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China Consumer Discretionary
Investment case: We initiate coverage of China Harmony New Energy
Auto (Harmony), China’s largest autos dealer with an independent after-
sales network, with a Buy (1) rating. We are positive on the prospects for
the company’s independent after-sales outlets, at which services are not
restricted to a single brand, unlike its 4S (sales, spare parts, service and
survey) stores, which cater only to 1 brand. After rapid expansion in its
independent outlets, we forecast Harmony’s after-sales service revenue to
rise by 35% YoY and contribute 69% of gross profit in 2016. Also, we look
for Harmony to benefit from better BMW sales (75%-plus of revenue) in
2016. Longer term, we think Harmony’s fledgling electric vehicle (EV)
business stands to benefit from its cooperation with Hon Hai Precision
(2317 TT, TWD82.50, Hold [3]) and Tencent (700 HK, HKD152.30, Buy [1]).
Catalysts: Accelerating earnings growth. We expect Harmony’s
expansion of its independent after-sales outlets over the past 2 years,
together with ongoing growth in its after-sales service revenue from 4S
outlets, to underpin an acceleration in net-profit growth from 14% YoY for
2015E to 28% YoY for 2017E. On our forecasts, gross profit from its after-
sales service business will increase by 36-39% YoY in 2016-17E.
Recovery in BMW sales to support new-car sales. We forecast BMW
sales volume in China (including BMW Brilliance and imports) to expand by
8% YoY for 2016E, backed by the late-2015 launch of the facelifted 3-
series, the new China-produced 2-series sedan and X1 SUV, and imports
of the new 5-series and facelifted 4-series. At the same time, we expect
BMW to boost its rebates slightly in 2016 to incentivise dealers.
Launch of new EV model. Harmony’s 44%-held Green Field Motor plans
to launch a low-end CUV by end-2016. Given its likely use of better battery
technology, we believe the new model will post higher sales than Green
Field’s e-X5, which should increase confidence in Harmony’s longer-term
EV plans.
Valuation: The stock is trading at a 2016E PER of 7.4x, in line with its
peers. However, with a rising proportion of gross profit derived from after-
sales services, as well as its EV development in conjunction with Tencent
and Hon Hai, we believe the stock should trade at a premium to its peers.
We initiate with a Buy (1) and SOTP-based 12-month TP of HKD5.50. On
2016-17E EPS, we are 15-16% below the Bloomberg consensus, likely due
to our inclusion of the dilution impact of a share issuance in 2015.
Risks: The key risks to our call are lower-than-expected new-car sales
growth and after-sales service revenue growth.
18 March 2016
China H armony N ew Energ y Auto
Initiation: independent after-sales outlets drive growth
We are upbeat on Harmony’s independent after-sales network
Alliance with Tencent and Hon Hai should help it penetrate EV market
Initiating coverage with Buy (1) rating and TP of HKD5.50
Source: FactSet, Daiwa forecasts
China Harmony New Energy Auto (3836 HK)
Target price: HKD5.50
Share price (17 Mar): HKD3.85 | Up/downside: +42.8%
Kelvin Lau(852) 2848 4467
Brian Lam(852) 2532 4341
60
86
113
139
165
3
5
7
9
11
Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
Share price performance
Harmony (LHS) Relative to HSI (RHS)
(HKD) (%)
12-month range 3.11-11.00
Market cap (USDbn) 0.78
3m avg daily turnover (USDm) 2.88
Shares outstanding (m) 1,576
Major shareholder Chairman Feng Changge (43.3%)
Financial summary (CNY)
Year to 31 Dec 15E 16E 17E
Revenue (m) 10,707 11,505 12,568
Operating profit (m) 908 1,026 1,259
Net profit (m) 577 689 880
Core EPS (fully-diluted) 0.435 0.437 0.559
EPS change (%) (6.3) 0.4 27.8
Daiwa vs Cons. EPS (%) 2.2 (15.3) (16.0)
PER (x) 7.4 7.4 5.8
Dividend yield (%) 3.2 3.8 4.9
DPS 0.103 0.122 0.156
PBR (x) 0.9 0.8 0.7
EV/EBITDA (x) 4.1 3.4 2.5
ROE (%) 13.5 11.3 13.1
2
China Harmony New Energy Auto (3836 HK): 18 March 2016
Table of contents
After-sales service business: fork in the road ....................................................... 6
Independent after-sales network to drive earnings growth .................................................6
A year of recovery for new-car sales .....................................................................12
BMW sales poised to recover in 2016 .............................................................................. 12
Bargaining power turning in favour of the dealers ............................................................ 13
Riding on future EV development in China ...........................................................15
Strong alliance with Tencent and Hon Hai ....................................................................... 15
Financial analysis ....................................................................................................20
Solid balance sheet looking good compared to peers ...................................................... 20
Margin to start improving from 2015 ................................................................................. 20
Net profit more sensitive to changes in after-sales service than new-car sales ................ 21
Improving payout and DPS going forward ........................................................................ 22
Valuation and recommendation .............................................................................23
Merits a valuation premium and rerating .......................................................................... 23
Risks to our call ............................................................................................................... 24
Company background .............................................................................................26
An auto dealer at the transformation stage ...................................................................... 26
3
China Harmony New Energy Auto (3836 HK): 18 March 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Harmony: net profit and net profit growth
We estimate Harmony’s 2015E net profit expanded by 14%
YoY, with a likely drop in its new-car sales margin partly
offsetting an increased contribution from after-sales
services. For 2016-17E, we forecast its net profit growth to
accelerate to 19-28% YoY as more of its independent after-
sales outlets commence operations (up from 120 at end-
2015 to 240 stores by end-2016E).
Meanwhile, Green Field Motor’s cross utility vehicle (CUV)
model, which is planned to be launched by end-2016, is
likely to record a minor net loss in the first year (2017)
before breaking even at the net-profit level in 2018E.
Source: Company, Daiwa forecasts
Valuation Harmony: 12-month forward PER (since IPO)
The stock is trading currently at a 2016E PER of 7.4x, on
our forecasts, in line with its peers and its average PER of
7.4x since listing in 2013, based on the Bloomberg
consensus. However, considering our expectation of an
increasing gross-profit contribution from after-sales service
through the company’s independent after-sales outlets, as
well as its cooperation with Hon Hai and Tencent on EV
development, we contend that Harmony merits a valuation
premium to its historical average and peers.
Source: Bloomberg, Daiwa forecasts
Earnings revisions Harmony: consensus 2015-16E EPS revisions
The Bloomberg-consensus forecasts of 2015-16E EPS
started to be revised down in April 2015, likely due to the
slowdown in China passenger vehicle (PV) sales.
Our 2016-17E EPS are 15-16% below those of the market,
likely as we include the dilution impact of the share
issuance undertaken in 2015. Also, we note that as the
consensus estimates incorporate the forecasts of only 5
analysts, they are prone to distortion by outliers.
Source: Bloomberg
113
220
351404
505577
689
88096%
59%
15%25%
14%19%
28%
0%
20%
40%
60%
80%
100%
120%
0
200
400
600
800
1,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
Net profit (LHS) YoY Growth (RHS)
(CNYm)
2
7
12
17
22
Jul-1
3
Sep
-13
Nov
-13
Jan-
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Mar
-14
May
-14
Jul-1
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Sep
-14
Nov
-14
Jan-
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Mar
-15
May
-15
Jul-1
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Sep
-15
Nov
-15
Jan-
16
PER +1 SD Average PER -1 SD
(PER)
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
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Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
(CNY)
2015E 2016E
4
China Harmony New Energy Auto (3836 HK): 18 March 2016
Financial summary
Key assumptions
Profit and loss (CNYm)
Cash flow (CNYm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
New PV sales volume (unit) 3,026 5,086 10,873 15,948 20,308 23,312 25,911 28,194
4S Dealership outlets (unit) 6 9 22 34 46 46 46 46
Comprehensive after-sales service
oulets (unit)0 0 0 5 24 120 240 360
New PV sales gross margin (%) 9.8 11.4 9.2 8.7 5.8 5.3 4.8 4.3
After-sales service gross margin (%) 39.6 37.6 44.0 45.9 45.8 45.7 45.8 46.0
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sales of new PV 1,617 2,753 5,244 7,610 8,947 9,087 9,311 9,540
After-sales services 185 279 412 723 1,249 1,620 2,194 3,028
Other Revenue 0 0 0 (0) (0) 0 0 0
Total Revenue 1,801 3,032 5,657 8,333 10,196 10,707 11,505 12,568
Other income 22 76 228 265 412 426 454 514
COGS (1,570) (2,614) (4,993) (7,336) (9,107) (9,485) (10,053) (10,765)
SG&A (83) (137) (309) (544) (640) (740) (880) (1,058)
Other op.expenses 0 0 0 0 0 0 0 0
Operating profit 170 357 583 718 861 908 1,026 1,259
Net-interest inc./(exp.) (18) (59) (108) (156) (140) (135) (103) (74)
Assoc/forex/extraord./others 0 0 0 1 5 0 0 (4)
Pre-tax profit 152 297 475 562 726 773 923 1,181
Tax (39) (77) (125) (155) (181) (192) (230) (295)
Min. int./pref. div./others 0 0 0 (3) (1) (4) (5) (6)
Net profit (reported) 113 220 351 404 544 577 689 880
Net profit (adjusted) 113 220 351 404 505 577 689 880
EPS (reported)(CNY) 0.141 0.276 0.439 0.424 0.506 0.435 0.437 0.559
EPS (adjusted)(CNY) 0.141 0.276 0.439 0.424 0.470 0.435 0.437 0.559
EPS (adjusted fully-diluted)(CNY) 0.141 0.276 0.439 0.424 0.465 0.435 0.437 0.559
DPS (CNY) 0.000 0.000 0.000 0.071 0.095 0.103 0.122 0.156
EBIT 170 357 583 718 861 908 1,026 1,259
EBITDA 180 373 621 793 972 1,053 1,207 1,474
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Profit before tax 152 297 475 562 726 773 923 1,181
Depreciation and amortisation 9 16 38 75 111 145 180 215
Tax paid (3) (4) (3) (72) (32) (192) (230) (295)
Change in working capital (66) (222) (381) (418) (528) 164 (43) (54)
Other operational CF items 5 5 (38) 113 86 199 171 155
Cash flow from operations 97 93 91 261 362 1,089 1,003 1,202
Capex (57) (175) (878) (668) (1,029) (630) (400) (400)
Net (acquisitions)/disposals 0 (77) (235) 36 64 (400) (325) (325)
Other investing CF items (197) (631) (89) (819) 524 670 0 0
Cash flow from investing (253) (883) (1,202) (1,451) (441) (360) (725) (725)
Change in debt 189 464 1,208 653 411 (500) (300) (300)
Net share issues/(repurchases) 0 0 0 1,320 0 2,651 0 0
Dividends paid 0 0 0 0 (67) (102) (162) (193)
Other financing CF items 42 312 66 (342) (218) (199) (171) (151)
Cash flow from financing 231 776 1,274 1,630 126 1,850 (633) (644)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash 75 (14) 163 440 47 2,578 (355) (166)
Free cash flow 40 (82) (787) (408) (666) 459 603 802
5
China Harmony New Energy Auto (3836 HK): 18 March 2016
Financial summary continued …
Balance sheet (CNYm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Cash & short-term investment 203 193 360 1,964 1,911 3,819 3,463 3,297
Inventory 160 334 711 1,527 1,487 1,555 1,648 1,765
Accounts receivable 12 17 59 117 74 78 83 91
Other current assets 811 1,947 2,033 2,133 2,010 1,883 1,994 2,143
Total current assets 1,187 2,490 3,162 5,741 5,481 7,334 7,189 7,296
Fixed assets 131 311 1,150 1,722 2,601 3,087 3,307 3,493
Goodwill & intangibles 9 22 33 109 87 86 85 84
Other non-current assets 17 27 30 37 51 451 776 1,097
Total assets 1,343 2,850 4,375 7,609 8,219 10,957 11,357 11,970
Short-term debt 808 1,574 2,585 3,985 3,776 3,307 3,054 2,813
Accounts payable 6 7 11 51 130 136 144 154
Other current liabilities 190 410 882 1,275 1,448 1,520 1,634 1,785
Total current liabilities 1,003 1,992 3,478 5,311 5,354 4,963 4,832 4,751
Long-term debt 0 0 290 48 102 102 102 102
Other non-current liabilities 0 0 5 12 16 16 16 16
Total liabilities 1,003 1,992 3,773 5,372 5,473 5,082 4,950 4,870
Share capital 0 0 0 9 9 12 12 12
Reserves/R.E./others 340 853 589 2,212 2,718 5,839 6,366 7,054
Shareholders' equity 340 853 589 2,221 2,726 5,852 6,379 7,066
Minority interests 0 5 13 16 20 23 28 34
Total equity & liabilities 1,343 2,850 4,375 7,609 8,219 10,957 11,357 11,970
EV 5,683 6,459 7,600 7,157 7,055 4,282 4,063 3,673
Net debt/(cash) 604 1,381 2,515 2,069 1,968 (409) (307) (382)
BVPS (CNY) 0.425 1.067 0.736 2.332 2.536 3.714 4.048 4.485
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sales (YoY) n.a. 68.3 86.6 47.3 22.4 5.0 7.5 9.2
EBITDA (YoY) n.a. 107.5 66.6 27.7 22.6 8.3 14.6 22.2
Operating profit (YoY) n.a. 109.4 63.5 23.1 20.0 5.4 13.0 22.7
Net profit (YoY) n.a. 95.6 59.1 15.2 25.0 14.3 19.4 27.8
Core EPS (fully-diluted) (YoY) n.a. 95.6 59.1 (3.3) 9.6 (6.3) 0.4 27.8
Gross-profit margin 12.8 13.8 11.7 12.0 10.7 11.4 12.6 14.3
EBITDA margin 10.0 12.3 11.0 9.5 9.5 9.8 10.5 11.7
Operating-profit margin 9.5 11.8 10.3 8.6 8.4 8.5 8.9 10.0
Net profit margin 6.3 7.3 6.2 4.8 5.0 5.4 6.0 7.0
ROAE 66.3 37.0 48.7 28.8 20.4 13.5 11.3 13.1
ROAA 16.8 10.5 9.7 6.7 6.4 6.0 6.2 7.5
ROCE 29.7 19.9 19.7 14.7 13.4 11.4 10.9 12.9
ROIC 13.4 16.6 16.1 14.0 14.3 13.4 13.3 14.7
Net debt to equity 177.8 161.9 427.1 93.2 72.2 net cash net cash net cash
Effective tax rate 25.8 25.9 26.2 27.6 24.9 24.9 24.9 25.0
Accounts receivable (days) 1.2 1.7 2.4 3.9 3.4 2.6 2.6 2.5
Current ratio (x) 1.2 1.3 0.9 1.1 1.0 1.5 1.5 1.5
Net interest cover (x) 9.2 6.0 5.4 4.6 6.2 6.7 9.9 16.9
Net dividend payout 0.0 0.0 0.0 16.6 18.8 23.6 28.0 28.0
Free cash flow yield 0.8 n.a. n.a. n.a. n.a. 9.0 11.9 15.8
Company profile
China Harmony New Energy Auto is an auto dealer focusing on luxury and ultra-luxury vehicles. It has
a sales network covering more than 20 cities, mainly in Central China and tier-1 cities. It also has an
independent network of 120 stores (as at end-2015) targeting the luxury vehicle after-sales market.
Following its acquisition of an 87.57% stake in Green Field Motor and formation of a JV with Hon Hai
Precision and Tencent, Harmony is seeking to enter the green car manufacturing business.
6
China Harmony New Energy Auto (3836 HK): 18 March 2016
After-sales service business: fork in the road
Independent after-sales network to drive earnings growth
Burgeoning after-sales market
We believe the China auto dealers’ earnings will be increasingly driven by after-sales
services, mirroring the experience of developed markets such as the US. As a result, their
revenue-growth trends should become more sustainable, even during times of stress in the
macro economy, as the gross margin on after-sales services is much higher than on new-
car sales (46% for the China dealers in 2015, on our estimates, vs. around 5% on their
new-car sales).
In terms of the gross margin on new-car sales, we expect the trend for the China auto
dealers as a whole to follow that of their US counterparts, with margins remaining
sustainable over the next 3 years (ie, 2016-18). While the China players’ new-car gross
margins currently lag their US equivalents’ (c4% for the China players vs c5% for the US
players), we believe that in time the 2 will converge to around 5%.
Alongside the ongoing rise in demand for after-sales services in China, Harmony appears
well-positioned with its vast network of independent after-sales outlets, which should lead
to the company’s net profit growth outpacing that of its domestic peers over the next 5
years. Overall, we forecast Harmony’s after-sales service revenue to increase by 35-38%
YoY for 2016-17E (after-sales service revenue expanding by 15% YoY from its 4S outlets
and 70-80% YoY from its independent after-sales network), compared with revenue growth
of just 3% YoY on new-car sales for both 2016E and 2017E, on our forecasts.
Harmony: revenue from new-car sales Harmony: revenue from after-sales services
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
US dealers: sum of total US-listed dealers’ revenue from new-car sales vs. after sales
US dealers: sum of total US-listed dealers’ gross margin from new-car sales vs. after sales
Source: Companies Source: Companies
0%
10%
20%
30%
40%
50%
0
2,000
4,000
6,000
8,000
10,000
12,000
2013 2014 2015E 2016E 2017E
Harmony's revenue from new car sales YoY Growth
(CNY m) (YoY %)
20%
30%
40%
50%
60%
70%
80%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2013 2014 2015E 2016E 2017E
Harmony's revenue from after sales services YoY Growth
(CNY m) (YoY %)
(25%)
(15%)
(5%)
5%
15%
25%
0
10,000
20,000
30,000
40,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Rev from new car sales (LHS) Rev from service (LHS)
Rev from new car sales, YoY Rev from service, YoY
(Revenue, USD m) (YoY % )
(25%)
(15%)
(5%)
5%
15%
25%
0
1,000
2,000
3,000
4,000
5,000
6,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
GP from new car sa les (LHS) GP from service (LHS)GP from new car sa les, YoY GP from service, YoY
(Gross profit, USDm) (YoY % )
More promising outlook
for Harmony’s after-
sales service business
than its new-car sales in
the next few years
7
China Harmony New Energy Auto (3836 HK): 18 March 2016
China dealers vs. US dealers: gross margin on new-car sales China dealers vs. US dealers: gross margin on after sales service
Source: Companies Note: *1H15 for China dealers, FY15 for US dealers
Source: Companies Note: *1H15 for China dealers, FY15 for US dealers
We are positive on the independent after-sales service outlets
Further expansion under way in 2016
At the end of 2015, Harmony had 120 independent after-sales service outlets, of which 45
were anchor outlets (which are bigger and offer more comprehensive services) and 75
were satellite outlets (small shops). In 2016 alone, the company targets to bring on stream
another 120 outlets (around 10-20 anchor outlets and 100-110 satellite outlets). The
company ultimately aims to achieve full coverage of all its business segments, including
car sales, maintenance and repair, financing and insurance service, at its anchor outlets
(some of which are not yet fully operational).
Moreover, all of the company’s existing anchor and satellite outlets are self-owned, though
in the future Harmony is open to partnerships or franchising of its satellite outlets, leading
to a scenario where the self-owned satellite outlets will offer maintenance and repair
services, auto detailing, and accessories sales, whereas the franchised satellite outlets will
mainly offer quick maintenance services.
On our estimates, the capex requirements for anchor outlets are CNY4-5m per outlet,
compared with CNY300,000-400,000 per satellite outlet (and CNY50-100m per 4S store).
Hence, we forecast Harmony’s capex on new independent after-sales outlets in 2016 will
be around CNY125m. More broadly, we expect its overall capex this year to total
CNY400m (with the remaining CNY275m being spent on renovating its 4S stores) down
from the CNY630m it spent in 2015, as it does not plan to add any more expensive 4S
outlets in 2016 or 2017.
3%
4%
5%
6%
7%
8%
9%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
*1H
15 o
r F
Y15
China dealers - New car sales gross margin
US dealers - New car sales gross margin
(Gross Margin)
30%
35%
40%
45%
50%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
*1H
15 o
r F
Y15
China dealers - After service gross margin
US dealers - After service gross margin
(Gross Margin)
Rapid expansion in the
number of independent
after-sales outlets in
2016E
We forecast CNY125m
will be spent on new
independent after-sales
outlets this year
8
China Harmony New Energy Auto (3836 HK): 18 March 2016
Harmony: future structure of independent after-sales service outlet network
Source: Company
Harmony: independent after-sales service network strategy
Category Details
Target markets - Mid-range and high-end customers
- Starts by targeting communities in nearby suburbs, then gradually covers the surrounding 5km or even larger area
Future strategy for site selection
- The surrounding area needs to have more than 500 target vehicles and more than 1,000 households
- The outlets should be close to the entry/exit of the targeted communities or the main entrance of parking lots
- Diversified ownership: self-owned, partnerships with car wash shops and parking lots, acquisition of small repair
shops
Mode of cooperation - Explores possible cooperation with auto decoration and detailing shops within 10km
- These outlets provide Harmony with a workshop in return for a split of revenue
Source: Company
Harmony: number of outlets
2010 2011 2012 2013 2014 2015E 2016E 2017E
4S stores 6 9 22 34 46 46 46 46
After-sales service outlets
43 120 240 360
- Anchor outlets
45 60 80
- Satellite outlets
75 180 280
Source: Company, Daiwa forecasts
Harmony: anchor outlet in Shanghai Harmony: anchor outlet in Shanghai
Source: Daiwa Source: Daiwa
Anchor Outlets
Satellite
outlet
Satellite outlet
Satellite outlet
Satellite
outlet
Satellite
outlet
Satellite outlet
Satellite outlet
Satellite
outlet
Satellite outlet
Self-owned
outlet
9
China Harmony New Energy Auto (3836 HK): 18 March 2016
Harmony: satellite outlet in Shanghai Harmony: satellite outlet in Shanghai
Source: Daiwa Source: Daiwa
Margin-enhancement opportunity
Although Harmony’s independent after-sales outlets collectively had a gross margin of
44% for 1H15, we expect the margin to improve to around 46% by 2017, which would be
comparable to the gross margin for its 4S shops, as sales start to ramp up in 2016-17 after
the rapid expansion undertaken in 2015-16.
We estimate Harmony’s independent after-sales outlets’ gross margin in 2015 was at the
lower end of its China peers’ range of 45-48%, due to the start-up costs it incurred from the
opening of its 120 independent outlets (see chart below). However, on a long-term view,
we believe the gross margin of the company’s independent after-sales outlets will likely
converge with that of its 4S shops, given there are no restrictions on the company
importing components from OEMs, thereby allowing it to source components at relatively
low cost.
Also, the investment requirements for anchor outlets and satellite outlets are much lower
than that for 4S shops, and therefore the capex needed to extend the company’s network
going forward will be much less than it has been in the past.
China auto dealers: gross margin on new-car sales China auto dealers: gross margin on after-sales service
Source: Companies Source: Companies
0%
2%
4%
6%
8%
10%
12%
0%
2%
4%
6%
8%
10%
12%
2010 2011 2012 2013 2014 2015-1H
Harmony Zhengtong BaoxinZhongsheng Yonda
(New car sales gross margin %)
35%
37%
39%
41%
43%
45%
47%
49%
35%
37%
39%
41%
43%
45%
47%
49%
2010 2011 2012 2013 2014 2015-1H
Harmony Zhengtong BaoxinZhongsheng Yonda
(After sales service gross margin %)
We foresee gross-
margin expansion for
Harmony’s independent
outlets in 2016-17
10
China Harmony New Energy Auto (3836 HK): 18 March 2016
Harmony: after-sales revenue from 4S stores Harmony: after-sales revenue from independent outlets
Source: Daiwa forecasts Source: Daiwa forecasts
Harmony: gross-margin comparison of after-sales service from 4S stores and comprehensive service outlets
Source: Company, Daiwa forecasts
Well-placed to adopt an O2O model in the future
On 2 November 2015, Harmony announced it had entered into a strategic agreement with
Alibaba Automobile, the Internet automobile platform of Alibaba Group (BABA US,
USD73.50, Buy [1]). Under their cooperation agreement, the companies formed a JV,
Harmony-Alibaba Automobile Car Port, to provide new-car sales, after-sales maintenance
service and financing. This JV provides a new revenue source for Harmony and will help
the company to get access to Alibaba’s online platform.
Compared with other cooperation between online platforms (such as BitAuto and
Autohome [both not rated]) and offline dealers (such as Zhengtong and Zhongsheng [all
not rated]), we consider the alliance between Harmony and Alibaba (and even Harmony’s
potential tie-up with other online platforms in the future) to have strong prospects given
Harmony’s vast independent after-sales network covering a large area and its lower capex
needs going forward, as anchor and satellite outlets are much less costly to set up than 4S
shops (CNY4-5m per anchor outlet, vs. CNY300,000-400,000 per satellite outlet and
CNY50-100m per 4S shop), which must meet the expensive design and fit-out standards
laid down by the brand itself.
Also, the tie-up with Alibaba offers the prospect of Harmony developing a strong
distribution network, whereby customers can select a vehicle to buy online and then have
the option of test-driving their chosen car at either the nearest Harmony independent after-
sales outlet or at a 4S store that specialises in that particular brand – whereas previously
prospective buyers would have to seek out the relevant 4S store to test-drive their vehicle.
This is an advantage for Harmony over other listed auto dealers, most of whom only
operate 4S shop dealership networks with no independent facilities.
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
200
400
600
800
1,000
1,200
1,400
1,600
2012 2013 2014 2015E 2016E 2017EAfter sales revenue from 4S stores YoY Growth
(CNY m) (YoY %)
0%
20%
40%
60%
80%
100%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2012 2013 2014 2015E 2016E 2017E
After-sales revenue from Independent outlets YoY Growth
(CNY m) (YoY %)
46.0% 46.0% 46.0% 46.0% 46.0%
44.4%
45.2% 45.2%
45.5%
46.0%
44.0%
44.5%
45.0%
45.5%
46.0%
46.5%
47.0%
44.0%
44.5%
45.0%
45.5%
46.0%
46.5%
47.0%
2013 2014 2015E 2016E 2017EGPM of after-sales service from 4S stores GPM of after-sales service from comprehensive after-sales outlet
Independent outlets
have greater flexibility in
terms of deliveries
versus 4S shops
11
China Harmony New Energy Auto (3836 HK): 18 March 2016
China auto dealers: number of dealership outlets
As of June-2015
Additional shops in 2015
Dealer Dealership stores Independent stores total Dealership stores Independent stores
Harmony 46 56 102
64
Zhengtong 106
106 30
Zhongsheng 199
199
Yonda 112 57 169 38
Greenland Rundong 73
73 11
Source: Companies
12
China Harmony New Energy Auto (3836 HK): 18 March 2016
A year of recovery for new-car sales
BMW sales poised to recover in 2016
We forecast BMW’s overall sales in China to increase by around 8% YoY for 2016, driven
chiefly by the introduction of the 3-series facelift in late 2015, and the new X1 SUV and 2-
series sedan due to be launched in 2016 through BMW Brilliance. The BMW Group
introduced its 7-series globally in June 2015 and is likely to launch a 4-series facelift and
new 5-series for import in 2016, which we believe would also help to stimulate Harmony’s
new-car sales in 2016.
On our estimates, BMW accounts for around 90% of Harmony’s volume and more than
75% of its new-car sales revenue. As such, Harmony stands to be one of the biggest
beneficiaries of a sales recovery for BMW in 2016. In addition, we expect BMW to raise its
commissions to dealers slightly by 1.0-1.5% in 2016, based on our recent conversations
with a number of BMW dealers In China. We therefore look for overall luxury new-car sales
at 4S shops to rise by 10% YoY for 2016, but see this growth slowing to 8% YoY for 2017
as we do not expect BMW to raise commission rates further in 2017.
BMW: sales breakdown in China BMW: product launches for 2H15-2016
Type of launch Date Model Segment
Global
Jun-2015 3 Series facelift Sedan
Jun-2015 7 Series Sedan
Oct-2015 X1 SUV
2016 (TBC) 4 Series facelift Sedan
2016 (TBC) 5 Series Sedan
BMW Brilliance
Sep-2015 3 Series facelift Sedan
Apr-2016 2 Series Sedan
Jun-2016 X1 SUV
Source: Company Source: Company
BMW Brilliance: recent sales breakdown
Source: CAM
(10%)
10%
30%
50%
70%
90%
110%
130%
150%
0
100
200
300
400
500
2010 2011 2012 2013 2014 2015
Brilliance BMW Sales unit (LHS) Import Unit (LHS)Brilliance BMW sales, YoY (RHS) Import unit, YoY (RHS)Total sales, YoY (RHS)
(Sales unit, k) (YoY %)
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16
3-Series sales 5-Series sales X1 sales
3-Series YoY BMW Brilliance total sales YoY
(Sales Unit) (YoY %)Launch of BMW's 3-Series facelift in late Sep-15
Rich pipeline in 2016
13
China Harmony New Energy Auto (3836 HK): 18 March 2016
Harmony: brand portfolio
Source: company Note: Up to 1H15
Harmony: BMW 4S shop in Shanghai Harmony: BMW 4S shop in Shanghai (after-sales service)
Source: Daiwa Source: Daiwa
Bargaining power turning in favour of the dealers
Industry trend shifting slightly to dealers
As highlighted in our sector report, Running on fumes in 2016; refill needed for 2017
published on 4 January 2016, BMW dealers in China joined forces in 2014 to bargain for
better rebates and more frequent reviews of sales targets and incentive payments by the
OEMs. Their efforts paid off with foreign brands like BMW agreed to pay CNY5.1bn in cash
rebates to dealers in 2014 and conduct more frequent target reviews in 2015.
Also, as mentioned, we expect BMW to raise its dealers’ basic commission rate by 1.0-
1.5% in 2016, which suggests the trend is swinging in favour of the dealers; and as such,
we expect the gross profit the dealers make on new-car sales to improve from 2016, after
a tough period since 2H14. We have observed a similar trend in mature markets like the
US, where dealers have demanded they make a certain margin on new-car sales rather
than suffering a loss on every new car sold.
Weak market
strengthens dealers
bargaining power over
OEMs
14
China Harmony New Energy Auto (3836 HK): 18 March 2016
Negotiations between BMW and its China dealers
Date Events
2H14 China’s auto market deteriorated unexpectedly in 2H14. As a result, BMW missed the chance to adjust its yearly sales targets, which led to most of its dealers piling up 2-3 months of inventory, instead of the usual 1.5 months. In order to receive the rebates offered by BMW, dealers started to cut prices to meet the unachievable sales targets.
Late-Nov 2014 Some BMW dealers started to take the lead and contact other dealers, and eventually they formed an alliance.
Early Dec 2014 The dealer alliance had 2 meetings with BMW during which both sides preliminarily agreed on a subsidy of less than CNY6bn.
Late -Dec 2014 The 2 parties finally agreed on a subsidy of CNY5.1bn.
17 April 2015 BMW China and BMW Brilliance issued a circular to their dealers reducing their sales targets for 2Q15. Further, they also announced that dealers that had reached 85% of their sales target would also be entitled to rebates, while those achieving equal to or more than 90% of their sales targets would receive bonus rebates.
Early July 2015 BMW China released more details of its rebate policy for 1H15. For imported models, dealers that achieved 100% of their sales target would be granted CNY16,000/vehicle sold, while for localised models, dealers that achieved 100% of their sales target would be granted CNY18,000/vehicle sold. For those dealers that could not achieve 100%, but did make above 85% of their sales target, they would still get a lower rebate.
Source: Caxin, Sina
New government policies favour dealers
On 6 January 2016, the Ministry of Commerce (MOFCOM) proposed new policies to give
dealers greater flexibility in terms of sourcing of car inventory. The new policies would
allow dealers to sell cars from different OEMs, and trade excess stock (both automobiles
and parts) amongst themselves. Assessment and examination of dealers’ performance
would require MOFCOM’s approval and would not be allowed to take place more than 2
times in a year. The new policies would also protect dealers from being dumped by OEMs,
as OEMs would be required to authorise dealers for at least 5 years at first, and for 3-year
periods thereafter.
Currently, auto OEMs typically sign yearly contracts with their dealers, which puts dealers
at a disadvantage and gives them less bargaining power over the OEMs, as they are
required to get permission from the auto OEMs to sell their cars. This effectively allows
OEMs to dictate the prices the dealers pay for new cars and branded replacement parts.
Dealers earn thin margins on new-car sales, and some are forced to sell at a loss, albeit
that OEMs provide subsidies to cover such losses.
We believe the proposed rules would be positive for auto dealers as the bargaining power
would shift from the auto OEMs to the dealers. The rules could also benefit small auto
OEMs, enabling them to sell their cars through more popular dealers without having to
build sales networks on their own. The policies would also protect customers, by
prohibiting the forced selling of insurance, selling above marked prices, and the charging of
excess fees. We expect more government policies to help the survival of local dealers in
order to support the sector.
Recent government policies and proposed policies governing auto dealers
Guideline document Issue date Important contents
Practice of governing new-car sales dealership (draft for soliciting opinion)
Jan-2016 - Contract years between OEMs and dealers to change to at least 5 years at first and at least 3 years thereafter
- To allow dealers to sell excess inventory to other dealers
- To allow dealers to sell cars from different OEMs
- To prohibit the forced selling of auto insurance and excessive surcharges
Practice on auto maintenance information disclosure
Jun-2015 - OEMs are required to disclose the technical details about the maintenance of their models, so that independent service maintenance stores can provide services by sourcing from local component providers
- OEMs are required to provide a catalogue of the maintenance parts and related tools, and to disclose the necessary procedures of fixing the parts
Source: MOFCOM
More protection and
flexibility for dealers
15
China Harmony New Energy Auto (3836 HK): 18 March 2016
Riding on future EV development in China
Strong alliance with Tencent and Hon Hai
On 22 December 2014, Hon Hai (through subsidiary Foxconn [Far East] Ltd) acquired a
10.53% stake in Harmony. Subsequently on 11 May 2015, Harmony used the CNY0.5bn
proceeds of its stake sale to acquire a 64% stake and injected capital into Green Field
Motor, a leading EV manufacturer. It increased this stake in Green Field Motor to 88% on
25 June 2015 after Tencent joined the alliance between Harmony and Hon Hai, and
established a JV called Harmony Futeng, in which Harmony, Hon Hai and Tencent all had
shareholdings of 40%, 30% and 30%, respectively.
On 31 December 2015, Henan Harmony (a wholly owned subsidiary of Harmony) signed a
series of agreements to form a joint venture with Harmony Futeng, called Zhejiang Aiche
Internet Intelligent Electric Vehicle Company Ltd (Aiche), in which Harmony Futeng holds a
55% stake and Henan Harmony has a 28% stake. Once the deal was completed on 31
January 2016, Harmony’s effective stake in Green Field Motor was 44% (for the final
structure, refer to the organisation chart below).
In the future, Green Field Motor plans to focus on mid-to-high end EV models, which
includes plans to launch a new CUV-type EV model by the end of 2016. In 2019, Green
Field Motor targets to produce a high-end SUV-type EV model. Management expects
10,000 unit sales of the high-end SUV in 2019 and 20,000 in 2020, and 10,000 unit sales
of the mid-end CUV in 2017, rising to 30,000 by 2020. Compared with other alliances
between OEMs and Internet companies, we believe the Harmony-Hon Hai-Tencent
alliance is more solid with the advantage of auto component manufacturing experience
from Hon Hai. The total development cost for the first model would be CNY400m, with the
second model requiring a higher amount due to brand new facilities.
Milestones of Harmony Futeng
Year Event
Dec-2014 Hon Hai, through subsidiary Foxconn, agrees to subscribe 128,734,000 shares for an aggregate amount of HKD609m. Upon completion of the agreement in March 2015, the subscription shares represent 9.8% of issued shares of Harmony, or 8.17% of the issued shares as at June-2015.
Jan-2015 Foxconn Technology (2354 TT), 30% owned by Hon Hai Precision, agrees to buy 54,711,840 shares from Eagle Seeker Company, Harmony's controlling shareholder. The shares represent 3.47% of the number of issued shares as of June 2015.
Jun-2015 Harmony enters into an agreement with Hongfujin Precision (Chengdu) (a subsidiary of Hon Hai [2317 TT]) and Shenzhen Tencent to set up a JV, Harmony Futeng, with initial capital of CNY1bn.
Dec-2015 Henan Harmony, a wholly owned subsidiary of Harmony, and Harmony Futeng jointly establish Aiche Company with registered capital of CNY550m, 28% of which is owned by Henan Harmony and 55% by Harmony Futeng. The rest 17% by other investors to be introduced in the future. Henan Harmony also agrees to transfer all of its 87.57% equity interest in Green Field Motor to Aiche Company, for a cash consideration of CNY347.4m
Source: Company
Harmony Futeng to
focus on high-end EVs;
Green Field Motor to
focus on the low end to
mid range
16
China Harmony New Energy Auto (3836 HK): 18 March 2016
Shareholder structure of Green Field Motor and the Harmony-Hon Hai-Tencent alliance
Source: Company, Daiwa
Hon Hai to provide expertise on component sourcing
Hon Hai’s auto business unit has been producing more than 100 components for Tesla (not
rated) for more than 5 years. Therefore, Hon Hai will be able to provide components for
many of the autos components required for its EV business. At the same time, Hon Hai can
provide expertise in terms of sourcing other auto components for its EVs.
According to our understanding, Hon Hai Precision currently does not have strong car
battery technology. As such, we would not be surprised if Hon Hai (possibly through
Foxconn Technology [not rated]) acquired or partnered with other companies to develop a
car battery business. In the near term, for the new CUV model to be launched by Green
Field Motor by the end of 2016, it would likely buy the batteries (lithium iron phosphate
(LFP) batteries, according to management) from other manufacturers, including LG Chem
(not rated), Samsung SDI (006400 KS, KRW99,500, Buy[1]), or ATL (not listed).
We believe that at the moment LFP batteries have a cost advantage over other types of
batteries. And adopting LFP batteries from SDI, LG Chem or ATL would be a significant
improvement over the current lead-acid batteries provided by Tianneng Power (Not rated)
used in Green Field Motor’s e-X5, in terms of energy density, battery life and cost.
In the long run, we believe Hon Hai may be the battery provider for Green Field Motor, but
the technology will depend on which partner it chooses or which asset it acquires. If Hon
Hai’s battery technology were not competitive enough, we believe Green Field Motor would
still outsource the batteries required for its future models.
100%
Independent third party investors
China Har mony
Other investors
Zhenjiang Aiche Internet Intelligent Electric Vehicle Company
Henan Har mony Har mony Futeng
Hon Hai Tencent
40%
30% 30%
Gr een Field Motor
55%28%17%
12.43% 87.57%
Hon Hai has been
working with Tesla for
years
Hon Hai may need to
acquire or partner with
other companies to
obtain battery
technology
17
China Harmony New Energy Auto (3836 HK): 18 March 2016
Comparisons of different types of li-ion battery
Types of Lithium-ion
Cathode material Chemical formula Pros Cons Energy capacity Model used in Supplier
Lithium Cobalt Oxide LiCoO2 Widely used in computer, communications and consumer electronics (3C) products. High-energy density and stable discharge voltage
Short life span, cobalt is toxic, limited specific power, lower thermal stability
150-200Wh/kg Tesla Roadster Panasonic
Lithium Manganese Oxide
LiMn2O4/ LMO Cheaper, less polluting, safer and offers moderate energy capacity
Lower life cycle and calendar life
100-150Wh/kg Nissan Leaf, Renault Kangoo
AESC
Lithium Nickel Manganese Cobalt Oxide
LiNiMnCoO2/ NCM Offers the combined advantages of LiCoO2 and LiMn2O4 batteries, has high capacity and power
Relatively expensive, price fluctuates with the price of cobalt; cobalt may result in pollution problem
150-220Wh/kg Toyota Prius 3, Ford Focus, Renault Fluence, GM Spark, Chevrolet Volt, HMC Sonata, Volvo XC90, Cadillac ELR, BYD Sung
Panasonic, Samsung SDI, LG Chem, BYD
Lithium Nickel Cobalt Aluminum Oxide
LiNiCoAlO2/ NCA High energy and power densities, and good life span
More expensive, safety issues
200-260Wh/kg Tesla Model S Panasonic
Lithium Iron Phosphate
LiFePO4 One of the safest Li-Ions battery and long life span
Moderate specific energy and a lower voltage, higher self-discharge (which decreases the life of the battery) and is heavy
90-120Wh/kg BYD E6,
BYD Qin,
BYD Tang
BYD, Samsung SDI, A123 System, Beijing Pride Power
Source: Battery University, Daiwa compiled
Characteristics of lead-acid batteries
Advantages Limitations
Low cost, simple to manufacture Low specific energy
Low self-discharge Slow to charge, takes 14-16 hours to fully charge
High specific power Limited cycle life
Good low temperature performance Lead is polluting
Source: Battery University
Tencent providing distribution network
While Hon Hai will provide the technological support, Tencent will work on enriching the
online sales distribution channel for the new high-end EV models produced by Green Field
Motor. Currently, Tencent does not have its own e-commerce platform for car sales,
although it does indirectly through its minority stake in Bitauto (not rated), which is an e-
commerce platform for auto sales.
We believe Tencent is keen to expand its exposure to the e-commerce autos business to
keep up with its competitors that have already linked up with dealers, such as Yongda and
even China Harmony, both of which are cooperating with Alibaba (BABA US, USD73.50,
Buy [1]).
Many Internet companies have formed alliances with the auto OEMs, such as BMW and
Baidu (BIDU US, USD183.05, Hold [3]), SAIC (not rated) and Alibaba, and Beijing Auto
Group (parent of BAIC motor (1958 HK, HKD6.23, Buy [1])) and LeTV.
Given Tencent’s strong distribution function through its popular mobile app “WeChat” and
other channels such as JD.com and Bitauto, we expect Tencent to be able to help the
Harmony Futeng alliance expand its sales network.
We believe Tencent is
keen to groom the auto
business it has bought
into
18
China Harmony New Energy Auto (3836 HK): 18 March 2016
Recent alliances between dealers/OEMs and Internet companies
Dealers/OEMs involved
Internet companies
involved
Other companies
involved Details
Harmony Tencent Hon Hai Setting up Aiche Company to develop NEVs; targeting annual sales of 10,000 units in 2019
Harmony Alibaba Plans to build an after-sales services network and to develop its e-commerce business and pre-owned car business
Yonda Alibaba Building up the O2O network: will offer offline vehicle pick-up after buying it online; will develop an online after-sales service, and will also sell imported models and provide an auto finance service
SAIC Alibaba Developing a smart car and related ecosystem; has already set up a JV with initial capital of CNY1bn
Aston Martin LeTV Faraday Future Developing a smart car and related ecosystem; already launched LeUI, a smart OS for autos
Source: Companies
Green Field Motor’s new model launch should be soon
Compared with Green Field Motor’s current e-X5, its new CUV will be positioned at a
higher price point, at around CNY70,000, compared with CNY50,000-60,000 for the e-X5
currently. However, the car battery in the new CUV is likely to be much better than the one
in the e-X5, and we expect it to be supplied by SDI, ATL or LG Chem, rather than by
Tianneng.
We forecast annual sales of the new EV SUV to be around 10,000 units for 2017, in line with
the company’s target, and think this is achievable as most new models in the market are
seeing monthly sales of around 1,000 units. According to management, the company expects
to make a small net profit in 2017 on the new EV, which should be launched in 2016.
We are confident in Green Field Motor’s ability to produce a popular CUV model, as we
found the e-X5 comfortable to test drive, even if we think the selling price is too high for a
low-speed EV (optimal speed of 60 km/h).
Harmony: current Green Field Motor plant in Zhejiang Harmony: current Green Field Motor plant in Zhejiang
Source: Daiwa Source: Daiwa
19
China Harmony New Energy Auto (3836 HK): 18 March 2016
Green Field Motor: e-X5 e-X5: the specs
Model Name eX-5
Launch date September 2014
Highest speed 62km/h
Driving range 155km
Engine type Pure electric
Length 4,045mm
Width 1,737mm
Height 1,620mm
Wheelbase 2,502mm
MSRP CNY62-70k
Source: Company Source: Company
Green Field Motor: Kelvin Lau test driving e-X5 model e-X5: spacious interior
Source: Daiwa Source: Daiwa
20
China Harmony New Energy Auto (3836 HK): 18 March 2016
Financial analysis
Solid balance sheet looking good compared to peers
As at the end of June 2015, Harmony’s cash and non-pledged deposit balance was
CNY4,391m, up 76% YoY, due mainly to the proceeds from its share issuance in 1H15
totalling CNY2,651m. We estimate that by the end of 2015, its cash position will grow to
CNY4.9bn, due mainly to low capex needs for Harmony’s independent outlet network
expansion plans. Hence, we expect the company’s net debt-to-equity ratio to improve
greatly, from 72% as at the end of 2014, to a net cash position of CNY409m as at the end
of 2015, and that it will be able to maintain this trend until the end of 2017,.
For its dealership business, we forecast capex for 2015-17E to be maintained at around
CNY400m a year. As Harmony will be expanding its independent outlet network
aggressively over this period, we forecast each anchor outlet to cost CNY3-5m, while a
satellite outlet will cost only 10% of this (CNY300,000-500,000 per outlet). Also, we expect
the EV business to remain as an associate business and not be consolidated for at least
the next 3 years.
Harmony: net debt-to-equity ratio
Source: company, Daiwa forecasts
Compared to its peers, Harmony’s net debt-to-equity ratio is substantially lower currently,
which we believe is due to Harmony’s focus on the after-sales services business (which
requires less initial capex than opening up more 4S stores).
Hong Kong-listed China auto dealers: net debt-to-equity ratio comparison
Company Stock Code 2010 2011 2012 2013 2014
China Harmony New Energy Auto 3836 HK 59 79 287 34 44
Baoxin Auto Group 1293 HK 65 21 217 204 207
Zhongsheng Group 881 HK 25 141 136 168 148
China Yongda Automobiles Service 3669 HK 137 197 108 161 182
China Zhengtong Auto Service 1728 HK netcash 49 54 50 59
China Greenland Rundong Auto 1365 HK n.a. 361 737 581 367
Average 44 106 209 167 156
Source: Bloomberg
Margin to start improving from 2015
In terms of profitability, we expect Harmony’s overall gross margin to improve over 2015-
17E, mainly due to its improved profit mix. But broken down by segment, we assume that
the gross profit margin for Harmony’s new-car sales business will decline to 5.3% for 2015
vs. 5.8% for 2014, due to larger price discounts being offered to customers in 1H15, when
China’s auto sales slowed. We expect this new-car sales gross margin trend to continue,
declining to 4.3% in 2017E.
178%162%
427%
93%72%
net cash net cash net cash
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
2010 2011 2012 2013 2014 2015E 2016E 2017E
Balance sheet improved
further following share
issuance in 1H15
Lower-than-peers net
gearing ratio
We expect the overall
blended gross margin to
remain high for 2015-17E
due to an increase in the
after-sales service
contribution
21
China Harmony New Energy Auto (3836 HK): 18 March 2016
Meanwhile, we expect the gross margin of its after-sales business to remain high over
2015-17E, at around 46%. We assume that the gross margin of its independent outlets
business to improve slightly over 2015-17E, as well, from 45.2% for 2015E to 46% for
2017E. Overall, we expect the blended gross margin to expand steadily, from 11.4% for
2015E to 14.3% for 2017E, reflecting the expanding proportion of after-sales services as a
percentage of the gross profit mix.
Harmony: gross margin by segment
Source: company, Daiwa forecasts
Net profit more sensitive to changes in after-sales service than new-car sales
We believe Harmony’s net profit will be more impacted by the company’s after-sales
service in the long run, and our sensitivity analysis confirms this, showing that the net profit
is indeed less sensitive to changes in new-car sales revenue than changes in after-sales
service revenue. For every 5% change in new-car sales revenue, we estimate that the total
revenue would change by 4%, but the net profit would change by only 1%. However, for
every 5% change in after-sales revenue, the total revenue would change by only 1%, but
the net profit would change by 3% as this business has a higher gross margin.
As we expect strong after-sales revenue growth, and given Harmony’s strong balance
sheet (net cash of CNY409m as at the end of 2015E), we see a low risk of earnings
deterioration or insolvency.
Harmony: sensitivity of changes in 2016 new car sales revenue on net profit
Harmony: sensitivity of changes in 2016 after-sales service revenue on net profit
New car sales revenue down 5% Base Case
New car sales rev up 5%
Total Revenue (CNYm) 11,040 11,505 11,971
% delta -4.0%
4.0%
Gross profit (CNYm) 1,429 1,452 1,474
% delta -1.5%
1.5%
Gross profit margin 12.9% 12.6% 12.3%
delta 33 bp
-30 bp
Net Profit (CNYm) 682 689 696
% delta -1.0%
1.0%
Net profit margin 6.2% 6.0% 5.8%
delta 19 bp
-17 bp
After sales service revenue down 5% Base Case
After sales service revenue up 5%
Total revenue (CNYm) 11,395 11,505 11,615
% delta -1.0%
1.0%
Gross profit (CNYm) 1,402 1,452 1,502
% delta -3.5%
3.5%
Gross profit margin 12.3% 12.6% 12.9%
delta -32 bp
31 bp
Net profit (CNYm) 669 689 709
% delta -2.9%
2.9%
Net profit margin 5.9% 6.0% 6.1%
delta -12 bp
11 bp
Source: Daiwa forecasts Source: Daiwa forecasts
9.8% 11.4% 9.2% 8.7%5.8% 5.3% 4.8% 4.3%
39.6%37.6%
44.0% 45.9% 45.8% 45.7% 45.8% 46.0%
12.8% 13.8%11.7% 12.0% 10.7% 11.4% 12.6% 14.3%
0%
10%
20%
30%
40%
50%
2010 2011 2012 2013 2014 2015E 2016E 2017E
New PV sale GPM After-sales service GPM Blended GPM
Net profit more sensitive
to changes in after-sales
service as this business
has a high gross margin
22
China Harmony New Energy Auto (3836 HK): 18 March 2016
Improving payout and DPS going forward
Harmony has been paying out dividends since 2013, with a payout ratio of 16.6% and
18.8% for 2013 and 2014, respectively. We see a high chance of Harmony maintaining its
DPS to at least CNY0.1, which means it could increase the payout ratio for 2015E to 28%,
and maintain it at this level from 2016E. This would translate into a yield of 3-5% for
2015-17E.
Harmony: dividend per share and payout ratio
Source: company, Daiwa forecasts
0.070.10 0.10
0.13
0.1616.6%
18.8%
28.0% 28.0% 28.0%
15%
20%
25%
30%
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
2013 2014 2015E 2016E 2017EDPS (CNY, LHS) Payout ratio (%, RHS)
(CNY) (Payout ratio %)
We forecast Harmony’s
payout ratio to improve
from 19% for 2014 to
28% for 2015-17E,
implying a 3-5% yield for
2015-17E
23
China Harmony New Energy Auto (3836 HK): 18 March 2016
Valuation and recommendation
Merits a valuation premium and rerating
The stock is trading currently at 2016E PER of 7.4x, which is in line with the 7.4x average
PER of the Bloomberg consensus for the stock since it listed in 2013, as well as being in
line those of the H-share listed China auto dealers. However, we do not think the current
valuation looks stretched, and see a good possibility of the stock being rerated in the next
12 months.
Fundamentally, Harmony’s gross margin is better than the industry’s, and we attribute this
to its focus on luxury and ultra-luxury brands, as well as the low-cost structure of its
independent outlets. For 2016-18, Harmony will put more emphasis on developing its after-
sales service network, which should help it continue to push its gross margin beyond that
of its peers. Thus, we believe Harmony deserves to be trading at a premium to its peers.
Hong Kong-listed China auto dealers: gross margin comparison
Company Stock Code 2010 2011 2012 2013 2014
China Harmony New Energy Auto 3836 HK 12.8 13.8 11.7 12.0 10.7
Baoxin Auto Group 1293 HK 8.9 10.7 8.7 9.7 9.1
Zhongsheng Group 881 HK 9.5 10.3 8.6 9.1 8.7
China Yongda Automobiles Service 3669 HK 7.8 7.9 8.2 8.7 8.1
China Zhengtong Auto Service 1728 HK 9.0 9.6 8.9 8.7 8.8
China Greenland Rundong Auto 1365 HK n.a. 7.6 6.8 8.6 9.3
Average 8.9 10.3 9.0 9.6 9.1
Source: Bloomberg, Daiwa
Another factor in support of our thesis that Harmony deserves a valuation premium is the
company’s move into manufacturing new EVs (via Green Field Motor), and this segment
enjoys a higher valuation than the auto dealers. Since May 2015, after the company
announced that it had acquired a 64.64% stake in Green Field Motor, Harmony has been
trading at an average PER of 9.0x, vs. 7x before the acquisition. Green Field Motor is
planning to launch its first high-speed low-end EV by the end of 2016, and a high-end one in
2019, and we believe any positive news flow on either would boost sentiment on the stock.
Harmony: 12-month forward PER (since listing on 13 June 2013)
Source: Bloomberg, Daiwa forecasts
Initiating with a Buy (1) rating, decent potential upside from current levels
We initiate coverage of Harmony with a Buy (1) rating and SOTP-derived 12-month target
price of HKD5.50, with DCF valuations for Harmony’s dealership and EV business. We
have used a DCF to value these 2 businesses as we think this is a more accurate way to
assess the long-term potential of its EV initiatives and independent after-sales network. But
we apply a 20% discount to our DCF valuation to reflect the conglomerate discount as
Harmony is now operating two different businesses (a dealership and EV manufacturing).
Our target price implies a 2016E PER of 11x, which we believe is achievable given the
ongoing margin improvement that we see over our 2016-18 and as its EV sales should kick
off in 2017.
2
7
12
17
22
Jul-1
3
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
Feb
-14
Mar
-14
Apr
-14
May
-14
Jun-
14
Jul-1
4
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
PER +1 SD Average PER -1 SD
(PER)
Better-than-peers and
improving gross margin
would be a short-term
catalyst
EV business deserves a
valuation premium and
long-term rerating
Initiate with a Buy (1)
rating, target price set at
HKD5.50
24
China Harmony New Energy Auto (3836 HK): 18 March 2016
Harmony: SOTP valuation
SOTP valuation Methodology Value (HKDm) Value per share (HKD)
Dealership & after-sales services DCF 8,860 4.50
EV business DCF 1,966 1.00
Target Price
5.50
Source: Daiwa forecasts
Harmony: DCF calculation for its dealership & after-sales services Harmony: DCF calculation for its EV business
Target gearing (debt/capital) (%)
20.0
Market risk premium (%)
9.2
Risk-free rate (%)
3.5
Cost of debt (%)
7.0
Cost of equity (%)
18.1
WACC (%)
15.6
Terminal Value
Terminal Growth Rate 1.0%
Terminal WACC 15.6%
DCF Valuation
NPV of Forecasts (CNYm) 6,389
NPV of Terminal Value (CNYm) 835
Enterprise Value (CNYm) 7,224
Less: Net Debt 307
Equity Value (CNYm) 7,531
No. shares (m) 1,576
CNY:HKD exchange rate 0.85
Discount 20%
Per Share Equity Value (HKD) 4.50
Target gearing (debt/capital) (%)
50.0
Market risk premium (%)
9.2
Risk-free rate (%)
3.5
Cost of debt (%)
7.0
Cost of equity (%)
18.1
WACC (%)
11.7
Terminal Value
Terminal Growth Rate 1.0%
Terminal WACC 11.7%
DCF Valuation
NPV of Forecasts (CNYm) 421
NPV of Terminal Value (CNYm) 3,377
Enterprise Value (CNYm) 3,798
Less: Net Debt 0
Equity Value (CNYm) 3,798
Stake owned by Harmony (%) 44
No. Shares (m) 1,576
CNY:HKD exchange rate 0.85
Discount 20%
Per Share Equity Value (HKD) 1.00
Source: Daiwa forecasts Source: Daiwa forecasts
Harmony: dealership & after-sales services DCF sensitivity Harmony: EV business DCF sensitivity analysis
Discount rate
NPV of FCF (CNYm)
Enterprise Value (CNYm)
Equity Value (CNYm)
Equity Value Per Share (HKD)
13.1% 7,221 8,620 8,927 5.30 13.6% 7,041 8,299 8,606 5.10 14.1% 6,868 8,001 8,308 5.00 14.6% 6,702 7,723 8,030 4.80 15.1% 6,542 7,465 7,772 4.60 15.6% 6,389 7,224 7,531 4.50 16.1% 6,241 6,998 7,305 4.40 16.6% 6,099 6,785 7,092 4.20 17.1% 5,962 6,585 6,892 4.10 17.6% 5,829 6,397 6,704 4.00 18.1% 5,702 6,219 6,526 3.90
Discount rate
NPV of FCF (CNYm)
Enterprise Value (CNYm)
Equity Value attr. to Harmony (CNYm)
Equity Value Per Share (HKD)
9.2% 1,144 7,334 3,227 1.90 9.7% 980 6,427 2,828 1.70 10.2% 826 5,637 2,480 1.50 10.7% 682 4,945 2,176 1.30 11.2% 547 4,336 1,908 1.10 11.7% 421 3,798 1,671 1.00 12.2% 303 3,320 1,461 0.90 12.7% 193 2,894 1,274 0.80 13.2% 90 2,514 1,106 0.70 13.7% -7 2,173 956 0.60 14.2% -97 1,867 821 0.50
Source: Daiwa forecasts Source: Daiwa forecasts
Risks to our call
Ongoing slowdown in the China economy could curb auto demand
Currently, we assume that the sales performance of the luxury and ultra-luxury segments
will outperform China’s overall auto new-car sales market in 2016-17, due mainly to the
restrictions on new car-plate licences in certain tier-1 cities and rising consumption power.
However, any significant deterioration in China’s macro conditions could lead to a sharp
decline in the sales of these segments, to which Harmony is highly exposed, and we see
this as the main risk to our call on the stock. Further, its after-sales service could also be
adversely affected, especially in terms of non-maintenance-related revenue, such as car
detailing and accessory sales.
Increasing competition could pose a risk
The profitability of the auto after-sales service business in general is typically higher than
the new-car sales business. As a result, we think Harmony’s successful “independent
comprehensive after-sales service outlet” model is likely to get the attention of its
competitors, which could lead to more intense market competition going forward. Given
that the entry barriers for the autos after-sales market are not high (ie, in terms of capital
and technological requirements), the arrival of new entrants could put pressure on the
margins of Harmony’s after-sales business.
A hard-landing for the
China economy would
severely affect
Harmony’s earnings
Low entry barriers for
the after-sales market is
a threat
25
China Harmony New Energy Auto (3836 HK): 18 March 2016
Uncertainty as to its EV business
Although it is experienced in EV manufacturing, Green Field Motor has focused on the low-
end EV segment since the company was set up in 2010. But since being acquired by
Harmony in 2015, the company has shifted its focus to high-end EV segment, and plans to
launch its first low-end cross utility model by the end of 2016 and high-end SUV in 2019.
We know that Green Field Motor has the technological capabilities to produce low-end
EVs, but it may take time for it to build up enough market recognition in the high-end EV
market. Therefore, our EV sales target for 2017-20 is conservative. However, if its sales
volume comes in lower than we expect due to delays in model launches or low brand
recognition, Green Field Motor’s profitability could drag down Harmony’s overall
performance.
More competing alliances being formed
Over the past few years, more auto manufacturers and Internet companies have paired up
to develop smart cars, for example, BMW+Baidu, BAIC+Letv, Weichai Enranger+Sina,
SAIC+Alibaba and SAIC GM+Huawei.
While we believe the Harmony-Hon Hai-Tencent alliance will be very competitive, given
their respective expertise, competition in this segment is inevitable, in our view. Most of the
auto OEMs in China have signed agreements to produce EVs in the future, indicating their
determination to gain large market shares. This could eventually lead to a price war, a
common strategy often adopted by the Internet giants, hence affecting Green Field Motor’s
profitability.
Auto Dealers: peer valuation comparison
Name
Bloomberg Trading Share price Market Cap Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%)
Code Currency 17-Mar-16 USD Mn
FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E
Hong Kong-listed
Baoxin Auto Group Ltd
1293 HK HKD 4.89 1612 NR 16.0 12.0 1.9 1.7 9.8 8.1 1.0 1.5 12.9 13.4
Zhongsheng Group Holdings
881 HK HKD 3.97 1099 NR 10.1 8.0 0.6 0.6 8.3 7.3 2.0 2.4 6.2 7.5
China Harmony New Energy Aut * 3836 HK HKD 3.85 782 Buy 7.4 7.4 0.9 0.8 4.1 3.4 3.2 3.8 13.5 11.3
China Meidong Auto Holdings
1268 HK HKD 0.87 122 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
China Yongda Automobiles Ser
3669 HK HKD 4.08 778 NR 7.6 6.2 1.1 1.0 8.1 6.8 3.0 3.6 15.2 16.2
China Rundong Auto Group Ltd
1365 HK HKD 2.98 364 NR 13.1 8.9 1.4 1.1 11.7 9.4 n.a. n.a. 12.2 18.5
China Zhengtong Auto Service
1728 HK HKD 2.79 795 NR 7.1 5.7 0.6 0.5 6.0 5.1 2.9 3.5 8.6 9.9
Dah Chong Hong
1828 HK HKD 3.10 732 NR 8.6 8.2 0.6 0.6 6.5 6.2 4.6 5.2 7.1 7.4
Others
China Grand Automotive Ser-A
600297 CH CNY 11.80 10017 NR 30.3 21.9 3.0 2.9 19.1 13.6 n.a. n.a. 11.5 13.8
Pang Da Automobile Trade-A 601258 CH CNY 2.82 2820 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Automotive Holdings Group Lt AHG AU AUD 4.02 938 NR 13.5 12.6 1.8 1.7 10.6 9.9 5.5 5.7 13.9 14.1
Asbury Automotive Group
ABG US USD 58.32 1456 NR 10.4 9.8 4.0 3.8 9.2 9.6 n.a. n.a. 38.8 42.4
Autonation Inc
AN US USD 48.08 5155 NR 11.9 11.2 2.3 2.0 10.9 10.8 n.a. n.a. 21.0 18.7
Carmax Inc ** KMX US USD 50.09 9804 NR 19.2 16.4 3.2 3.5 19.1 17.0 n.a. n.a. 16.6 18.9
Copart Inc *** CPRT US USD 40.95 4586 NR 25.3 21.2 5.5 5.7 12.9 11.9 n.a. n.a. 22.3 25.3
Lithia Motors Inc-Cl A
LAD US USD 90.46 2326 NR 13.0 11.9 2.9 2.4 11.4 10.4 0.7 0.7 24.5 22.2
Sonic Automotive Inc-Class A
SAH US USD 18.36 845 NR 9.5 8.6 1.3 1.2 10.6 10.5 0.5 0.9 14.3 13.6
Group 1 Automotive Inc
GPI US USD 55.18 1292 NR 7.7 7.5 1.3 1.2 10.7 10.3 1.5 1.5 16.9 15.9
Autocanada Inc
ACQ CN CAD 18.55 391 NR 11.3 9.4 0.9 0.9 14.5 11.8 5.4 5.4 9.3 10.6
Total
Weighted average
14.4 17.7 14.4 2.7 2.7 13.5 11.5 0.6 0.6 15.6
High
30.3 21.9 5.5 5.7 19.1 17.0 5.5 5.7 38.8 42.4
Low
7.1 5.7 0.6 0.5 4.1 3.4 0.5 0.7 6.2 7.4
Median
11.3 9.4 1.4 1.2 10.6 9.9 2.9 3.5 13.9 14.1
Source: Bloomberg, *Daiwa forecasts Note: **Feb year-end, ***Jul year-end
Green Field Motor, as a
new entrant to the high-
speed EV sector, has not
yet been tested
More alliances being
formed implies large-
scale competition in the
smart-car segment
26
China Harmony New Energy Auto (3836 HK): 18 March 2016
Company background
An auto dealer at the transformation stage
From luxury-auto dealership to green-car producer
Listed in 2013, Harmony is an auto dealer in China that focuses on luxury and ultra-luxury
autos, with an established sales network covering more than 20 cities mainly in central
China and the tier-1 cities.
Currently, it has 11 brands in its dealership portfolio, including premium brands such as
BMW, Mini, Lexus, Jaguar and Land Rover, and the ultra-premium brands like Ferrari,
Aston Martin, Maserati and Rolls Royce.
Its auto after-sales service is another strong pillar of Harmony’s business. The company
has been building an independent after-sales network, which now comprises 120
dealership outlets (as at end-2015) in order to capture the fast-growing luxury vehicle after-
sales market.
In 2015, Harmony acquired an 87.57% equity interest in Green Field Motor, a China EV
manufacturer, as a stepping stone to enter the new EV sector. In June 2015, Harmony set
up an “Internet + Intelligent Electric Vehicle” JV with Tencent and Foxconn, further
demonstrating the company’s determination to get into the green-car manufacturing
business.
Harmony: management profile
Management Positions Profile
Mr. Feng Changge Executive Director Chairman
Mr. Feng is the founder of the company and responsible for its overall strategic and business direction of. He received a master's degree in law from Central South Institute of Law in 2001. He has over 10 years’ experience in China's autos industry. He has been in the industry since 2005, when he founded Henan Zhongdebao Automobile Sales & Services Company, which was the first BMW dealership outlet in Henan Province.
Mr. Yu Feng Executive Director Chief Executive Officer
Mr. Yu is responsible for the company’s day-to-day business and management, and has extensive experience in senior management and industrial industry knowledge. He graduated from Central South Institute of Law with a bachelor’s degree in law in 1992 and completed a postgraduate course in criminal law at China University of Political Science and Law in 2000. In July 2005, Mr. Yu joined Henan Zhongdebao Automobile Sales & Service Company, where he was involved in obtaining the dealership rights to auto brands such as, Land Rover, Lexus, Rolls-Royce and Aston Martin.
Mr. Qian Yewen Executive Director CFO
Mr. Qian has extensive experience in corporate finance and capital markets. Prior to joining the company, he served at Citigroup, China International Capital Corporation and Cazenove (now known as Standard Chartered Securities). Mr. Qian graduated from Peking University with a master’s degree in economics (majoring in finance) in July 2006. He is a CFA.
Mr. Yang Lei Executive Director Chief Operating Officer
Mr. Yang is responsible for overseeing and managing the company’s automobile business. He graduated in 2002 from Henan University, College of Foreign Languages, majoring in English. Mr. Yang joined the company in April 2005 in the sales department of the BMW business, during which he gained extensive sales and marketing experience in the autos industry.
Ms. Ma Lintao Executive Director Vice-President
Ms. Ma is responsible for the company’s overall admin and PR, she also serves as chairman of the company’s wholly owned subsidiary Lexus Yuanda. Ms. Ma graduated from Henan Institute of Finance and Economics with a bachelor’s degree in national economic planning and statistics in June 1992. From 1992-2003, she worked at the China Construction Bank Henan branch. She joined the company in 2006 as the chairman of Lexus Yuanda, a wholly owned subsidiary of Harmony.
Source: company, Daiwa
A leading China dealer of
luxury autos that has
diversified its business
into the emerging EV
sector
27
China Harmony New Energy Auto (3836 HK): 18 March 2016
Harmony: developmental milestones
Year Event
2005 Henan Zhongdebao was established, the operating subsidiary of Harmony's first BMW 4S dealership outlet
2006 Zhengzhou Yuanda Lexus was established, the operating subsidiary of Harmony's first Lexus 4S dealership outlet
2009 Xinxiang Xindebao was established, the operating subsidiary of Harmony's first BMW-service-only outlet
Harmony launched its used-car agency business
2010 Opened the first MINI dealership outlet in Zhenzhou, Henan
Beijing Haudebao was established, the operating subsidiary of Harmony's first BMW 4S dealership outlet in Beijing
2011 Henan Hedebao was established, the operating subsidiary of Harmony's first BMW repair and maintenance centre in Zhengzhou
Huacheng Auto was established, the operating subsidiary of Harmony's first Rolls Royce 4S dealership outlet in Zhengzhou
Shangdebaojun was established, the operating subsidiary of Harmony's first BMW 5S dealership outlet in Shanghai
2012 Zhengzhou Huading was established, the operating subsidiary of Harmony's first Aston Martin 4S dealership outlet in Zhengzhou
Guangdebao was established, the operating subsidiary of Harmony's first BMW 5S dealership outlet in Guangzhou
Yichang Lushun was established, the operating subsidiary of Harmony's first Jaguar Land Rover 4S dealership outlet in Hubei
First Maserati & Ferrari dealership outlet was opened in Suzhou, Jiangsu
2013 First Lexus dealership outlet was opened in Xiamen, Fujian
Listed on the Hong Kong Stock Exchange (stock code 3836)
Commenced operations of its comprehensive after-sales services centre
2014 Hon Hai acquired a 10.5% stake in Harmony
Entered into an MOU with Xinnengyuan Automobile to acquire a stake in Green Field Motor
2015 Established Hexie Futeng Internet + Intelligent Electric Vehicle Investment Management Company, a joint venture investment management company co-invested in by Harmony (40%), Foxconn (30%) and Tencent (30%)
Acquired an 87.57% equity interest in Green Field Motor
Signed a strategic cooperation framework agreement with Alibaba to develop "Internet + Automobile Sales and Services"
2016 Formation of Zhejiang Aiche Internet Intelligent Electric Vehicle Company; Harmony transferred the 87.57% stake in Green Field Motor to Aiche to strengthen Green Field Motor's shareholder base
Source: company, Daiwa
China Harmony: organisational structure
Source: company, Daiwa
3.47%
Hon Hai Pr ecision Industry (2317.TT)
Management
Chia Har mony New Energy Auto (3836.HK)
Eager seeker company -Chair man Feng Changge
8.17% 43.86%
100%
1.22%
Foxconn (Far East) Public shareholders
43.28%
Foxconn Technology Company (2354.TT)
30%
28
China Harmony New Energy Auto (3836 HK): 18 March 2016
Harmony: network coverage
Source: company Note: as at end-1H15
Harmony: dealership outlets by age Harmony: new-vehicle sales volume and growth by age of
dealership outlet
Source: company, Daiwa Note: as at end-1H15
Source: company, Daiwa
Harmony: 2016E revenue breakdown by segment Harmony: 2016E gross profit breakdown by segment
Source: Daiwa forecasts Note: 4S after-sales service & independent after-sales outlets combined as total after-sales
services
Source: Daiwa forecasts Note: 4S after-sales service & independent after-sales outlets combined as total after-sales
services
293
14 Dealership outlets openedfor 0-3 years
Dealership outlets openedfor 3-5 years
Dealership outlets openedfor over 5 years
(5%)
0%
5%
10%
15%
20%
0
1,000
2,000
3,000
4,000
5,000
6,000
Dealership outletsopened for 0-3 years
Dealership outletsopened for 3-5 years
Dealership outletsopened for over 5 years
1H14 (LHS) 1H15 (LHS) YoY growth (RHS)
(units) (%)
81%
11%
8%
19%
Sales of new PVs 4S after-sales service Independent after-sales outlets
31%
40%
29%
69%
Sales of new PVs 4S after-sales service Independent after-sales outlets
29
China Harmony New Energy Auto (3836 HK): 18 March 2016
Daiwa’s Asia Pacific Research Directory
HONG KONG
Takashi FUJIKURA (852) 2848 4051 [email protected]
Regional Research Head
Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273
Regional Research Co-head
John HETHERINGTON (852) 2773 8787 [email protected]
Regional Deputy Head of Asia Pacific Research
Rohan DALZIELL (852) 2848 4938 [email protected]
Regional Head of Product Management
Kevin LAI (852) 2848 4926 [email protected]
Chief Economist for Asia ex-Japan; Macro Economics (Regional)
Junjie TANG (852) 2773 8736 [email protected]
Macro Economics (China)
Jonas KAN (852) 2848 4439 [email protected]
Head of Hong Kong and China Property
Cynthia CHAN (852) 2773 8243 [email protected]
Property (China)
Leon QI (852) 2532 4381 [email protected]
Banking (Hong Kong/China); Broker (China); Insurance (China)
Anson CHAN (852) 2532 4350 [email protected]
Consumer (Hong Kong/China)
Jamie SOO (852) 2773 8529 [email protected]
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Dennis IP (852) 2848 4068 [email protected]
Power; Utilities; Renewables and Environment (Hong Kong/China)
John CHOI (852) 2773 8730 [email protected]
Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap
Kelvin LAU (852) 2848 4467 [email protected]
Head of Automobiles; Transportation and Industrial (Hong Kong/China)
Brian LAM (852) 2532 4341 [email protected]
Transportation – Railway; Construction and Engineering (China)
Jibo MA (852) 2848 4489 [email protected]
Head of Custom Products Group
Thomas HO (852) 2773 8716 [email protected]
Custom Products Group
PHILIPPINES
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Utilities and Energy
SOUTH KOREA
Sung Yop CHUNG (82) 2 787 9157 [email protected]
Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel
Mike OH (82) 2 787 9179 [email protected]
Banking; Capital Goods (Construction and Machinery)
Iris PARK (82) 2 787 9165 [email protected]
Consumer/Retail
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Small/Mid Cap
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Christie CHIEN (886) 2 8758 6257 [email protected]
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Small/Mid Cap
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Head of India Research; Strategy; Banking/Finance
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Capital Goods; Utilities
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Ramakrishna MARUVADA (65) 6499 6543 [email protected]
Head of Singapore Research; Telecommunications (China/ASEAN/India)
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Oil and Gas; Capital Goods
David LUM (65) 6329 2102 [email protected]
Banking; Property and REITs
Shane GOH (65) 64996546 [email protected]
Small/Mid Cap (Singapore)
Jame OSMAN (65) 6321 3092 [email protected]
Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)
30
China Harmony New Energy Auto (3836 HK): 18 March 2016
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Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, OUE Downtown 2, Singapore 068809, Republic of Singapore
(65) 6220 3666 (65) 6223 6198
Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia
(61) 3 9916 1300 (61) 3 9916 1330
DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines
(632) 813 7344 (632) 848 0105
Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638
Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea
(82) 2 787 9100 (82) 2 787 9191
Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302,Kerry Center,1 Guanghua Road,Chaoyang District,
Beijing 100020, People’s Republic of China
(86) 10 6500 6688 (86) 10 6500 3594
Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China
(86) 21 3858 2000 (86) 21 3858 2111
Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,
Lumpini, Pathumwan, Bangkok 10330, Thailand (66) 2 252 5650 (66) 2 252 5665
Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India
(91) 22 6622 1000 (91) 22 6622 1019
Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam
(84) 4 3946 0460 (84) 4 3946 0461
DAIWA INSTITUTE OF RESEARCH LTD
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China Harmony New Energy Auto (3836 HK): 18 March 2016
Important Disclosures and Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.
Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationship
For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Japan
Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.
Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.
Investment Banking Relationship
Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa
Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures
Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK)
DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Singapore
This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.
Australia
This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
India
This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Taiwan
This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.
Thailand
This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).
This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.
The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.
United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
32
China Harmony New Energy Auto (3836 HK): 18 March 2016
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
Germany
This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Bahrain
This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113
United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).
Ownership of Securities
For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships
For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making
For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings
Rating Percentage of total
Buy* 63.9%
Hold** 21.3%
Sell*** 14.8%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.
In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.
There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association