-Strong growth for BBA 1H2014: Owning to the continuing effect of capacity release, BBA (Brilliance BMW) delivered 140 thousand cars in the first half of 2014, a year-on-year increase of 37%, out of which SUV model X1 increased by 107% year-on-year to 22 thousand, X3 increased by 55% to 46 thousand, and X5 increased by 51% to 71 thousand. The company's sales goal in 2014 is 260 thousand cars, a 30% year-on-year increase, and in half a year it has achieved 53.8% of the sales goal for the year. Since the capacity of Dadong factory for production of series 5 has been approaching its limit, we believe in the coming one-year BBA's sales increase will be mainly contributed by series 3 and X1.

-JV Contract renewal in advance is expected to eliminate uncertainty: 4 years ahead of the expiration of the joint venture contract, BMW Group and the company have announced recently that joint venture contract would be extended to 2028; this move is expected to eliminate the uncertainty of the source for future profitability, and is conducive to the introduction of new BMW models and their technologies, which is beneficial to the company's stock performance and the level of valuation.

-Accelerated segmentation product strategy: BMW Group has issued the guidance on the future planning of Chinese market, including: 3 new models will realize localized production in China; Continue to increase the total capacity of BBA's Dadong factory and Tiexi factory in Shenyang; BMW¡¦s 3-cylinder and 4-cylinder gasoline engines are going to be put into production in China in 2016. It is learned that the 3 new models for domestic production in future are respectively BMW 2X Active Tourer van, BMW X3 and one new entry-level model lower than the level of X3, which will increase the vehicle types of domestic production in China from currently 3 models to 6 models. For SUV model X3, the wheelbase will be extended, which is more likely to meet the vehicle purchase needs of domestic consumers at present, and the future performance is worthy of expectation. After the completion of BBA's new engine plant, production of advanced 3-cylinder and 4-cylinder gasoline engines will be officially started in 2016, which will positively improve the capacity and quality of BBA.

How we view this

We believe that, after experiencing the explosive growth in past few years, the increase rate of China's luxury car market begins to slow down, with structure-based and pluralism market development trend becoming apparent, so BMW's accelerated introduction of segmentation products is conducive to continuous development of new segment markets.

Investment Action

According to above, we revised our target price to HK$16.45, based on 15/11/8.5xP/E in2014/2015/2016, which we believe is rational considering its high ROE and fast growth ahead among peers, and the suggestions of ¡§accumulate¡¨ rating be given.

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