Made in China 2025key technology focus released, topromote wide application of UAV The Advisory Committee of National Manufacturing Power-BuildingStrategy of the PRC (国家制造强国建设战略咨询委员会) recentlyreleased the key technology roadmap under the Made in China2025plan, which focuses on 10major high-end and strategicindustries including aerospace equipment, striving to excel or reachadvanced international standards by 2025. According to theroadmap, aerospace equipment worth approximately US$2tn will bein demand in 2025. Given China’s expanding airspace, domesticgeneral aircraft, market potential for helicopters and unmannedaerial vehicles (UAV) is huge. China targeted wide application ofUAV in the following areas by 2025: i) border patrol, ii) public orderand anti-terrorism, iii) agriculture, forestry, husbandry and fishing, iv)mapping, v) pipeline monitoring and maintenance, vi) emergencyand rescue, vii) photography and entertainment. We believe asChina is constantly making breakthrough in UAV technology, thegrowth prospect in areas such as patrol, search and rescue as wellas agricultural plant protection is rosy, with market size exceedingRmb100m. Strong forces join hands, leading technology in China Three core technologies of the company are flight control, rotarywing and engine-powered technology. Of which, the companyunderwent mass production of engine-powered model by modifyinghigh-capacity products, showing its state-of-the-art enginetechnology in China. A design team from Tsinghua Universityprovided the technologies for flight control and the fourth generationof rotary wing. Of which, the flight control technology is the mostimportant as it is deemed as the "brain" of UAV and the keybattlefield for future competition. Tsinghua University possessesleading edges in flight control technology for unmanned helicoptersin China, the control capacity of which is comparable to militarylevel. The pair’s collaboration will create synergy effect, whichenables the company to possess the most advanced UAVtechnology in China. Best choice in the area of UAV with its products enjoyingobvious competitive edges The XV series products of Loncin Motor cover areas such as borderpatrol, public security and anti-terrorism, agriculture, groundmapping, pipeline detection and maintenance, emergency rescue,etc. The UAV model XV-1, which is 5.2meters in length, 1.2metersin width and 1.3meters in height, is mainly adopted in specializedmarkets including investigation and search & rescue. With a maximumtake-off weight of 230kg, maximum task loading capacity of 50kg, maximumservice ceiling of over 3000m, maximum flight hours of over 3hours and acruising radius of over 100km, XV-1keeps pace with similar advanced modelsintroduced in global markets, and recently, its product information has becomeavailable on China’s military weapon equipment purchasing informationwebsite. The company’s specialized plant protection UAV model XV-2, which is4.88meters in length, 1.12meters in width and 1.4meters in height, isunrivalled in terms of flight accuracy control, drug loading capacity, and hovertime, taking a leading position in the domestic agricultural plant protectionmarket. Reiterate Buy. Maintain 6-month TP at Rmb30 2015marks the year of strategic business upgrade for Loncin, and we believere-rating of the company’s valuation has just begun, as UAV conforms to theagricultural informatization trend, while Loncin expands its electric vehiclebusiness into after-sale markets. We expect 2015-17E diluted EPS to beRmb0.97, Rmb1.08and Rmb1.22respectively. Reiterate Buy and maintain6-month TP at Rmb30, corresponding to 28x of 2016E PE. Risk factors China’s motorcycle sales slump. Development of strategic business may notprogress smoothly as expected.

1H15 net profit up 31.79%, beating market expectation. Anhui Jianghuai Automobile announced its interim results. For the sixmonths ended June 2015, the company’s turnover totalledRmb23.517bn, up 14.55% YoY. Net profit attributable to parentamounted to Rmb537m, up 31.79% compared to a year back, andcorresponding to EPS of Rmb0.40 per share, exceeding marketexpectation. The revenue growth was mainly attributable to surge inSUV and new energy vehicle (NEV) sales. The reason why net profitgrew even faster than revenue was the substantial increase ingovernment subsidies amid rising NEV sales. A great pick with NEV concept; sales pure electric cars up4.7x. In the first half of 2015, Anhui Jianghuai Automobile sold 2,692 unitsof pure electric cars, up 470% from a year ago, and surpassing thethat for the full year of 2014. It’s noteworthy that sales volume forJune and July was 1,022 units and 982 units respectively, whichmeans there is a big chance the figure will be even moreencouraging for the second half. According to the company’sstrategic layout for the new energy segment, NEVs will account forover 30% of its production and sales by 2025. Jianghuai Automobileis planning a Rmb4.5bn private placement, from which the netproceeds will be invested in new energy passenger vehicle,commercial vehicle and related key component projects. After theconstruction period ends two years later, its production capacity ofnew energy passenger vehicles, high-end and pure electrical lighttrucks will both reach 100,000 units per year, which will be highlyconducive to the achievement of the company’s NEV strategicplanning, improvement in profitability and increase in valuation level. SUV sales keep booming, launch of new models worthanticipating. In the first half, Jianghuai Automobile’s SUV sales soared 536% YoYto 110,000 units, accounting for 38% of its overall complete vehiclesales, and playing a big part in fuelling revenue growth. The salesvolume of flagship model Ruifeng S3 was 92,000 units, skyrocketing891% YoY, and continuing to top all other compact SUV models. Inorder to further strengthen the company’s competitive edges in theSUV market, Ruifeng S2 will be launched soon. As the success ofRuifeng S3 consolidates the company’s brand image in the SUVsegment, we expect Ruifeng S2, which is highly similar to Ruifeng S3except for the smaller size, will win recognition from consumers andenjoy strong sales momentum. If so, Jianghuai Automobile’s marketshare in the SUV segment will expand further, which could guaranteethe swift growth in overall revenue. Initiate coverage with Buy, six-month TP at Rmb21. We expect Jianghuai Automobile to witness growth in both results and stockvaluation, given the gradual stabilization of the light truck business, theexplosive growth of SUV sales, and the remarkable development of the NEVbusiness. Excluding impact from the share placement, we expect thecompany’s net profit growth to be 108%, 37% and 32%, and EPS to beRmb0.75, Rmb1.03 and Rmb1.36 respectively over 2015-17. We initiatecoverage on the company with a Buy rating. Six-month TP is set at Rmb21,corresponding to 20x 2016 PE. Risk factor: SUV or NEV sales fall short of expectation.

Event:The company’s interim results were in line with expectation basedon its interim report, with operating income amounting toRmb3.157bn in 1H15, down 7.56% YoY. Net profit attributable to theparent company hit Rmb350m, up 9.75% YoY. EPS were Rmb0.44,and gross margin was 20.59%, up 0.79 ppt YoY. Net profit marginwas 11.66%, up 1.87 ppts YoY. Comments:The company’s traditional business was stable. The companyactively adjusted product mix amid complicated businessenvironment. Profitability of all segments surged significantly, withgross margin for light-duty engine, two-wheeled motorcycle, farmmachinery and equipment as well as power generation segments upby 0.67, 0.54, 0.41 and 1.71 ppts respectively. Shareholding in Lichi, with micro-electric vehicles layout. On25 July 2015, the company became the controlling shareholder ofShandong Lichi. We expected the market size of four-wheeledmicro-electric vehicles to reach 3,000,000 units/year and worth overRmb100bn. As a famous micro-electric car maker, Shandong Lichi’s1H15 sales topped 14,700 units, or 2.67 times the full-year sales in2014. Revenue totalled Rmb310m, with net profit of Rmb17m. Weexpect 2015 full-year sales to hit 30,000-40,000 units, with revenueof about Rmb700m. The acquisition laid a foundation for thecompany to tap into the micro-electric car market worth overRmb100bn. “Multi-pronged, Focused Growth” strategy with promising UAVbusiness. The company fully promoted the “Multi-pronged,Focused Growth” development strategy with traditional businessgrowing steadily. Through the acquisition of Saonon on 2 June 2015,the company successfully forayed into the distributed energymarket, which helped promote its strategic business. We believe itsunmanned aerial vehicles (“UAV”) business is promising. Thecompany’s agricultural plant protection UAV delivered maiden flight,and its unmanned helicopter XV-1 was up on the Army Weaponsand Equipment Procurement Information Network, which beatmarket expectation. Market scale of UAV agricultural plantprotection in China is expected to reach Rmb100bn. Havingfirst-mover and technological advantages in the field given the closecooperation with Tsinghua, the company could become one of thefew UAV companies that deliver solid results. Reiterate Buy; revise 6m TP down to Rmb41.00. 2015 marks the year of strategic business upgrade for Loncin, and we believere-rating of the company’s valuation has just begun, as UAV conforms to theagricultural informatization trend, while Loncin expands its electric vehiclebusiness into after-sale markets. Factoring into the consolidation of theresults of Lichi and Saonon, we raise the company’s earning forecast andexpect its turnover to be Rmb7.441bn, Rmb8.483bn and Rmb9.925bnrespectively over 2015-17, corresponding to YoY growth of 12%, 14% and17% respectively. Over 2015-17, the company's net profit attributable toparent is expected to see YoY growth of 32.6%, 11.1% and 13.6%, anddiluted EPS will be Rmb0.97 and Rmb1.07 and Rmb1.22 respectively. Wereiterate Buy rating with a revised six-month TP of Rmb41.00, correspondingto 38x 2016E PE. Risk factors. Sales of motorcycles may decline substantially in China. Development ofstrategic business may not progress smoothly as expected.