III Guo IV

Gasoline Vehicles Guo II Guo III Guo IV

Gas fueled Vehicles Guo II Guo III Guo IV Guo V

Motorcycle Motorcycles & mopeds Guo II Guo III

Motor tricycle Guo II Guo III

Low-speed Vehicles N/A Guo I Guo II

Non-road Mobile Machinery Diesel Engine N/A Guo I Guo II

Small gasoline Engine N/A Guo I

Environmental Indicators

GB17930

Guo III

GB17930

Guo IV

GB17930

Guo V Beijing Shanghai Guangdong Jiangsu

Sulfur Content (ppm) ≤150 ≤50 ≤10 ≤10 ≤10 ≤50 ≤10

Summer vapor pressure (kPa) ≤72 40-68 40-65 40-65 42-65 45-60 40-65

Olefin (vol%) ≤30 ≤28 ≤24 ≤24 ≤25 ≤25 ≤25

Manganese content (mg/L) ≤16 ≤8 ≤2 ≤2 ≤2 ≤8 ≤2

Aromatics + Olefin (vol%) ≤70 ≤68 N/A N/A ≤60 ≤60 N/A

Aromatics (vol%) N/A N/A ≤40 ≤40 N/A N/A ≤40

Implementation Date 1-Jan-10 1-Jan-14 1-Jan-18 18-Dec-13 1-Sep-13 1-Jun-10 31-Oct-13

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Exhibit 4: Emission Standards for Diesel Vehicles


Battery Basics A battery is a unit of one or more cells (also termed batteries themselves) in which chemical

energy is converted into electricity, and in the case of electric vehicles, mechanical energy.

Energy is created when chemical reactions transfer energy from the electrodes to the

electrolyte at their interface. The key components of a battery are the cathode, anode,

separator, and electrolyte.

We discuss the component in more detail below:

Cathode: The positive end of the battery. It creates power by attracting electrons through

a circuit with positive ions. A cathode can be made out of several materials including lead-

acid (Pb+), carbon-zinc, alkaline, nickel metal hydride (NiMH), nickel cadmium (NiCd),

manganese lithium-ion (Mn Li-ion), iron phosphate lithium-ion (PO4 Li-ion), nickel cobalt

manganese lithium-ion (NCM Li-ion), and nickel cobalt aluminum lithium-ion (NCA Li-ion).

Anode: The negative end of the battery. It acts as a counterpart to the cathode. The ions

are stored in the anode when the battery is charged.

Separator: A thin film within the electrolyte that separates the anode and the cathode. It is

made out of a polymer and is microporous, which means that it facilitates the transfer of

ions while preventing the anode and cathode from touching, which would cause the cell to

short out.

Electrolyte: A liquid that houses the anode, cathode, and separator and ensures ion

transfer between the electrodes. The electrolyte is made up of organic solvents and lithium

salts. An important quality of the electrolyte is that it is not electrically conductive, which

would cause the cell to short out if the electrons were able to pass between the cathode

and anode within the cell, instead of being forced through an external circuit.

Exhibit 5: A Visual Diagram of a Battery


Regular

Diesel

Environmental Indicators

GB19147

Guo III

GB1914

Guo IV

GB17947

Guo V Beijing Shanghai Guangdong Hainan GB252

Sulfur Content (ppm) ≤350 ≤50 ≤10 ≤10 ≤10 ≤50 ≤50 ≤350

Cetane ≥49 ≥49 ≥51 ≥51 ≥51 ≥51 ≥49 ≥45

Density (kg/m3) 810-850 810-850 810-850 800-845 800-845 800-845 810-850 Report

PAHs (%) ≤11 ≤11 ≤11 ≤11 ≤11 ≤11 ≤11 N/A

Lubrication (µm) ≤460 ≤460 ≤460 ≤460 ≤460 ≤460 ≤460 N/A

Implementation Date 1-Jul-11 1-Jan-15 1-Jan-18 31-May-12 1-Sep-13 1-Jun-10 20-Nov-13 1-Jul-13

Vehicle Use Diesel

Industrials

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2 December 2015



A battery’s characteristics depend, in large part, on their constituent materials. There are a

wide range of battery systems made from varied metals, each with distinct attributes.

We discuss the most common battery systems below:

Lead Acid Batteries. Lead-based battery technology was first developed in 1859 and

today’s flooded batteries are not significantly different from those made 100 years ago.

Lead acid batteries are widely used in automobiles, aircraft, uninterruptible power supply

(UPS) applications, motive power (forklifts), telecom, and reserve power. The benefits of

lead acid technology are that it is proven, with over 100 years of commercial/residential

use, and it is safe. Additionally, lead-acid batteries are the cheapest battery technology

available. The disadvantage of this battery type is that it has lower energy density in

comparison to the newer advanced battery technologies, is significantly heavier, and has

greater life cycle constraints. Newer lead acid technologies such as absorbent glass mat

(AGM) have a better cycle life and are used in start-stop systems in cars that require

frequent charging and discharging.

Nickel-Cadmium (NiCd). NiCd batteries make up a small niche of the industrial battery

market with only 4% of total units. NiCd batteries are largely used in industrial applications

including industrial and telecom standby power, and in the aviation and rail markets for

back-up power and starting systems. Additionally, NiCd batteries are used in consumer

electronics and power tools. The batteries have better energy density than lead acid

batteries and a longer cycle life, but are environmentally unfriendly, and are 1.5x to 3.0x

the price of lead acid batteries in industrial applications.

Nickel-Metal-Hydride (NiMH). NiMH batteries are used in the transportation (hybrid

vehicles) and consumer electronic markets. The first wave of hybrid vehicle adoption has

been driven by NiMH batteries. NiMH technology represented a revolution for the auto

business as the technology offers high enough energy density and low enough weight to

be functional for assisting in powering vehicles.

NiMH has higher energy density compared to lead acid and NiCd batteries, but it has

reduced cycle life vs. NiCd. While battery life is a constraint, with proper energy

management systems NiMH batteries can be kept from fully discharging, thereby extending

overall battery life to an acceptable level – in the case of hybrid automobile batteries

increasing expected battery life to more than 10 years. NiMh was the preferred chemical

configuration for hybrid vehicles such as the Prius based on its lower cost and higher safety

profile (at the time). The disadvantages of NiMh include a high self-discharge rate.

Lithium-ion. Lithium-based batteries were first introduced by Sony in 1991. The initial

application for Li-ion batteries was in consumer electronics as portable batteries for laptops

and cell phones. Lithium-based batteries now serve the consumer electronic, military and

space industries and most recently, the hybrid vehicle market. Li-ion batteries have higher

energy density than predecessor chemistries, and at the same time have lower weight and

can potentially be produced at significantly lower cost at scale production. As a result, Li-

ion has become the technology of choice for the consumer electronics industry and a

natural progression in the HEV/EV market.

Lithium batteries typically use a carbon anode material, a metal oxide or phosphate for the

cathode material, and a lithium salt as the electrolyte. The most commonly used

commercial lithium battery chemistries typically vary on the material used for the cathode.

Common chemical combinations include:

Lithium cobalt oxide (LiCoO2): This chemical combination has the highest

energy capacity, as much as 200+ Wh/kg and is used in laptops and consumer

electronics. The tradeoff is greater risk of thermal runaway and shorter cycle life.

Cannot be charged or discharged at current higher than its rating.

Lithium iron phosphate (LiFePO4): Phosphate batteries are typically more

stable and safer, have improved cycle counts and shelf life, but have lower energy

Industrials

Initiating Coverage

2 December 2015



density. Excellent safety and life span, moderate specific energy and elevated self-

discharge.

Lithium manganese oxide (LiMn2O4): Spinel structure provides lower

internal resistance, capacity is one-third lower than Li-cobalt and higher than

Liphosphate but still 50% more than nickel-based batteries. Engineers can design

for long life, maximum load current (specific power), or high capacity (specific

energy).

Lithium nickel cobalt aluminium oxide (LiNiCoAlO2): This chemical

combination is less commonly used in consumer electronics, but has high specific

energy and power densities and a good lifespan, making it attractive for the EV

industry. Tesla uses a lithium nickel cobalt aluminium oxide (NCA) combination in

its batteries. Lithium cobalt oxide is the most commonly used combination for

consumer electronics and has very high specific energy, but its stability and

lifespan are insufficient for vehicle applications. Lithium iron phosphate and

lithium manganese are safer with better life but lower capacity. NCA has higher

energy and power density and a good life span.

Lithium polymer (LiPo): In LiPo cells, the lithium salt electrolyte is not held in

an organic solvent but in a solid polymer composite. It is sold in flexible pouch

cells that can be shaped in almost any way but require a solid casing to retain

their shape.

Storing and generating electricity

Electricity is generated in the process of discharging when ion cells travel within the

electrolyte and through the separator from the negatively-charged anode to the positively-

charged cathode. Simultaneously, electrons flow through a circuit outside of the battery

that connects the anode to the cathode.

When the battery is charging, ions migrate from the positively charged cathode, passing

through the separator within the electrolyte, to be housed between the layers of the

negatively-charged anode. Simultaneously, electrons flow from the cathode to the anode

through an external circuit. This process allows the battery to take in and store energy for

future use. Charging continues until the process is either stopped to use the battery (hence,

to enter the discharging phase and reverse the flow of both the ions and the electrons) or

until there has been a complete transfer of all of the ions over to the anode to become fully

charged. When the ions are fully transferred from the cathode to the anode, the battery

stops charging, because the electrons can only move if the ions are moving.

Conversely, when the battery is discharging, both the ions and the electrons travel in the

opposite direction of their journey during charging. Ions flow from the negatively-charged

anode, through the electrolyte and separator, to the positively-charged cathode.

Simultaneously, the electrons move from the anode to the cathode through an external

circuit that includes an electrically conductive path within the device being powered

Discharging continues until the process is either stopped to recharge the battery (hence, to

enter the charging phase and reverse the flow of both the ions and the electrons) or until

there has been a complete transfer of all of the ions over to the cathode (i.e., the battery is

exhausted).

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2 December 2015



Exhibit 6: A Battery in Charging and Discharging States


Measuring battery performance

Batteries are assessed on several different metrics that quantify their performance and

safety. The most important terms to describe the performance of batteries are capacity,

voltage, energy, and power.

Capacity is a measure of the amount of electrons that an individual battery cell provides.

This metric is calculated in terms of milli-ampere-hours/gram (mAH/g, based on weight) or

milli-ampere-hours/cubic centimeter (mAh/cc, based on volume). The capacity of a battery

determines how long it will be able to generate power in the discharging state. An analogy

for this measurement is the amount of water in a hose.

Voltage is a measure of electric force, which is derived from the difference in potential

energy between the anode and the cathode, and is a function of the metal used in the

cathode. In today’s cells, if the metal is cobalt, nickel, manganese, or any combination of

those, the average voltage is about 3.7V (iron phosphate cells average 3.3V). An analogy of

the voltage of a battery is to think about the pressure strength of water flowing out of a

hose.

Energy is calculated as capacity multiplied by voltage and is expressed as a watt-hour, or

in the case of electric vehicles, kilowatt-hours (kWh, or 1,000 watt-hours).

Power is calculated as energy divided by time, expressed in watts. High power batteries

with rapid discharge capability are used for bursts of energy, such as in vehicular

acceleration and portable tools.

Aside from the key performance metrics of capacity, voltage, energy, and power, the

lifetime and efficiency of batteries are described and impacted by other qualities inherent in

all batteries. These qualities, which include memory effect, cycle life, conditioning, self-

discharge, and material density, are described in more detail below.

Industrials

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Electric Vehicle Basics The electric vehicle industry has traditionally been broken down into three main categories,

depending on the reliance of existing drivetrains to all-electric vehicles:

Hybrid Electric Vehicle (HEV) refers to a vehicle that uses both an internal combustion

engine (using conventional gasoline, diesel, or biodiesel) in tandem with either an electric

motor powered by a rechargeable battery (either NiMH or Li-Ion) much larger and more

powerful than the 12V starter battery. There are many different types of hybrids used by

OEMs that offer varying degrees of improved fuel economy and reduced carbon emissions

depending on the vehicle’s target market. However, current models produced by major

OEMs generally fall into two broad categories of “strong” or “mild” hybrid.

Typically, a strong hybrid includes a smaller internal combustion engine (compared to a

traditional ICE vehicle) assisted by a separate electric motor that can provide added torque

or can propel the vehicle while shutting off the internal combustion engine at lower

speeds. The result is better city mileage relative to highway mileage performance. The

electric motor is powered by a large rechargeable electric battery that can be charged either

by regenerative braking (utilizing the kinetic energy from braking) or by the internal

combustion engine.

A mild hybrid can only be propelled by an internal combustion engine and a smaller

electric motor is used to provide a boost to the ICE, which is typically smaller to save on

fuel. Because mild hybrids lack an electric drive train they require a much smaller

rechargeable battery compared to strong hybrids and also have fewer additional

components. The rechargeable battery can be charged by either the internal combustion

engine or through regenerative braking. Since mild hybrids lack the ability to run

exclusively on an electric engine, they usually have better highway mileage than city

mileage (similar to conventional ICE vehicles).

Plug-In Hybrid Electric Vehicle (PHEV) differ from strong hybrid HEVs in that PHEVs

have an all-electric range (approximately 31–50 miles in select PHEV models) and can be

plugged into an electric outlet to charge their primary battery. PHEVs utilize the electric

drive train as the main source of propulsion while the purpose of the internal combustion

engine is to extend the vehicles driving range (beyond 40 miles).

Depending on the PHEV configuration, a combustion engine can be used as an optional

and direct source of propulsion (Parallel Hybrid) or a combustion engine can be used but

only as a power source to drive the electric motor (Series Hybrid). Batteries for PHEVs,

regardless of configuration, will require superior energy densities capable of storing a much

greater amount of energy and providing sufficient power for longer sustained periods than

batteries for current HEVs.

Fuel economy for PHEVs can greatly exceed that of conventional HEVs given that most daily

commutes are shorter than the all-electric range of 31–50 miles. PHEVs could be well suited

for markets that have very high fuel costs but low electricity costs and regions where

relatively clean energy sources such as nuclear, hydro, and other renewables are more

commonly used. The disadvantages for owning PHEVs are the high up-front cost of the

batteries and the lack of infrastructure or stations that will enable rapid recharging.

Electric Vehicle (EV or BEV) is the purest form of electrified vehicle in that it relies solely

on an electrical motor(s) as its source of propulsion. EVs do not emit any notable

greenhouse gases during the operation although it can be argued that EVs GHG emission to

the generation source. An EV electric motor is propelled by a high powered, large capacity

rechargeable battery pack (larger than a typical PHEV battery pack) that can be recharged

by connecting to an electric outlet.

Current EV designs travel 62–270 miles before they need to be recharged, but do not have

the benefit of range extension. Early entrants into the EV space include the Tesla Roadster;

the Nissan Leaf was the first significant “mass market” EV introduced in 2011.

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2 December 2015



EPS (Rmb) outlook

Source: Company data, Jefferies

Yutong is China’s largest manufacturer of plug-in hybrid bus in China, which captured

more than 40% market share in 2013-14. Yutong was the first to develop and produce

electric buses in the country and offer a broad portfolio of hybrid and pure electric buses.

As the largest manufacturers of medium and large buses in China, it has over 30% market

share in the segment and is increasing market share in the fast growing light bus segment.

Stronger than expected industry growth

Stronger than expected market share gains

in light bus segments

Stronger than expected income growth

Favourable government NEV subsidy

policy

Catalysts

Target Investment Thesis

Yutong continues its market leading

position among traditional and NEV bus

manufacturers in China

Yutong’s NEV products add to its market

share in Light Bus segment

China and global economy maintain

stable growth

SOTP target price Rmb 26.0, implied 13x

2017 PE

Upside Scenario

China and global economy y/y growth

surprise

Battery prices decline significantly

PE multiple 16x (2017 PER), target price

Rmb32.5

Downside Scenario

China economic growth downside

surprise

Surprise cut of NEV subsidy

Battery prices increase

PE multiple 9.6x (2017 PER), target price

Rmb19.5

Long Term Analysis

Scenarios for 2015E

China NEV Bus Market Breakdown


Major bus makers’ NEV sales of total volume (2014)


Company Description

THE LO

NG

VIE

W

Peer Group

Zhengzhou Yutong(A)

BUY: Rmb26.0 Price Target

Risks / Other considerations

Global economic recession

China’s economy experiences slower

growth

Decline in consumer spending,

especially travelling

Rising raw material prices

Exchange rate fluctuation

Long Term Financial Model Drivers

Revenue CAGR 2014-17E 15%

EBIT CAGR 2014-17E 19%

Earnings CAGR 2014-17E 20%

Recommendation / Price Target

Ticker Rec. PT

600104 CH BUY Rmb19.7

000625 CH BUY Rmb25.0

2238 HK HOLD HK$9.6

489 HK BUY HK$13.3

2333 HK BUY HK$13.4

175 HK BUY HK$4.3

002594 CH UNPF Rmb36.0

1211 HK HOLD HK$43.0

600066 CH BUY Rmb26.0

600686 CH NC NA

000957 CH NC NA

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2 December 2015



EPS (Rmb) outlook


BYD Company Limited (stock code: H Shares: 1211 HK; A Shares: 002594 CH) is principally

engaged in rechargeable battery and photovoltaic business, handset components and

assembly services, as well as automobile business which includes traditional fuel-engined

vehicles and new energy vehicles while taking advantage of its technological superiority to

actively develop business relating to the area of new energy products.






policy

Catalysts


BYD maintains its NEV PV market leading

position in China

BYD new NEV models maintain their price

and battery competitive advantages over

others


stable growth

SOTP Target Price HK$43.0, implying 42x

17e PE

Upside Scenario


surprise

More stimulus to support NEV demand



HK$53.8

Downside Scenario


surprise

Surprise cuts of NEV subsidy

Battery industry oversupplies


HK$32.3

Long Term Analysis

Scenarios for 2015E

NEV sales mix of major NEV OEMs


Passenger vehicle sales volume


Company Description

THE LO

NG

VIE

W

Peer Group

BYD(H)

HOLD: HK$43.0 Price Target



growth

Decline in consumer spending

Change in China NEV subsidy policy

Stronger than expected


Significant decline in battery price






Ticker Rec. PT

600104 CH BUY Rmb19.7

200625 CH BUY HK$25.5

2238 HK HOLD HK$9.6


489 HK BUY HK$13.3

2333 HK BUY HK$13.4

175 HK BUY HK$4.3



Zoyte-unlisted NC NA

Chery-unlisted NC NA

Industrials

Initiating Coverage

2 December 2015



EPS (Rmb) outlook


BYD Company Limited (stock code: H Shares: 1211 HK; A Shares: 002594 CH) is principally

engaged in rechargeable battery and photovoltaic business, handset components and

assembly services, as well as automobile business which includes traditional fuel-engined

vehicles and new energy vehicles while taking advantage of its technological superiority to

actively develop business relating to the area of new energy products.






policy

Catalysts


BYD continues its NEV PV market leading

position in China

BYD new NEV models maintain its price

and battery competitive advantages over

others


stable growth

SOTP target Price Rmb36.0, implying 42x

17e PE

Upside Scenario


surprise

More stimulus to support NEV demands



Rmb45.0

Downside Scenario


surprise

Surprise cut of NEV subsidy

Battery industry oversupplies


Rmb27.0

Long Term Analysis

Scenarios for 2015E

NEV sales mix of major NEV OEMs


Passenger vehicle sales volume


Company Description

THE LO

NG

VIE

W

Peer Group

BYD(A)

UNDERPERFORM: Rmb36.0 Price Target



growth

Decline in consumer spending

Change in China NEV subsidy policy

Stronger than expected


Significant decline in battery price






Ticker Rec. PT

600104 CH BUY Rmb19.7

200625 CH BUY HK$25.5

2238 HK HOLD HK$9.6


489 HK BUY HK$13.3

2333 HK BUY HK$13.4

175 HK BUY HK$4.3



Zoyte-unlisted NC NA

Chery-unlisted NC NA

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2 December 2015



Company DescriptionBYD Company Limited is principally engaged in the research, development, manufacture and distribution of automobiles, secondaryrechargeable batteries and mobile phone components. The company operates its businesses primarily through automobile business, whichprovides automobiles, including G6, S6 and other series; secondary rechargeable battery business, which provides lithium-ion batteries andnickel batteries, which are applied in mobile phones, digital cameras, electric tools, electric toys and other portable electronic devices, aswell as mobile phone components and assembly businesses, which offers casings, keypads, liquid crystal display (LCD) modules, cameras,flexible circuit boards, chargers, and mobile phone design and assembly services. The company operates its business within the domesticmarket and in overseas markets.

Zhengzhou Yutong Bus Co., Ltd. is principally engaged in the manufacture and sale of buses. The company’s main product portfolio consistsof school coaches, enterprise shuttle buses, caravans, motor homes, new energy buses, sightseeing buses, urban buses among others. It alsoprovides ground passenger transportation services. The company distributes its products within domestic markets and to overseas markets.

Analyst Certification:I, Zhi Aik Yeo, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Joseph Fong, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Yoanna Wang, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Lucinda Nan, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Laban Yu, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewsexpressed in this research report.I, Johnson Leung, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Zhi Aik Yeo is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Joseph Fong, CFA is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.

Registration of non-US analysts: Yoanna Wang is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Lucinda Nan is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Laban Yu is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Johnson Leung is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

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Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• BYD Company Limited (002594 CH: RMB63.29, UNDERPERFORM)• BYD Company Limited (1211 HK: HK$42.60, HOLD)• Zhengzhou Yutong Bus Co., Ltd. (600066 CH: RMB21.71, BUY)

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2 December 2015



Industrials

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2 December 2015



Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1132 53.60% 323 28.53%HOLD 827 39.16% 164 19.83%UNDERPERFORM 153 7.24% 19 12.42%

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2 December 2015



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Initiating Coverage

2 December 2015



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Industrials

Initiating Coverage

2 December 2015



autos & auto parts - jefferies · pdf filemkt. cap price cons. current eps estimates...

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