DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access 28 July 2015 Asia Pacific/China Equity Research Automobile Distributors China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) INITIATION From luxury dealer to high-end EV maker ■ Initiating with OUTPERFORM and a TP of HK$8.80 implying a 42% potential upside. Harmony Auto, a leading luxury dealer group in China, is transforming into a new energy vehicle (NEV) maker. It has tied up with Foxconn and Tencent and has acquired an 88% stake in Greenfield Motor (a NEV maker). Although the traditional car dealership operation remains the major near-term earnings contributor (97-99% in 2016-17) for Harmony, we think its new NEV operation is likely to provide it a decent long-term growth potential. After the 47% correction from its last peak, the stock is trading at 12.6/9x 2015/16E P/E and its risk-reward potential looks attractive. ■ Aftersales income to jump on expanding independent service network. By doubling its independent luxury car service centers from 43 in 2014 to 80 in 2015, Harmony auto has been able to capture the fast-growing luxury vehicles service and emerging electric vehicles after-sales market growth, resulting in a 40% earnings CAGR from independent service centers. The company thinks it can offer outstanding balance between aftersales service quality and price. ■ The ambitious alliance is aiming to break into high-end EV market. We understand there are quite a few EV new entrants, but Foxconn-Tencent- Harmony alliance is most likely to work out, in our view. Our confidence stems from Foxconn's well-developed EV component supply chain, Tencent's internet expertise, and Harmony's dealership network. High-end EV operation is estimated to book Rmb408/974 mn in profit in 2019/20E after Rmb288 mn in loss in 2018. ■ Valuation. Our HK$8.80 target price is DCF-based, as simple multiples cannot fully exhibit dealer business' long-term earnings power and Harmony's new endeavour in the electric vehicle market. Key risk: Weaker-than-expected luxury car demand may ignite a price war, hurting dealers' margins. Share price performance 60 80 100 120 140 4 6 8 10 12 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Price (LHS) Rebased Rel (RHS) The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6741.44 on 27/07/15 On 27/07/15 the spot exchange rate was HK$7.75/US$1 Performance over 1M 3M 12M Absolute (%) -31.1 -37.9 40.5 — Relative (%) -18.6 -15.8 39.2 — Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 10,195.9 10,857.4 12,093.6 12,277.2 EBITDA (Rmb mn) 901.4 1,167.1 1,447.7 1,655.5 EBIT (Rmb mn) 790.8 1,007.5 1,236.0 1,391.6 Net profit (Rmb mn) 547.0 623.9 861.6 947.3 EPS (CS adj.) (Rmb) 0.50 0.40 0.55 0.60 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.45 0.62 0.81 EPS growth (%) 33.4 -20.8 38.1 9.9 P/E (x) 10.0 12.6 9.1 8.3 Dividend yield (%) 1.9 1.5 2.1 2.3 EV/EBITDA (x) 10.4 6.2 5.2 4.6 P/B (x) 2.0 1.3 1.2 1.1 ROE (%) 22.1 14.6 13.9 13.6 Net debt/equity (%) 56.1 Net cash Net cash Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. Rating OUTPERFORM* [V] Price (27 Jul 15, HK$) 6.21 Target price (HK$) 8.80¹ Upside/downside (%) 41.7 Mkt cap (HK$ mn) 9,785 (US$ 1,262) Enterprise value (Rmb mn) 7,225 Number of shares (mn) 1,575.70 Free float (%) 46.6 52-week price range 11.00 - 4.09 ADTO - 6M (US$ mn) 9.5 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Research Analysts Bin Wang 852 2101 6702 [email protected]Mark Mao 852 2101 6710 [email protected]
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
28 July 2015
Asia Pacific/China
Equity Research
Automobile Distributors
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK)
INITIATION
From luxury dealer to high-end EV maker
■ Initiating with OUTPERFORM and a TP of HK$8.80 implying a 42% potential upside. Harmony Auto, a leading luxury dealer group in China, is transforming into a new energy vehicle (NEV) maker. It has tied up with Foxconn and Tencent and has acquired an 88% stake in Greenfield Motor (a NEV maker). Although the traditional car dealership operation remains the major near-term earnings contributor (97-99% in 2016-17) for Harmony, we think its new NEV operation is likely to provide it a decent long-term growth potential. After the 47% correction from its last peak, the stock is trading at 12.6/9x 2015/16E P/E and its risk-reward potential looks attractive.
■ Aftersales income to jump on expanding independent service network. By doubling its independent luxury car service centers from 43 in 2014 to 80 in 2015, Harmony auto has been able to capture the fast-growing luxury vehicles service and emerging electric vehicles after-sales market growth, resulting in a 40% earnings CAGR from independent service centers. The company thinks it
can offer outstanding balance between aftersales service quality and price.
■ The ambitious alliance is aiming to break into high-end EV market. We understand there are quite a few EV new entrants, but Foxconn-Tencent-Harmony alliance is most likely to work out, in our view. Our confidence stems from Foxconn's well-developed EV component supply chain, Tencent's internet expertise, and Harmony's dealership network. High-end EV operation is estimated to book Rmb408/974 mn in profit in 2019/20E after Rmb288 mn in
loss in 2018.
■ Valuation. Our HK$8.80 target price is DCF-based, as simple multiples cannot fully exhibit dealer business' long-term earnings power and Harmony's new endeavour in the electric vehicle market. Key risk: Weaker-than-expected
luxury car demand may ignite a price war, hurting dealers' margins.
Share price performance
60
80
100
120
140
4
6
8
10
12
Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
MSCI CHINA F IDX which closed at 6741.44 on 27/07/15
On 27/07/15 the spot exchange rate was HK$7.75/US$1
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 2
Focus charts Figure 1: Harmony earnings breakdown by segment Figure 2: Traditional 4S stores earnings outlook
100%
93% 90% 88%85%
7% 10%10%
12%
1.2% 3.2%
2013 2014 2015e 2016e 2017e
New energy vehicle Independent service center Traditional 4S
409 507 562
762 807
17%
24%
11%
35%
6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
-
100
200
300
400
500
600
700
800
900
2013 2014 2015e 2016e 2017e
Rmb Mn
Traditional 4S store earnings YoY
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 3: New energy vehicle earnings contribution Figure 4: Independent service store earnings outlook
- 10 30
(47)
161
331
(100)
(50)
-
50
100
150
200
250
300
350
400
2015e 2016e 2017e 2018e 2019e 2020e
Rmb Mn
+200% -258%
-441%
+105%
1
40
62
90
110
-
20
40
60
80
100
120
2013 2014 2015e 2016e 2017e
Rmb Mn
+54%
+46%
+22%
Source: Company data, Credit Suisse estimates Source: Company data
Figure 5: New energy vehicle sales volume outlook Figure 6: Independent service store (Shanghai–tier 1 city)
2 510
15 18 18 18
57 7 7
510
20
25
35
25
10
20
45
55
70
0
10
20
30
40
50
60
70
80
2014 2015 2016 2017 2018 2019 2020
'000 unit
Lvye low-end (E-X5) Lvye mid-end
Zhengzhou High-end sedan Zhengzhou High-end SUV
Source: Company data, Credit Suisse estimates Source: Company data
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 3
China Harmony New Energy Auto Holding Limited 3836.HK / 3836 HK Price (27 Jul 15): HK$6.21, Rating:: OUTPERFORM [V], Target Price: HK$8.80, Analyst: Bin Wang
Target price scenario
Scenario TP %Up/Dwn Assumptions Upside Central Case 8.80 41.71 Downside
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
2
4
6
8
10
12
14
16
Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15
12MF P/E multiple
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15
12MF P/B multiple
Source: IBES
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 4
From luxury dealer to high-end EV maker Initiating with OUTPERFORM; HK$8.80 TP implies
42% potential upside Harmony Auto, a leading luxury dealer group in China, is transforming into a new energy
vehicle (NEV) maker. It has tied up with Foxconn and Tencent, and has acquired an 88%
stake in Greenfield Motor (an NEV maker). Although traditional car dealership operation
remains the major near-term earnings contributor (97-99% in 2016-17) for Harmony, we
think its new NEV operation is likely to provide decent long-term growth potential. After a
47% correction from its last peak, the stock is trading at 12.6/9x 2015/16E P/E and its risk-
reward potential looks attractive.
Aftersales income to jump on expanding
independent service network Harmony auto is doubling its independent luxury car serve centers from 43 in 2014 to 80 in 2015. Meanwhile, the company is also planning to newly build 800 small-scale satellite repair shops (each service center links to ten satellite repair shops) to capture the fast-growing luxury vehicles and emerging electric vehicles' aftersales market. We expect Harmony's independent service stores to gain market shares from both individual repair shops and 4S stores in the lucrative after-market by attracting the out-of-warranty and more price-sensitive luxury customers, thanks to Harmony's offering of outstanding balance between service quality and price. We estimate earnings from independent service stores to go up by 54%/46%/22% YoY to Rmb62 mn/Rmb90 mn/Rmb110 mn in 2015/16/17E, respectively, to account for around 10-12% of Harmony's total earnings, thanks to its aggressive independent service network expansion.
The ambitious alliance is aiming to break into the high-end EV market We understand there are quite a few EV new entrants, but Foxconn-Tencent-Harmony alliance is most likely to work out. With the high-end electric internet intelligent vehicle launch in end-2017, we estimate 20,000/30,000/45,000 unit sales in 2018/2019/2020E, respectively. We think this volume assumption is achievable because: (1) EVs are much simpler mechanically than ICE vehicles, with far fewer parts, making it much easier for new entrants to get into the electric vehicle game, (2) Foxconn's well-developed EV component supply chain along with the strong battery expertise of Boston power, its battery supplier (3) Tencent's expertise in on-line Infotainment and Telematics and Harmony auto's strong EV aftersales network. We believe the ambitious alliance will be able to offer high-quality high-end EVs series and estimate that this operation to book
Rmb408/974 mn in net profit in 2019/20E after booking Rmb288 mn in loss in 2018.
Valuation
We derive our HK$8.80 target price from a DCF-based methodology, as simple multiples do not fully exhibit a dealer business's long-term earnings power and Harmony's new endeavour in the electric vehicle market. Our target price implies 12.9x/11.7x 2016/17E P/E, a premium to Chinese auto dealer's average of 8.0x 12-month forward P/E, which is
justified by the company's penetration into the high growth EV segment, in our view.
Risks
Key downside risks are: (1) Weaker luxury car demand, (2) failure to receive a new energy vehicle license, and (3) intensified competition in the independent service market. Key upside risks are: (1) Integrating internet into the auto aftersales market and (2) government extending the application of new energy vehicle subsidy to lead-acid battery low-speed electric vehicles.
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 5
Initiating with OUTPERFORM; HK$8.80 TP implies 42% upside Harmony Auto, a leading luxury dealer group in China (the 36
th largest dealer group by
revenue in 2014), is transforming into a new energy vehicle (NEV) maker, after tying up
with Foxconn and Tencent, and acquiring an 87.6% stake in Greenfield Motor (a NEV
maker). Harmony Auto guided that it will acquire the rest of the Greenfield Motor's stake,
12.4%, in the near future. Although its traditional car dealership operation remains the
major near-term earnings contributor (97-99% in 2016-17) for Harmony, we think its new
NEV operation is likely to provide a decent long-term growth potential. After the 47%
correction from its last peak, the stock is trading at 12.6/9x 2015/16E P/E and its risk-
reward potential looks attractive.
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 6
Figure 7: China's top-40 auto dealer groups by revenue (2014)
Rank Company name Revenue (Rmb bn) Ticker
1 Sinomach Automobile Co. ltd 90.5 600335 CH
2 China Grand Automotive 86.4 600297 CH
3 Pang Da Automobile Trade 60.3 601258 CH
4 Zhongsheng Group Holdings 54.8 881 HK
5 Lei Shing Hong Automobile Ltd 46.7
6 Shanghai Baoxin Auto 36.3 1293 HK
7 Hubei Hengxindelong Trade Co 36.2
8 Guangdong Materials Group Corporation Auto Trading 33.7
9 Shanghai Yongda Holding 32.9 3669 HK
10 China ZhengTong Auto Services Holding 31.3 1728 HK
11 Zhejiang Materials Industry Yuantong Automobile Group 24.3
12 Changjiu Automobile Investment Co., Ltd 22.6
13 Jiangsu Wanbang jinzhixing Auto Investment Ltd. 19.8
14 Beijing Yuntong Guorong Investment Ltd. 19.7
15 Shenzhen DFS Industrial Group Co., Ltd. 18.5
16 Tianjin Haowu Electromechanical Product & Auto Trade 17.9
40 Guangzhou Automobile Group Trade Co., Ltd. 8.7 Note: Blue highlight names are luxury dealer groups
Source: China Auto Dealer Association
Foxconn tied up with Harmony auto in December 2014 by acquiring a 10.53% stake in the
firm, which planned to use the Rmb0.49 bn in proceeds (of the 10.53% stake) to penetrate
into the new energy vehicle manufacturing market and signed an MOU (Memorandum of
Understanding) to acquire Greenfield Motor, a leading electric vehicle (EV) maker with an
annual capacity of 120,000 units. By end-June 2015, Harmony auto had successfully
acquired Greenfield's 87.6% stake. Greenfield launched its low-end pure electric SUV "e-
X5" in September 2014 at a price range of Rmb62K-70K for the lower-end market.
Greenfield had sold around 2,000 units of "e-X5" in 2014 and targets to deliver 5,000 units
in 2015. Harmony is also working along with Foxconn to upgrade Greenfield's design,
production, and sales distribution network, and is planning a brand new mid-end electric
vehicle at a price range of around Rmb100,000 for tier 4/tier 5 areas. This car will be
showcased in 2H15 for the first time and would be ready for sales by end-2016. Greenfield
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 7
plans to sell 5,000 units of this new mid-end electric vehicle in 2017, thanks to its
refreshed stylish design, higher efficient battery, and stronger dynamics.
Figure 8: Greenfield "e-X5" electric SUV
Source: Company data
Tencent joined the Foxconn–Harmony alliance in March 2015 by pencilling in an
agreement on developing a smart electric car platform to integrate electric vehicles to the
internet. The coalition established "Harmony Futeng", a 40:30:30 investment management
company formed by Harmony:Foxconn:Tencent, in that proportion, in June 2015, aiming at
internet and intelligent electric vehicle opportunities. Harmony guided that this ambitious
alliance plans to build a new high-end electric vehicle plant in Zhengzhou city, with
200,000 units of annual capacity. This plant will be used to launch high-end products
(priced at around Rmb300,000), such as a pure-electric internet-enabled intelligent vehicle
by end-2017, which could drive 300 km on a single charge with 180 km/hour of maximum
speed. The alliance will invest Rmb4 bn in the next three years for the new plant and the
development of new high-end EV models (a sedan and an SUV), per Harmony's guidance.
Figure 9: Foxconn-Tencent-Harmony alliance history
(Dec. 22 2014) Foxconn
subscribed 129 mn shares in
Harmony and became its 2nd
largest shareholder
(May 11 2015) Harmony
acquired 64.64% stake in
Greenfield Motor, an EV
manufacturer
(Jun. 26 2015) Harmony acquired
additional 22.93% stake in
Greenfield Motor, to a total 87.6%
(Jun. 18 2015) Harmony (40%), Foxconn
(30%) Tencent (30%) formed an investment
management company to develop “Internet
+ Intelligent Electric Vehicle”
(Jun. 28 2015) Foxconn
bought 40 mn shares (or
2.5% stake) in Harmony
from the Chairman
(Dec. 30 2014) Harmony signed
a MOU to acquire Greenfield
Motor, an EV manufacturer
(Mar. 23 2015) Harmony-Foxconn-Tencent pencil an
agreement on jointly developing a smart electric car
platform to integrate the internet with electric vehicles
(End-2016) Brand
new mid-end electric
vehicle launch
(End-2017) New
high-end internet
intelligent electric
vehicle launch
Source: Company data
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 8
Figure 10: Foxconn-Tencent-Harmony alliance to penetrate into China's intelligent electric vehicle market
Source: Company data
Figure 11: Terry Gou (Foxconn), Changge Feng (Harmony) and Pony Ma (Tencent)
Source: Company data
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 9
Aftersales income to jump on expanding independent service network Harmony is an early mover in capturing the demand for the luxury car aftermarket service
and opened its first independent multi-brands service store in late 2013. Harmony started
from its dominant 4S aftersales service market in the Henan province and replicating the
business model in other tier 1 and tier 2 cities. We estimate earnings from independent
service stores to go up by 54%/46%/22% YoY to Rmb62/Rmb90/Rmb110 mn in
2015/16/17E, accounting for around 10-12% of Harmony's total earnings, thanks to its
aggressive independent service network expansion. The company plans to double its
service center from 43 by end-2014 to 80 by end-2015, and further expand to 100/120 in
2016/17E. Meanwhile, the company also plans to newly build 800 small-scale satellite
repair shops (each service center links to ten satellite repair shops) to capture the fast-
growing luxury vehicles and emerging electric vehicles' (e.g., Tesla) aftersales market.
Figure 12: Harmony—Independent service store number Figure 13: Independent service store earnings outlook
5
43
80
100
120
8 15
20 20
0
20
40
60
80
100
120
140
2013 2014 2015e 2016e 2017e
Shop #
Total independent service center # Tesla service shop #
1
40
62
90
110
-
20
40
60
80
100
120
2013 2014 2015e 2016e 2017e
Rmb Mn
+54%
+46%
+22%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 14:Independent service store (Shanghai–tier 1 city) Figure 15: Independent service store (Puyang–tier 3 city)
Source: Company data Source: Company data
We expect Harmony's independent service stores to gain market shares from both
individual repair shops and 4S stores in the lucrative after-market by attracting the out-of-
warranty luxury customers, who are more price-sensitive than fresh car owners, thanks to
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 10
Harmony's reputation for service quality and price. Meanwhile, we expect a rising demand
for new energy vehicle aftersales service to help Harmony capture the emerging
opportunities, thanks to its strong EV service expertise via its partnership with Tesla for its
aftersales service.
Low service quality still a challenge for individual repair shops. Individual repair
shops are generally short of experienced high-quality technicians as they have limited
access to repair-related technical information on luxury OEMs and professional training.
Customers are also at the risk of accepting lower-quality, or even counterfeit parts, despite
the individual repair shops' low price. Harmony's independent service stores could
maintain the high service-quality standards set by 4S stores, backed by their deep repair-
related know-how of luxury brands, decent brand awareness, and experienced service
staff members.
Signature price competitiveness edges out 4S stores. Compared with 4S stores, which
are required to use high-priced OEM-authorised spare parts, Harmony's independent
service stores enjoy strong price competitiveness. Harmony could provide customers
options between OEM authorised spare parts and lower-priced non-OEM branded but
authentic parts, on the back of its diversified parts sourcing channels. As a result,
independent service stores can generate higher returns than a typical 4S shop. The
company has guided that the capex for an independent service center is around Rmb4 mn
(as the company mainly rents the building), which is substantially lower than that of a
typical 4S dealership. We expect the average per store annual revenue to reach Rmb8 mn
and assume a 45% gross margin and 12.5% net margin (Rmb3.6 mn in gross profit and
Rmb1.0 mn in net profit). The payback period is around four years on an average—much
better than that of a typical 4S dealership.
Figure 16: Harmony auto's independent service center layout (end-2014)
Beijing (3)
Shandong (4)
He'nan (18)
Shaanxi
Hubei
Beijing
Shandong
Jiangsu
Zhejiang
Guangdong
Shanghai
He'nan
Guizhou
Sichuan
Liaoning
Shaanxi (4)
Guangdong (3)
Shanghai (1)
Jiangsu (1)
Zhejiang (2)
Hubei (2)
Liaoning (1)
Guizhou (1)
Sichuan (1)
Fujian (2)
Fujian
Source: Company data
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 11
The ambitious alliance is aiming to break into the high-end EV market We are positive on Harmony-Foxconn-Tencent's coalition to penetrate into China's fast
growing EV market. With the high-end electric internet-enabled intelligent vehicle launch in
end-2017, we estimate 20,000/30,000/45,000 unit sales in 2018/2019/2020E. We think
this volume assumption is achievable as: (1) EVs are much simpler mechanically than ICE
vehicles with far fewer parts, making it easier the entry of new players into the electric
vehicle game, (2) Foxconn has a well-developed EV component supply chain and Boston
power, its battery supplier, has a strong battery expertise, (3) Tencent has strong expertise
in on-line Infotainment and Telematics and Harmony auto has a strong EV aftersales
network. We estimate this high-end internet electric vehicle operation (which is 30%
owned by Harmony) to book Rmb408/Rmb974 mn in net profit in 2019E/2020E and post
Rmb288 mn in loss in 2018E.
Figure 17: New energy vehicle sales volume outlook Figure 18: High-end internet electric vehicles' earnings
2 510
15 18 18 18
57 7 7
510
20
25
35
25
10
20
45
55
70
0
10
20
30
40
50
60
70
80
2014 2015 2016 2017 2018 2019 2020
'000 unit
Lvye low-end (E-X5) Lvye mid-end
Zhengzhou High-end sedan Zhengzhou High-end SUV
(288)
408
974
(400)
(200)
-
200
400
600
800
1,000
1,200
2016e 2017e 2018e 2019e 2020e
Rmb Mn
-242%
+139%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 12
Figure 19: New high-end internet electric vehicle plant blueprint in Zhengzhou
Source: Company data, DaHe Daily
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 13
Much easier for new entrants to assemble EVs than
ICEs
EVs are mechanically much simpler than ICE vehicles, with far fewer parts, making it
much easier for new entrants to get into the electric vehicle game. The supply chain of a
conventional OEM is a very lengthy and complex operation – a typical global OEM would
require more than 1,000 suppliers to supply over 20,000-30,000 components, including
engine, fuel system, transmission, drive train, exhaust, etc., that make up an internal
combustion engine (ICE) vehicle.
Compared with the complexity to develop and produce an ICE vehicle, which requires
sophisticated assembling skills to deal with massive precision spare parts, electric vehicles
that have remarkably far fewer parts are much easier to manufacture and assemble. In
particular, engine and transmission, the two most complicated systems in an ICE vehicle
no longer exist in an EV. Propelled by an electric motor and a battery pack, an EV's
propulsion system is less complex, as there are fewer moving parts. Transmission also
becomes unnecessary, as the electric motor's output characteristic does not require a
transmission to adapt. The electrification of the powertrain system eliminates a number of
control and connection parts specific to ICE such as starters, spark plugs, clutch valves,
tailpipe, fuel injection, distributor, fuel tank, among others, leaving an electric motor to
match the battery pack – the single biggest cost component in a typical electric vehicle.
In addition, an EV's simplified powertrain system and spare parts reduce its supply-chain
complexity, enabling modular design applicable for its mass production. Modularity could
largely lower the barrier of entry for EV manufacturing, as new entrants may source core
EV components, such as electric motor, battery from multiple component suppliers.
Therefore, we see a rising trend of ambitious new players entering the EV industry, such
PV of terminal value 2,574 Equity / (Equity +Debt) Ratio 46.5%
Value of core operations 7,454
Net debt/(cash) (65) Risk free rate 3.5%
Equity value 7,519 Market risk premium 7.0%
Beta 0.74
No. of shares (mn) 1,075 Borrow ing cost 7%
Value per share (Rmb) 7.0 Tax Rate 25%
Value per share (HKD) 8.7 WACC 7.0%
Implied PE 15 (x) 17.8 Revenue Grow th YoY 10.0%
Implied PE 16 (x) 12.9 Terminal grow th rate 1.0% Source: Company data, Credit Suisse estimates
Figure 60: Auto dealers' 12M fwd P/E in the past two years Figure 61: Harmony's P/E over the past two years
0
2
4
6
8
10
12
14
16
Zhengtong Baoxin Yongda Zhongsheng Harmony
0
2
4
6
8
10
12
14
16
before enter EV business
after enter EV business
Source: the BLOOMBERG PROFESSIONAL™ service consensus Source: the BLOOMBERG PROFESSIONAL™ service consensus
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 31
Risks Downside risks
Luxury car demand slowdown may ignite price wars and hurt dealers’ margins
Historical data shows a clear correlation between the dealer's new car margins and
market-wide luxury dealer per store sales volumes. If luxury demand decelerates due to a
weaker-than-expected macro-economy and more intensified government anti-corruption
campaign, we see downside risk to dealers' new car sales margins. A slowdown in luxury
car sales and fast-expanding dealership number might drag down per dealership sales
and increase pricing pressure.
The company's NEV development plan may be delayed if it fails to receive a
passenger vehicle production license
The company plans to deliver its sample electric vehicles to Ministry of Industry and
Information Technology (MIIT) in 2H15 as one of the process to apply for new energy
vehicle production license. Any delay in sample EV delivery or failure in passenger vehicle
production license application may impose negative impact on company's new energy
vehicle development plan (both mid-end lithium-ion battery EV and high-end EV models).
Intensified competition in independent service market may result in lower margin or
sales growth of company's independent service business
Given the relatively low entry barriers for independent service market, new entrants,
especially those leading dealers group's foraying into the market may impose margin
depression or sales growth slowing down to company's independent service business.
Upside risks
Integrating internet into auto aftersales market could be a new growth engine
By incorporating internet companies' online platforms with dealers' offline networks, auto
aftersales market may find a new growth engine driver to fuel the online-to-offline (O2O)
segment. The company has established a broad strategic cooperation with many domestic
internet platforms, such as Tencent, Tmall.com, JD.com, and could benefit from the rising
O2O trend.
The government may extend the application of new energy vehicle subsidy to lead-
acid battery low-speed electric vehicle
Currently, only lithium-ion battery electric vehicles are eligible for the government's new
energy vehicle subsidies. With the loosening of government's restriction on low speed
electric vehicles, the government may extend subsidy application and grant subsidy to
lead-acid battery electric vehicle. Company's "Green field" subsidiary could be one of the
key beneficiaries.
Company background
China Harmony New Energy Auto is a leading luxury dealership group in China in terms of
the number of 4S stores (45 by end-2014). Its main focus is on luxury and ultra-luxury auto
brands, such as Rolls-Royce, Aston Martin, Ferrari, Maserati, BMW, Land Rover, Jaguar,
Lexus, MINI, Volvo, and Zinoro. Harmony also operated 43 independent after-sales
service stores by end-2014. The company is transforming into a new energy vehicle (NEV)
maker, after its tie-up with Foxconn and Tencent and after acquiring an 87.6% stake in
Greenfield Motor (a NEV maker).
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 32
Figure 62: Company key milestones
Year Key milestones
2015 Acquired 87.57% equity interests in Greenfield Motor Co., Ltd.
Formed a joint venture investment management company, Harmony auto (40%
stake), Foxconn (30% stake) and Tencent (30% stake) to invest in “internet +
intelligent electric vehicle” project
2014 Hon Hai Group acquired 10% stake in Harmony Auto
Entered into a strategic cooperation framework agreement in respect of
“internet + intelligent electric car” with Tencent and Foxconn Technology
Group
Entered into aftersales collaboration with Tesla Motors, Inc. for plate work and paint
spraying
Acquired Shanghai Goocar Pre-owned Automobile Co., Ltd to develop used car
business
2013 Listed in Hong Kong Stock Exchange
Commenced independent aftersales service business
2012 First Aston Martin store in Zhengzhou, Henan
First Rolls Royce store in Xi'an, Shaanxi
First Jaguar Land Rover store in Zhengzhou, Henan
First Maserati & Ferrari store in Suzhou, Jiangsu
2010 First Mini store in Zhengzhou, Henan
2006 First Lexus store in Zhengzhou, Henan
2005 First BMW store in Zhengzhou, Henan
Source: Company data, Credit Suisse estimates
Figure 63: Company structure
Harmony New Energy Auto
(3836.HK)
Foxconn
(Far East)
Ultra luxury / Luxury auto dealership (45) Used car and independent service
8.17%
H-share public
shareholder
44.25%
BMW (20) Independent aftersales
service store (43)
Electric vehicle
Green Field Motor
(87.57%)
Managements
1.21%
Chairman FENG
Changge
43.83%
Mini (3)
Lexus (5)
Volvo (2) Zinoro (1)
Jaguar Land
Rover (1)
Aston Martin (3)
Ferrari /
Maserati (6)
Used car service (1)
Investment management
JV company (stake:
Harmony 40%, Foxconn
30%, Tencent 30%)
High-end “Internet +
Intelligent Electric Vehicle”
To be confirmed
Hon Hai Precision
Industry (2317.TW)
Foxconn Technology
Co., Ltd (2354.TW)
2.54%
29%100%
Source: Company data, Credit Suisse estimates
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 33
Figure 64: Management profile
Name Position Experience
FENG Changge Chairman
Executive Director
FENG is the founder of the Group and is responsible for the overall strategic and business
direction of the Group.
FENG graduated with a bachelor’s degree in economic law from Central South Institute of Law
(now known as Zhongnan University of Economics and Law) in 1992 and received a master's
degree in law from the same institution in 2001.
From 1992-2002, he served as an assistant judge and a judge in Henan's judicial system.
He started a law firm and was involved in real estate investment since 2002;
He is also the controlling shareholder of Hexie Industrial Group, whose business interests focus
on branded and luxury lifestyle goods and services, including property development, golf courses
and automobile sales.
YU Feng CEO
Executive Director
YU oversees the day-to-day business and management of the Group
YU graduated from Central South Institute of Law (now known as Zhongnan University of
Economics and Law) with a bachelor's degree in law in 1992 and completed a postgraduate
course in criminal law from China University of Political Science and Law in 2000.
From 1992 to 2001, he worked in the courts in Luoshan county of Henan province.
From June 2003 to July 2005 he was with Yuanda Investment.
In July 2005, he joined Henan Zhongdebao, where he was involved in obtaining the dealership
rights for automobile brands such as Land Rover, Lexus, Rolls Royce, and Aston Martin.
YANG Lei COO Executive Director
YANG is responsible for overseeing and managing the Group's automobile business.
YANG graduated in 2002 from Henan University, College of Foreign Languages majoring in
English.
YANG joined the Group in April 2005 in the sales department of our BMW business, during which
he gained extensive sales and marketing experience in the automobile industry.
Qian Yewen CFO Qian has extensive experience in corporate finance and capital markets.
Qian graduated from Peking University with a master degree in economics (majored in finance) in
July 2006 and a bachelor degree in philosophy in June 2004. He is a Chartered Financial Analyst
(CFA).
Prior to joining the Group, Qian served as Vice President of China Investment Banking at
Citigroup Global Market Asia Limited from July 2014 to June 2015. Between September 2007
and July 2014, Qian worked at China International Capital Corporation Limited where his last
position was that of Executive Director of the Investment Banking Department. He also served as
an analyst in the Corporate Finance Department of Cazenove Asia Limited (now known as
Standard Chartered Securities (Hong Kong) Limited) from July 2006 to August 2007.
CUI Ke Vice president
Executive Director
CUI is responsible for overseeing the network development and operation supervision of BMW
and Land Rover brands.
CUI graduated in economics and business management from the Henan Institute of Finance and
Economics (now known as Henan University of Economics and Law) in 2008.
CUI joined the Group in July 2009 as the general manager of Luoyang Yuedebao Automobile
Sales & Services Co., Ltd. He was promoted as a vice president of the company in February
2011. He was appointed as the general manager of Huadebao in February 2011.
MA Lintao Head of administration Executive Director
MA is responsible for the Group’s overall administrative matters and public relationships.
MA graduated from Henan Institute of Finance and Economics (now known as Henan University
of Economics and Law with a bachelor's degree in national economic planning and statistics in
June 1992.
From July 1992 to December 2003 MA worked in China Construction Bank's Henan branch in
various positions.
MA joined the Group in September 2006 as the chairman of Yuanda Lexus, Harmony's wholly-
owned subsidiary.
MA is the wife of FENG Changge.
Source: Company data, Credit Suisse estimates
28 July 2015
China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 34
Companies Mentioned (Price as of 27-Jul-2015)
Alibaba Group Holding Limited (BABA.N, $83.02) BAIC Motor Corporation Limited (1958.HK, HK$6.95) BMW (BMWG.DE, €89.08) Baidu Inc (BIDU.OQ, $206.25) Baoxin Auto Group Ltd (1293.HK, HK$3.7) China Harmony New Energy Auto Holding Limited (3836.HK, HK$6.21, OUTPERFORM[V], TP HK$8.8) China Yongda Automobiles Services Holding limited (3669.HK, HK$4.59) China Zhengtong Auto Services Holding limited (1728.HK, HK$4.14) Foxconn Technology Corp (2354.TW, NT$93.0) General Motors Corp. (GM.N, $31.06) Hon Hai Precision (2317.TW, NT$90.1) SAIC Motor Corp Ltd (600104.SS, Rmb19.2) Sina Corporation (SINA.OQ, $42.51) Tencent Holdings (0700.HK, HK$145.6) Tesla Motors Inc. (TSLA.OQ, $265.41) Weichai Power Co. Ltd (2338.HK, HK$10.7) Zhongsheng Group Holding limited (0881.HK, HK$4.53)
Disclosure Appendix
Important Global Disclosures
I, Bin Wang, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least a ttractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiven ess of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
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Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sec tor. An analyst may cover multiple sectors.
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China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 35
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 49% (27% banking clients)
Neutral/Hold* 35% (43% banking clients)
Underperform/Sell* 13% (38% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relati ve basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objec tives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html
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Price Target: (12 months) for China Harmony New Energy Auto Holding Limited (3836.HK)
Method: We derive our HK$8.80 target price for China Harmony New Energy Auto Holding Limited from a DCF (discounted cash flow)-based methodology, as simple multiples do not fully exhibit a dealer business's long-term earnings power (mainly from services) and Harmony's new endeavour in electric vehicle market. We apply a WACC (weighted average cost of capital) of 7.0% for our equity valuation. Key assumptions include an 5.6% cost of debt, a 3.5% risk free rate, 0.74 beta, a 25% income tax rate and an 47% equity-to-"equity+debt" ratio. Our target price implies 12.9x/11.7x 2016/17E P/E (price-to-earnings), a premium to other Chinese auto dealer peers. We believe the valuation premium is justified by company's higher long-term growth potential via penetrating into high growth EV segment.
Risk: Risks that could impede achievement of our target price of HK$8.80 for China Harmony New Energy Auto Holding Limited include: (1) Luxury car demand slowdown may ignite price wars and hurt dealers’ margins; (2) Company's EV development plan may be delayed if it fails in its application for a passenger vehicle production license; and (3) Intensified competition in independent service market may result in lower margin or sales growth of company's independent service business.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (3836.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (3836.HK) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (3836.HK) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (3836.HK) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (3836.HK) within the next 3 months.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (3836.HK) within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.
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China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 36
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (3836.HK) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse (Hong Kong) Limited ........................................................................................................................................ Bin Wang ; Mark Mao
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
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China Harmony New Energy Auto Holding Limited (3836.HK / 3836 HK) 37
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