Investment Highlights

54.51% owned by China Changan Automobile Group （CCAG）， theCompany is China's leading powertrain systems manufacturer forpassenger vehicles （PVs）。 Its major products include engines,gearboxes and other powertrain systems for PVs, and counts majorcarmakers including Chang'an BAIC Motor and Foton as its clients.

Currently, the Company sources the majority of its profits from HarbinDongAn Automotive Engine Manufacturing Co., （hereinafter referred toas DAE, listed Company and CCAG own 36% and 19% stakes in DAErespectively）。 Thanks to product mix upgrading and buoyant demand forrelated passenger vehicles, the Company and DAE sold 150,000 unitsand 240,000 units of engines in 1H16, up 100% and 27% respectively.

Short-term: earnings turning around brilliantly thanks to buoyantdemand for related passenger vehicle models. The Company postedoperating profit of Rmb52mn in 2Q16, of which, the headquarter loggedearnings of Rmb26.86mn, far exceeding expectations. The impressiveresults mainly came on the back of: （i） product mix upgrading at the HQ:

its new product, the M series engines accounted for 96% of its totalsales volume; and （ii） sizzling sales of popular models equipped withpowertrain systems manufactured by the Company. We forecast itssales volume in 2016 will rebound to the peak seen during 2009-10,leading to a turnaround in earnings growth. We anticipate its net profitwill surge to Rmb150mn in 2016E, up 500%-plus YoY. Looking into2017E, we believe the Company will maintain its rapid growth at over50% thanks to rising sales volume of popular models as well as newmodels to be launched next year.

Medium-term: mass production for 6AT gearbox expected in 1H16,facilitating the establishment of a leading powertrain systemmanufacturer. After launching the project in 2011, DAE is expected toachieve mass production of its 6AT gearbox in 1H17 and subsequentlysupplied to local brands including FAW Haima and Zotye. After gainingmarket approval on the reliability and consistency of this new product,the 6AT gearbox is expected to be fitted onto the popular modelsincluding Chang'an CS75 and CX70, leveraging on the resources of theparent group. Mass production of the 6AT gearbox, will allow theCompany to consolidate its position as a core supplier of powertrainsystems in China, and helping to drive up its valuation in the future. Atthe same time, the Company has already completed the development ofthe prototype and performance calibration of its next major product, theM12T turbocharged engine, which is expected to be formally launchedonto the market in 2H17. As the M12T adopts a combination ofadvanced domestic and overseas technologies, it will ensure relevantmodels will meet China's future emission standards.Long-term: is the most likely to become the platform for manufacturing powertrain systems ofCCAG. Taking reference from the capital structure between SAIC Motor/Huayu Automotive Systems andBAIC Motor/Shandong Binzhou Bohai Piston, we also anticipate CCAG to foster its own platforms formanufacturing parts & accessories or powertrain systems in the future. CCAG directly owns a substantialstake in Harbin Dongan Auto Engine, at 55%. Meanwhile, the latter is also witnessing improvedoperations as well as a turnaround in earnings. As such, we believe the Company is the most likely tobecome the future platform for manufacturing powertrain systems of CCAG. In addition, a reshuffle of itsmanagement around the turn of 2016 will give a new lease of life to the Company.

Risks: （i） worse-than-expected sales volume for products equipped for new models; （ii） disappointingmarket reception to new products including its turbocharged engine and 6AT transmission; （iii）slower-than-expected progress in asset consolidation at the group level.

Earnings forecast, valuation and investment rating: We forecast its 2016-18E EPS to beRmb0.33/0.52/0.73 （2015A: Rmb0.05）。 The stock is currently trading at Rmb10.71, implying 2016-18EP/E of 32/20/15x. Given the turnaround in its earnings, its new products including turbocharged enginesand 6AT gearboxes will enable the Company to become a key supplier of powertrain systems formainstream local carmakers. From a long-term perspective, we believe the Company could become aplatform for manufacturing powertrain systems for CCAG. Taking into account industry average valuation,we believe it warrants a fair valuation of ——35x 2017E P/E. Initiate coverage with BUY and a target price ofRmb18.