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1 INDUSTRY UPDATE Chinese government formally releases credit-based system. Analyst: Mark Po, CFA Tel: (852) ) News flow on the new energy vehicle (NEV) industry remains positive. In early Sep 2017, the Chinese government released a message on banning sales of internal combustion engine vehicles in the long term. According to recent news releases, the Chinese government is also considering allowing overseas vehicle makers to set up wholly-owned electronic vehicle businesses in the free trade zones. The final decision has not yet been made, but it could be put in place as early as next year. This relaxation of the joint venture rule will give overseas companies an opportunity to establish manufacturing operations in China. Also, foreign car makers are actively seeking joint venture opportunities in China: Ford Motor [F.US] is planning to cooperate with Anhui Zotye Automobile to build electric passenger vehicles in China under a new brand; and Volkswagen [VOW.GR] launched a new joint venture with JAC to develop electronic vehicles in China. Also, yesterday, after a year of discussion, the Ministry of Industry and Information Technology (MIIT) formally released the credit-based system (fuel efficiency standard for NEVs) for the auto industry. The news flow remains positive for the NEV supply chain, including raw materials, batteries and OEMs. Despite their recent share price outperformance, we believe that investors may have renewed interest in companies in the NEV supply chain. We also believe that shares of auto OEMs with limited exposure to the NEV segment will continue to underperform, given uncertainties on the growth outlook. Credit-based system to promote the NEV industry. The Chinese government released a draft of the credit-based system in Sep 2016 and released the final version yesterday. According to the MIIT credit-based system, automakers will be evaluated on two areas: (a) average fuel consumption of conventional vehicles (fuel efficiency standard), and (b) the proportion of NEV production (NEV standard). The credit-based system will become effective in Apr Automakers will gain if they fulfil the requirements set by the MIIT system and will lose they fail to meet the targets. The lost from the fuel efficiency standard can be offset by gained from the NEV standard, but lost from the NEV standard cannot be offset by gained from the fuel efficiency standard. The average fuel consumption is expected to drop 6% YoY from 2016 to Under the credit-based system, enterprises in China that produce or import fewer than 2,000 vehicles per annum will not have to meet the fuel efficiency standard. Enterprises in China that produce or import more than 2,000 vehicles but fewer than 30,000 vehicles will have to meet the fuel efficiency standard but not the NEV standard. For enterprises in China that produce or import 30,000 vehicles or above, the NEV contribution must reach 10% of total sales in 2017 and 12% in For example, an automaker with annual production volume of 1m units must accumulate 100,000 in 2019 and 120,000 in The for producing an NEV will be subject to a formula set by the Chinese government: a) pure electric vehicles R+0.8 (R=km), b) hybrids 2, and c) fuel cells 0.16 P (P=kWh/100km). The /credits will be capped at 5. Regarding pure electric vehicles, for producing cars with a range of 300km, an automaker will get 4.4. If an automaker fails to meet the MIIT requirements, it will not be allowed to produce high-fuel-consumption models unless its achieves a positive point total in the following year. NEV production are more difficult to get, so some automakers may have to suspend production of highly profitable high-fuel-consumption models. Automakers can buy NEV credits from other automakers with excess credits, which means that new energy capacity will be rerated by the market. The MIIT will also establish a blacklist system for automakers that do not meet the requirements. Automakers on the blacklist will be restricted or banned from benefiting from government support policies, such as financial subsidies and preferential tax policies. According to the China Association of Automobile Manufacturers (CAAM), the NEV ratio achieved by automakers was only 3% in Therefore, the 10% target ratio for 2019 will be difficult for some automakers to achieve. We believe that the change in the subsidy programme earlier this year created uncertainty in the NEV sector and that growth of the whole industry was capped in 1H However, the launch of the credit-based system and policy support for the EV battery industry indicates that the Chinese government is still keen on promoting NEVs and that the outlook for the NEV supply chain (especially electric vehicles) remains positive. Under the MIIT credit system, automakers will take more responsibility for promoting NEVs. Automakers can meet the fuel efficiency requirements through the application of new technology, but meeting the requirements under the NEV production system will require more R&D investment and more advanced NEV production capability. The leading players with first-mover advantage will thus be the major beneficiaries. On the micro level, we think that a few listed local OEMs such as BYD [1211.HK] and BAIC [1958.HK] will be able to meet new standard in 2018 and The market also believes that Geely [0175.HK] should be comfortably able to meet government s requirements, given its new NEV line-up. Automakers with significant exposure to the highfuel-consumption vehicle segment will be hurt by the new policy. Potential beneficiaries and losers. Potential beneficiaries of the credit-based system and new policy on the EV sector include BAIC, BYD Coslight [1043.HK], Tianneng [0819.HK], and Xinyi HK [8328.HK]. However, it seems that Chaowei s [0951.HK] acid-lead battery operation has been hit by high raw material costs, and its shares may come under pressure due to concerns about profitability (link to industry news flow: In our latest key takeaways from our meeting with Guoxuan High-tech Co., Ltd [ CH], we highlighted that Guoxuan High-tech Co., Ltd is also one of the key beneficiaries, as the market is now re-rating battery capacity in China. Suppliers of raw materials such as lithium and cobalt will also see stronger demand under the new policy. Companies with higher exposure to the high-fuel-consumption segment, such as Great Wall Motor [2333.HK], may suffer significantly from the new policies if they fail to achieve the new targets set by the Chinese government. 1

2 Figure 1: MIIT credit system MIIT Average fuel consumption standard New energy vehicle production standard Positive Negative Positive Negative Internal transferable Tradable Sources: MIIT, NDRC, Internet, CGIS Research Figure 2: MIIT s new energy vehicle production standard Driving range Car Type R R < R < R < 350 R 350 Pure EV Passenger vehicle / PHEV Passenger vehicle / Sources: MIIT, Internet, CGIS Research 2

3 Figure 3: Monthly new energy vehicle sales volume Units Sales Volume (units) YoY (%) 120, ,000 80,000 60,000 40,000 20, /14 03/15 06/15 09/15 12/15 03/16 06/16 09/16 12/16 03/17 06/17 Sources: WIND, CGIS Research 350% 300% 250% 200% 150% 100% 50% 0% -50% -100% Figure 4: MIIT s new energy vehicle production ratio target Year New energy vehicle production Target ratio / / / 10% 12% Sources: MIIT, Internet, CGIS Research 3

4 Figure 5: Peer comparison Sector Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Share Price Performance F 3M 6M 12M Price Market Cap 2017F 2018F 2019F 2017F 2018F 2019F F F F 1M YTD Lcy US$m x x x x x x x x % % % % % % % % % % % Automaker PV 1211 HK Byd Co Ltd-H , n.a HK Geely Automobile Holdings Lt , HK Guangzhou Automobile Group-H , HK Great Wall Motor Company-H , HK Baic Motor Corp Ltd-H , HK O Luxe Holdings Ltd n.a. n.a. n.a. n.a. n.a. n.a. 2.8 n.a n.a. 0.7 n.a. 0.0 n.a Bus CH Saic Motor Corp Ltd-A , n.a CH Zhengzhou Yutong Bus Co -A , n.a CH Zhongtong Bus & Holding Co-A , n.a. n.a. n.a. 3.3 n.a n.a. n.a CH Anhui Ankai Automobile-A n.a. n.a. n.a. n.a. n.a. n.a. 5.1 n.a. 4.0 n.a. 0.0 n.a. n.a. n.a CH Beiqi Foton Motor Co Ltd-A , n.a n.a HK China Dynamics Holdings Ltd n.a. n.a. n.a. n.a. n.a. n.a. 0.3 n.a n.a n.a. 0.0 n.a HK Fdg Electric Vehicles Ltd ,134 n.a. n.a. n.a. n.a. n.a. n.a. 3.0 n.a n.a Average CH Beijing Easpring Material-A , n.a Cathode materials CH Citic Guoan Information-A , n.a. n.a. n.a. 6.2 n.a. 3.5 n.a. 2.1 n.a. n.a. n.a CH China Baoan Group-A ,897 n.a. n.a. n.a. n.a. n.a. n.a. 4.3 n.a. 5.2 n.a. 1.1 n.a. n.a. n.a CH Kingray New Materials Sci -A , n.a. n.a. n.a CH Hengdian Group Dmegc -A , n.a CH Jiangxi Special Electric -A , n.a n.a n.a Anode material CH Jiangsu Guotai Int Group -A , n.a CH China Baoan Group-A ,897 n.a. n.a. n.a. n.a. n.a. n.a. 4.3 n.a. 5.2 n.a. 1.1 n.a. n.a. n.a Li-ion battery separator CH Fspg Hi-Tech Co Ltd -A ,149 n.a. n.a. n.a. n.a. n.a. n.a. 3.6 n.a. 6.0 n.a. 2.7 n.a. n.a. n.a CH Zhejiang Nanyang Technolog-A , n.a. n.a. n.a. 5.0 n.a n.a. n.a. n.a CH Shenzhen Hifuture Electric-A , n.a. n.a. n.a n.a n.a. n.a CH Cangzhou Mingzhu Plastic -A , n.a CH Jiangsu Guotai Int Group -A , n.a Electrolytic solution CH Shenzhen Capchem Technolog-A , n.a CH Do-Fluoride Chemicals Co-A , n.a. n.a CH Jiangsu Bicon Pharmaceutic-A , n.a. n.a. n.a. n.a. 4.7 n.a n.a. 5.4 n.a. n.a. n.a Power core CH Sichuan Chengfei Integrat -A , n.a. n.a. n.a. 5.4 n.a. 7.9 n.a. 1.1 n.a. n.a. n.a CH Zhejiang Narada Power Sour-A , n.a CH Shenzhen Desay Battery Tec-A , n.a BMS CH Sunwoda Electronic Co Ltd-A , n.a CH Shenzhen Topband Co Ltd -A , n.a. n.a. n.a n.a CH Ningbo Joyson Electronic -A , n.a Lithium materials CH Jiangxi Ganfeng Lithium Co-A , n.a CH Tibet Mineral Development-A ,573 n.a. n.a. n.a. n.a. n.a. n.a. 5.0 n.a. 1.1 n.a n.a. n.a. n.a CH Qinghai Salt Lake Industry-A ,136 n.a n.a CH Tianqi Lithium Industr Ind-A , n.a Battery 1043 HK Coslight Technology Intl Gp n.a. n.a. n.a. n.a. n.a. n.a. 0.7 n.a. 7.4 n.a. 1.7 n.a. 0.0 n.a CH Guoxuan High-Tech Co Ltd , n.a CH Eve Energy Co Ltd-A , n.a HK Tianneng Power Intl Ltd , HK Chaowei Power Holdings Ltd HK Fdg Kinetic Ltd n.a. n.a. n.a. n.a. n.a. n.a. 4.8 n.a. n.a. n.a. n.a. n.a. 0.0 n.a HK Hybrid Kinetic Group Ltd n.a. n.a. n.a. n.a. n.a. n.a. 2.4 n.a n.a n.a. 0.0 n.a HK Xinyi Automobile Glass Hong n.a. n.a. n.a. n.a. n.a. n.a. 8.4 n.a. 0.1 n.a. 0.1 n.a. 0.0 n.a Super Capacitor 894 HK Man Yue Technology Holdings n.a. n.a. n.a. n.a. n.a. n.a. 0.5 n.a n.a. 1.2 n.a. 0.0 n.a CH Nantong Jianghai Capacitor-A ,259 n.a. n.a. n.a. n.a. n.a. n.a. 2.8 n.a. 6.4 n.a. 6.2 n.a. n.a. n.a Average Permanent magnetic material CH Beijing Zhongke Sanhuan Hi-A , n.a CH Jilin Sino-Microelectronic-A n.a. n.a. n.a n.a CH Zhongshan Broad Ocean Moto-A , n.a HK Zhuzhou Crrc Times Electric , n.a Motor driver CH Shenzhen Inovance Technolo-A , n.a CH Zhejiang Founder Motor Co -A n.a CH Beijing Zhongke Sanhuan Hi-A , n.a CH Jiugui Liquor Co Ltd-A , n.a. n.a CH Jiangxi Special Electric -A , n.a n.a n.a CH Ningbo Yunsheng (Group) Co-A , n.a CH Wolong Electric Group Co L-A , n.a n.a CH Xinzhi Motor Co Ltd-A , n.a n.a CH Hunan Corun New Energy Co-A , n.a. n.a. n.a n.a n.a. 0.0 n.a Average n.a Charging equpment CH Shenzhen Auto Electric Pow-A n.a. n.a. n.a. n.a. n.a. n.a. 6.1 n.a. 1.2 n.a. 1.9 n.a. n.a. n.a CH Nari Technology Co Ltd-A , n.a CH Sieyuan Electric Co Ltd-A , n.a n.a CH Shanghai Potevio Co Ltd - A n.a. n.a. n.a. n.a. n.a. n.a. 7.8 n.a n.a n.a. n.a. n.a CH Shenzhen Kstar Science And-A , n.a CH Suzhou Industrial Park Hes-A n.a HK China Titans Energy Technolo n.a. n.a. n.a. n.a. n.a. n.a. 1.5 n.a. 1.4 n.a. 1.6 n.a. 0.0 n.a HK Wasion Group Holdings Ltd HK Zte Corp-H , HK Jiangnan Group Ltd Average HSI Index Hang Seng Index HSCEI Index Hang Seng China Ent Indx SHCOMP Index Shanghai Se Composite MXCN Index Msci China Sources: Bloomberg, Company, CGIS Research 4

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