Event:

The Company announced its plan to set up a NEV JV with a few partners via acontribution of Rmb320mn to take a stake of 40% as the largest shareholder.

Comments:

Investing into a NEV company to achieve business transformation conducive tovaluation re-rating. On 6th Mar 2017, the Company announced that it would set up a NEVcompany with Sinomach Capital, China Machinery International Engineering Design &Research Institute Co., Ltd., China National Electric Apparatus Research Institute Co., Ltd.

（China Electric Institute CEI） etc. with the parties mentioned to take stakes of 40%, 17%, 3%and 7% respectively. This NEV company will be mainly engaged in R&D andmanufacturing of pure electric vehicles and NEV parts/power electronics with an designedcapacity of 100,000 units up to now. By taking a major stake in a NEV company, theCompany further extended its presence along the entire auto/auto service value chain,transforming into an auto conglomerate engaging in auto R&D, manufacturing, trade andfinance from a pure auto trade service provider. This is conducive to the Company'svaluation re-rating.

The NEV project likely to progress faster than expected considering the richresources that the parent group boasts. As a major auto arm of its parent group, theCompany is the sole capital operation platform for the auto assets under China NationalMachinery Industry Corporation （Sinomach）。 In addition to the Company, this NEV projectwill also integrate multiple resources under the Sinomach, including AutomotiveEngineering Corporation （AE）， the leading auto production line supplier in China that hasever implemented engineering construction projects for many a JV auto project in Chinafor Benz, BMW, Jaguar Land Rover, Volkswagen, Volvo, GM etc. and playersimplementing national innovative projects such as CEI, China Machinery InternationalEngineering Design & Research Institute Co., Ltd., Sinomach Capital etc. In addition,Ganzhou, where the NEV project will be located, unveiled policy tailwinds for NEV in Jun2016. When implemented there, this project is expected to receive huge amount of fiscalawards or subsidies for equipment purchase and be given priority in local government'spicking auto suppliers. As it will be located in Ganzhou, an economically underdevelopedcity, this project is expected to surprise the market to the upside in progress concerningobtaining the license for manufacturing pure electric vehicles, mass production of suchautos etc.

The imported auto market has bottomed out while the Company's new businessessuch as financing/leasing, parallel-import auto etc. have kept turning around. Theimported auto market has bottomed out. During 2016, China imported a total of 1.04mnautos （-3.4% YoY vs -24.2 during 2015）。 Of which, for Dec 2016 alone, sales of importedautos stood at 89,000 units with the YoY growth swinging up into the black （+6.1%）。 TheCompany's financing/leasing business has grown steadily. It has continued reinforcing itscooperation with auto makers via auto leasing projects and won the bid for the auto importservice project （for Jaguar Land Rover）。 During 1H2016, it won bids for 11 nationalprojects, developing 20+ premium clients. In addition, its parallel-import auto business,among other new businesses, has been also progressing swiftly and is expected tobecome a fresh profit growth driver for the Company.

The Company is expected to carry out SOE reform as the sole capital operationplatform for the auto assets under the parent group, Sinomach. The Company is thesole listed vehicle for the auto businesses under its parent group, Sinomach, which hasclearly requested to give full play to the Company's advantages as a listed company to 1）support itself to raise its overall asset securitization rate and 2） boost the Company'searnings via inorganic growth such as mergers and restructuring. The parent group hasalready accumulated experience in internal resource restricting as it helped ChinaNational Erzhong Group Co. to transform into an engineering contractor and a mastercontractor from a pure manufacturer by facilitating internal restructuring and businessdevelopment based on resource consolidation.

Potential risks: the imported car subsector continues declining sharply, exploration innew businesses such as auto financing/leasing, parallel-import auto etc. missesexpectations and the progress in the NEV project is disappointing.

Earnings forecast, valuation and investment rating: According to its unaudited 2016results, we cut the Company's 2016/17/18E EPS estimates to Rmb0.62/0.83/1.03 （2015AEPS at Rmb0.51）。 The Company is trading at Rmb14.26, implying 2016/17/18E PE of23/17/14x. As the market of imported autos has been turning around, new businessessuch as financing/leasing and parallel-import autos have kept turning to the better. TheCompany is also expected to carry out SOE reform. We believe 25x 2017E PE is fair forthe Company and reiterate our BUY rating and the TP of Rmb19.