Event: In Mar 2014, the Company registered wholesale of 500k units (+8.3% YoY/+12.8% MoM), including Shanghai Volkswagen’s sales volume of 152k units (+15.1% YoY/-5.7% MoM), Shanghai GM’s 144k units (+7.2% YoY/+26.3 % MoM), SAIC Motor Passenger Vehicle’s 18k units (+3.7% YoY/+30.2% MoM), and SGMW’s 166k units (+6.0% YoY/+15.5% MoM). Comments: In Mar, the Company registered wholesale of 500k units (+8.3% YoY), extending steady growth. Among its major JVs, Shanghai Volkswagen sold 152k units (+15.1% YoY) in Mar, Shanghai GM sold 144k units (+7.2% YoY/+26.3% MoM) and SGMW sold 166k units (+6.0% YoY, +15.5% MoM). We forecast that SAIC Motor will maintain steady growth in the April sales volume, and beat the industry average in terms of the YoY growth rate. 1Q14 results are expected to sustain rapid growth. SAIC Motor sold cumulatively 1.52mn units (+14.4% YoY) in 1Q14, higher than the average growth rate in the sector. Among its JV subsidiaries, Shanghai Volkswagen sold 512k units (+25.3% YoY) and maintained high profitability thanks to continuous high sales of Passat and Tiguan; Shanghai GM sold 432k units (+7.7% YoY) and its profitability is expected to continue improving due to the rising proportion of B-class sedans (such as Regal, Malibu, Encore and Captiva) and SUVs in the sales mix. Considering steady increase in the Company’s 1Q14 sales volume and strong profitability, we forecast its 1Q14 net profit to sustain rapid growth. The Company’s e-commerce platform was officially launched on 28 Mar, indicating the Company is actively exploring the new business model. Against the growing importance of Internet in auto consumption, the Company officially put its e-commerce platform (i.e. the www.chexiang.com) into operation on 28 Mar. This is not directed at overthrowing the existing distribution channels. Instead, it hopes to attract the customer traffic by providing individualized services (such as auto customization) through the online platform, and guide the online customers to the offline channels to build the O2O business model and form a virtuous cycle. The e-commerce platform is forecast to help upgrade the Company’s brand and valuation. Record high dividend yield issued a positive signal and will help fuel re-rating. The Company proposed to distribute cash dividend of Rmb12 for every 10 shares outstanding, equivalent to a dividend payout ratio of 53.3% (compared to 16.4% in 2011 and 31.9% in 2012). Relative to the share price of Rmb12.81 at present, it dividend yield is as high as 9.4%, scaling a new high in the Shanghai and Shenzhenstock exchanges over the past two years. In our view, the high dividend yield issues a positive signal to the investors. In addition, given its stable market position and abundant cash flows, we project the Company will continue handsome dividend payout in the future. Potential risks: (i) Worse-than-expected consumers’ recognition of Shanghai Volkswagen’s new models; (ii) growing losses of the Company’s own brands; (iii) slowing growth of the sector due to some cities’ purchase restrictions and even-odd license plate plans. Earnings forecast, valuation and investment rating. We reiterate the Company’s 2014/15/16E EPS of Rmb2.48/2.86/3.24 (EPS of Rmb2.25 in 2013). Its last price of Rmb14.57 per share implies prospective 2014/15/16E PE of 6/5/5x. As a leader in the Chinese auto market, SAIC Motor kept a dividend yield of more than 9%. In addition, it is actively developing the auto e-commerce and alternative energy vehicle business. Based on the sector’s average valuation, we believe a prospective 2014E PE of 8x is fair for it. We reiterate the “BUY” rating and set its target price at Rmb19.

Event: Gemdale amended its articles of association and expanded its Board of Directors to 14 members. Ke Ling, Juncan Huang, Aihong Chen, Bi’an Chen, Juyi Sun, Jiajun Chen, Lili Liang, Shengde Lin and Dafeng Yao were nominated as candidates for directors of the seventh Board of Directors, and another five people were nominated as candidates for independent directors, according to its announcement. Comments: Sino Life and Anbang Insurance were allowed to designate directors to the Company's Board of Directors. Upon the adjustment, the four largest shareholders would all have representatives on the Board. The Company plans to expand its Board of Directors from 12 members to 14; and except an independent director who left the position upon expiry of his term, all the other members on the Board were retained. Additionally, both Sino Life and Anbang Insurance were allowed to designate directors to the Company’s Board of Directors. Upon the adjustment, all of the Company’s four largest shareholders would have positions on the Board of Directors, and these four largest shareholders collectively control an estimated stake of more than 25% in the Company. The adjustment reflects the long-term shareholding willingness of Sino Life and Anbang Insurance, and suggests that the major shareholders are relatively united and confident in the management. Since Sino Life took stake in the Company in 2013, other investors have been speculating on its shareholding intention. Although designation of directors doesn’t equal to restriction of the sale of free float shares, it indicates that both insurance companies agree to the medium to long term investment value of the Company. In our view, the adjustment also reflects that the four largest shareholders (i.e. Sino Life, Futian Investment, Anbang Insurance and Futian Construction) are relatively united and confident in the Company’s core management members, such as Ke Ling, Juncan Huang and Jiaun Xu of the Board of Directors. Optimization of the equity structure is forecast to further improve the Company’s corporate governance but not dampen its decision-making efficiency. In our view, both Sino Life and Anbang Insurance are bullish on the Company’s long-term prospect and have good faith in its core management team, as evidenced by their continuous increase of stake in the Company through the secondary market and their designation of directors. The shareholders with great influence on the Company’s operation management and intention to hold stake in thelong term will help improve the Company’s governance mechanism and make sure the management works for the interests of shareholders. Additionally, the Board of Directors comprising of representatives of the major shareholders and core management members of the Company will guarantee great efficiency in the routine decision-making process. Rise of Gemdale: the right rhythm and the premium products. Gemdale became prudent about land acquisitions while active about de-stocking in 2H13. It effectively improved the quality of land bank, and made preparations for the land acquisition after 2Q14E. Additionally, the Company has inherent brand premium and achieved solid sales performance against the huge supply and fierce competition in southeast China. Its previous shortest slab (poor quality of land bank, improper timing of land acquisition) has been filled up completely. Adjustment of the Board of Directors is expected to deliver a boost to its income statement in 2014E. Potential risks: restrictions on the settleable resources in 2013-14; earnings growth is mainly due to alternation of accounting policy. Valuation, earnings forecast and investment rating: we reiterate the Company’s 2013/14/15E EPS at Rmb0.91/0.95/1.49. Given that a) adjustment of the Board of Directors is in favour of the free float shareholders, b) monthly sales of the Company are expected to increase along with increase in the property projects launched, and c) the Company is expected to see a frog-leap development after 2014 (due to increase in the settlement scale and profitability. The Company’s 2015 earnings growth is relatively high considering the time lag in settlement of sold properties), we assign the Company a 6x 2015E PE and raise its target price to Rmb8.94 (from Rmb7.73). Reiterate the BUY rating on the last share price of Rmb7.24.

Event: On 8 Apr, Haier Group and China CITIC Bank signedin Qingdao a strategic cooperation agreement on supply chain e-finance. Under the agreement, the existing sales/logistics/information networks of the Group’s Goodaymart will be closely connected with the Bank’s supply chain e-finance business, and a supply chain online platform featuring in online/offline integration will be set up, which will provide convenient financing and payment services for upstream and downstream enterprises on Goodaymart platform. Comments: (1) Goodaymart provides quality application scenarios for the implementation of the Bank’s supply chain e-finance Traditional supply chain finance is a kind of financing mode whereby banks connect core enterprises with upstream and downstream enterprises, and provide overall financial products and services.Take the home appliance sector for instance, banks generally focus on home appliance brand manufacturers, providing financial support for upstream and downstream enterprisesin their supply chain. In practice, given pledged assets, risk control, and other conditions, bank service still focuses on home appliance brand manufacturers, while downstream distributors usually find it hard to gain direct access to financing service due to their small-scale turnover, lack of fixed assets, among others. Goodaymart’s outlets/information systems provide a scenario for the implementation of supply chain e-finance.First, Goodaymart provides distribution, logistics, and after-sale service, matchmaking with 7.5k-plus county-level distribution stations (county-level Haier franchise stores and Goodaymart outlets), involving a total of ~35k outlets (including township distribution stations), and the distributors involved are characterized by small-scale turnover, light fixed assets, and steady cash flow. Second,Goodaymart organizes these participants in a good order via the systems and networks, and has achieved interconnectivity and intercommunication with these outlets through the in-door system. Goods purchase, sales, and inventory as well as payment settlement and write-off can be completed in a real-time manner in the system, and Goodaymart system has accumulated a sea of data information on the participants in its supply chain. The Bank can take advantage of Goodaymart to boost network-based supply chain finance and reduce credit cost and risk, which will make its capital application faster and safer. The Bank can take advantage of Goodaymart to achieve network-based supply chain finance, similar to the case where Alibaba employs Taobao platform to offer loans to Taobao stores. On theone hand, the Bank can rely on Goodaymart system data analysis, monitor distributors’ operations, and reduce cost of credit granting and credit risk; on the other hand, Goodaymart has established a financial network matching with its logistics network, and its financial network can enable real-time financial settlement with distributors; the Bank can employ Goodaymart platform to “whole-course one-stop” online credit loan model with 24/7 quick service, credit funds can directly enter upstream accounts in the supply chain, and also warrantee security in using credit funds. (2) Haier can take advantage of the Bank to increase distributor leverage, and weaken its financial risk Haier is expected to take advantage of the bank as an external force to address funding demand within its supply chain, and reduce its financial risk. Home appliance distributors used to gain access to loans mainly by three means: (i) borrowing from banks, (ii) three-party acceptance bills endorsed by manufacturers, and (iii) period of payment on open account provided by manufacturers. Among them, the last two means are common, but have two weaknesses: (i) increasing manufacturers’ financial risks, and (ii) while providing endorsement, payment period, and other supports, manufacturers generally cut sales price subsidies, implying increased financing cost of distributors in a disguised form. After the advancement in the cooperation between Haier and the Bank, funding demand in the supply chain is expected to be diverted toward the Bank, which will provide distributors with a wider range of financial services, and reduce Haier’s financial risks. Introducing financial services to improve financial leverage for distributors is in line with the trend of increasing efficiency in home appliance channels.According to the our forecast outlined in our China Home Appliance Sector Strategy Report for 2014, as the sector enters a moderate growth period from an expansion period, and e-commerce O2O model sees accelerated penetration into the traditional distribution stockpile model, there exists intrinsic demand for flattening and efficiency improvement in home appliances channels, and distributors’ profit model evolves accordingly, transforming from past hoarding and focusing on single profit toward “rapid run with small steps” to seek turnover. As channel efficiency improves, distributors will try to reduce inventory assets and strengthen financial leverage, in a bid to improve operation efficiency and ROE.Currently, Haier hasbroadly completed channel flattening and initial presence in online/offline O2O, and it will keep boosting O2O operation of its outlets at all levelsin 2014. For instance, it will step up central warehouse construction in tier-1 and tier-2 cities, and need to reserve only prototypes and a small number of inventory at its tier-1 and tier-2 community stores and franchise stores, so that after consumers experience consumption at a franchise store and the store places orders in the system, most goods can be directly delivered to consumers within 24 hours by a central warehouse closest to the franchise store. Therefore, Goodaymart system supports distributors to maintain low-inventory operation, while financial leverage improvement can rely on the Bank and other external financial resources. (3) Goodaymart system sees heightened barriers, evolving towardplatform value from logistics distribution service The partnershipbetween Goodaymart and the Bank marks Goodaymart’splatform value has started to highlight; besides providing efficient logisticsdistribution of large articles, Goodaymart isbecoming acore thresholdfor Haier’stransformationin future. (i) The partnershipbetween Goodaymart and the Bankwill provide financial servicefor upstream and downstream partners in the supply chain, and help upstreamsuppliers and downstream distributors reduce financial costand financingdifficulty, which will make supply chain partnership much firmerand beef up customerloyalty to Goodaymart system. (ii)Goodaymart logistics distribution servicesees accelerated logistics socialization. In 2013, the JV and partnershipbetween Goodaymart’schannel business and Alibaba’s e-commerce platform marked the rapid growth of the Company’s logisticssocialization; in 2013, itsacquisition of Shanghai BOYOL underscored its advantages in home furnishingand furniture distribution service by virtue of M&As. Its logistics businessis estimated to have grown 17% in 2013E. With its deepening cooperation with AlibabaandShanghai BOYOL, its logistics business is projected to keep growing rapidly in 2014E. (iii) E-commerce O2O, small-scale customization service, and other new business models need to be implemented via Goodaymart. Goodaymart system has opened up thechannel between manufacturers and retailers, with onlyGoodaymartstandingbetween online/offlineandsales distribution. Featuring in high efficiency and flattening, Goodaymart played a decisive role in delivery in three days for online shopping, small-scale customization of refrigerators, and other events in 2013. Potential risks: (i) Slower-than-expected cooperation-as upstream and downstream financing demands in thehome appliancesector are related with pricing, sales policy, and other factors, financial leveragewon’t be heightened blindly; additionally, Goodaymart lackscredit management experience, so Goodaymartand the Bankwill see a run-in periodfor system matchmaking, cooperation, and customer development. (ii) Competitors’accelerated development-its competitors includingMidea boast proprietarylogistics companies, many retail outlets, and a variety of basic resources of after-sale service outlets, which, based onefficient organizationand continued input, may constitute a distributionsystem for large articles similar to thatof Goodaymart; and(iii) Sector operation-macro economic downturnandreal estate sales contraction will dampen home appliance consumptionin future. Investment advice: Haier Group and China CITIC Bank inked a strategic cooperation agreement on supply chain e-finance, and Goodaymart network and data system provide quality application scenarios for the latter’s supply chain e-finance. On the one hand, the Bank may reduce credit cost and risk, and enable 24/7 real-time services. On the other side, Haier can take advantage of the Bank to increase distributor leverage, and weaken its financial risk, and Goodaymart’s logistics service and the Bank’s credit service will boost its distributors’ profitability to pick up. The cooperation marks that Goodaymart evolvesfrom logistics service value toward platform business value, Goodaymart customer loyalty and barriers will be heightened, and e-commerce O2O, small-scale customization, and other new business models will be materialized via Goodaymart. We reiterate its 2013/14/15E EPS of Rmb1.50/1.70/2.00 and “BUY” rating.

Investment Highlights The Company is expected to become a platform for integration of animal vaccine sector. With the consistent improvement in industry structure, SMEs without financial strength and R&D ability will be gradually eliminated. Over the next decade, China’s animal vaccine sector is expected to form the market pattern like the oligopoly market in the US. In our view, as one of the leaders in the sector, the Company will be dedicated to animal vaccine sector after spinning off real estate business. Additionally, its business cooperation with France-based CEVA has seen a good start, and it is expected to move in two aspects in future by virtue of its financial strength: (i) continue to expand and upgrade its production lines, diversify industry technology resources, and increase products in the pipeline; and (ii) launch more business cooperation at equity level, in an effort to develop into a platform for sectoral integration, and solidify its market leadership. Market-based vaccine business will continue to grow, and FMD vaccines will be the Company’s major earnings growth driver in 2014E. The Company’s market-based vaccines boast outstanding quality and robust demand from large-scale farms. It still has Rmb200mn-plus market potential in medium and large-scale breeding pig and live pig farms. As its cattle and sheep FMD trivalent vaccines see low base of revenue and a small number of competitors, direct marketing business is expected to keep contributing to it growth, which coupled with expectations for growth in swine FMD vaccines, is projected to boost its market-based vaccine business to grow by 40%-plus. Its tender-based vaccines cover three major epidemics-FMD, PRRS, and swine fever, in which, FMD vaccines are of the largest scale with most upbeat growth prospects. In our view, the growth in tender-based vaccines will be reflected in two aspects: (i) bid-winning scale is expected to keep increasing; and (ii) unit tender price is expected to pick up. It is forecast to register Rmb394mn in tender-based vaccine revenue in 2014E, up by ~24% YoY. New drivers for growth: brucellosis vaccine, porcine circovirus vaccine, and other new products are expected to be launched in 2015E: The Company is expected to launch new brucellosis vaccine at end-2014E or beginning-2015E, whose unit tender price, based on its forecast and market expectation, is expected to increase to Rmb2/dosage (the Company’s tendering volume stood at ~100mn dosages in 2013). Moreover, among vaccines for non-compulsory inoculation, porcine circovirus vaccine has become a product with relatively huge demand with ~Rmb1.5bn in market size. If the Company takes advantage of technological cooperation, porcine circovirus vaccine may be launched at beginning-2015E at the soonest, and is expected to log Rmb150mn in revenue over the 2-3 years thereafter. Additionally, as a leader in the sector, it has the ability and is likely to further develop and expand its poultry vaccine business. In our view, if it takes advantages of inorganic growth or technological cooperation, it is expected to bridge the gap in poultry vaccines in 2015E at the soonest, and register Rmb100mn in revenue within three years thereafter, equivalent to a 5% share in the tender-based vaccine market. Potential risks: (i) Large-scale spread of new/mutated viruses; (ii) failure in new product R&D or cooperation, and (iii) policies. Initiate coverage of the Company with “OVERWEIGHT” rating. Based on detailed analysis of the Company’s products in the pipeline, R&D, production, and other competitive strengths, we are upbeat on its rosy growth prospects and attraction. In our view, relying on its growth in FMD vaccine business over the next two years, it may continue to launch brucellosis vaccine, porcine circovirus vaccine, poultry vaccine, and other new products with high possibility for its earnings to beat expectations. After spinning off real estate business, it has become the purest animal vaccine play among comparables. Animal vaccine business will see a huge potential and rapid growth, and its market-based vaccines are expected to continue grow across cycles, and its share price boasts margin of safety. After gross margin picks up, its 2014-15E net profit growth rate is projected to average at ~45%. We set its target price at Rmb32 per share (implying 2014E PE of 35x, and 2014/15/16E EPS of Rmb0.91/1.32/1.53), and initiate coverage of it with “OVERWEIGHT” rating.

2013 EPS increased by 47.6% YoY to Rmb0.93, in line with expectations. The Company posted a) turnover of Rmb2.94bn (+30.0% YoY), b) operating profit of Rmb1.33bn (+45.4% YoY), c) net profit attributable to shareholders of the parent company of Rmb1.04bn (+47.6% YoY) and d) EPS of Rmb0.93 for 2013. In 4Q13, its turnover slid 12.3% YoY due to the base number effect, net profit attributable to shareholders of the parent company increased by 2.8% YoY, and EPS came in at Rmb0.22, in line with expectations in the annual earnings guidance. In 2013, Haining China Leather Market registered EPS of Rmb0.70 (+40% YoY, in line with expectation) from rental business, Rmb0.20 from shop sales and Rmb0.03 from settlement of Dongfang Yishu project. A 61.1% YoY increase in the rental income is the main reason for high annual earnings growth, and increase in business tax expenses dampened 4Q13 profit growth. In 2013, the Company opened Chengdu market, Tongerpu Phase II market and the Haining Phase V market. The expansion boosted its rental income to increase by 61.1% YoY to Rmb1.54bn, and the rental income as a percentage of total turnover up 10.4ppts to 53%. This effectively underpinned fast growth of the Company’s rental earnings. Against zero income from property and shop sales settlement, the Company’s business tax and surcharges surged by 70.4% to Rmb190mn in 4Q13, due to the one-off provisioning for the land appreciation tax of the Tongerpu Phase I project. This slowed the Company’s 4Q13 earnings growth and meanwhile, created a low comparison base for 2014. During 2013, the Company’s business tax and surcharges increased by 104.1% YoY, and it as a percentage of the Company’s revenue hit an all-time high at 20.6%. We expect both metrics to decline noticeably in 2014. Consolidated gross margin rose 11.7ppts to 71.6%; SGA expense ratio dipped 1.0ppt; and net margin jumped 3.9ppts to 35.9%. In 2013, the Company reported net operating cash inflow of Rmb1.35bn, suggesting abundant cash conditions. Thanks to increase of the rental rate in mid-2013, gross margin of the Company’s shop rental business jumped 0.5ppt YoY to 88.8%; and due to the high unit selling price of Chengdu market, the gross margin of shop sale business increased by 25.0ppts YoY to 79.7% (Chengdu project needs to pay land appreciation tax equivalent to 37% of its sales revenue). The Company boasts a higher barrier to entry in terms of the business model, and it is subject to little pressure from the labor and marketing expenses. During the report period, the Company’s SGA expense ratio dipped 1.0ppt to 7.0% due to the economies of scale, while its net operating cash inflow totalled Rmb1.35bn and capex was Rmb970mn, showing favourable cash turnover. Market innovation broadens: supply chain finance + smart market construction + Korean apparel outlets. 1Q14E EPS of the Company is estimated to increase by +25%~+30% YoY. In 2014, the Company will start cooperation over and rapidly push ahead the construction of smart markets, including big data tenant service and O2O service. It also launches the supply chain financial service along the leather industry chain (a guarantee company has been established in 2013) to provide import/export financing service and private fund clearing service, in order to lower the tenants’ financing cost and increase its profits. Additionally, according to the annual report, F/4 of the Tongerpu Phase III project and the Chengdu Phase II project are exploring the Korean apparel outlet segment, which could widen the Company’s growth potential. The annual report expects two markets (Harbin market/Tongerpu Phase III market) will be opened and 2~3 new markets will be signed in 2014. The Company is expected to finish its building of presence among the provincial capitals by 2016. In our view the external expansion is tipped to fuel continued fast growth of the Company’s rental income. We project its 1Q14 EPS to grow by +25%~+30% YoY (basically including no settlement income from shop sales). Potential risks: 1) impact of macro economy and weather on the leather consumption; 2) lower-than-expected revenue from the external expansion. Earnings forecast and valuation: Based on the Company’s annual report, we project 2014-15E EPS of it to be Rmb1.20/1.50 (Rmb0.95/1.15 from rental business, former forecast of 2015 EPS is Rmb1.55), and project its 2016E EPS to be Rmb1.59 (based on the current in-operation projects; we will update the forecast after the Company announces opening of new markets in future; Rmb1.32 from shop rentals). The current share price implies 11x 2014E PE, and the 2014-16 CAGR of its rental business is estimated to be 24%. We maintain the BUY rating with TP at Rmb24.0.

Event:In Mar 2014, Yutong Bus sold 4,1999 units (+32.1% YoY, +89.9% MoM), including 2,320 units of large passenger vehicles (+45.1% YoY, +245% MoM), 1,318 units of medium passenger vehicles (+7.3%YoY, +11.5% MoM), and 561 units of light passenger vehicles (+59.4% YoY, +57.1% MoM). Comments: Yutong Bus recorded sales of 4,199 units (+32.1% YoY, +89.9% MoM) in Mar 2014, representing a noticeable pickup in sales volume growth. Delivery of alternative energy vehicles pushed up growth of the Company’s sales volume. Among others, the Company sold 2320 units of large passenger vehicles (+45.1% YoY, +245% MoM). Along with rollout and implementation of the local detailed policies and launch of the alternative energy vehicle tendering projects, sales volume of the Company is expected to sustain rapid growth in 2Q14. 1Q14 positive growth is expected. Yutong Bus sold accumulatively 10,668 units of autos, up slightly by 3.4% YoY. It delivered 900 units of alternative energy vehicles in 1Q14, including 600 units delivered to Venezuela. Given increase in the high-price products as a percentage of total sales volume, we forecast the Company will sustain high average selling prices and profitability and realize single-digit positive growth in its 1Q14 results. Increase in the ratio of alternative energy vehicles will help upgrade the Company’s product mix and enhance its profitability. Yutong Bus has remarkable comprehensive advantage in the alternative energy passenger vehicle market. It sold 3,897 units (+118% YoY) of alternative energy passenger vehicles in 2013 with a market share of nearly 40%. Given its ample capacity and rich in-pipeline products in the field of plug-in hybrid electric vehicles, battery electric bus and ordinary hybrid electric vehicles, it is expected to sustain a leading position in the market. We forecast Yutong Bus to sell 8000 units and 16,000 units of alternative energy vehicles in 2014/15E, respectively, and the alternative energy vehicles as a percentage of its total sales are forecast to rise from ~7% to ~20%, which will raise the Company’s average selling price and profitability. Injection of auto parts assets helps improve profitability. Yutong Group, the Company’s controlling shareholder, promised to inject auto parts assets to the Company prior to end-2014. The dashboard, luggage rack, sponge and plastic parts, wire harness, bus air-con, and other auto parts businesses of the Group boast much higher gross margin (~20%) than that of whole vehicle manufacturing. Injection of these parts assets is projected to slightly boost the Company’s EPS. Potential risks: Macro downturn causes demand for medium- and large coaches to come in less than expected; efforts to implement alternative energy coach policies fall short of expectations and slow delivery of alternative energy coaches causes the Company to report worse than expected 1Q14E EPS. Earnings forecast and valuation. We reiterate the Company’s 2014/15/16E EPS at Rmb1.71/2.07 /2.49 (2013A EPS at Rmb1.43). Its last price of Rmb15.91 is equivalent to 2014/15/16E PE of 9/8/6x. As the leading player in the medium and large coaches segment, the Company commands solid position and benefits from faster phase-out of heavily-polluting vehicles, accelerated extension of alternative energy bus and other environment protection policies. Given valuation of auto sector, we believe that 15x 2014E PE fair for the Company and reiterate BUY with its target price at Rmb25 per share.

2013 annual EPS met expectations and 1Q14 net profit is estimated to sustain rapid growth. In 2013, the Company logged Rmb4.57bn in turnover, Rmb0.77bn in operating profit and Rmb0.61bn in net profit, up 30%/57%/52% YoY, respectively. Its 2013 net profit after excluding non-recurring gains/losses surged 69%, and basic EPS was Rmb2.00 in line with our expectation. Full-year weighted average ROE stood at ~20%. The Company plans to pay out Rmb10 of cash dividend (tax inclusive) plus 10 bonus shares for every 10 shares outstanding. It guided YoY growth of 30~50% in 1Q14E net profit. Turnover grew rapidly amid surging gross margin. Due to shutdown for overhaul and other factors, the Company’s turnover growth slowed somewhat in 4Q13. But its full-year turnover growth remained high at 30%-plus. Three-piece can sales revenue from Red Bull, one of its core customers, rose 37% YoY, representing 72% of its turnover. Full-year sales revenue of two-price cans exceeded Rmb400mn (+21% YoY), in which, orders from JDB came in at more than 400mn pieces, accounting for more than 50% of its sales volume. Currently, Shangyu project is operating at full load, and capacity utilization rate of Zhaoqing project (put into operation in 4Q13) is consistently growing. Thanks to growing capacity utilization rate and low raw materials prices, gross margin of three- and two-price cans edged up 4.8/5.5ppts YoY to 32.81%/16.14%. ORG Packaging reasonably controlled expenses and kept sound cash flow. Increase in product freight, labor cost and R&D expenditure boosted selling/administrative expense ratio to edge up 0.93/0.55ppt to 2.62%/6.97%; while ample funds on hand drove down financial expense ratio by 1.14ppts YoY to 1.71%. As a result, cost/income ratio increased slightly. Full-year net operating cash flow stood at Rmb670mn (+61% YoY), thanks to a) growth in sales volume and b) recovery of the notes receivable (notes receivable dropped by 50% YoY). Guided by the “grand strategy for large market” strategy, ORG Packaging consistently offers innovative integrated packaging solutions. The Company’s major customers are expected to beef up brand marketing in view of the FIFA World Cup to be held in 2014, which will directly benefit the Company. Orders from Red Bull are forecast to grow 30%-plus, and in addition to full operation of the Yixing factory, ORG Packaging is projected to build presence in central and western China to better serve the needs of Red Bull. As for two-pieces cans, the Company has inked long-term cooperation agreements with Beijing Yanjing Brewery and Tsingtao Brewery, and set up factories in Guangxi and Qingdao to expand its national presence. Against robust development of the mobile Internet-based new economy, the Company has upgraded its strategy from “production innovation” to “innovation of technology, service, and business model”, and extended its customer base from food & beverage into smartphone, and other consumer electronics fields to further tap into the downstream market. Application of coated iron and other production techniques and the innovative package design and other high value-added services will step up its competition edge. By fulfilling the “grand strategy for large market” strategy, it is forecast to become a leading integrated packaging service provider in China. Its earnings growth in future deserves expectations. Potential risks. (i) Slow progress in development of new projects, (ii) excessive high concentration on customers, and (iii) decline in gross margin. Earnings forecast, valuation, and investment rating. Thanks to the business growth in Red Bull, JDB, and other core customers, the Company is projected to keep rapid growth in earnings. We forecast its 1Q14E earnings to grow ~40%. Additionally, the Company expressly noted that it will take advantage of the innovation of technology, service, and business model to build an integrated packaging service leader, and tap into the wide market potential. Overall, we lift its 2014/15E EPS to Rmb2.68/3.40 (from Rmb2.54/3.02), and project its 2016E EPS to be Rmb4.50, implying a CAGR of 31% in 2014-16E. Based on 2013 PEG of 1.1x (a 15% premium relative to the packaging sector’s average 22x 2014E PE given the Company’s rapid growth), we raise its target price to Rmb68.30, and reiterate “BUY” rating.

Investment Highlights In-lineEPS of Rmb0.94 in 2013.In 2013, the Company raked in Rmb3.13bn in turnover (+76.9% YoY), Rmb1.97bn in operating cost (+94.3% YoY), and Rmb80mn in net profit attributable to shareholders (+49.3% YoY). ItsEPS of Rmb0.94 met expectations.It plans to pay out Rmb0.71 of cash dividend (tax inclusive) plus 2 bonus shares for every 10 shares outstanding.In 4Q13, intensive project settlement boosted its turnover to surge 329.0% QoQ and 76.2% YoY, and 4Q13 EPS stood at Rmb0.79 (+2,22.3% QoQ/+54.9% YoY), showing notable seasonal features. Additionally, it forecast 1Q14E net profit to increase 30-40%. Changes in turnover breakdown dragged down gross margin, and 4Q13 cash flow improved. In 2013, the Company’s consolidated gross margin came in at 37.2%, down 5.6pptsYoYdue to increase in the share of low-marginwater supply and drainage business (from 19.3% to 34.9%, gross marginwas only 21.0%). Gross margin of sewage solutionbusiness stoodhighat 45.3% (-3.5ppts YoY). Due to the impact of slowing macro economy and fine-tuning of local government debt policies, payment of government customers was affected. Thispropped up receivables to increase 96.3%YoYto Rmb1.28bn, in which, 82.4% were aged less than one year and due from quality major customers, showing relatively slight risk. Quarterly, fund collection at end-2013 fueled a turnaround in operating cash flow, which grewto Rmb670mn in annual 2013 compared to-Rmb720mn in 1-3Q13. Given upgradeof water standardsand water resource shortage, implementation of the clean water plan may accelerate adoption of membrane technology. With constant implementation of policies for energy conservation and emissions reduction and the 12thFive-Year Plan, areasthat are sensitive towater environment and those with scarce water resource will need to upgradesewage treatment plantsin order to meet the elevated discharge standard. Additionally, the Ministry of Environmental Protection is drawing a water pollution control action plan, which could propose to eliminate the use of inferior Class-V water. Given China’s limited environmental capacity and unique advantage of membrane technology in quality water output, the said technology is projected to enjoy a huge market for promotion and application. Mixed ownership is extending, and JVs and M&As will boost the Company’s development. The Company develops business based on amixed ownership system,and effectively exploresJVs and M&As. On the basis of its presence in such existing markets as Beijing, Yunnan, Jiangsu, Inner Mongolia,Hubei, Hunan, Xinjiang, and Shandong, it has continued to build presence in South China, Shanxi, Qingdao, Jilin, and Wuhan markets through regional JVs since 2013, and further stepped up its cooperation in the existing markets by increasing stake in JinjianWater. In 2014, it will keep settingup JVs with local governments to upgrade, transform, and expand the capacity of sewage treatment plants, and carry out new business models such as project PPP, financing lease, and water fund, in an effort to expand its membrane and product application market. Moreover, it is seeking appropriate M&A targets at home and abroad, in a bid to accelerate its development through investment or M&As. Potential risks: (i) Heavy reliance on government’s fiscal spending, (ii) collection of receivables, (iii) smaller-than-expected orders, and (iv) expiry of lockup on restricted shares. Reiterate “BUY” rating.Given that a) the Company has ample orders in hand and b) that policies are projected to boost thedemand for membrane technology, we lift its 2014/15E EPS to Rmb1.39/1.98 (from Rmb1.35/1.90), and project its 2016E EPS at Rmb2.72. Its last share price implies 2014/15/16E PE of 23/16/12x. Factoring in its high growth of earnings, growing expectations for upgradeoverhaul afterrollout of the pollution control action plan, and the sector’s average valuation, we set its target price at Rmb41.8 (implying 2014E PE of 30x), and reiterate “BUY” rating.

Investment Highlights The Company guided a 220~250% growth in 1Q14E net profit. In the1Q14 earnings guidance, the Company forecast to register Rmb17.86~19.53mn in net profit attributable to shareholders, implying EPS of Rmb0.18-0.19. The EPS grew220-250%YoY, thanks mainly to surging revenue from EMU connectors. In 2013, it logged Rmb225/66.34mn in turnover/net profit (+43%/27% YoY). Accelerated growthin orders will fuel high earnings growth in 2014E.Based onthe Company’s announcement, it has won~Rmb100mn in orders throughout 2013, and Rmb60.36mn worth of orders YTDin 2014, showing accelerated pace in order acquisition. Among its customers,CSR Qingdao Sifang has awarded it many orders for 250/350km/hEMUs in succession. On28Jan 14, the Company became a connector supplier for the CRH5 EMU, railway trains, and urban rail trains of CNRChangchun Railway Vehicles,pointing to accelerating connector localization at CNR. In 2013, China Railway Corporation (CRC) completed two tenders forEMUs, and the Company is one of thelargestcomponents beneficiaries. Business climate of the sector is upbeat. 2014-15E will seea peak for EMUdeliveries, which will keep underpinningthebusiness climate of therailway equipmentsector. At the beginningof 2014,CRC set forth a plan on kicking start Rmb630bn in fixed asset investment and putting6,600km of new railway lines in operation. In our view, along with stead growth of China’srail transitsector,the connector segment boasts high growthpotential. The Company’sshare in the EMU connector market is expected to exceed 25% in 2015Efrom an estimated 15% in 2013. Besides CSR, the Company wasrecently allowed to supply connectors to CRH5 EMUof CNR. Meanwhile, the robust constructionof urban rail transit system across China over thenext five years, and kick-off of intra-cityvehicle(120-140km/h) construction in Wenzhouimply there is a relativelyhuge market in future. Inorganic development isexpected. In addition torail operations, the Company has been smoothly promoting electric vehicleconnectorwith an estimated market share of 20-30% in 2013. With rapid development of domestic electric vehicle market (500k units of electric vehicles in 2015E imply anRmb2.5-3.0bn worth of market for connector manufacturers), the Company is expected to grow rapidly as theonly localconnectorsupplier. Moreover, promotion of wind power connector, communicationsconnector, and other business also go well,and it is expected to get the license for defense connectorproductionin 2014E. As at end-3Q13, cash and cash equivalent of the Company tallied Rmb570mn, and its debt ratio stood at only 6.4%. This will effectively support itsinorganic development and consistent M&As in the future. Watch for theM&Amoves in future. Potential risks.(i) Slower-than-expected delivery of orders for light rails, (ii) decline in consolidated gross margin, and (iii) slower-than-expected progress in businesses other than rail operations. Earnings forecast and valuation. According to the Company’s earnings guidance, we slightly trim its 2013E EPS to Rmb0.65 (from Rmb0.66), and project its 2014/15E EPS to be Rmb0.90/1.18, suggestingaCAGR 38%. As a supplierof core components, it boasts high barriers; and thevisible earnings growth in 2014E will create space for it to expandstrategic presence. We see a likelihood of upward earnings revision in the future. Out of expectations forits horizontal and vertical extension,we reiteratethe“BUY”ratingwith target price of Rmb36(implying 2014E PE of 40x).

The Company logged Rmb170mn in net profit (+77% YoY) and EPS of Rmb0.55 in 2013, meeting market expectations. Thanks to the rapid growth of its JVs (i.e. Shanghai Johnson Controls Automotive Electronics (SJCAE) and Dongfeng Visteon (Wuhan) Automotive Trim Systems), and Rmb40-plus investment gain from transfer of stake in Dongfeng Visteon, the Company logged Rmb170mn in net profit (+77% YoY) and EPS of Rmb0.55 in 2013, falling within the guided range of earnings and in line with market expectations. Its headquarters saw steady development of various businesses, and the gross margin, expense ratios, and other indicators kept stable. The Company’s earnings are forecast to register a high growth of ~40% in 2014E, and auto electronics earnings to represent 30%-plus. The Company mainly manufactures auto meter system, trim system, braking system, fuel supply system products, vehicle body controllers, and other electronics systems. In 2014E, SJCAE is projected to sustain a high growth of 40%-plus, and Dongfeng Visteon to register a rapid growth of 20%-plus. Additionally, transfer of land slot in Zhanjiang is forecast to create revenue of Rmb40-80mn to the Company. Given the above factors, its earnings are forecast to register a high growth of ~40% in 2014E. With constant upgrade in SJCAE’s electronic products and client base structure, high growth of 30%-plus is forecast to be sustained thanks to the growing proportion of automotive electronics. The Company holds a 40% stake in SJCAE, which supplies passenger vehicle meter assembly, HVAC, intelligent key, display, vehicle body electronic control system, and other automotive electronic products mainly to customers such as Dongfeng Peugeot Citroen, Mazda and Ford. In 2013, SJCAE posted Rmb880mn in turnover (Rmb470mn in 2012), and Rmb100mn in net profit (Rmb42.08mn in 2012). The Company is projected to be taken by Dongfeng Motor Group (DMG) as a platform for auto parts resource integration. Based on the development models of HUAYU Automotive Systems of SAIC Motor, Changchun FAWAY Automobile Components and Fawer Automotive Parts of China FAW Group, and other auto parts platforms, the Company is expected to develop into DMG’s platform for auto parts resource integration as the only listed auto part maker under DMG. Currently, the Company’s parts are supplied mainly to Dongfeng Heavy-duty Truck (commercial vehicles) and Dongfeng Peugeot Citroen (passenger vehicles), with a small proportion of products supplied to members within DMG, so there should be a broad potential of rapid growth in future. Potential risks: (i) slower-than-expected development of SJCAE’s electronic products and customers, (ii) decline in market positions of major downstream customers, (iii) heavy-duty truck part business losses arising from bleak commercial vehicle market, and (iv) surging raw materials prices and rising labor cost eroding corporate earnings. Earnings forecast and valuation: given SJCAE’s rapid development, revenue from transfer of Deli land slot in Zhanjiang, among others, we lift the Company’s 2014/15/16E EPS to Rmb0.77/0.78/0.94 (EPS of Rmb0.55 in 2013; from 2014/15E EPS of Rmb0.60/0.60). It is trading at Rmb9.54, implying 2014/15/16E PE of 12/12/10x. Given that over the next three years, its net profit after excluding non-recurring gains and losses is projected to register a CAGR of 30%, and auto electronics business to represent 30%-plus and keep improving, we value the Company at 20x 2014E net profit after excluding non-recurring gains and losses. We set its target price at Rmb12, and upgrade to “OVERWEIGHT” rating.

Investment Highlights Slightly forecast-beating earnings growth. The Company logged Rmb11.1bn/1.1bn in turnover/net profit (+18.8%/29.4% YoY) and EPS of Rmb1.07. Its net profit/EPS after excluding non-recurring gains stood at Rmb1.02bn (+37.5% YoY)/Rmb0.99, respectively, and the operating cash flow per share came in at Rmb0.34. It plans to pay out Rmb3.5 of cash dividend (tax inclusive) for every 10 shares outstanding. The non-recurring gains stemmed mainly from a) government subsidies and b) consolidation of Tesly Diyi Pharmaceutical and Tesly Shente Pharmaceutical. Revenue from pharmaceutical manufacturing business came in at Rmb4.92bn (+25.1% YoY), and related gross margin rose by 0.85ppts YoY to 75%; revenue from health care distribution business hit Rmb6.07bn (+13.3% YoY), and related gross margin increased by 0.35ppts to 5.2%. Its 4Q13 turnover/net profit stood at Rmb3.02bn/ 0.2bn (+6.3%/36.8% YoY), and the gross margin increased by 7.8ppts to 38.3% because that revenue from the higher-margin pharmaceutical manufacturing business grew faster than that from the lower-margin health care distribution business. The parent company registered Rmb3.87bn in turnover (+26.9% YoY) and Rmb830mn in net profit after excluding non-recurring gains/losses (+14.2% YoY); and gross margin slid to 64.3% (-4ppts YoY), mainly due to (i) mounting cost arising from the increase in radix notoginseng/water/electricity/gas prices and labor cost, and (ii) decline in consolidated gross margin as the fast-growing tier-2 products’ gross margin was lower than that of Danshen Drops. In 2013, 11 of the Company’s products (including Xingnaojing Injection) posted sales of more than Rmb100mn, and Compound Danshen Drops posted Rmb2.4bn in revenue (+ ~20% YoY), although its proportion to pharmaceutical manufacturing revenue slid to 49%. Among drugs that have realized more than Rmb100mn in sales revenue, Andrographolide Drops, Dexzopiclone Tablets, Qishen Yiqi Drops, and Yiqi Fumai Power Injection registered a rapid growth. Pharmaceutical subsidiary Tesly Diyi logged Rmb135mn in net profit (+27.4% YoY). Through acquisition of Tiandi Pharmaceutical, the Company got another promising TCM injection, i.e. Xingnaojing Injection. Market competition for Xingnaojing Injection is mild, as only three companies (i.e. Tiandi Pharmaceutical, Jiminkexin and Dali Pharmaceutical) are licensed to produce it. As a drug for stroke and emergency aid, Xingnaojing Injection boasts a wide range of indications and low incidence of adverse reactions. It is expected to be another blockbuster medicine for the cerebrovascular medication system diseases and realize Rmb1bn in sales value in future. (Xingnaojing Injection produced by Jimin Kexin realized retail sales of Rmb1.15bn in 2013). The Company is expected to launch a fresh round of innovative executives incentive scheme. In Oct 09, the Company unveiled the measures for a long-term incentive fund program, under which the executives would be assessed based on a five-year cycle. 2013 was the last year of the said cycle. Going ahead, the Company is expected to launch a new incentive scheme in due time in 2014E, and establish a talent management mechanism and four-in-one talent incentive mechanism, in an effort to enhance the cultivation and incentives for talents. Inorganic M&As are worth expectation. With innovative R&D model, establishment of an integrated R&D system that covers independent R&D, transplanting cooperation and joint development, the Company is expected to improve its R&D efficiency and quicken the pace of product launches. Since its acquisition of Tesly Diyi Pharmaceutical and Tesly Shente Pharmaceutical in 2013, it has acquired such major promising products as Temozolomide (Diqing), Eszopiclone (Dexzopiclone Tablets) and Xingnaojing Injection. In our view, the Company will further acquire new products through inorganic M&As, and accelerate the launch of new products. Potential risks.Impact of slow progress in tendering of provincial medical insurance and essential medicines on the sales of the Company’s new products. Earnings forecast and valuation. We are upbeat on the Company’s long-term rapid earnings growth led by favourable fundamentals and the expected new incentive mechanism. As a representative of the modern Chinese medicine manufacturers, Tasly enjoys notable advantage in product clusters, and its exclusive products and preparations will continue to benefit from new essential medicine policy dividend. The inorganic M&As are expected to beat expectations. Without factoring in inorganic M&As, we forecast its 2014/15/16E net profit to increase by 29%/27%/25% YoY and its EPS to be Rmb1.38/1.75/2.19. Its last share price implies 2014E PE of 29x. Reiterate “BUY” rating

SAIC Motor posted net profit of Rmb24.8bn (+19.5% YoY), equivalent to EPS of Rmb2.25 in 2013, strongly outperforming the market expectations. It realized sales volume of 5.11 units (+13.7% YoY), turnover of Rmb565.8bn (+17.6% YoY), net profit of Rmb24.8bn (+19.5% YoY) and net profit with deduction of the non-recurring gains of Rmb22.8bn (+10.3% YoY) in 2013. Its non-recurring gains mainly included Rmb1.4bn in government subsidies and Rmb800mn from transfer of financial assets. In 4Q13, SAIC Motor posted net profit of Rmb6.8bn (+47.3% YoY), and gross margin of 17.7% (+5.2ppts QoQ), noticeably outstripping the market expectations. The Company proposed to distribute cash dividend of Rmb12 for every 10 shares, implying a dividend yield of 9.4%. The handsome dividend payout issues a positive signal to the market. SAIC Motor plans to distribute cash dividend of Rmb12 for every 10 shares, equivalent to a dividend payout ratio of 53.3% (compared to 16.4% in 2011 and 31.9% in 2012). Relative to the share price of Rmb12.81 at present, it dividend yield is as high as 9.4%, scaling a new high in the Shanghai and Shenzhen stock exchanges over the past two years. In our view, the high dividend yield issues a positive signal to the investors. In addition, given its stable market position and abundant cash flows, we project the handsome dividend payout to continue in the future The e-commerce platform is officially put into operation on 28 March, indicating the Company is actively exploring the new business model. This will fuel increase in the stock’s valuation. Against the increasing online shopping habit of consumers, SAIC Motor officially launches the e-commerce platform “chexiang.com” on 28 March. This is not directed at overthrowing the existing distribution channels. Instead, it hopes to attract the customer traffic by providing individualized services (such as auto customization) through the online platform, and guide the online customers to the offline channels to build the O2O business model and form a virtuous cycle. The e-commerce platform is forecast to help upgrade the Company’s brand and valuation. SAIC Motor will usher in a new round of product launch cycle in 2015. This will warrant its earnings growth. Shanghai Volkswagen and Shanghai GM are the Company’s main sources of profit. Shanghai Volkswagen is expected to roll out the A+ class sedan, B-class SUV and c-class sedan to extend the high growth, while Shanghai GM is expected to roll out A class SUV, Cadillac ATS, new-generation Regal and new-generation Lacrosse to further improve its product mix and underpin the earnings growth in the future. We forecast the Company’s 2014/15 sales volume CAGR to surpass 10% and its net profit growth to surpass the sales volume growth. Potential risks: disappointing sales volume due to slowdown in macro economy; weak receiving of the new models, widening loss of the local brand operation and impact of new auto purchase bans. Earnings forecast and valuation: given the stronger-than-expected annual results, we raise its 2014/15/16E EPS to Rmb2.48/2.86/3.24 (vs 2013 EPS of Rmb2.25, the former forecast of 2014/15E EPS was Rmb2.37/2.76). Its current share price (Rmb12.81) equals to 5x/4x/4x 2014/15/16E PE. As a leader in the domestic auto sector, the SAIC Motor maintained a dividend yield as high as 9%-plus in 2013, and it is actively testing the e-commerce and alternative energy vehicle business. Based on valuation of the auto sector, we value the Company at 8x prospective 2014E PE. Maintain the BUY rating with TP at Rmb19.

The Company reported 2013 net income of Rmb1.82bn (+17.6%YoY), equivalent to EPS of Rmb1.43, which beats market consensus expectations. In 2013, the Company sold a total of 56k vehicles (+8.5% YoY) to rake in turnover of Rmb22.1bn (+11.8%YoY), out of which net income stands at Rmb1.82bn (+17.6%YoY) and EBITDA net income at Rmb2.67 (+32.5% YoY). Its 4Q13 net income came in at Rmb920mn (+59% YoY), beating consensus expectations, which is mainly due to the following two reasons. 1) Recovery of Rmb800mn in advance for land slot and writeback of Rmb260mn in bad debt provision; 2) Delivery of alternative coache and that of export orders coincided so that its selling price per unit and profit were boosted noticeably. Coach segment grew steadily and alternative energy coach enters fast-growth period with its 2014/15E output and sales volume growth rate approaching 100%. Sales volume of coaches posted low growth rate for two straight years as demand for long-distance passenger transportation via high-way diminishes due to diversion by high-speed railway. Given low base of coaches with seats, public bus entering the growth period etc., we forecast that CAGR of medium and large coach market will maintain at ~9% in 2014/15E and the increment will mainly stem from alternative energy bus, export and school bus etc. Over next two years, a total of over 300k units of alternative energy vehicles will be extended, among which alternative energy coaches will tally 80k-100k units. Given efforts in implementing this policy etc., we forecast that the sales volume of alternative energy vehicles in 2013/14/15E will come in at 10k/20k/40k units. As the leading maker of alternative energy coach, the Company commands solid market position and its profit margin is expected to further rise. Boasting noticeably comprehensive advantages in the field of alternative energy coach, the Company sold a total of 3,897 alternative energy coaches in 2013 (+118%YoY) with its market share at nearly 40%. The Company has adequate capacity and products (Plug-in Hybrid coach, pure electric coach and conventional hybrid coach) full in the pipeline so that it is expected to maintain its leading position in market. We project that the Company’s sales volume will come in at 8k/15k units in 2014/15E and alternative energy autos as a percent of its total sales volume is expected to rise to nearly 20% from 7% with ASPs and profitability being enhanced continually. Injection of auto part assets will be conducive to enhancing the Company’s profitability. Yutong Group, controlling shareholder of the Company’s has committed to finish injecting auto part assets into the Company by the end of 2014. The Group’s part businesses such as dashboard, luggage rack, sponge and plastics, wiring harness, coach air-con etc. boast desirable profitability with their gross margins maintain above 20%, which is higher than the Company’s gross margin for now. The aforesaid auto part assets are projected to enhance the Company’s profitability after being injected into it, which is conducive to pickup of the Company’s profit growth rate. Potential risks: Macro downturn causes demand for medium- and large coaches to come in less than expected; efforts to implement alternative energy coach policies fall short of expectations and slow delivery of alternative energy coaches causes the Company to report worse than expected 1Q14E EPS. Earnings forecast and valuation. Given its better than expected 2013 results and proportion of alternative energy coach sales volume to rise over next two years, we lift the Company’s 2014/15/16E EPS to Rmb1.71/2.07 /2.49 (2013A EPS at Rmb1.43). Its last price of Rmb15.47 is equivalent to 2014/15/16E PE of 9/7/6x. As the leading player in the medium and large coaches segment, the Company commands solid position and benefits from faster phase-out of heavily-polluting vehicles, accelerated extension of alternative energy bus and other environment protection policies. Given valuation of auto sector, we believe that 15x 2014E PE fair for the Company and reiterate BUY with its target price at Rmb25 per share.

Focusing on pickup, SUV and sedan, the Company is dedicated to becoming a world-class auto maker. The Company sold 770k autos in 2013 (+24%) to register Rmb56.8bn in turnover (+32%) and Rmb8.2bn in net profit (+44%). Its selling price per vehicle and profit per vehicle have been going on rising. Looking ahead, the Company will focus on pickup, SUV and sedan and devote itself to becoming a world-class auto maker by attracting talents, delivering leading quality, innovating technologically, outstanding management, integrating supply chains and international-standard oriented operation and boosting its brand value on advantages in product categories. We forecast that the Company will maintain 20% growth in sales volume and 30% rise in earnings p. a. over next two years. H8 is projected to be launched in Apr 2014 and the Company is experiencing the production uphill better than expected. The Company announced on Jan 14th 2014 to postpone launch of H8 by three months for further improvement so as to deliver better quality. We project that H8 will be launched formally in Apr 2014. Given the training for personnel of its Xushui Plant and meticulous preparation for manufacturing, we reckon that the Company is expected to experience its production uphill better than expected. H8 is the first high-performance SUV in the mid- to high-end market after the Haval brand started standing on its own and its stable monthly sales volume is projected to be over 5k units given Haval’s good reputation and extensive client base. H2 is projected to be launched in 2H14E andO2O marketing (online order-placing) is projected to be adopted to market a portion of this product. As the SUV model that the Company develops out of scratch, H2 is projected to be equipped with an engine of 1.5T to combine strong power and fuel efficiency perfectly. Given that buyers will be younger, their needs are more individualized and internet market, online order placing is projected to be adopted for a portion of H2. We forecast that the selling price of H2 will fall within the range of Rmb90k-Rmb110k. Given the range of selling price and marketing mode, we project that stable monthly sales volume of H2 is forecast to be over 10k units, being one of the major drivers for its sales volume growth going forward. The Company is projected to launch automatic H6 model that is equipped with 6AT and the product’s capacity is expected to rise to 30k units per month. Since 2011 when H6 was launched, this model has been in undersupply and buyers still have to wait for a period of time even for now when its monthly output has already been nearly 25k units. Furthermore, the Company has been raising its selling price continually through upgrade or revamping. At present, Sport H6’s sales volume has already took up over 50% of H6’s total. The Company is projected to launch the automatic H6 model that is equipped with 6AT, which is conducive to further raising its sales volume and selling price per vehicle. As for capacity, thanks to capacity adjustment of its second plant in Tianjin, the Company’s monthly H6 output is expected to rise to 30k units in 2H14E. Potential risks: H8, H2 and other new models see worse than expected acceptance after being launched so that their sales volumes miss expectations. Economical SUV segment witnesses intensifying competition, which undermines the Company’s profitability. Continually declining output and sales volume of sedan cars drags down the Company’s earnings. Earnings forecast, valuation and investment rating: We forecast the Company’s 2014/15/16E EPS to be Rmb3.67/4.77/5.75 (2013A EPS at Rmb2.70). If sales volume of H8 and H2 climbs fast, the Company may deliver better than expected earnings. Trading at Rmb31.30 per share, the Company sees its 2014/15/16E PE stands at 9/7/5x. We believe that the Company is the best local brand auto maker and project that 1Q14E will see the low in its growth throughout 2014E. The Company is to launch H8 in Apr as scheduled. If it is well-received in market, sales volume of H8 will open up the space for the Company’s long term growth. To be launched in 2Q14E, H2 will be one of its major sources of profit growth in future. The automatic H6 model will be launched in 2H14E so that its monthly sales volume will increase to 30k units. Given the average valuation level of auto sector and the Company’s earnings growth rate, we believe 14-15x 2014E PE is fair for the Company. Reiterate BUY rating with the target price at Rmb52 per share.

Thanks to China’s 4G network construction and national network security strategy, the Company’s earnings are expected to sustain a rapid growth in 2014-16E. With the rapid growth in mobile Internet traffic, construction of 4G base stations and supporting networks will keep growing for three straight years. In the domestic market, the Company has transformed from an “expansion” period into a “harvest” period. The launch of the national network security strategy will drive operators, government departments, enterprises and public institutions to tilt toward Chinese standards and manufacturers in network equipment and IT software procurement, and the Company is expected to gain more business growth in integrated applications such as government/enterprise network market and “smart city”. We thus project that its earnings will keep growing during 2014-16E. Notable improvement in overseas operation. While maintaining a rapid growth in terminal sales in Europe and the US, the Company has launched 4G business in Southeast Asia, one of the overseas markets where it is better positioned, providing strong support to its overseas business rally; its operation in Africa is about to enter a harvest period again, which is conducive to narrowing its losses. Transformation strategy gets started: the Company takes advantage of its abundant technology accumulation to make increased efforts in such fields as smart city, industrial informatization, and alternative energy, and has expressly put forward its development goal of “building another ZTE”. Among China’s integrated hardware/software R&D technology companies, the Company ranks among the top 5 in terms of its scale and comprehensive ability. It boasts profound accumulation in such technological fields as self-developed OS, memory database, chip, network equipment, software application development, mobile terminal and energy management. Under the orientation of national independent and controllable development, the Company has started to take advantage of its various resources to develop in a variety of patterns in the emerging sectors. It has made increased efforts in the development of a number of fields including IDC synergetic operation, virtual operator, smart TV game, overseas e-commerce platform, and alternative energy management, and has expressly put forward a strategic goal of “building another ZTE”. The Company’s long-term value is underestimated, and its clear-cut strategy and organizational structure adjustment will improve operation efficiency. The Company is a top player by international intellectual property rights it has accumulated for years,and also boasts a leading position in terms of its independent innovation at home, which serves as noticeable check and balance against industrial leaders, and boasts a solid position and noticeable long-term value. At end-2013, it carried out overall organizational structure adjustment and executives reshuffle, elevated its government/enterprise as an independent business division, improved mobile phone R&D and business procedures, and isolated operator customized terminal business and distribution channels to mobilize internal resources and dynamics. Its government/enterprise network and mobile terminal operations are expected to pick up significantly to become the power house for its long-term growth. The Company’s 1Q14E earnings are projected to surge YoY, and operators’ disclosure of their capex plans and the Company’s progress in the emerging fields will become catalysts for its share price in the near term. 4G network construction project in 2013 was postponed till early 2014, which is projected to drive the Company’s 1Q14E earnings to surge YoY. It progress in such emerging fields as alternative energy, smart city, IDC collaborative operation, virtual operation, and game cooperation will be gradually materialized, which will become catalysts for its development. Potential risks: (i) domestic operators’ smaller-than-expected capex on 4G network, (ii) limited improvement in the Company’s mobile phone/overseas businesses, and (iii) slow development in the emerging fields. Earnings forecast, valuation, and investment rating. Given that the Company is operating in a period of earnings reversal, its earnings will improve gradually, and its development in the emerging sectors will gradually reflect its long-term track record technologically and strategic value. We lift its 2013/14/15E EPS to Rmb0.41/0.88/1.1 (from Rmb0.41/0.85/1.00). Factoring in its clear orientation for strategic transformation and gradual improvement in its earnings, we raise its target price to Rmb20 per share (implying 2013/14/15E PE of 49/23/18x), and reiterate “BUY” rating.