-JAC is a comprehensive automobile producer specializing on research & development, manufacturing, sale & services of commercial vehicles, passenger vehicles, and engine components. Existing products of JAC include: heavy-duty, medium-duty, light-duty and micro-duty trucks, multi-purpose commercial vehicles, MPVs, SUVs, sedans, and core components including special chassis and gearboxes, engines etc., The Company's product mix is the most comprehensive among automobile enterprises with self-owned brands.

-In July 2014, JAC announced the plan of principal reforms including comprehensive listing of the Company on stock market through merger by absorption of converting shares, implementation of mixed ownership, introduction of strategic investors and equity share ownership by management. We consider such reforms would generate long-term benefits to JAC.

-JAC's sale volume of vehicles in 2015H1 demonstrated an uptrend, increased 20.5% yoy, to 292,000 vehicles; in which sale of passenger vehicles surged 80.7% yoy, to 161,000. It is mainly due to the timeliness of SUV being strategically re-positioning. The small-scaled SUV, JAC S3, launched in 2014H2 were well-received by market and it brought a five-times yoy surge on the sale volume of SUV vehicles of the Company, which amounted to 110,500. Among this, S3 contributed 92,000. The Company planned to introduce S2, which is a smaller-scaled SUV, in 2015H2. In addition to the steadily increase of sale volume of the new model of S5 launched in 2015H1, we anticipated that the Company will gain more in the market segment of medium- and small-scaled SUVs, with her expansion of product lines. The new model of MPV, M2, will also be launched in 2016, with the hope to improve the undesirable situation that the Company's MPV being updated slowly.

-JAC developed the business of pure electric vehicles relatively early. In 2015H1, the Company recorded a total sale of pure electric vehicles amounted to 2692 vehicles. Being hindered by the insufficient production capacity of the electric battery, the production capacity of JAC's electric- vehicles of the fifth generation, IEV5, may not be enough to satisfy the market demand. With the solution to increase the production capacity of the batteries in 2015H2, JAC's sale performance of the vehicles using new energy would be enhanced. Recently, the Company has announced the plan of raising not exceeding RMB4.5 billion through a private targeted issuance of 329 million shares. The raised capital will be mainly devoted to the projects of vehicles using new energy and their core components (RMB2 billion); high-end pure electric-driven light truck (RMB2 billion); and high-end gearboxes for commercial vehicles (RMB0.5 billion). We consider the Company's strategy of consistent development of vehicles using new energy would help advancement into long-term room for growth.

Investment Thesis

As analyzed above, we expected diluted EPS of the Company to RMB 0.81 and 1.29 for 2015/2016. And we accordingly gave the target price to 16.2, respectively 20/12.6x P/E for 2015/2016. "Buy" rating. (Closing price as at 3 August 2015)

Company Profile

China Anhui Jianghuai Automobile Company Limited (JAC) is a comprehensive automobile producer specializing on research & development, manufacturing, sale & services of commercial vehicles, passenger vehicles, and engine components. The Company was founded as Hefei JAC automobile factory in 1964 and completed the reform to implement stockholding system in 1999. JAC was listed on the Shanghai Stock Exchange in August 2011.

Existing products of JAC include: heavy-duty, medium-duty, light-duty and micro-duty trucks, multi-purpose commercial vehicles, MPVs, SUVs, sedans, and core components including special chassis and gearboxes, engines etc., The Company's product mix is the most comprehensive among automobile enterprises with self-owned brands. JAC's annual production capacity currently reaches 700,000 vehicles, 500,000 engines and related components. The Company's network of sale services exceeds 2000 points of sales, covering all provinces, autonomous regions, municipalities and counties throughout the whole country of China.

Comprehensive listing releases benefits of reforms

In July 2014, JAC announced the plan of principal reforms including comprehensive listing of the Company on stock market through merger by absorption of converting shares, implementation of mixed ownership, introduction of strategic investors and equity share ownership by management. We consider such reforms would generate long-term benefits to JAC.

Firstly, upon the comprehensive listing of the Company, the levels of shareholders were simplified, and the structure for corporate governance was improved. Operation efficiency can be enhanced and market-oriented decisions can be made more quickly. Synergy effect can be utilized.

Secondly, the introduction of strategic investors would help enhancing the equity ownership structure of the Company, and implement better monitoring function and resources sharing at the same time.

Last but not least, equity ownership by management was enhanced. The Company's key management and technical personnel provide funds to make actual investment in the Company and directly hold 1.9% of the equity of the Company. Such act can improve the internal motivation system for staffs, as well as strength the initiative by the management.

SUVs being well-received by market boosted up sale

JAC's sale volume of vehicles in 2015H1 demonstrated an uptrend, increased 20.5% yoy, to 292,000 vehicles; in which sale of passenger vehicles surged 80.7% yoy, to 161,000. It is mainly due to the timeliness of SUV being strategically re-positioning. The small-scaled SUV, JAC S3, launched in 2014H2 were well-received by market and it brought a five-times yoy surge on the sale volume of SUV vehicles of the Company, which amounted to 110,500. Among this, S3 contributed 92,000. The Company planned to introduce S2, which is a smaller-scaled SUV, in 2015H2. In addition to the steadily increase of sale volume of the new model of S5 launched in 2015H1, we anticipated that the Company will gain more in the market segment of medium- and small-scaled SUVs, with her expansion of product lines. The new model of MPV, M2, will also be launched in 2016, with the hope to improve the undesirable situation that the Company's MPV being updated slowly.

New energy vehicles help advancement into long-term room for growth

JAC developed the business of pure electric vehicles relatively early, and the Company's electric vehicles successfully won the hearts of consumers in the target markets with their relatively low price and being included in the subsidized directory of Beijing and Shanghai. In 2015H1, the Company recorded a total sale of pure electric vehicles amounted to 2692 vehicles. Being hindered by the insufficient production capacity of the electric battery, the production capacity of JAC's electric- vehicles of the fifth generation, IEV5, may not be enough to satisfy the market demand. With the solution to increase the production capacity of the batteries in 2015H2, JAC's sale performance of the vehicles using new energy would be enhanced. Recently, the Company has announced the plan of raising not exceeding RMB4.5 billion through a private targeted issuance of 329 million shares. The raised capital will be mainly devoted to the projects of vehicles using new energy and their core components (RMB2 billion); high-end pure electric-driven light truck (RMB2 billion); and high-end gearboxes for commercial vehicles (RMB0.5 billion). We consider the Company's strategy of consistent development of vehicles using new energy would help advancement into long-term room for growth.

Valuation

As analyzed above, we expected diluted EPS of the Company to RMB 0.81 and 1.29 of 2015/2016. And we accordingly gave the target price to 16.2, respectively 20/12.6x P/E for 2015/2016. "Buy" rating.

Financials

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