30% revenue growth partially mitigated decline in margins Huayu Automotive released its 1H16 results after market close. The company’s1H16 gross revenue edged up by 29.9% YoY to RMB61.3bn, achieving 55% ofour FY16E revenue forecast. The revenue growth was likely driven by 1)growth in passenger vehicle (PV) production volume in China during the perioddue to government’s tax stimulus on small-engine car purchases and 2) theinclusion of Yanfeng’s overseas interior trim business since 2H15. Meanwhile,Huayu’s 1H16 gross profit grew 27.6% YoY to RMB8.3bn with 0.2ppt YoYgross profit margin contraction. Together with 7.6% YoY growth in profitcontribution from its JVs/associates, but partially offset by 37.1% YoY jump inSG&A expenses (largely due to the inclusion of overseas interior trim businesssince 2H15, in our view), 1H16 net profit increased by 6.0% YoY to RMB3.1bn,achieving 56% of our FY16E profit estimate and 57% of consensus. On aquarterly basis, 2Q16 revenue increased by 27.2% YoY to RMB29.6bn andJVs/associates income grew by 5.0% YoY to RMB821.9m, probably due toOEM’s robust production in 2Q16. As a result, 2Q16 net profit increased by8.7% YoY to RMB1.6bn. Deutsche Bank view – favorable outlook with expanding overseas sales intact We think that the stable sales growth outlook at SAIC (600104.SS, CNY23.53,Buy) will continue to ensure a solid revenue source for Huayu in FY16-18E. Inaddition, the expanding overseas sales of its interior trim subsidiary Yanfengafter the set-up of the new interior trim JV with Johnson Controls (JCI.N,USD45.06, Hold), should provide an additional growth driver for Huayu. Wemaintain our Buy rating given attractive FY17E P/E valuation of 8.6x and 3.7%FY17E yield. Key downside risks are weaker-than-expected auto sales volume,an inability to acquire new customers and market share loss.

31% 1H16net profit growth with margin improvement Yutong Bus reported 30.6% YoY 1H16net profit growth to RMB1.2bn. Thecompany’s 1H16revenue increased by 27.7% YoY to RMB13.3bn on the backof 23.6% YoY growth in bus sales volume to 29,768units. Due to the productmix improvement (increasing sales contribution from new energy buses) andreduction in procurement costs, in our view, gross profit margin expanded1.8ppt YoY to 24.4% in 1H16. Meanwhile, operating profit margin improved by2.7ppt YoY on 2.5% YoY drop in administrative expenses (resulting fromdecreased R&D spending) and partly offset by 44.1% growth in sellingexpenses. Together with a 63.1% increase in non-operating income mainlyfrom government subsidy, but mitigated by 1) RMB93.8m impairment loss(RMB50.1m gain in 1H15) on receivables provision and 2) RMB20.0m FX loss(RMB88.9m FX gain in 1H15), Yutong’s 1H16net profit margin increased by0.2ppt to 9.3%. On a quarterly basis, Yutong’s 2Q16net profit grew 49.6% YoYand 1.3x QoQ to RMB856.8m. Deutsche Bank view – Buy on new energy bus outlook Yutong’s 1H16net profit is above our estimates of RMB1.0bn and accountedfor 33% of our full year estimates. In July, Yutong’s sales volume recorded a37.4% YoY decline with 36.2% YoY and 70.5% YoY drop in large and lightbuses, respectively. We believe the sales dent was mainly due to high baseeffect, overhang on the government’s possible revision to the subsidy schemeand the fluctuation on monthly public bus orders. Going forward, we remainoptimistic on Yutong’s increasing profit contribution from the new energy bussegment, despite the recent monthly sales volatility. Thus, we maintain Yutongas our top Buy in the CV segment and we think a near-term catalyst is thesequential pick-up in new energy bus sales after policy overhang removal. Keydownside risks include unexpected changes in government new energy bussubsidy policy and weaker-than-expected new energy bus demand.

China's largest bus manufacturer leading the new energy drive Subsidy-stimulated demand to continue; subsidy reduction risk well contained Persuading five million prospective car buyers to choose a new technology will be a major challenge for the Chinese government. However, getting hundreds of fleet bus operators to switch to New Energy Vehicles (NEV) is already proving to be a much quicker process, via regulations and intensive subsidy programs. NEV bus sales of 78,409 units accounted for a quarter of the whole industry last year, and we expect this to grow 28% annually over the next five years. Yutong is the clear leader in this field, with a 26% market share and on our estimates by 2018 will make over 60% of profit from NEV products. We initiate coverage with a Buy, TP RMB25.9, 14x forward PER. Subsidy-stimulated demand to continue; subsidy reduction risk well contained New energy bus sales grew 3.5x in 2015, and China is committed to accelerating adoption by both public and private operators. Changes to the subsidy regime from this year and the high up-front purchase price are legitimate obstacles but we expect greater cost efficiencies and policy support to generate a 28% five-year CAGR as we expect 36% of the public bus fleet to be replaced and updated to NEVs. On our estimates, Yutong has the breadth of product range and leading position to maintain a 27% share of this expanding market. Solid earnings growth supported by increasing new energy bus contribution We expect sales in H1 2016 to be weak as the subsidy regime should be changed after alleged abuse of the system last year (and 4Q15 sales were exceptional), but thereafter we forecast 35% volume growth annually to 2018. Pricing will be adjusted lower as subsidies are cut, but production costs will fall as battery costs decline rapidly. Product mix will also improve. Our earnings forecasts are for an undemanding 11.1% FY15-18E CAGR. Initiating coverage with a Buy; target price set at 14x avg. FY16/17E P/E; risks Target price of RMB25.9 is set based on 14.0x average FY16/17E P/E, c.30% above Yutong’s mid-cycle P/E of 10.6x. We believe this is justified, given an 11.1% three-year earnings CAGR in FY15-18E. Key downside risks: unexpected changes in government’s subsidy policy and weaker-than-expected demand.

Solid interior giant not losing out in technology competition; Buy. Huayu Automotive hosted a reverse roadshow in Shanghai on 5 May. Thedirector of the company's R&D centre demonstrated Huayu's strategic plan onautomatic driving assistance systems (ADAS). In addition, senior managementalso addressed investors' questions on its 1Q16 results announcement. Ingeneral, we think our investment thesis on Huayu remains intact withexpanding overseas contribution and future potential from Huizhongacquisition. Maintain Buy on attractive valuation. ADAS: limited mid-term contribution but showcased strong R&D capability. The director of Huayu's ADAS R&D center believes the intelligent car is thefuture and Huayu has been investing in related fields since 2011-12. The centercurrently employs more than 100 staff with annual investment of aboutRMB50-60m. The ADAS team plans to tap the market through radar andsensor fusion systems. While Huayu hasn't teamed up with any OEMs at themoment for the development of ADAS, the company will start delivering lowfrequencyradars to one of its customers in 2017 on a small scale, i.e. verylimited revenue contribution. We are pleased to see Huayu’s preparation inadvanced technology, which will sustain its competitiveness, in our view. 1Q16: Yanfeng and Huizhong on-track. According to management, the slower net profit growth (than revenue growth)in 1Q16 was mainly due to a RMB110m one-off gain from asset disposal in1Q15. If excluding the one-off gain, net profit would have grown 6% YoY. Yanfeng, Huayu's interior business, recognized about RMB14.6bn revenue in1Q16, with RMB6bn from overseas due to the acquisition of Johnson Control's(JCI.N, Hold, USD40.50) interior business. Management commented that orderbook at Yanfeng remains robust and it has secured some new orders fromglobal OEMs (including premium brands) since incorporation in July last year. Regarding the newly-acquired Huizhong chassis business from its parentco, itrecorded about RMB3.8bn in 1Q16 revenue, up 7% YoY. According to Huayu,there was improvement in profitability at Huizhong during the period andmanagement foresees great potential in Huizhong through product integration. Deutsche Bank view – favorable outlook with expanding overseas sales. We think that the stable sales growth outlook at SAIC (600104.SS, Buy,CNY20.46) will continue to ensure a solid revenue source for Huayu in FY16-18. In addition, the expanding overseas sales of Yanfeng should provide anadditional growth driver. We maintain our Buy recommendation given whatwe see as attractive FY16E P/E valuation of 9x. Key downside risks are weakerthan-expected auto sales volume, an inability to acquire new customers,market share loss, and an unexpected increase in raw material prices.

Stronger-than-expected margin mitigated weak JVs’ profit contribution SAIC Motor released its 1Q16results after market close today. The company’s1Q16gross revenue grew by 9.0% YoY to RMB185.2bn, with a 4.5% YoYincrease in vehicle sales volume during the period. Meanwhile, SAIC’s 1Q16gross profit grew by 29.0% YoY to RMB23.1bn with 2.0ppt YoY gross profitmargin improvement, probably driven by better product mix and reduceddiscounting at the JV sales companies, in our view. Meanwhile, there were 1)31.0% YoY increase in SG&A expenses and 2) 9.8% YoY decline in profitcontribution from its JVs/associates (mainly attributable to merely 1.0% salesvolume growth at Shanghai-Volkswagen (SVW) and 1.9% sales volume drop atSAIC-GM, and slower sales at its commercial vehicle units in 1Q16, in ourview). All in all, 1Q16net profit increased by 6.3% YoY to RMB7.9bn. Deutsche Bank view – stable earnings growth should be sustainable As SAIC’s 1Q16net profit accounted for 24% of our full-year FY16earningsforecasts of RMB32.8bn, we consider the results in line. Going forward, weexpect mild sales growth for SVW and SGM on the back of purchase taxstimulus and the rollout of more new models, including a few SUVs such asSVW New Tiguan. Together with the strong momentum at SGM-Wuling, wethink these developments will help SAIC Motor to resume 9-10% earningsgrowth in FY16-17, thus supporting future dividend payouts. Thus, wemaintain our Buy recommendation on SAIC Motor. Key downside risks aresales disappointment and unanticipated margin pressure.

32% revenue growth partially mitigated weak margins and JVs’ profit. Huayu Automotive released its 1Q16 results before market open today. Thecompany’s 1Q16 gross revenue edged up by 32.4% YoY to RMB31.7bn, fasterthan passenger vehicle (PV) production volume growth of 7.3% YoY in Chinaduring the period, probably driven by the contribution from overseas interiortrim sales, in our view. Meanwhile, Huayu’s 1Q16 gross profit grew 31.6% YoYto RMB4.2bn with flattish YoY gross profit margin growth. However, with 1)36.7% YoY increase in SG&A expenses; 2) 10.5% YoY growth in profitcontribution from JVs/associates; and 3) a higher effective tax rate, 1Q16 netprofit increased by 3.1% YoY to RMB1.4bn, accounting for 28% of our originalFY16 earnings forecast, mainly due to the inclusion of Huizhong business. Deutsche Bank view – cut TP to factor in private placement dilution; Buy. We raise our FY16-17E by 14.2-14.3% to reflect better-than-expected FY15revenue and consolidation of Huizhong since FY16. As a result, we lift ourFY16-17E earnings forecast by 7.6-11.0%, partially offset by weaker-thanexpectmargins. However, our FY16-17E EPS estimates are lowered by 9.1-11.8% due to the dilution from 569.5m shares private placement completed inJanuary this year. Our target price is set at a target 10.5x average FY16/17E P/E (from 10xFY16E), about 11% below Huayu’s mid-cycle P/E of 11.8x. This is justified, inour view, as we expect Huayu to deliver 12.4% three-year net profit CAGR inFY15-18E. We think the expanding overseas sales should provide an additionalgrowth driver for Huayu. We maintain our Buy rating given attractive FY16EP/E valuation of 9.1x. Key downside risks are weaker-than-expected auto salesvolume, an inability to acquire new customers, market share loss, and anunexpected increase in raw material prices.

SAIC Motor hosted a post-FY15-results conference call earlier today. Keytakeaways are as follows: - FY16 outlook: SAIC expects China auto sales to grow 4% YoY in FY16, withpassenger vehicle (PV) sales increasing 6% YoY and commercial vehicle (CV)decreasing 4%. Management believes 1) government’s promotion of newenergy vehicles (NEVs), 2) small-engine car tax stimulus and 3) yellow-labelvehicle scrappage will continue to support vehicle sales, while foreseeingpressure from 1) macro slowdown, 2) manufacturing cost increase due toemission standard upgrade and 3) price competition. - Gross profit margin: Management attributes the margin decline at local brandmainly to the increasing sales contribution from Roewe 360/350 sedan, partlyoffset by solid sales of MG GS SUV. They foresee gross profit margin for autoOEMs to remain a steadily declining trend due to 1) intensified competition and2) cost hike from emission upgrade. SAIC will strike to offset the impactthrough mix improvement by launching premium/high-end models. - New energy vehicles: SAIC sold 12.1k units of NEVs last year, including 10.7kRoewe E550 (up 2.9x YoY). Management aims at an annual NEV sales target of600k units by 2020 (200k for the local brand and 400k for its JVs) in order toachieve government’s emission requirement of 5.0L/100km. In addition, thecompany’s first internet car will be launched in 2H16E. - Inventory: Management believes the company’s inventory level is reasonable. According to SAIC, the all-channel inventory (OEM and dealer combined) forShanghai-VW (SVW) is about 1.8-1.9 month, while that for SAIC-GM (SGM) is2 months and 3.5 months for the local brand. - SUV: SAIC has planned several new SUV models (including facelift) for itsvarious brands, including new generation SVW Tiguan SUV, new SUV modelfrom SGM Chevrolet and Buick, and two SUV models from the local brand. Deutsche Bank view – marginally raise earnings forecast on higher margins We slightly reduce our FY16-17 net revenue forecast by 2.9-4.8% mainly onlower volume assumptions. However, we marginally raise our FY16-17 netprofit forecast by 0.1-2.0% on slightly better-than-expected margins. Wemaintain our target benchmark at 8x FY16E P/E, which is marginally below thecompany's 10-year historical trading average. This is justified, in our view, aswe expect SAIC to achieve a three-year net profit CAGR of 8.4% in FY15-18. On a P/BV basis, we believe the company's implied FY16E target P/BV of 1.4xis also justified, considering its 17% sustainable ROE. Going into FY16, we expect mild sales growth for SVW and SGM on the backof purchase tax stimulus and the rollout of more new models, including a fewSUVs. Together with the strong momentum at SGM-Wuling, we think thesedevelopments will help SAIC Motor to resume 9-10% earnings growth in FY16-17, thus supporting future dividend payouts. Key downside risks are salesdisappointment and unanticipated margin pressure.

SAIC Motor released its FY15 results after market close today. The company’sFY15 gross revenue grew by 6.2% YoY to RMB664.9bn, on back of 5.0%growth in vehicle sales volume to 5.9m units during the period. Meanwhile,SAIC’s FY15 gross profit grew by only 0.7% YoY to RMB76.6bn with 0.6pptYoY gross profit margin compression, possibly due to discounting at the JVsales companies, in our view. Thanks to 1) merely 0.7% YoY increase in SG&Aexpenses and 2) 6.6% YoY growth in profit contribution from its JVs/associates(mainly attributable to 5.5% sales volume growth at Shanghai-Volkswagen(SVW), partly offset the 0.5% sales volume drop at SAIC-GM, respectively, andslower sales at its commercial vehicle units in FY15, in our view), FY15 netprofit increased by 6.5% YoY to RMB29.8bn, which was in-line with thepreliminary profit guidance that was announced in January. On a quarterlybasis, SAIC’s 4Q15 net profit reached RMB8.5bn, representing a 12.8% YoYgrowth (20.2% QoQ) in net profit on 23.6% YoY increase (39.5% QoQ) invehicle sales.

23% revenue growth partially mitigated weak margins. Huayu Automotive released its FY15 results after market close today. Thecompany’s FY15 gross revenue edged up by 23.2% YoY to RMB91.1bn, likelydriven by 1) growth in passenger vehicle (PV) production volume in Chinaduring the period, especially in 4Q15 due to the government’s stimulus onsmall-engine car purchases, and 2) the surge in overseas interior trim sales. Meanwhile, Huayu’s FY15 gross profit grew 13.9% YoY to RMB12.8bn with1.1ppt YoY gross profit margin contraction. Together with 7.3% YoY growth inprofit contribution from its JVs/associates (attributable to PV productiongrowth in 4Q15 by Huayu’s customers, in our view), but partially offset by16.4% YoY increase in SG&A expenses, FY15 net profit increased by 7.4% YoYto RMB4.8bn. Huayu’s FY15 revenue and net profit was 7% and 5% above ourfull year expectation, respectively. On a quarterly basis, 4Q15 revenue surged by 48.6% YoY to RMB29.1bn andJVs/associates income also grew by 43.1% YoY to RMB723.6m, probably dueto OEM’s strong production rebound in 4Q15 after stimulus. As a result, 4Q15net profit also increased by 16.0% YoY to RMB1.1bn. Deutsche Bank view – favorable outlook with expanding overseas sales. We think that the stable sales growth outlook at SAIC (600104.SS, CNY19.88,Buy) will continue to ensure a solid revenue source for Huayu in FY16-17. Inaddition, the expanding overseas sales of Yanfeng – Huayu’s wholly ownedinterior trim subsidiary – after the set-up of the new interior trim JV withJohnson Controls (JCI.N, USD38.09, Hold), should provide an additionalgrowth driver for Huayu. We maintain our Buy recommendation given whatwe see as attractive FY16E P/E valuation of 8x. Key downside risks are weakerthan-expected auto sales volume, an inability to acquire new customers,market share loss, and an unexpected increase in raw material prices.