Gross margin expansion and stronger JVs income offset SG&A increase. Huayu released its 1Q17results after market close today. The company’s 1Q17gross revenue rose by 7.1% YoY to RMB34.0bn, slightly faster than passengervehicle (PV) production volume growth of 6.8% YoY in China during the period.Meanwhile, Huayu’s 1Q17gross profit grew 15.1% YoY to RMB4.8bn with1.0ppt YoY gross profit margin improvement driven by improving efficiencyand good momentum on overseas business, according to the company.Together with 1) 22.5% YoY growth in profit contribution from JVs/associates; 2) RMB41.6m of finance income in 1Q17vs. RMB15.3m finance cost in 1Q16; and 3) a lower effective tax rate, but partly offset by 1) 25.6% YoY increase inSG&A expenses and 2) 40.4% YoY decrease in non-operating income, 1Q17net profit increased 7.1% YoY to RMB1.5bn with flattish net profit margin.DB view – 1Q17profit in-line; maintain Buy on valuation and attractive yield. As Huayu’s 1Q17net profit accounted for 22% of our FY17E earnings forecastand 24% of consensus, we consider the results largely in-line. Our target priceis set at 10x FY17E P/E (unchanged), about 15% below Huayu’s mid-cycle P/Eof 12x. This is justified, in our view, as we expect Huayu to deliver 11.0%three-year net profit CAGR in FY16-19E. We think that the stable sales growthoutlook at SAIC (600104.SS, CNY27.25, Hold) would continue to ensure a solidrevenue source for Huayu. The expanding Yanfeng’s overseas sales shouldalso provide an additional growth driver. We maintain our Buy rating givenattractive FY17E P/E valuation of 9.5x. Key downside risks are weaker-thanexpectedauto sales volume, an inability to acquire new customers, marketshare loss, and an unexpected increase in raw material prices.

17% net profit decline on 22% sales volume drop. Yutong Bus reported a 16.5% YoY 1Q17 net profit decline to RMB316.2m. The company’s 1Q17 gross revenue decreased by 24.5% YoY to RMB3.9bn with 22.0% YoY drop in bus sales volume to 9,651 units. Gross profit margin contracted 45bps YoY to 23.4% in 1Q17, probably as a result of product mix downgrade on lower new energy (NEV) bus sales, in our view. Meanwhile, operating profit margin also narrowed 2.5ppt YoY on 2.1ppt expansion of SG&A to sales ratio. However, with a 1) RMB28.2m gain on a change in fair value (vs. loss of RMB103.5m in 1Q16) mainly from financial assets; 2) RMB46.0m investment gain (up 1.7x YoY) due to higher dividends from JV/associates; and 3) RMB21.0m net finance cost (down 28.2% YoY), partly offset by 1) 1.2x YoY increase in impairment loss on receivables provisions and 2) 66.1% decline in non-operating income on less amortization of deferred income, 1Q17 net profit margin improved 83bps to 8.2%. Yutong’s 1Q17 net profit accounted for 8% of both our FY17 earnings forecasts and consensus. Although the result is slightly lower than Yutong’s recent year performance, we believe it brings no surprises to the market given weak 1Q17 bus sales. Deutsche Bank view - new energy bus demand to recover; maintain Buy. Yutong registered a 27.1% YoY bus sales growth in March. We believe the NEV bus demand will continue to recover on the clarification of some local government subsidy and new subsidy eligibility list, i.e. Beijing, Jiangsu, etc. Meanwhile, we forecast stable NEV gross margins for Yutong going forward, on cost reduction and better mix mitigating cuts in subsidies, leading to consistent c.60% gross profit contribution from the NEV bus business. Maintain Buy given our optimism on Yutong's increasing profit contribution from NEV bus segment. Target price based on 14.0x FY17E P/E. Downside risks: unexpected changes in NEV bus subsidy policy and weaker-than-expected NEV bus demand.

Maintaining Buy on below NEV peer valuation Yutong's 14% FY16profit growth was stronger than we expected, given higherASP and margin for new energy (NEV) buses. Despite the company's cautioustone on the FY17NEV sales outlook, we estimate NEV margin to remaindecent in FY17-19with cost reduction and better mix mitigating a subsidydecline. We now forecast 1% earnings growth in FY17, followed by 21%earnings recovery in FY18on a rebound in NEV bus sales. Given consistentc.60% gross profit contribution from the NEV business, we maintain Buy. FY16beat, on NEV bus ASP and margin; 55% dividend payout Yutong reported 14% YoY FY16net profit growth to RMB4.0bn. FY16revenueincreased by 15% YoY to RMB35.9bn on the back of 6% bus sales growth(NEV bus sales up 31% YoY). Due to a better mix (increasing sales contributionfrom NEV buses) and a reduction in procurement costs, gross marginexpanded 2.5ppt YoY to 27.4% in FY16. On a quarterly basis, 4Q16net profitgrew 6% YoY (70% QoQ) to RMB1.8bn due to strong year-end NEV bus sales.Yutong declared a RMB1.0dividend per share, implying a 55% payout. Remaining optimistic on NEV demand, despite flattish FY17revenue target Yutong targets flattish YoY revenue in FY17E. Management is cautious on theNEV bus market in 2017, due to 1) pulled-forward NEV sales in 4Q16; and 2) adecrease in NEV bus subsidy, and expects full-year NEV bus sales to stay flator slightly improve YoY. However, we forecast stable NEV gross margins goingforward, on cost reduction and better mix mitigating cuts in subsidies, leadingto consistent c.60% gross profit contribution from the NEV bus business. Lifting earnings on higher-than-expected NEV bus margin; maintaining Buy We raise FY17-18E earnings by 5-8%. The earnings increase is mainly due tohigher NEV bus ASP and margin assumptions, partly offset by reduced NEVsales forecast. Our TP is based on 14.0x FY17E P/E to reflect our optimism onYutong's increasing profit contribution from the new energy bus segment. Keydownside risks include unexpected changes in NEV bus subsidy policy andweaker-than-expected NEV bus demand.

A decent 4Q16 growth despite high base; 55% dividend payout Yutong Bus reported a 14.4% YoY FY16 net profit growth to RMB4.0bn, 8%above our FY16 forecast. The company’s FY16 revenue increased by 14.9%YoY to RMB35.9bn on the back of 5.9% YoY growth in bus sales volume to70,988 units (new energy bus (NEV bus) sales up 31.4% YoY to 26,856 units). Due to product mix improvement (increasing sales contribution from NEV bus)and reduction in procurement costs, in our view, gross margin expanded2.5ppt YoY to 27.4% in FY16. Operating margin improved by 1.6ppt YoY on43.9% growth in selling expenses (mainly due to increasing provision for NEVbus warranty expenses) and partly offset by a mere 0.7% YoY rise inadministrative expenses. Together with a 27.6% increase in non-operatingincome mainly from subsidy (not related to NEV bus sales), but mitigated by 1)RMB438.0m impairment loss (FY15: RMB240.7m) on receivables provision and2) RMB114.5m FX loss (FY15: RMB152.7m gain), FY16 net margin remainedstable YoY at 11.3%. Yutong declared a RMB1.0 dividend per share, implying a55% payout. On a quarterly basis, 4Q16 net profit grew 5.8% YoY (69.8% QoQ)to RMB1.8bn due to strong year-end NEV bus demand in 4Q16. In theannouncement, Yutong targets to achieve RMB35.9bn revenue in FY17E, i.e. flattish YoY, citing pressure from both NEV bus and conventional bus sales. DB view – NEV bus demand still supported by government; Buy In 2M17, Yutong’s sales volume recorded a 39.6% YoY decline due to thedelayed announcement of new subsidy eligibility list and uncertainty in localgovernment subsidy, in our view. Despite the possible instant impact onmargins after NEV subsidies cut, we believe major NEV makers can probablymitigate this by lowering production costs. 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. Key downside risks: unexpected changes inNEV bus subsidy policy and weaker-than-expected NEV bus demand.

Loss making 4Q16 leading to full-year earnings miss Spring reported FY16 revenue growth of 4.1% YoY to RMB8.4bn on the back of 11.7% RPK traffic growth, but partially offset by 6.8% passenger yield decline. Despite a 3.1% YoY drop in fuel cost, it recorded a 46.7% YoY drop in operating profit to RMB626.2m on 20.9% YoY increase in ex-fuel operating cost (vs. 13.1% YoY ASK growth). Together with a 59.5% increase in net finance cost due to 1) 1.1x surge in interest expense (enlarged loan balance for aircraft purchase and prepayment) and 2) FX loss of RMB93.3m (Yen appreciation against RMB), the airline’s FY16 net profit declined by 28.4% YoY to RMB950.5m, which is 21% below our estimate and 25% below consensus. On a quarterly basis, 4Q16 recorded a net loss of RMB219.1m (4Q15: RMB125.5m profit) on 24.3% YoY expansion in operating expenses amid weak international passenger yield. Deutsche Bank view - worst is behind us; yield should bottom out in FY17E We raise our FY17-18E revenue by 3.5-3.8% to factor in higher revenue growth. However, we trim our FY17-18E net profit by 14.3-14.4% due mainly to higher cost and lower margin assumptions. While we acknowledge near-term share price volatility given FY16 earnings miss, we maintain Buy as we expect the airline’s yield to bottom out in FY17 with fuel price staying low and load factor staying at c.92%. Our new TP is based on 4.0x FY17E P/BV (unchanged), c.20% below Spring’s average P/BV of 5.3x since listing. We believe this is justified vs. sustainable ROE of about 16-17%. Key downside risks: excessive capacity addition; competition from regional LCCs and Chinese airlines; and slower-than-expected demand growth.

Loss making 4Q16 leading to full-year earnings miss Spring reported FY16 revenue growth of 4.1% YoY to RMB8.4bn on the back of 11.7% RPK traffic growth, but partially offset by 6.8% passenger yield decline. Despite a 3.1% YoY drop in fuel cost, it recorded a 46.7% YoY drop in operating profit to RMB626.2m on 20.9% YoY increase in ex-fuel operating cost (vs. 13.1% YoY ASK growth). Together with a 59.5% increase in net finance cost due to 1) 1.1x surge in interest expense (enlarged loan balance for aircraft purchase and prepayment) and 2) FX loss of RMB93.3m (Yen appreciation against RMB), the airline’s FY16 net profit declined by 28.4% YoY to RMB950.5m, which is 21% below our estimate and 25% below consensus. On a quarterly basis, 4Q16 recorded a net loss of RMB219.1m (4Q15: RMB125.5m profit) on 24.3% YoY expansion in operating expenses amid weak international passenger yield. Deutsche Bank view - worst is behind us; yield should bottom out in FY17E We raise our FY17-18E revenue by 3.5-3.8% to factor in higher revenue growth. However, we trim our FY17-18E net profit by 14.3-14.4% due mainly to higher cost and lower margin assumptions. While we acknowledge near-term share price volatility given FY16 earnings miss, we maintain Buy as we expect the airline’s yield to bottom out in FY17 with fuel price staying low and load factor staying at c.92%. Our new TP is based on 4.0x FY17E P/BV (unchanged), c.20% below Spring’s average P/BV of 5.3x since listing. We believe this is justified vs. sustainable ROE of about 16-17%. Key downside risks: excessive capacity addition; competition from regional LCCs and Chinese airlines; and slower-than-expected demand growth.

16% earnings growth with strong auto production; 52% dividend payout Huayu’s FY16 gross revenue edged up by 17.8% YoY to RMB124.3bn. The revenue growth was likely driven by 1) growth in passenger vehicle production in China during the period due to tax stimulus on small-engine car purchases and 2) growth in Yanfeng’s overseas interior trim business. FY16 gross profit grew 26.4% YoY to RMB17.7bn with 0.9ppt gross margin expansion. Together with 19.6% YoY growth in profit contribution from its JVs/associates but partly offset by 25.3% YoY jump in SG&A expenses, FY16 net profit increased by 16.1% YoY to RMB6.1bn, slightly beating our expectation by 5%. On a quarterly basis, 4Q16 net profit grew 14.7% QoQ (28.9% YoY) to RMB1.6bn with 3.1ppt QoQ gross margin improvement. Deutsche Bank view - overseas expansion on track with favorable outlook We raise our FY17-18E revenue by 3.8-5.3% to reflect stronger-than-expected overseas revenue growth. Together with higher margin assumptions, we lift our FY17-18 earnings forecasts by 4.5-5.5%. Our TP is based on 10.0x FY17E P/E (unchanged), about 15% below Huayu’s mid-cycle P/E of 12x. This is justified, in our view, as we expect Huayu to deliver a 11.0% FY16-19E three-year net profit CAGR. We think that the stable sales growth outlook at SAIC (600104.SS, CNY24.67, Hold) will continue to ensure a solid revenue source for Huayu in FY17-19E. In addition, the expanding overseas sales of its interior trim subsidiary Yanfeng should provide an additional growth driver. We maintain Buy given attractive FY17E P/E valuation of 8.5x and 6.2% FY17E dividend yield. Key downside risks: weaker-than-expected auto sales volume, an inability to acquire new customers and market share loss.

Robust auto production momentum leading to a strong 4Q16EWith China passenger vehicle (PV) production volume finishing at 24.4m units(+15.5% YoY) and SAIC Motor, Huayu’s largest OEM customer, recording10.5% YoY vehicle production growth, we revise up our FY16 revenue andearnings forecasts for Huayu by 7.6% and 5.6%, respectively. For 4Q16, weexpect Huayu to deliver a 66.5% YoY net profit growth (before 4Q15restatement on Huizhong inclusion) to RMB1.3bn on 40.2% YoY net revenuegrowth to RMB26.8bn but partly offset by 44bps gross margin contraction. During the quarter, China PV production growth rate accelerated to 17.3% YoYfrom 9M16’s 14.7%. PV sales growth also increased, by 15.3% in 4Q16indicating strong sales momentum and healthy industry sales/productionbalance. Meanwhile, SAIC registered 12.9% YoY growth in vehicle productionin 4Q16 with SAIC-Volkswagen JV up 5.0% YoY and SAIC-GM up 4.7%. Deutsche Bank view – lifting earnings and TP on auto sales; maintain BuyWe raise our FY16-18E revenue by 5.4-7.6% to reflect stronger-than-expectedFY16 China PV production volume. As a result, we lift our FY16-18 earningsforecasts by 4.1-5.6%, partially offset by weaker-than-expect margins. Ourtarget price is based on 10.0x FY17E P/E (from 10.5x average FY16/17E P/E),about 15% below Huayu’s mid-cycle P/E of 11.8x. This is justified, in our view,as we expect Huayu to deliver a 12.4% two-year net profit CAGR in FY16-18E. We forecast China’s PV sales to increase by 4.5% YoY in 2017E and 4.0% YoYin 2018E. We believe that the stable sales growth outlook at SAIC (600104.SS,CNY25.00, Hold) will continue to ensure a solid revenue source for Huayu inFY17-18E. In addition, the expanding overseas sales of its interior trimsubsidiary Yanfeng after the set-up of the new interior trim JV with JohnsonControls (JCI.N, USD43.95, Hold), should provide an additional growth driverfor Huayu. We maintain our Buy rating given attractive FY17E P/E valuation of8.5x and 3.8% dividend yield. Key downside risks are weaker-than-expectedauto sales, inability to acquire new customers and market share loss.

4Q16 international traffic remaining weak; but sequential recovery in sight Spring Airlines recorded 17.8% YoY growth (17.7% MoM) in passenger traffic(RPK) in December. While domestic RPK registered a growth rate of 29.9%YoY (10.7% MoM), international RPK declined 1.4% YoY (but up 38.5% YoY)mainly due to weakness in Thailand and Korea routes, in our view. However,with controlled passenger capacity expansion (ASK up 17.8% YoY), overallpassenger load factor was maintained flattish YoY (improved by 0.6ppt MoM)to 89.4% in December. Domestic passenger load factor decreased 0.7ppt YoY(0.2ppt MoM) to 91.8% and international load factor was down 0.1ppt YoY(but up 3.6ppt MoM) to 84.2% despite 1.3% YoY cut (32.6% MoM expansion)in international ASK during the month. For 4Q16, Spring’s overall RPK grew 12.1% YoY and passenger load factorreached 88.5% (down 1.4ppt YoY) on 13.8% expansion in ASK. For domesticroutes, RPK increased 20.8% YoY and passenger load factor dipped 1.8ppt YoYto 91.8%. For international routes, RPK decreased 3.6% YoY and passengerload factor dipped 2.1ppt YoY to 81.1%. Deutsche Bank view: worst is over; yield to bottom out in FY17E We reduce our FY16-18 revenue estimates by 1.5-2.2%, mainly due to loweryield assumptions and partly lower international traffic assumptions. As aresult, we trim our FY16-18 net profit forecasts by 9.2-9.7% as we factor in theslower revenue growth and less operating leverage. While we acknowledge near-term share price volatility as our FY16 reportednet profit estimate is about 16% below Bloomberg consensus, we maintainBuy rating on Spring given China’s low penetration of low-cost carrier. Weexpect the airline’s load factor to stay at c.92% with yield bottoming out inFY17E. Our target price of RMB44.6 is based on 4.0x FY17E P/BV (from 4.2xFY17E P/BV), c.20% below Spring’s average P/BV of 5.3x since listing. Webelieve this is justified, given a sustainable ROE of about 18-19% in FY17-18E.Key downside risks: excessive capacity addition; fiercer-than-expectedcompetition from regional LCCs and Chinese airlines; and slower-thanexpecteddemand growth.

Yutong Bus attended our Access China Conference on 9 January. The following are the key takeaways from investor meetings: - Yutong sold 70,988 units of buses in 2016 (+6% YoY), including c.26-27k units of new energy (NEV) buses. Among the total NEV bus sales volume, c.90% was public buses and over 80% were pure electric buses with the rest being plug-in hybrid electric buses. - For 2017E, the company is cautious on China’s NEV bus market after the subsidy cut. However, management still believe Yutong will be able to deliver positive NEV sales volume as well as top-line growth, given its advanced technology in terms of unit energy consumption and energy utilization efficiency. - The company will strive to maintain a relatively stable profitability of its NEV buses and expects to partially mitigate the negative impact from the reduced NEV bus subsidy through raising net-subsidy selling price and supplier cost reduction (i.e. battery cost). - Management comments that about 60-80% of the public transportation bus sold in 2016 were NEV buses. Despite the cuts in NEV bus subsidy in 2017-20, the company believes that the public transportation field would still be government’s main focus to promote the country’s vehicle electrification in future. - Yutong believes the recently announced new subsidy policy provides great opportunities to industry leaders with advanced technology, such as Yutong, to further gain market share in the NEV bus market. It has been investing in NEV field for many years already with annual R&D spending of RMB700-800m. According to management, its NEV products offer better user experience and lower full life cycle maintenance costs compared to competitors. - According to management, all of Yutong’s current NEV bus products meet the higher-end of the tightened eligibility requirement of battery energy density and unit energy consumption and, therefore, are qualified for the highest possible level of subsidy. Deutsche Bank view Despite the possible instant impact on margin due to lower subsidies, we believe that major NEV makers such as Yutong can probably mitigate this in the long run by lowering production costs (e.g. battery and scale effects). Our target price is based on 14.0x FY17E P/E, about 30% more than Yutong's mid-cycle P/E of 11x to reflect our optimism about Yutong's increasing profit contribution from the new energy bus segment. This is justified, in our view, as we expect the company to deliver a 11% two-year earnings CAGR in FY16-18. Key downside risks for Yutong include: 1) unexpected changes in the Chinese government's new energy bus subsidy policy; 2) weaker-than-expected new energy bus demand; and 3) market share loss in new energy buses.

Deutsche Bank view – leading players to benefit; cut TP on lower margins Despite the possible instant impact on margin due to lower subsidies, webelieve that major NEV makers such as Yutong can probably mitigate this inthe long run by lowering production costs (e.g. battery and scale effects). Weraise our FY16E net revenue by 3.9% and net profit by 3.7% on higher NEV bussales volume and better mix. We, however, lower our FY17-18E net profitforecast by 0.2%-5.2% on lower NEV bus margin assumptions followinggovernment’s subsidy cuts. Our new target price is still based on 14.0x FY17EP/E (unchanged from 14.0x FY17E P/E), about 30% more than Yutong's midcycleP/E of 11x to reflect our optimism on Yutong's increasing profitcontribution from the new energy bus segment. This is justified, in our view, aswe expect the company to deliver a 11% two-year earnings CAGR in FY16-18.On a forward P/BV basis, the company's implied target FY17E P/BV of 2.8x isalso justified, given our forecast sustainable ROE of 27-28%. Key downsiderisks for Yutong include: 1) unexpected changes in the Chinese government'snew energy bus subsidy policy; 2) weaker-than-expected new energy busdemand; and 3) market share loss in new energy buses.

Plans to import and produce Audi vehicles in future SAIC Motor announced today that the company has signed a memorandum ofunderstanding (MOU) with Volkswagen AG (VOWG.DE, EUR128.7, Hold) on 11November, regarding the establishment of Audi brand import and productionbusiness in China through the existing SAIC Volkswagen JV. In brief, thefurther cooperation between SAIC Motor and Volkswagen will include 1) theproduction and sales of Audi brand products, 2) sales of imported Audivehicles, and 3) the possibility of providing new energy vehicles and intelligentinternet mobile service to Chinese customers. Deutsche Bank view – a long-term positive but limited immediate impact Undoubtedly, we think that the inclusion of Audi import and production inSAIC Motor’s business will help to further enrich the company’s productionportfolio, especially in the premium segment. That being said, we do notenvision much immediate impact on sales and earnings. To elaborate, Audisold 487k units of cars in China in 10M16 according to the brand while morethan 90% of the sales volume was contributed by the FAW Audi JV’s localproduction (for A3, A4L, A6L, Q3 and Q5). In other words, it appears that whatSAIC can import or produce in future would mostly be not-so-mainstreammodels and the volume contribution is likely to be tiny vs. 1.6m units of SAICVolkswagen sales in 10M16. To conclude, we uphold our Buy recommendation on SAIC Motor as webelieve that the company can generate stable earnings from its major JVs,while its local brand production should thrive with the recently successful newmodel launches (e.g. Roewe RX5 SUV). All of these should translate intoconsistently high dividend payout. Key downside risk to our forecast is weakerthan-expected new model demand.

13% 3Q16 net profit YoY growth on decent sales at both local brand and JVs. SAIC Motor released its 3Q16 results after market close. The company’s 3Q16gross revenue grew by 18.3% YoY to RMB180.3bn, on the back of 16.4%growth in vehicle sales volume during the period. Meanwhile, SAIC’s 3Q16gross profit grew by 24.8% YoY to RMB23.2bn with 65bps YoY gross profitmargin improvement, possibly due to 1) accounting method change in dealerrebates at SVW Sales Company and 2) decent sales for new local brandmodels such as Roewe 360 and Roewe RX5 SUV, in our view. Together with14.1% YoY increase in profit contribution from its JVs (on 23.1% and 19.1%YoY sales volume growth at Shanghai-Volkswagen (SVW) and SAIC-GM,respectively), but partly offset by 1) 31.1% YoY increase in SG&A expenses(accounting change as mentioned above and higher promotion expense) and 2)1.3x YoY increase in finance cost, 3Q16 net profit increased by 13.2% YoY toRMB8.0bn. On a 9M16 basis, SAIC’s net profit of RMB23.1bn was up by 8.6%YoY, on an 8.4% YoY growth in vehicle sales volume, and accounted for 72%of our and Bloomberg full-year FY16 earnings forecasts of RMB31.9bn. Therefore we consider the results in line with expectations. Deutsche Bank view – stable earnings growth on track with attractive yield. Going forward, we expect 4Q16E sales momentum to ease on a higher base,but we still expect stable sales and earnings growth with more new SUVmodel introduction, such as those from Shanghai-Volkswagen and the newRoewe RX5 SUV. We maintain our Buy recommendation given attractiveFY17E P/E valuation of 7.4x on the back of 8% FY15-18E three-year EPS CAGRand attractive 6.8% FY17E dividend yield. Key downside risks are salesdisappointment and margin pressure.

28% YoY earnings growth with robust Yanfeng overseas trim business. Huayu Automotive released its 3Q16 results after market close. The company’s3Q16 gross revenue edged up by 27.7% YoY to RMB31.5bn. The revenuegrowth was likely driven by 1) growth in passenger vehicle (PV) productionvolume in China during the period due to government’s tax stimulus on smallenginecar purchases and 2) growth in Yanfeng’s overseas interior trimbusiness. Meanwhile, Huayu’s 3Q16 gross profit grew 23.2% YoY toRMB4.2bn with 0.5ppt YoY gross profit margin contraction. Together with55.4% YoY growth in profit contribution from its JVs/associates, but partiallyoffset by 28.7% YoY jump in SG&A expenses (largely due to the inclusion ofoverseas interior trim business since 2H15, in our view), 3Q16 net profitincreased by 28.2% YoY to RMB1.4bn. On a 9M16 basis, Huayu’s net profit ofRMB4.5bn was up 12.1% YoY and accounted for 81% of our full-year FY16earnings forecasts of RMB5.5bn (82% of Bloomberg consensus FY16Eestimates). Therefore, we consider the results slightly above both our andconsensus expectations. Deutsche Bank view – overseas expansion on track with favorable outlook. We think that the stable sales growth outlook at SAIC (600104.SS, CNY23.06,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,USD44.09, Hold), should provide an additional growth driver for Huayu. Wemaintain our Buy rating given attractive FY17E P/E valuation of 8.7x 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.

13% 3Q16 net profit growth, despite volume decline, with margin improvement Yutong Bus reported 13.3% YoY 3Q16 net profit growth to RMB1.0bn. Thecompany’s 3Q16 gross revenue decreased by 1.8% YoY to RMB8.4bn with11.8% YoY drop in bus sales volume to 17,715 units. Due to the product miximprovement (increasing sales contribution from new energy buses) andreduction in procurement costs, in our view, gross profit margin furtherexpanded 2.7ppt YoY to 26.8% in 3Q16. Meanwhile, operating profit marginalso improved by 2.3ppt YoY despite 4.0% and 0.7% YoY gain in selling andadministrative expenses, respectively. Together with a 36.8% YoY increase innon-operating income mainly from government subsidy and RMB62.4m fairvalue gain (3Q15 RMB80.4m loss), but partly mitigated by 1) RMB118.0mimpairment loss (up 1.5x YoY) on receivables provision; 2) RMB62.7m equityinvestment loss and 3) RMB34.6m net finance costs due to FX loss, 3Q16 netprofit margin increased by 1.6ppt to 12.4%. On a 9M16 basis, Yutong’s netprofit of RMB2.3bn was up by 22.0% YoY, on 7.5% YoY growth in bus salesvolume, and accounted for 61% of our full-year FY16 earnings forecasts ofRMB3.7bn (vs. 9M15 contributing 53% to FY15 net profit) and 57% ofconsensus FY16E estimates. Therefore, we consider the results in-line. Deutsche Bank view – new energy bus demand likely to pick up QoQ in 4Q16E We believe the sales dent in 3Q16 was mainly due to uncertainties on thesubsidy scheme (ahead of the announcement of subsidy fraud investigation inSep) and the fluctuation on monthly public bus orders. Going forward, weremain optimistic on Yutong’s increasing profit contribution from the newenergy bus segment, despite the recent monthly sales volatility. We maintainYutong as our top Buy in the CV segment and we think a near-term catalyst isthe sequential pick-up in new energy bus sales after policy overhang removal. Key downside risks include unexpected changes in government new energybus subsidy policy and weaker-than-expected new energy bus demand.