CLSA-BrillianceAuto-20140416

Brilliance Auto
HK$12.22 - BUY
Financials
Year to 31 December 11A 12A 13CL 14CL 15CL
Revenue (Rmbm) 6,443 5,916 6,103 5,668 5,838
Net profit (Rmbm) 1,812 2,301 3,374 4,173 5,139
EPS (fen) 36.3 45.8 67.1 82.7 101.8
CL/consensus (31) (EPS%) - - 100 101 104
EPS growth (% YoY) 42.5 26.3 46.6 23.2 23.1
PE (x) 28.0 21.7 14.4 11.7 9.5
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
FCF yield (%) (1.8) (1.1) (2.5) (0.7) (0.7)
PB (x) 7.3 5.0 3.7 2.9 2.3
ROE (%) 27.2 27.1 29.3 28.1 27.2
Net debt/equity (%) 40.1 21.6 15.8 12.6 8.9
Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com
Scott Laprise
scott.laprise@clsa.com
+852 2600 7914
Will Chen, CFA
+86 21 2020 5920
Ben Xu
+86 21 2020 5807
17 April 2014
China
Autos
Reuters 1114.HK
Bloomberg 1114 HK
Priced on 15 April 2014
HS CEI @ 10,028.7
12M hi/lo HK$14.44/8.17
12M price target HK$15.42
±% potential +26%
Shares in issue 5,025.8m
Free float (est.) 57.5%
Market cap US$7,921m
3M average daily volume
HK$108.4m (US$14.0m)
Major shareholders
Huachen Automotive Group
Holdings Company Limite 42.5%
Stock performance (%)
1M 3M 12M
Absolute 18.6 (4.8) 31.1
Relative 10.0 (3.2) 36.5
Abs (US$) 18.8 (4.8) 31.3
Source: Bloomberg
www.clsa.com
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Brilliance Auto
Rel to CEI (RHS)
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Who doesn’t want a BMW?
We initiate with a BUY on Brilliance Auto, the Chinese JV partner of BMW.
While BMW’s model cycle is bottoming, capacity expansion in China
should support earnings growth. As Brilliance’s self-branded vehicles
continue to be loss-making, we expect the JV to account for over 100% of
profit from 2014, making it a BMW proxy. Aspirational middle-class car
buyers are upgrading and this should support luxury segment growth.
Our PE-based target price of HK$15.42 implies 26% upside.
BMW model cycle is bottoming
BMW is reaching the bottom of its model cycle. We forecast blended ASP to drop
3.3% YoY in 2014 and 3.2% YoY in 2015 due to higher shipments of the 3
Series. Net margin at the BMW JV should stay at 9.5%/9.4% in 14CL/15CL. The
higher-profit 5 and 7 Series are ageing and are to likely be replaced in 2016.
Meanwhile, rival Mercedes-Benz has just launched the new and well-received S-
Class, enhancing its brand image and moving it up the model cycle.
Proxy for BMW
With Brilliance’s self-branded cars making losses, we estimate the BMW JV to
contribute 102% and 101% of net profit for 2014 and 2015. Shipment growth
for the JV should be 26.5% and 28.3% YoY, supported by capacity expansion at
the Tiexi and Dadong factories. We expect earnings growth of 23.7% in 2014
and 22.7% in 2015. Risk to net profit arises if the company launches more low-
profit self-branded cars, especially as the government is pushing this policy.
Chinese like luxury cars
The luxury market in China has experienced explosive growth in the past three
years as demand has exceeded supply. We believe China’s aspirational middle
class will provide primary demand, helped by very attractive car loans.
Localisation of luxury car models should speed up in the next few years and we
expect that total localised luxury capacity will grow 142% from 2012 to 2016.
Initiate with BUY
We believe the company’s earnings growth should remain high and anticipate
23.2% YoY in 2014 and 23.1% YoY in 2015. We use 12x 15CL PE to derive
our HK$15.42 target price. The stock traded at an average 12.6x in the past
three years with a 2010-13 earnings Cagr of 38.5%. We use a slightly lower
target multiple as we expect slower growth in the luxury segment. With 26%
implied upside, we initiate coverage with a BUY call.

Brilliance Auto - BUY
2 scott.laprise@clsa.com 17 April 2014
Brilliance Auto - HK$12.22 - BUY
The business Competition & market franchise
In 2003, Brilliance started its JV with BMW to produce localised
BMW models, including the 3 Series, 5 Series and X1. The JV is
the primary profit contributor, accounting for 102% of Brilliance’s
total profit in 2013. Sales of the company’s self-branded business,
Jinbei Minibus, remain weak and should be close to breakeven in
the next two years. We believe this is a reflection of Brilliance’s
car-making capability, which has to date not been very
successful. In the next three years, we don’t expect to see any
significant change from its self-brand minibus and forecast sales
of 77,000 and 79,000 units in 2014 and 2015.
Brilliance owns 51% of Shenyang Automotive (SYA), China's
largest minibus producer. The company has diverted it focus
from minibus as its core Hiase brand saw lower market share
in 2013. Its self-brand recorded an operating loss of Rmb24m
in 2012 and Rmb61m in 2013, due to slowing shipments. Its
JV business will benefit from BMW localisation. We forecast
shipment growth for BMW Brilliance at 26.5% YoY for 2014
and 28.3% YoY for 2015, mainly supported by capacity
expansion at its Tiexi and Dadong factories.
Valuation history
PE bands PB bands
Brilliance is trading at 11.5x 12-
month forward PE, below its
average of 12.6x in the past
three years and 13.9% higher
than the -1sd level. The
company is also trading at 2.9x
forward PB, which is lower than
its average of 3.1x in the past
three years and 13.7% higher
than the -1sd level.
Bands (from the top): max, +1sd, avg, -1sd, min
Target-price sensitivity
Our blue-sky value of HK$17.9
assumes BMW shipment
growth at 13.9% and 28.3%
YoY in 14CL and 15CL, with a
blended ASP rising 0.2% YoY
in 14CL and falling 3.2% YoY
in 15CL.
Our target price of HK$15.42
assumes 26.5% and 28.3%
BMW shipment growth in 14CL
and 15CL, with a blended ASP
YoY decline of 3.3% and 3.2%
over the two years.
Our rainy day value assumes
BMW shipment growth of
39.2% and 28.3% YoY in 14CL
and 15CL, with blended ASP
falling 7.6% and 3.2% YoY
over the two years.
Source: CLSA
2.1x
6.5x
10.9x
15.2x
19.5x
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4
9
21
Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 Apr 14
log (HK$)
0.4x
1.5x
2.6x
3.7x
4.7x
1
2
4
9
21
Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 Apr 14
log (HK$)
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15
Share price Target price
Blue sky Rainy day
(HK$)
10.2
17.9
15.4

Section 1: BMW model cycle is bottoming Brilliance Auto - BUY
17 April 2014 scott.laprise@clsa.com 3
BMW model cycle is bottoming
We forecast blended ASP for BMW to decline by 3.3% and 3.2% YoY in 2014
and 2015 due to higher shipments of the 3 Series. Net margin of the
Brilliance-BMW JV will stay at 9.5%/9.4% in 14CL/15CL. The higher-profit
5 and 7 Series are ageing and are likely to be replaced in 2016. Meanwhile,
rival Mercedes-Benz has just launched its new and well-received S-Class,
enhancing its overall brand image and moving it up the model cycle.
BMW-Brilliance joint venture
Brilliance China was established in 1992 and listed on the Hong Kong
exchange in 1999. In 2002, Brilliance started its joint venture with BMW
forming BMW Brilliance Automotive to produce localised BMW models. Models
include: the 3 Series, 5 Series and X1. One unfortunate issue for investors is
that BMW-related profit is added in at the JCE line, which means an equity
gain method of accounting. We therefore have very little data or insight into
the primary profit driver of the company, as it does not need to report any
financial details such as revenue, gross profit or cost items.
For 2013, Brilliance made net profit attributable to equity holders of
Rmb3,374m, or 46.6% YoY growth. Meanwhile, the JV income from BMW
Brilliance was Rmb3,829m, or 64% YoY growth. The JV is the primary profit
driver for the company. In 14CL, we expect income from the JV to be about
102% of total net income.
We have not factored in any exports of the 3 Series and 5 Series to other
markets, especially within Asia or the Middle East, as we expect the company
to focus its car sales within China. However, should sales slow dramatically,
the company may utilise this option as the longer version of these cars are in
high demand in some of these markets, particularly where consumers
commonly use a driver. There is little incentive to export as BMW would need
to share 50% of the profits with Brilliance, which it currently doesn’t have to
when it ships cars from Germany.
Figure 1 Figure 2 Figure 3
BMW Brilliance 3 Series BMW Brilliance 5 Series BMW Brilliance X1 SUV
Source: BMW China
Brilliance began to make vehicles in 1994. The company also had a pre-2010,
self-branded business that made losses. What we mean by self-branded is the
vehicles were 100% manufactured by Brilliance (Chinese-made domestic cars)
and not the cars in the JV with BMW. BMW Brilliance started to produce
localised BMW models from 2003, choosing what was thought to be a weaker
Chinese partner giving it the potential for more control of the JV. It was a
difficult decision for BMW to make cars in China as this had the potential to hurt
the brand image. A debate at BMW fuelled by worries that the government
might put in even higher import duties was the main reason to bring its high-
Brilliance has become
a proxy for BMW’s
China business
In 2009, the money-
losing self-brand
Zhonghua sedan was sold
back to the group
BMW details are reported
as an equity gain providing
few financial details
We have not factored in
any exports from China to
other markets
BMW decision to produce
in China driven by fears of
import taxes
Expect ASP decline on
higher shipments
JV income from BMW
Brilliance should make up
102% of total net income

volume cars to China. Audi had even earlier made this decision though that was
driven more by trying to sell cars to the government as officials could only buy
“Made in China” cars. We believe this was the wrong decision made by the
luxury carmakers as it would have been able to have higher profits from
imported cars and an even better brand image. We don’t believe that higher
taxes would have been imposed as the volume of cars was not so big and the
end user often is a government official. But the worry about long-term future
and the fact competitors were likely to produce locally drove their decision.
BMW has very few production facilities outside of Germany with an SUV plant in
the USA and small production of its 3 Series in South Africa.
Before 2009, Brilliance had two self-brands - Jinbei minibus and Zhonghua
sedans. At the end of 2009, Brilliance China changed the focus of the listed
company to an almost pure play on the BMW JV after it sold the money-losing
Zhonghua business back to the group company. This was an excellent solution
as BMW needed to plan a new factory but Brilliance did not have the money
and was worried BMW might want to start a new JV with another Chinese
partner. Selling the self-branded cars business to the parent gave it an
opportunity. At the same time, BMW started to look around at other JVs with
potential partners like SAIC. Other carmakers wanted to form a JV with BMW,
but with the high-volume 3 and 5 Series locked up with Brilliance, there was
not much left for a new JV.
Today, the self-branded business is Jinbei minibus, which saw weak sales in
1H13, shipping 34,000 buses with revenue of Rmb2,572m, a decline of 8.4%
YoY and a net loss of Rmb67m (excluding the Brilliance JV income), compared
to a Rmb22m profit and Rmb46m loss in 1H13 and 2H13. We believe this is a
reflection of the carmaking capability of Brilliance, which has to date not been
very successful.
Figure 4
BMW 2013 shipments and production in China compared with total passenger car sales
Brand Production Sales
Dec
2013
Jan-Dec
2013
Jan-Dec
2012
% Change Dec
2013
Jan-Dec
2013
Jan-Dec
2012
% Change
Prior
month
YTD Prior
month
YTD
Total PV 1,165,912 12,100,772 10,767,380 (0.79) 12.38 1,175,565 12,009,704 10,744,740 4.24 11.77
BMW 3 Series 8,053 62,598 25,354 13.9 146.9 5,368 61,213 20,794 3.43 194.38
BMW 5 Series 10,545 126,888 103,517 (9.71) 22.58 9,807 123,852 105,939 8.26 16.91
BMW M12 42 55 0 * * 0 0 0 * *
Total 18,640 189,541 128,871 (0.58) 47.08 15,175 185,065 126,733 6.5 46.03
Source: CAAM
Figure 5 Figure 6
Jinbei minibus Haishi Zhonghua sedan
Source: Company website
Brilliance had to sell its
self-branded car business

Brilliance China owns 51% of Shenyang Automotive (SYA), the country's
largest minibus producer. Its core Hiase minibus brand (known as Hiace
outside China) lost market share from 43,000 units in 2012 to 36,900 units in
2013. The vehicle is built with a quality Toyota engine but proved more costly
than cheaper Chinese competitors.
Figure 7
Company share structure
Source: Company disclosure. Xingyuandong makes auto parts. Jingbei Auto owns 49% of Shenyang Auto.
Huachen Automotive
Group Holdings
Individuals Liaoning Province
0.4% 99.6%
Brilliance China Automobile
Holdings Limited (1114 HK)
Public shareholders
42.5% 57.5%
Xingyuandong Shenyang Automotive Brilliance BMW
100% 51% 50%
Self-brand loses money
and we don’t expect this
to change anytime soon
50% share in JV with
BMW and 51% in
Shenyang Automotive

Company history: Over 64 years
Figure 8
Brilliance Auto history
Year Event
1949 Brilliance China Automotive Holdings Limited was founded.
1991 Shenyang Jinbei Car Maker was founded, one of the carmakers of Brilliance China Automotive Holdings Limited.
1992 Becomes first Chinese car company to be listed on a foreign stock exchange; it went public on the NYSE, in 1992. It was
incorporated in Bermuda. When it was first listed, it was one of the most active stocks on the exchange. Toyota sent
engineers to the company to train personnel.
1995 The first Chinese automotive company to pass the ISO 9000 quality assurance programme. At this time the Toyota
agreement expired, but the company was well on its way.
1996 The name was changed to Shenyang Brilliance Jinbei Automobile with a registered capital of US$444m. It launched a
mid-priced minibus which is their main product even today.
1998 The company bought a 51% indirect equity interest in Ningbo Yuming, which produces car windows, moulding and
stripping. It also bought a 50% indirect interest in Miayang Xinchen, which produces petrol engines for passenger
vehicles and light duty trucks. It also formed Xing Yuan Dong, a fully owned subsidiary, to consolidate the purchasing
and sourcing of spares parts.
1999 The company went public on the Hong Kong stock exchange. It also acquired a 16% equity stake in Shenyang
Aerospace, a joint venture company with Mitsubishi that manufactures Mitsubishi gasoline engines.
2000 Established Ningbo Brilliance Ruixing, a fully owned subsidiary to organise trading, and development of auto parts for Ningbo
Yuming. It also formed Mianyang Brilliance Ruian and a subsidiary company, also developing auto parts for Mianyang Xinchen.
It acquired a 50% equity interest in Shenyang Xinguang, making gasoline engines for passenger vehicles.
2001 Entered into an assistance agreement with BMW for technical support, and training to help them produce the Zhonghua
sedan. The company acquired a 100% equity interest in Dongxing, making automotive components.
2002 Entered into a joint venture with BMW. The Zhonghua sedan was launched.
2003 The company owns a research and design centre with 499 people. There were two doctors and 33 with a Master’s degree
and the rest technical personnel. The main purpose was to improve the company’s products, such as its cars, data
management system and testing. It also began producing BMW 3 and 5 Series, and launched the Jinbei minibus.
Today The company has 159 related companies, 14 of which are solely owned, 125 are ventures or holding companies, and 20
joint operating enterprises, with total assets of Rmb300bn. The company makes auto parts and components, including
window stripping. mouldings, seats, axles, safety and airbag systems, interior finishings, and engines for passenger cars,
minibuses, sport utility vehicles, and light duty trucks.
Source: Company
Figure 9
Brilliance historical price
Source: Winds
0
2
4
6
8
10
12
14
16
Oct 99 Mar 02 Aug 04 Dec 06 May 09 Oct 11 Feb 14
(HK$)
Brilliance share price
jumped after the sale of
the self-branded cars
back to parent

Brilliance and the BMW JV contract
Foreign auto companies coming into China are required to set up joint
ventures if they want to manufacture vehicles in China. While in many other
sectors a JV is preferable to help get through red tape and establish
relationships or “guanxi”, the main purpose of an auto JV is to try and help
Chinese partners learn how to build quality cars. The auto sector system of
JVs is to give the Chinese partner relatively easy access to profits to fund
their own car production as well as learn how to make cars.
Profit, loss, and risk are shared to the contribution of registered capital of the
JV partners. The contract is set up in both English and Chinese equally, being
valid in accordance with the Law of the People’s Republic of China on Sino-
Foreign Equity Joint Ventures. Interestingly, almost all the business contracts
we have ever encountered are only valid using the Chinese version and the
English version is only provided as an aid.
The JV contract with BMW Brilliance Automotive Limited (BBA) was formed on
27 March, 2003. The JV partners are BMW Holding, a 100% subsidiary of
BMW AG, which is located in the Netherlands, and the Shenyang JinBei
Automotive Industry Holdings Company (Brilliance) located in China, with
both holding a 50% stake.
The Brilliance stake is with Brilliance China Automotive Holdings Limited
holding a 40.5% stake and the Shenyang municipal government holding a
9.5% stake. The Chinese-German 50:50 partners both agreed to initially
invest €450m by 2005 with registered capital of €150m, which was later
increased.
The partner’s general terms and business activities are defined in the first
paragraphs of the JV contract, with initially six engine-variants of the 3 Series
and five engine-variants of the 5 Series and at the start 30,000 passenger
cars in total. Of course the contract has some flexibility built in, such as being
able to add new products down the road. The company planned in the
contract to possibly export cars abroad and to establish international
branches and a distribution and sales branch in Beijing was already regulated.
Figure 10
BMW Brilliance car models
Car line Body variance Model Engine code Engine capacity Cyl. Gearbox Designation
E46 4 door limousine 318i N42B20 2.0 L 4 Automatic 318i limousine
E46 4 door limousine 320i M54B22 2.2 L 6 Automatic 320i limousine
Source: BMW Brilliance
Must have a JV for all
foreign auto companies
BMW ownership is held
out of the Netherlands
The contract does allow
exporting of cars out of
China though we have not
forecast any exports

The business scope is the production of BMW passenger cars, engines, parts
and components, and accessories. The company can sell products produced
and provide after-sales services, including spare parts. From the contract:
4.2 Business Scope
4.2.1 The business scope of the JV Company shall be to produce BMW
passenger cars, engines, parts and components, and accessories
therefore; to sell the products produced by itself; and to provide after-
sales services (including spare parts) in connection with its products.
4.2.2 The JV Company also will conduct all business activities necessary for or
ancillary to the activities listed in Article 4.2.1 including, but not limited to,
industrial, engineering, commercial, financial, marketing, financial
services, and training activities.
The contract was set up for the years 2003 to 2010, with the business plan to
be renewed for a six-year period. A management by deviation approach is
followed with benchmark figures set for the budget and an accepted
difference of 15% and for return on sales of 5%.
Board of directors composition
The board of directors of BBA was initially composed of 13 directors, six
appointed by the two parties and one independent director, first nominated by
BMW and then mutually appointed by the parties. After three years, the board
of directors in the JV contract agreed to be reduced to seven directors, each
party appointing three and one independent, not employed by BMW. If the
ownership structure changes then the allocation will change as well.
Staff appointments
The JV’s general manager reports to the board of directors bi-annually and as
needed. The GM needs to report on finances, major dealings and transactions,
problems and important matters materially affecting the business, and the
budget. Typically for a JV, also in the case of BBA, the chairman of the board is
appointed by Brilliance, whereas the vice-chairman is appointed by BMW. Both
are appointed for three years and can be reappointed.
The general manager as well as the deputy general managers for the
departments’ sales and manufacturing are nominated by BMW and then
appointed by the board, as is common in Sino-Foreign JVs.
Brilliance nominates the deputy general manager for the finance department. For
human resources the nomination is done by both. Qualifications for all appointed
persons include professional qualifications, substantial experience in their field,
and ability to speak English, as this is the working language of the JV at least at
a senior corporate level. This is a common issue in a JV, communication. Day-to-
day activities are conducted in Chinese, but it seems like they must have a lot of
translating to do at the senior level as it is unlikely they can all speak English.
Roles of both parties in the JV
 Brilliance
 Apply for loans
 Helps to localise the product
 Procure fiscal, administrative, customs, and tax-related services
 Recruitment, and transportation of imported equipment
 Provide the site and infrastructure
The company can produce
cars, components, sell
and provide service
The contract is renewable
every six years
Board of directors has
seven members
Chairman appointed by
Brilliance, whereas the
vice-chairman is
appointed by BMW
Surprisingly English is the
working language of the
JV at least at a senior
corporate level
Roles of the parties
clearly defined

 BMW
 Assists with the purchasing of material and equipment
 Training of employees
 Localised parts and components development
 Set up of the production site and existing buildings and equipment
 Technology transfer, licensing certain technology, management and
operational know-how required for the JV over a time of 15 years
Further agreements in the JV
Brilliance assures to not use any of the technology or process knowledge
transferred. This seems to me to be contrary to the purpose of a Chinese
automotive JV. Brilliance products are not to be marketed in competition with
the JV products. While improvements are allowed, the appearance of the
Brilliance cars is not allowed to be adapted from BMW cars. Definitely
previous models of the Zhonghua cars (those models sold back to the parent
in late 2009) looked like BMWs. One of the first times we went to the factory
and walked through the parking lot and saw the cars from the rear, we had
difficulty distinguishing Zhonghua sedans from the BMWs.
The quality of the JV products is agreed to meet BMW standards and when we
talked with the company it said the quality level is exactly the same as cars
made in Germany. We also spoken to Daimler on this issue and management
there told us that this was one of the biggest mistakes the company had
made. The company wishes it spent more time explaining to consumers that
the product made in China is exactly the same as the one made in Germany.
While the model and options may vary, product quality is the same.
Consumers in China still believe the best cars are imported cars and that a
car made in China is inferior, but this is slowly changing. It is also agreed to
not vary retail prices by more than 5%. Importing products also made in the
JV is only allowed up to 5% of the produced volume of the JV in case of
competition of the similar products.
How does the contract renewal occur
In the past, when contracts were renewed, the Chinese partners still had
limited bargaining power and were also worried about adding more terms in
the contract when talking with the OEM. Making profit from the JV is more
important for the Chinese partner. But we should expect to see more
additions in future contracts, which benefit the Chinese partner when we have
future renewals. This is due to:
1) Poor overseas markets and more reliance on China.
2) More bargaining power from the Chinese side. We are seeing this now in
the negotiations between PSA and Dongfeng.
Interestingly, Brilliance’s CEO Qi Yuming was quoted with an interesting idea
last year, wanting the government to set a price ceiling of Rmb150,000 for
any car a foreign JV partner wanted to sell in China. We might see the
Chinese partner adding this term into the contract.
How could the contract terminate
The best example of a termination is the Nanjing Fiat case. The main reasons
for the Fiat JV contract termination was due to weak sales of the JV models
and Fiat was not happy. So the company started to look for other JV partners
and has since hooked up with Guangzhou Auto Group Company (GAC).
Another termination was PSA, previously the JV partner with GAC but that
Appearance of BMW
cars is not allowed
to be copied
Contract renewals could
change in the future
Proposal to limit car
ASP from JVs
There have been
contract terminations
in the past in China
We believe the quality
of a BMW made in
China vs Germany
are almost identical

venture ended in 1996 and PSA signed a new venture with Dongfeng Auto.
The company was with GAC for about 11 years, made only about 100,000
cars but the French company did not want to localise car-part production in
China. Also the French had the view of only introducing old models with old
technologies and in the end GAC wanted to end the relationship.
Termination can occur when: sales are not good; either party is unhappy
about cooperation; or leaves the Chinese market (low possibility).
Brilliance is all about BMW
While most Chinese carmakers are trying to introduce their own self-branded
cars within the structure of their JVs, Brilliance changed back in 2009 and is
using the old SOE structure. Domestic cars are made mainly in the group
company and BMWs in the listed company. The government initially set up
JVs to make the self-branded cars within the JVs so it is interesting to see the
company continue to be allowed to work this way. We don’t believe this
structure will last unless the central government changes its view on the auto
JV policy. But by keeping some small minibus production and investing in
electric vehicles, the company seems to be doing enough to keep Beijing
satisfied, at least for the time being.
Figure 11
Major BMW, Benz and Audi product cycle
Source: CLSA
2005 2006 2007 2008 2009 2010 2011 2012 2013 14CL 15CL 16CL
Benz
C-Class New version New version
E-Class New version New version
S-Class New version New version
GLK First launch New version
BMW
3 Series New version New version
New
version
X1 First launch New version
I3
I3 EV
launch
I8 EV
launch
Zinoro First launch
Audi
A4 New version
A6 New version New version
A8 New version
Q3 New version
Q5 First launch
Brilliance removed most
self-brands from their JV

Financial details cover self-branded business
We need to highlight that the financial details from the company are very
limited as the JV profits are accounted for by equity gain, a structure
becoming more common and providing little insight into the company. When
we look at financial highlights for the company in the chart below, the detail is
derived from the self-branded car business and not the BMW JV.
Even though the purpose of the company is to make its own self-branded
cars, it has not been able to successfully make any new cars in the JV. Its
self-brand recorded an operating loss of Rmb57m in 2012 and a loss of
Rmb178m in 2013 due to slowing shipments this year. We only forecast mini-
bus shipments of 75,000 units in 13CL, or a decline of 9% YoY.
In the next three years, we don’t expect to see any significant change from
its self-brand minibus and we forecast 77,309 units and 79,628 units, in 2014
and 2015, considering no significant new models, no competitive advantage
in technology or features.
Figure 12
Key financial highlights only represent self-branded cars and not BMW JV
(Rmbm) 1H13 2H13 2013 1H14CL 2H14CL 14CL 1H15CL 2H15CL 15CL
Revenue 2,572 3,531 6,103 2,649 3,019 5,668 2,728 3,110 5,838
Cost of sales (2,296) (3,121) (5,417) (2,365) (2,726) (5,090) (2,435) (2,807) (5,243)
Gross profit 276 411 687 284 294 578 293 303 595
Other net income 11 85 96 12 30 42 12 31 43
Interest income 24 23 47 25 30 55 25 31 56
Selling & distribution expenses (246) (362) (608) (189) (329) (518) (195) (339) (534)
Administrative expenses (195) (204) (399) (160) (165) (324) (164) (170) (334)
Ebitda (61) 25 (36) 89 (22) 67 98 (17) 81
Operating profit (130) (48) (178) (28) (139) (168) (29) (144) (173)
Finance costs (70) (68) (139) (87) (87) (175) (94) (94) (188)
Share of associates 97 96 193 97 97 193 97 97 193
Share of JCEs 2,105 1,343 3,448 2,081 2,209 4,290 2,534 2,740 5,274
Impairment losses on assets 0 0 0 0 0 0 0 0 0
PBT 2,002 1,323 3,325 2,062 2,079 4,140 2,507 2,600 5,107
Income tax (expense) credit (2) (6) (8) 0 (2) (2) 0 (2) (2)
PAT 2,000 1,317 3,316 2,062 2,076 4,138 2,507 2,597 5,105
Loss for the year from
discontinued operations
0 0 0 0 0 0 0 0 0
Minority interest 30 28 58 (0) 35 35 (1) 35 34
Net profit 2,030 1,344 3,374 2,062 2,111 4,173 2,506 2,632 5,139
Depreciation & amortization 69 73 143 117 117 235 127 127 254
Share base - Basic (m) 5,026 5,026 5,026 5,046 5,046 5,046 5,046 5,046 5,046
Share base - Diluted (m) 5,046 5,046 5,046 5,046 5,046 5,046 5,046 5,046 5,046
Basic EPS (Rmb) 0.404 0.267 0.671 0.409 0.418 0.827 0.497 0.522 1.018
Margins (%)
Gross margin 10.7 11.6 11.2 10.7 9.7 10.2 10.7 9.7 10.2
Other net income 0.1 0.1 1.6 0.1 0.1 0.7 0.1 0.1 0.7
Interest income 0.0 0.0 0.8 0.0 0.0 1.0 0.0 0.0 1.0
Selling & distribution expenses (9.6) (10.3) (10.0) (2.0) (2.5) (9.1) (2.0) (2.5) (9.1)
Administrative expenses (2.0) (2.4) (6.5) (2.0) (2.4) (5.7) (2.0) (2.4) (5.7)
Ebitda margin (2.4) 0.7 (0.6) 3.4 (0.7) 1.2 3.6 (0.5) 1.4
Operating margin (5.1) (1.4) (2.9) (1.1) (4.6) (3.0) (1.1) (4.6) (3.0)
PBT margin 77.8 37.5 54.5 77.8 68.8 73.0 91.9 83.6 87.5
Effective Tax rate 25.0 25.0 0.3 25.0 25.0 0.1 25.0 25.0 0.0
PAT margin 77.7 37.3 54.3 77.8 68.8 73.0 91.9 83.5 87.4
Net margin 78.9 38.1 55.3 77.8 69.9 73.6 91.9 84.7 88.0
Source: Company, CLSA (JCE - Joint controlled entities, BMW makes 99% of this income)
Self-brand mini-bus
business is shrinking and
loss-making . . .
. . . and we are bearish
on its minibus business in
the next three years

We highlight that the above financials table is not helpful to investor since the
key profit driver, BMW income, is treated as an equity gain. In addition, there
is limited information about the JV business provided by Brilliance China,
which means there is low visibility within the company to BMW. The BMW JV
profits are reported under the share of joint controlled entities (JCEs).
Figure 13 Figure 14
Self-brand net profit likely a small loss in next few years No significant change expected for self-branded cars
Figure 15
Self-brands should still make a loss in the next three years
Source: Company, CLSA
Forced into electric vehicles
We don’t expect to see any short-term catalyst for Brilliance self-brands, noting
that even the company gives very bearish guidance since the BMW JV is so
profitable, which leaves little desire to develop own brands. In the meantime,
BMW has agreed to help with the JV co-branded electric vehicle (EV) model
called the Zinoro 1E (Zhi Nuo, 之诺, in Chinese). It was on display at the
Guangzhou Auto Show in November 2013. A co-brand is a vehicle that will be
branded under the Chinese partner’s name but made together by both
companies and both share in the profits. It is sort of the opposite of a normal JV
that is made by a Chinese and foreign company using the foreign brand’s name.
According to BMW Brilliance, it will have a range of about 150 kilometers, (93
miles using a lithium battery from Ningde Times New Energy Technology),
rear-wheel drive using a 125kW electric motor (165hp) with peak torque of
about 250 Nm (184 lb-ft). The specifications don’t seem to be very exciting
(100)
(50)
0
50
100
150
200
250
300
350
400
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2010 2011 2012 2013 14CL 15CL
(Rmbm)
Revenue
Net profit (RHS)
(Rmbm)
(20)
(15)
(10)
(5)
0
5
10
15
20
25
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2009 2010 2011 2012 2013 14CL 15CL
(units) Mid-priced minibus
Deluxe minibuses
YoY (RHS)
(%)
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2010 2011 2012 2013 14CL 15CL
(Rmb)
Blended ASP
Profit per car (RHS)
(Rmb)
No intention to make
significant change for its
self-brand in the short-
term if they don’t have to
Poor visibility into the
BMW business as the
company uses equity
gain accounting
The potential turnaround
opportunity for them is
entering into MPV from its
minibus business
Self-brand ASP should
be Rmb73k and loss
per car of Rmb996 in
14CL and 15CL

as the car can go from 0-50 kilometres (31 miles per hour) in 5.5 seconds, a
bit slow for an electric car. The acceleration tops out at 130kph (81mph),
which is pretty fast for an electric car. Charging seems reasonable at about
eight hours from empty to fully charged using the 220v standard in China.
The company does not seem to be planning to make many of these cars and
we hear it will probably lease them. The plan so far is to open a store in
Shanghai and Beijing.
Figure 16 Figure 17
Zinoro - using the same platform as the BMW X1 Denza - Co-branded version from Daimler and BYD JV
Source: Company
The competitor from Daimler, the Denza, is based on a first-generation
Mercedes-Benz B Class designed to accept batteries within the floor. It was
developed in China by a team of engineers from both Daimler and BYD Auto.
The companies put together this deal back in March 2010.
It is interesting to note the two different styles these carmakers are following.
BMW is making this car for the Chinese partner and does not want to have
any association with the Chinese brand. It seems the approach BMW is taking
is to get the car companies to push the EV concept in order to try and get
more acceptances in the market. Daimler, on the other hand, is using its own
brand to market the car.
The reason these companies are specifically helping the Chinese partners on
EV cars is that they don’t expect a lot to be sold. But more importantly, there
is a perception that unless they share some technology for helping the
Chinese government with the new energy vehicle policy, they may not get
approval for more new factories. We find this difficult to believe and this is
what a Chinese partner is supposed to manage - future expansion. But some
of the carmakers are taking this very seriously and worry they could be
penalised down the road, so the fear factor is driving this programme.
BMW is clearly moving “big time” into electrification and it seems it is
providing technology to the Chinese partner that will be at the low end of
their product portfolio. So the company should not have a big impact on the
more important segments of higher-end that they really care about. But for
Daimler, we are a little bit confused as to why it wants to keep its own logo on
the car and branding with BYD. It might be due to the fact that Daimler is
further behind on the electrification strategy and maybe this strategy buys
them more time.
Denza - JV with
Daimler and BYD
At the start the plan is to
lease rather than sell
these cars
We do not expect to see a
lot of units sold for Zinoro
BMW at the corporate
level is making a big bet
into electrification

Opportunities for Brilliance self-brand
We do not have a clear view of the self-brand strategy of Brilliance other than
the company seems to want to keep self-branded cars out of the listed
company and put them in the parent group. Brilliance clearly would like to
keep the listed company as much of a pure play on BMW as possible, though
we don’t believe this is doable in the long run. We would expect the
government at some point to come in and question the whole JV structure,
which is counter to the system. Therefore, the move into new energy vehicles
seems to be a good compromise strategy. We have seen little so far in results
in terms of a self-branded car, but at least the company can argue that it is
working hard and spending money.
We do see a potential opportunity to enter the multi-purpose vehicle (MPV)
segment as an extension to its minibus business. We expect MPVs to possibly
experience similar explosive growth to that of SUVs in the next few years. So
far, we have not heard the company making any MPVs but we simply highlight
where we see an opportunity.
MPVs are the fastest-growing segment in the China auto market. It is a bit of
a surprise to see the segment growing so well but this is likely some of the
fallout from the growth in SUVs plus a low-base effect. Traditionally in China,
MPVs are bought by companies to move around management personnel. This
tradition exists from the old days of the SOEs whereby transportation is
always provided. Consumers have not wanted to buy an MPV for personal use
as they don’t want other people to think they are driving a company car. But
this is changing as consumers realise the convenience of having a big SUV for
use with the family. We also see more MPV choices in the market and
consumers are slowly looking at an MPV as an option. We expect to see good
growth going forward as these cars slowly gain acceptance with the
consumer.
Figure 18
Monthly PV shipment YoY growth breakdown
Source: Wind
Back in 2000, almost no MPVs were sold. Historically, most MPVs have been
the kind of multiuse vehicle or something called a mianbao che (translated as
bread loaf vehicle). They historically have not sold well for family use as they
give the Chinese consumer the feeling of a company car for use in
transporting people or cargo. This segment is currently dominated by low
pricing at around Rmb50,000 and offers minimal features.
(100)
(50)
0
50
100
150
200
250
300
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14
('000 units) PV Basic Car
MPV SUV
Cross over PV YoY (RHS)
Basic car YoY (RHS) MPV YoY (RHS)
SUV YoY (RHS) Crossover YoY (RHS)
(%)
MPV’s up 141% YTD
albeit from a low base
MPVs a good
opportunity
to expand
Brilliance seems to want
to keep self-branded cars
out of the listed company
MPVs are the fastest-
growing segment in the
China auto market

We see the segment overall as the least oversupplied and the best
opportunity for carmakers going forward from a low base. In the MPV
segment, we see the low, mid and high models all undersupplied compared to
other segments. SUVs over the past two years have been undersupplied, but
almost all carmakers are targeting the segment with new products. While it
will still take some marketing to overcome the company car stigma, we
believe the recent growth in the SUV market will help pave the way for bigger
and similar cars like MPVs.
Figure 19
Segment share of passenger cars in China
Source: CAAM
0
20
40
60
80
100
2008 2009 2010 2011 2012 2013
(%)
MPV
SUV
A class: up to 1.6L
B class: 1.6-2.5L
C class: 2.5-3.0L
D class: over 3.0L
MPV segment - least
oversupplied and
best opportunity

Section 2: Proxy for BMW Brilliance Auto - BUY
Proxy for BMW
We saw 102% of net profit for 2013 coming from the BMW JV. We estimate
shipment growth for BMW Brilliance to maintain at 26.5% and 28.3% YoY in
2014 and 2015, respectively, mainly supported by capacity expansion at the
Tiexi and Dadong factories, which results in earnings growth of 23.7% and
22.7% YoY. Risk to net profit arises if the company launches more low-profit
self-branded cars, especially as the government is pushing this policy.
Figure 20
Profit contribution breakdown
(Rmbm) 2009 2010 2011 2012 2013 14CL 15CL
JV income from Brilliance-BMW 355 896 1,720 2,325 3,435 4,250 5,214
Profit from self-brand business (1,995) 375 92 (24) (61) (77) (76)
Total net profit (1,640) 1,271 1,812 2,301 3,374 4,173 5,139
Profit contribution from
BMW Brilliance (%)
70.5 94.9 101.1 102 102 101
Figure 21
Key financial highlights for BMW Brilliance
(Rmbm) 2009 2010 2011 2012 2013 14CL 15CL
Revenue 14,674 21,485 37,532 56,151 73,173 89,170 110,705
Cost of goods sold (12,606) (17,602) (31,059) (44,577) (57,330) (70,684) (88,138)
Gross profit 2,069 3,883 6,473 11,573 15,842 18,487 22,566
SG&A (1,317) (1,834) (3,194) (4,500) (6,139) (7,153) (8,661)
Operating profit 751 2,049 3,278 7,073 9,704 11,333 13,905
Tax (41) (257) 162 (2,423) (2,833) (2,833) (3,476)
Net profit 711 1,792 3,441 4,650 6,871 8,500 10,429
Net profit attributable to
Brilliance
355 896 1,720 2,325 3,435 4,250 5,214
Ratio analysis (%)
Ebit margin 5.1 9.5 8.7 12.6 13.3 12.7 12.6
Net profit margin 4.8 8.3 9.2 8.3 9.4 9.5 9.4
SG&A as % of revenue (9.0) (8.5) (8.5) (8.0) (8.4) (8.0) (7.8)
Gross margin 14.1 18.1 17.2 20.6 21.7 20.7 20.4
Figure 22
Key financial highlights for self-brand segments
Minibus (Rmbm) 2009 2010 2011 2012 2013 14CL 15CL
Revenues 6,149 8,949 6,443 5,916 6,103 5,668 5,838
Cost of sales (5,294) (7,725) (5,587) (5,220) (5,417) (5,090) (5,243)
Gross profit 855 1,224 856 696 687 578 595
Other net income 112 92 48 50 96 42 43
Interest income 31 79 76 74 47 55 56
Selling & distribution expenses (310) (462) (388) (539) (608) (518) (534)
Administrative expenses (331) (363) (361) (339) (399) (324) (334)
Ebitda 818 709 369 83 (36) 67 81
Operating profit 357 569 231 (57) (178) (168) (173)
Finance costs (94) (171) (194) (174) (139) (175) (188)
Share of associates 22 92 69 92 193 193 193
Share of JCEs (1) 78 122 109 13 40 60
PBT (360) 569 229 (31) (111) (110) (107)
Income tax (expense) credit (41) 54 (58) (58) (8) (2) (2)
PAT (401) 623 171 (88) (119) (112) (110)
Loss for the year from
discontinued operations
(2,698) 0 0 0 0 0 0
Minority interest 1,104 (248) (79) 64 58 35 34
Net profit (1,995) 375 92 (24) (-61) (77) (76)
Source: CLSA, Company report
We expect that the JV income of BMW Brilliance to make up 102% of
Brilliance’s total net profit in 2014 and the ratio kept at around 100% in the
next two years.
Proxy for BMW
China business
Since 2012 BMW
provides around 100%
of profit for Brilliance
BMW Brilliance Ebit
margin should be stable
over the next three years
Self-brand should
continue to make loss in
the next few years

Figure 23
JV income of BMW Brilliance is 99% of Brilliance net profit in 2013
BMW’s China business outlook is a function of the JV with Brilliance in the
next few years, which is reflected in the high sensitivity of BMW Brilliance’s
shipment volume and ASP to Brilliance’s earnings.
Below we show how much Brilliance represents of BMW’s worldwide profit. We
do not have any further breakdown in China for parts, or any other profit
made at the JV. China as part of BMW globally also makes profit from parts
sent to the JV, imported cars like the 7 Series and X Series SUVs.
Figure 24
BMW Brilliance profit contribution to BMW
(Rmbm) 2009 2010 2011 2012 2013 14CL 15CL
Brilliance-BMW 355 896 1,720 2,325 3,435 4,250 5,214
BMW 1,943 28,972 43,930 41,343 43,058 44,227 46,408
% contribution 18.3 3.1 3.9 5.6 8.0 9.6 11.2
Source: CLSA, Bloomberg
Figure 25
Sensitivity analysis - most sensitive to ASP change
(%) Net profit Ebitda
2013 2014 2015 2013 2014 2015
1% change in Brilliance-BMW blended ASP 8.0 8.1 8.2 0.0 0.0 0.0
1% change in Brilliance-BMW sales volume 1.7 1.7 1.7 0.0 0.0 0.0
1% change in Jinbei minibus blended ASP 1.6 1.4 1.2 na na na
1% change in Jinbei minibus sales volume 0.2 0.1 0.1 na na na
Source: CLSA
Great 1H13 result supported by the new 3 Series
In 4Q12, BMW Brilliance launched a long-wheeled version of the 3 Series and
the regular version was launched in 1Q13. Monthly 3 Series shipments have
reached 5,000 per month. According to CAAM, in 2013, total 3 Series
shipments were up by 194% YoY with the 5 Series up 17% YoY. This strong
sales performance helped the company to make a total net profit of
Rmb3,374m, up 46.6% YoY. JV income from BMW Brilliance was Rmb3,448m,
or 47.7% YoY growth.
0
20
40
60
80
100
120
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
6,000
2009 2010 2011 2012 2013 14CL 15CL
(Rmbm) JV income from Brilliance-BMW (LHS)
Total net profit (LHS)
Net profit
(%)
BMW Brilliance is the sole
profit source for Brilliance
and will likely be in the
next three years
JV shipments and ASP has
high sensitivity to the
Brilliance’s earnings
BMW Brilliance
contributed c.8% of total
profit for BMW Group
and the ratio should
trend up to 11.2% in
15CL, with expanding
localisation capacity
1% ASP change of BMW
Brilliance blended will
cause over 8% Brilliance
net profit change

Figure 26
BMW Brilliance monthly shipments breakdown by products
Source: Company
The CAAM data is the only official source for vehicle shipments to car dealers
in China. This official source will only tell us sales to dealers and not to end
users and is therefore the reason we always refer to car shipments. There is
unfortunately no source for end user sales in China. This can therefore lead to
some errors or strange numbers coming out of CAAM.
The CAAM data shows BMW Brilliance 3 Series shipments in 2012 were only
20,794 units (monthly average 17,000 units). In 2Q12, there were no 3
Series shipments. This was due to a local capacity constraint, so BMW China
launched the imported model 3 Series first and in 4Q12, the long-wheel
version of the new 3 Series was sold. The new Tiexi factory has annual
capacity for 100,000 units and since it has come online, there are no more
imports of these models into China.
Shipment growth supported by capacity additions
We forecast shipment growth for BMW Brilliance to maintain at 26.5% and
28.3% YoY in 2014 and 2015, mainly supported by capacity expansion at the
Tiexi and Dadong factories. The 5 Series should still make up the largest
shipment volume and we forecast 138,714 units (116,000 units per month)
and 149,000 units (124,000 units per month) in 2014 and 2015. However, we
expect 5 Series shipments as a percentage of total shipments to decrease to
44.3% in 2015 from 65.7% in 2012 while on the other hand the 3 Series is
expected to increase to 36.6% in 2015 from only 21.5% in 2012 with the new
3 Series launched in 4Q12 (long-wheel) and 1Q13 (regular version).
0
5,000
10,000
15,000
20,000
25,000
Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13
Brilliance BMW X1
Brilliance BMW 5 Series
(units)
New 3 Series monthly
shipments around 5k
units on average
There is no data source
for car sales to
consumers in China
Unit volume growth will
come more and more
from the less-profitable
3 Series

Figure 27
BMW Brilliance shipment forecast breakdown by model
Figure 28
5 Series had a facelift in 3Q13, though with no major upgrades
Source: BMW China
The key upgrades of the new face lifted 5 Series are:
 Small change to the exterior: including the shape of headlights, rear-view
mirror and taillights.
 Change in the interior: offering one more colour option for the seat
 Upgrade of the main console with an LED panel
 Upgrade of the iDrive system
 Upgrade in the driving assistance system
 Installed a surveillance camera on the top of the car
0
10
20
30
40
50
60
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2009 2010 2011 2012 2013 14CL 15CL
(units)
3 Series
5 Series
X1 SUV
Zinoro
1 Series
YoY chg (RHS)
(%)
5 Series discount offered
is less than 5% due to
strong consumer demand
Shipment growth should
maintain at 26.5 % in
14CL and 28.3% in 15CL

We believe the 3 Series will be the primary growth engine for BMW Brilliance
shipments, supported by both long-wheel and regular versions as highlighted
with the recent launch of the entry-level model 316i. We expect 3 Series
annual shipments could reach 94,880 units (7900 units per month) in 2014
and 123,344 units (10,278 units per month) in 2015. We expect that new
entry-level model, the 316i, will sell well due to the very competitive ASP
(MSRP starting from Rmb283,000), which is at the upper end of pricing for
mid-class sedans, such as GAC Honda Accord, GAC Toyota Camry, DFM Nissan
Tienna and the Buick Regal.
The normal 3 Series is very similar to the 3 Series sold throughout the world.
The long version is designed to target consumers who have a driver and
compete with the Audi A4L. The long version has premium pricing while the
regular version is more aggressively priced.
Figure 29
Entry-level luxury models will put pressure on middle-to-high end segment
Car model MSRP (Rmb’000)
Brilliance BMW 316i 283.0
GAC Honda Accord 2.4L 235.8
GAC Toyota Camry 2.5L CVT 259.8
Buick Lacross 2.0T 259.9
Source: CLSA, Autohome.com
The entry-level luxury models are grabbing market share from the mid-to-
high-end segment, especially the Japanese, due to brand premium. Our talk
with dealers showed the average age of car buyers is between 25 and 40,
though they are getting younger. Those car buyers care more about the car
branding and consider buying a car as a way to raise their social status. In
addition, those buyers are more willing to accept using credit as opposed to
their parents who saved money, making those low-rate loans very attractive.
Taking BMW and Audi as examples, BMW is offering a 1.99%-2.99% loan rate
and Audi even offers 0%.
As luxury car sales continue to slow down, BMW and the car dealers are
focusing on a new strategy. For example, in our talk with one dealership
group, they put big advertising boards close to the Toyota Camry dealer. They
use the slogan translated from Chinese “just add a little bit more and you
could be driving away in a BMW”. We believe this targeted advertising will
work very well as most consumers go to a dealership with a budget in mind.
But the BMW dealers think they can change the mind of these consumers by
using car loans and explaining that their car payment will be just a little bit
more. We thought this would mean more 3 Series sales as consumers move
up. But to our surprise, talking to the dealer, they actually try to get the
buyer to go from looking at a Camry into buying a BMW 5 Series. The dealer
explained to us that car buying is such an emotional experience that once you
can convince a buyer they can afford a 5 Series, many will go for this option.
So the car dealers are becoming much more sophisticated in their selling
approach and moving aspirational car buyers from lower products into their
entry-level or premium luxury cars.
3 Series will be the
primary growth engine
for shipments
BMW dealers moving
aspirational buyers
up the value chain
Car loans at some BMW
dealers going from 15%
in 2012 to +40% in 2013

Figure 30
BMW suggests Rmb283k for the 316i with market price around Rmb250k
Source: BMW China
Three positive catalysts for the 3 Series
We outline below why we see the BMW 3 Series as a big growth driver over
the next few years.
1. Capacity is not a problem with the new Tiexi factory completed
In 2013, BMW Brilliance’s total annual capacity hit 300,000 units with the new
Tiexi factory phase I completed. In 2014, we expect 50,000 units of
additional capacity will be added at the Dadong factory with total annual
capacity reaching 350,000 units. Now this can also be a negative if we see
consumers slow down and then capacity utilisation ratio fall, which would
leads to a less efficient factory impacting margins.
Figure 31
BMW Brilliance capacity breakdown
0
20
40
60
80
100
120
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2009 2010 2011 2012 2013 14CL 15CL
(units) Tiexi
Dadong
Utilisation (RHS)
(%)
Total annual capacity
should reach 350k units
in 14CL (Tiexi 200k and
Dadong 150k units)
316i launched in 4Q13
with two versions and
MSRP at Rmb283k
Total annual capacity can
reach 500k in 2016CL

Figure 32
Tiexi factory total capacity should reach 350k units per annum in 14CL
2009 2010 2011 2012 2013 14CL 15CL 16CL
Tiexi 100,000 200,000 200,000 250,000 350,000
Dadong 50,000 100,000 100,000 100,000 100,000 150,000 150,000 150,000
Total 50,000 100,000 100,000 200,000 300,000 350,000 400,000 500,000
Brilliance BMW 44,997 53,963 95,451 147,374 207,427 259,433 318,120 381,649
Utilisation (%) 90.0 72.0 95.5 98.2 83.0 79.8 84.8 84.8
Source: Company, CLSA, Capacity utilisation is calculated from an average capacity over 2 years as all the capacity will not be in place for the whole year
2. Entry-level luxury models will provide the growth
We expect 3 Series shipment volume to increase from 29% of total shipments
in 13CL to over 36% in 14CL and the 5 Series to drop from 60% to 53% in
14CL. We expect 3 Series annual shipment volumes to increase from 61,000
units in 13CL (5,000 units per month) to 123,000 units in 15CL (127,000
units per month). Entry-level luxury models such as the 316i which retail at
Rmb260,000 will grab market share from middle-to-high-end cars, especially
Japanese brands. They will appeal to younger car buyers where branding
becomes more important in the emotional car buying decision. The younger
buyers, the target market for the 3 Series, are also less concerned about
going into debt so car loans are a viable option.
Figure 33
Shipment breakdown
Shipment (units) 2009 2010 2011 2012 2013 14CL 15CL
3 Series 17,899 29,605 42,843 34,766 61,213 94,880 123,344
5 Series 27,623 41,019 65,494 105,939 123,852 138,714 149,118
X1 SUV 0 0 5 20,641 22,362 28,400 33,228
Zinoro 0 0 0 0 0 500 1,000
2 Series 0 0 0 0 0 0 30,000
Total 45,522 70,624 108,342 161,346 207,427 262,494 336,690
Total shipment growth YoY (%) 55 53 49 29 26.5 28.3
Shipments by product (%)
3 Series 39.3 41.9 39.5 21.5 29.5 36.1 36.3
5 Series 60.7 58.1 60.5 65.7 59.7 52.8 44.3
X1 SUV 0.0 0.0 0.0 12.8 10.8 10.8 9.9
Zinoro 0.0 0.0 0.0 0.0 0.0 0.2 0.3
1 Series 0.0 0.0 0.0 0.0 0.0 0.0 8.9
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
As we move to a greater portion of sales coming from the 3 Series, this will
impact negatively on ASP and profit per car. We see 2013 as the peak for ASP
and profit per car. But as BMW moves down the luxury market, the company
will be able to sell more volume.
Figure 34 Figure 35
Profit per car and blended ASP BMW Brilliance margins almost flat in next 3 years
270
280
290
300
310
320
330
340
350
360
370
0
5
10
15
20
25
30
35
40
2009 2010 2011 2012 2013 14CL 15CL
(Rmb'000) Profit per car
Blended ASP (RHS)
(Rmb'000)
0
2
4
6
8
10
12
14
2009 2010 2011 2012 2013 14CL 15CL
Net profit margin
Ebit margin
(%)
3 Series production is
increasing rapidly
In 2013 we saw the peak
in ASP and profit per car

We forecast blended ASP to drop by 3.3% YoY in 2014 and 3.2% YoY in 2015
due to a higher portion of 3 Series shipped. In addition, net margin of the
BMW Brilliance JV will stay at 9.5% and 9.4%, in 14CL and 15CL.
When we compared YoY growth rates for both shipment and profit, we found,
except in 2012, that profit growth outpaced shipment growth, which we
believe is mainly due to a high production utilisation ratio and high-margin
products like the 5 Series. This means the efficiency from expansion is
dropping. Presently our sensitivity shows that a 1% change in shipment
growth is not enough to give 1% profit growth.
Figure 36
Shipment growth faster than profit growth in most years
3. BMW is the top luxury brand in Chinese consumers’ mind
Among the three German luxury brands, during the past three years, BMW
and Audi outperformed Mercedes Benz. Audi’s ‘government sales changing
into individual market’ strategy has proved a big success and compared with
the other two, Audi has the highest localisation level with more JV models and
fewer imports. The advantage of this strategy has been government officials,
who are more inclined to buy a car made in China as an imported car
symbolises excess. Also, Audi maintains a strong market among companies
that are almost SOEs and service providers to SOEs. If a government official
is driving an Audi, it is very difficult for a service provider to be driving
around in a car much better as this might cause a loss of face.
Digital Luxury Group’s 2013 luxury survey has Audi and BMW ranked No.1
and No.2 of the most sought-after luxury brands in China while Mercedes
Benz ranks No.7. Now, the Benz brand is very well known, and we believe it
will increase as it introduces new models. Its old model lineup has hurt its
image in the past few years. The new S Class, we believe, is already
impacting favourably on the brand and we should see a pickup in the
desirability for the brand in the next few years.
0
20
40
60
80
100
120
140
160
2010 2011 2012 2013 14CL 15CL
BMW Brilliance shipment growth
BMW Brilliance profit growth
(%)
Shipment growth outpaced
the profit growth, which
we think is mainly due to
the margin erosion
Higher portion of 3
Series production should
bring down net margins
Benz becoming
more popular
During the past three
years, BMW and Audi
outperformed
Mercedes Benz

Figure 37
BMW ranks No.2 of the most sought-after luxury brands in China
1 Audi 11 Lancome
2 BMW 12 Gucci
3 Chanel 13 Hermes
4 Estee Lauder 14 Volvo
5 Louis Vuitton 15 Land Rover
6 Mercedes Benz 16 Infiniti
7 Lexus 17 Chow Tai Fook
8 Dior 18 Cadillac
9 Porsche 19 Cartier
10 Lamborghini 20 Clinique
Source: Digital Luxury Group
In the Chinese consumers’ mind, Mercedes Benz and BMW are better than
Audi. This is also reflected in the price with Audi being the cheapest among
the three German marques. Car owners who want to show their social status
is reflected in a Chinese saying: “开宝马，坐奔驰” -“drive a BMW and be driven
in a Mercedes Benz”. Audi has carved out a niche as being a modest luxury
brand mostly used by government or government-like companies in China.
For BMW Group, China has become the most important market, accounting
for 18% of its total worldwide shipments. In total, China has more than one
million BMW cars on the road. In addition, the 5 Series, X5 and X6 SUV and 7
Series China shipments all outpaced ex-China shipments, which is a reflection
of the Chinese consumer’s strong demand for ultra-luxury imported autos.
Figure 38
BMW Brilliance profit contribution to BMW
(Rmbm) 2009 2010 2011 2012 13CL 14CL 15CL
Brilliance-BMW 355 896 1,720 2,325 3,435 4,250 5,214
BMW 1,943 28,972 43,930 41,343 43,058 44,227 46,408
% contribution 18.3 3.1 3.9 5.6 8.0 9.6 11.2
Source: CLSA, Bloomberg
Figure 39
BMW China shipments vs ex-China breakdown by product
Source: CLSA, BMW Group
0
5
10
15
20
25
30
35
40
1
Series
X1 3
Series
X3 Z4 5
Series
X5 X6 6
Series
7
Series
MINI Rolls
(%)
China
Ex-China
BMW has a sportier image
and thought to be the
better choice for those who
personally drive their car
China is BMW’s largest
market in the world
BMW ranks No.2 of
the most sought-after
luxury brands in
China, second to Audi
China market represents
over 18% of total BMW
global shipments

BMW Brilliance will benefit from capacity additions and we expect localised
BMW models to increase from 55% in 13CL to 68% in 15CL of BMW’s total
unit sales in China.
Figure 40
BMW’s localisation ratio should reach 68% in 15CL from 55% now
Source: BMW Group, CLSA
Five negative catalysts for the stock
After reviewing the three potential catalysts for Brilliance, we now look at five
negatives we see developing for the company.
Negative 1: Priced to perfection with limited upside
BMW management has done a great job managing the brand in China, and
indeed we consider it the best of the luxury carmakers. It has outperformed
in almost every area, including dealer network expansion, dealership
management, brand building, product localisation and even JV partner
selection (Brilliance is a weaker partner than BAIC/Mercedes and FAW/Audi).
Discussion with BMW dealers reveals active management and proactive policies
from the employees here in China. Compared to Benz, they have had a lot of
management issues in the past such as having price wars among dealer groups
for the old S Class. We see this now fixed at Benz and it will improve a lot in
the next two years with better management and better models.
Figure 41 Figure 42
Ranks No.2 in car segment, second to Audi in branding BMW did best in dealership expansion in past few years
Ranks Cars Fashion Beauty
1 Audi Chanel Estee Lauder
2 BMW LV Lancome
3 Lexus Gucci Dior
Ranks Hospitality Watches Jewelry
1 Sheraton Omega Chow Tai Fook
2 Hilton Rolex Cartier
3 Intercontinental Longines Swarovski
Source: Digital Luxury Group Source: CLSA, internet news
40
45
50
55
60
65
70
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
2009 2010 2011 2012 13CL 14CL 15CL
Imported (LHS)
Brilliance BMW (LHS)
JV model of total BMW China shipment
(units) (%)
0
100
200
300
400
500
600
2012 13CL 14CL 15CL
Audi Mercedes Benz BMW Porsche JLR
(stores)
BMW will continue to sell
more domestic made
BMWs as a % of their
total shipments to China
We view BMW as the
best-managed luxury
carmaker in China

But the competition has also been watching and is starting to emulate BMW.
Audi and Mercedes Benz have already started to copy BMW’s dealership
management style, which is a reflection of its success. The question now is
what can BMW do next? What’s the future upside? We believe the company
has peaked and is entering a poor part of the model cycle, especially when
compared with Mercedes.
In Figure 43, we describe the different dealership styles for the big three
German brands. While we describe the current situation, we don’t expect this
to continue forever. We see a lot of changes ahead for Mercedes Benz and
expect the company could move away from such a concentration at a few
dealership groups to a more balanced approach, similar to BMW. Audi’s
dealership strategy seems to be working, but if the company does move in any
direction, we expect it will be more towards the BMW model. For BMW, we fail
to see what the company can do to improve from here. It has already cut back
on costs as this year’s dealership meeting was held in China and we think the
company could be preparing for a tougher, more competitive year ahead.
Figure 43
Dealership style comparison between the German Big 3 in China
Source: CLSA
Major brand differences in China
BMW is regarded as a good quality auto, with strong power and a sporty
image in China, or a “driver’s car.” This is related to the company’s history.
BMW stands for Bayerische Motoren Werke, which produced engines for
airplanes back in 1916. BMW’s commercials always use light colours (usually
white and blue from its logo) to demonstrate sportiness, which makes BMW
appeal to a younger Chinese generation. This is also reflected from a Chinese
saying: ‘开宝马，坐奔驰’ - “drive a BMW, be driven in a Mercedes Benz.”
Balance style
 Build up relationship with several large dealers, but each
market share should below 10%
 Dealers has incentive to build up their own brand in dealership
 Can ensure service quality and maintain competition between
dealers
 Still have control and strong bargaining power over dealers
Scatter style
 All dealer partners are very small ones with no concentration
 Pros: Fully control those dealer partners
 Cons: Can't ensure the service of the quality and dealers have
no strong incentive to further develop business
Concentration style
 Primary partner is Lei Shing Hong
 Pros: Can ensure service quality
 Cons: Low bargaining power with dealers; Expansion speed will
be limited
BMW’s dealership
management style
has proved to be
the most successful
Competition copying
BMW’s successful dealer
management approach
BMW brand image
is about being
sporty and young

Figure 44 Figure 45
Blue and white are the main colours in BMW’s ads Brilliance BMW 3 Series commercial
Source: BMW China
Audi was essentially a government car in China in the past and always put
the emphasis on new technology. The company is perceived as being more
about a value-for-money luxury car choice. Compared to the other two
brands, Audi does not often use celebrities in commercials and focuses more
on the car itself. Audi has a lower profile, or considered more of middle-of-
the-road luxury brand and widely treated as the best car for doing business.
The typical colour for an Audi sedan is black, which gives people a feeling of
calm, tradition and steadiness.
Figure 46 Figure 47
FAW Audi A4L commercial FAW Audi A6L most widely used in business
Source: Audi China
Mercedes Benz has tried to deliver a brand to consumers that is luxurious,
noble and successful. Along with BMW, a Mercedes Benz sedan is a car for the
elite and successful. It is not used for government as it is thought to be too
luxurious and overstated. Mercedes uses more celebrities in its commercials.
Audi brand image is
more conservative
Mercedes brand
image is for the
elite and successful

Figure 48 Figure 49
Movie start Ziyi Zhang is the spokeswoman for Benz Luxurious, noble and successful is the image for Benz
Source: Mercedes Benz
What is interesting is how Lexus has been able to have such a high ranking
as the third most sought-after luxury car and sixth overall in terms of luxury
brand in China. This ranking even beats Mercedes Benz, which has a
manufacturing presence, far more dealerships and more cars overall sold per
year. Lexus has decided not to manufacture in China yet as the company
prefers to focus on controlling product quality coming out of one factory in
Japan. While it sells fewer cars, it can make more profit per car as it does not
have to share with a Chinese JV partner. But what is most surprising is how
this brand has done so well despite all the political issues between Japan and
China. This tells us a lot about the Chinese consumer. Despite political issues,
if the product is good, the consumer will buy it and appreciate the brand
quality. We also don’t expect Lexus production in China any time soon,
especially with the yen having recently devalued so greatly.
Negative 2: End of product cycle for BMW - Mercedes Benz is back
A lot of success by the luxury carmakers is a function of the model cycle and
Mercedes Benz has been in a bad part of the cycle but has started to re-
emerge in 2014 with new models. For the past couple of years, the company
has been pushing old products while Chinese consumers like the latest and
newest rather than maintain loyalty to a brand. BMW, on the other hand, is
heading into the bad part of the cycle as its fleet is ageing. With the new 3
Series launch in 4Q12 (long-wheel) and 1Q13 (regular-wheel version), BMW
has a very old 7 Series to be replaced in 2015 and 5 Series into its fifth year.
This means strategically BMW needs to push consumers to the brand, give
more discounts and hope it can hold sales until the fleet is renewed. Given its
strong brand image, and if it manages this transition well, the company can
still hold onto robust growth but good execution will be important. The
company is planning to launch two electric vehicles, while this might not
translate into significant sales, it could improve the brand image and keep
buyers away from competitors. For Brilliance though, the only direct impact
will be the ageing 5 Series, but it has such a good brand image and we
expect strong sales to continue.
Lexus the 3rd
most sought
after luxury car in China
Mercedes Benz model
cycle peaking and
BMW bottoming

Figure 50
BMW Brilliance shipments history
Source: CAAM, Autohome.com
Monthly shipments for both the 3 Series and 5 Series are still below Audi’s
A4L and A6L, due to capacity limitations, albeit still better than Mercedes
Benz’s C-Class and E-Class. Compared to BMW, we see more potential upside
from Mercedes Benz, as the company currently has two new major models to
launch (the new S and C-Class), which both look like winners.
Figure 51 Figure 52
Monthly shipments: 3 Series vs C-Class vs A4L Monthly shipments: 5 Series vs E-Class vs A6L
Source: Companies, CLSA
In terms of shipments for sedans, FAW Audi did the best in localising models
offered among the three German brands with its A4L monthly shipments over
10,000 units and the A6L at over 25,000 units. Another interesting pattern
we note is that the monthly performance correlation among German brands is
very high, especially for FAW Audi and Mercedes Benz, with their monthly
shipments correlation at over 87%.
0
5,000
10,000
15,000
20,000
25,000
Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13
Brilliance BMW X1
New 3 Series launched
(Long version in 4Q12 and
Regular version in 1Q13)
New 5 Series launched
(units)
Localised X1
SUV launched
0
2,000
4,000
6,000
8,000
10,000
12,000
Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13
Brilliance BMW X1
BAIC Benz-GLK
FAW Audi Q3
FAW Audi Q5
(units)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13
BAIC Benz E
FAWAudi A6L
(units)
The sales pattern among
the Big 3 German brands
are highly correlated
Audi remains the
shipment leader

Talking with BMW dealers in 1Q13 revealed that they were offering around a
20-25% discount, or sometimes more, for the BMW 7 Series to offset the
impact of the old model selling against the new Mercedes Benz S-Class
launched in late September 2013 in China.
Benz getting serious in China
This year, we also heard that Cai Jianjun (previously Brilliance’s head of sales
at BMW) also joined Mercedes Benz, which we believe will strengthen
Mercedes’ China sales and marketing. The China operation has made a lot of
changes with the new head of Daimler's operations in China, Hubertus Troska.
We met Hubertus, and were impressed, coming with an excellent track
record, appearing very level headed, and he seems a “get things done” kind
of leader. He has already fixed many problems that had built up over the past
few years, so we think management issues are no longer a concern. Troska
has also highlighted a shift of focusing on volume at the expense of proper C
and E-Class positioning. He expects to see the luxury market grow by more
than 10% in 2014, while we forecast the number of luxury vehicles sold rising
from 228,000 in 2013 to 270,000 in China, or growth of about 18% YoY.
This seems like a reasonable target as the company was at the bottom of the
model cycle last year, having grown 11% YoY and in December alone, aided
by the launch of new products, grew 22% YoY. Troska targets deliveries to
China of 300,000 by 2015 with locally made models making up two-thirds
(Audi makes 90% of its vehicles in China). Daimler China will add seven new
models and wants to add 20 new or facelifted models by 2015. Troska
expanded the dealership network by 75 in 2013 and wants to add 50 more in
2014 and 2015. The CEO of Daimler, Dieter Zetsche, has a goal to surpass
BMW and Audi globally by the end of this decade, and the company will need
to see significant growth in China to reach this goal.
Figure 53 shows the rapid expansion of luxury automakers’ dealership
networks. The big push started in 2011 with BMW leading the way and
expanding the fastest. From 2013 to 2015, the dealerships will be mostly
added in smaller tier cities as the luxury carmakers move inland.
Figure 53
Luxury brand auto dealerships
Source: CLSA, Company disclosure
0
100
200
300
400
500
600
2005 2006 2007 2008 2009 2010 2011 2012 13CL 14CL 15CL
Audi Mercedes Benz BMW Porsche Land Rover
(stores)
Benz cleaning up
their act in China
Daimler China plans to
grow 18% in 14CL
Benz aggressively adding
new dealerships
The big 3 German makers
are all expanding
dealerships rapidly

Figure 54 Figure 55
New E-class more competitive with the BMW 5 Series New S-Class looks a winner based on ex-China feedback
Source: Mercedes Benz China
While the new S-Class has only recently started to show up in China in limited
numbers, we have been reading online feedback from some of the initial
customers. Local auto blog feedback is mostly positive including, with the ley
points being: marvellous shape; nice interior; and great handling. While the
S-Class has no direct impact on Brilliance, the image from its flagship product
should translate into overall sales.
Negative 3: SUV localisation lags German peers
In the past two years, the SUV segment is clearly the outperformer, up 49%
YoY in 2013. We believe this is reflected in increasing replacement demand
and Chinese consumers’ preference for big cars. “City SUVs” or unibody
construction SUVs grew 61% in 2013. We believe the SUV segment will not
commoditise in 2014 and expect it to maintain healthy 25% YoY shipment
growth.
Figure 56
Shipments forecast breakdown by products
YoY % growth 14CL 15CL 16CL 17CL 18CL
Total 11 10 9 7 6
PV Total 12 11 10 8 7
CV Total 5 5 4 4 4
Sedan 10 10 9 8 6
MPV 15 20 15 15 10
SUV 25 15 15 10 10
Cross-over 0 0 0 0 0
Source: CLSA
BMW missing some higher
end SUVs so far only
imported
We expect SUV market to
maintain 25%YoY growth
in total shipments

Figure 57
BMW China shipments vs ex-China breakdown by product
Source: Company
So far, BMW Brilliance only has one localised SUV model, the X1 with monthly
shipments at around 1,500-2,000 units, which is worse than the Benz GLK
and not even close to FAW Audi’s Q3 and Q5 SUV. We believe BMW has been
too slow in localising its new SUVs and has missed out on this segment, which
will impact growth for Brilliance. There is speculation that BMW Brilliance is
also considering localising its mini brand, which we don’t expect will prove a
very positive move as this product class is not very profitable, noting that
Benz returned a loss on its mini competitor, the Smart. However, we do see a
better choice being to localise the X3 SUV, which can directly compete with
the Audi Q5 in the luxury SUV segment. If the company wanted to move
ahead of Audi then it would need to consider launching a locally made X5
before Audi comes out with a locally produced Q7.
Figure 58
X3 SUV localisation would be a significant catalyst for Brilliance
Source: CAAM
We haven’t heard any details from the company on the localisation of its X3
brand, but expect this would be a good strategy.
0
5
10
15
20
25
30
35
40
1
Series
X1 3
Series
X3 Z4 5
Series
X5 X6 6
Series
7
Series
MINI Rolls
(%)
China
Ex-China
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13
BAIC Benz C
FAW Audi A4L
(units)
Lack of SUV’s
a weakness
Audi is the leader in the
SUV segment with the Q3
and Q5 made in China
BAIC Benz GLK monthly
shipments exceed the
Brilliance BMW X1
The SUV’s X3 and
X5 SUV make up
around 50% of BMW
worldwide shipments
and are imported

Figure 59
ASP comparison of major models (all models except the X3 are made in China)
Segment Brand Model MSRP
(Rmb)
Retail price
(Rmb)
Discount
(%)
Sedan FAW Audi A4L (TFSI 2.0T) 309,800 253,800 (18.1)
Sedan FAW Audi A6L (TFSI 2.0T) 383,000 320,700 (16.3)
Sedan Brilliance BMW 3 Series (320Li 2.0T) 329,800 296,800 (10.0)
Sedan Brilliance BMW 5 Series (520Li 2.0T) 435,600 410,600 (5.7)
Sedan BAIC Benz C-Class (C180 1.8T) 315,000 235,000 (25.4)
Sedan BAIC Benz E-Class (E260L 1.8T) 443,000 380,000 (14.2)
SUV FAW Audi Q3 (35 TFSI 2.0T) 285,000 253,400 (11.1)
SUV FAW Audi Q5 (35 TFSI 2.0T) 358,500 333,800 (6.9)
SUV Brilliance BMW X1 (18i MT 2.0T) 259,000 233,000 (10.0)
SUV BAIC Benz GLK (260 4MATIC 2.0T) 398,000 396,000 (0.5)
SUV BMW X3 (2.0T) 523,000 496,500 (5.0)
Source: Autohome.com
Negative 4: Greater competition in the luxury segment
The luxury segment will become more crowded in the next few years with
more premium brands focusing on China. According to our numbers, in the
next four years, total localised luxury capacity will grow 142% by 16CL, or a
four-year Cagr of 9.1%.
Lexus, Infiniti, Jaguar Land Rover and Acura have already announced plans in
the next three years to establish China factories with capacity of around
200,000-400,000 units each, though since the Japanese yen has devalued so
much they may rethink this idea. Mitsubishi and Jeep also plan to establish a
China factory with their JV partner, GAC. Cadillac is currently finishing a
US$1.3bn plant in Shanghai with its JV partner, SAIC, which will have new
capacity of 160,000 cars, with 30,000 units of capacity to be returned for GM
models. The company told us during our visit in March 2013 that it will launch
a new Cadillac model every year for the next few years.
Figure 60
Upcoming localised luxury models in the next three years
Brand Model
Infiniti Q50
Cadillac ATS
Acura Acura Concept SUV-X
Porsche Macan
Benz A-class
Jeep Cherokee
JLR Evoque
Volvo XC60
Chang'an DS
Lincoln MKC
Source: Autohome.com
Chinese consumers will have more choice, even though we have to admit that
tier-1 luxury brands such as BMW, Audi and Benz are still the best luxury car
brands in Chinese consumers’ mind. In addition, with more demand for entry-
level luxury cars, BMW is taking market share from the mid-to-high-end
segment, especially from Japanese brands, but also diluting their brand
premium, which we worry, will hurt them down the road. As we see
consumers maturing, they might start to look for more unique brands as an
expression of their wealth and individuality, but we believe we are still a few
years away from any significant impact.
JLR will be locally
producing models with
Chery Auto JV partner
GM plans to make a big
push into the luxury
segment with Cadillac
Brilliance BMW lack of a
vehicle with an ASP of
>Rmb350,000 to compete
with the Audi Q5

Negative 5: BMW JV self-brand - Zinoro may be a backwards step
Brilliance China announced its plan to launch a JV self-brand with its partner
BMW called the Zinoro. The first is a pure EV sedan called the Zinoro 1E and
was shown at the Guangzhou Auto Show in November 2013.
Figure 61
The first BMW JV self-brand EV sedan - Zinoro 1E
Source: Company website
The company will also be launching two of its own self-branded cars. We believe
these new cars will be the start of narrowing margins as the company, similar to
when it had its Zhonghua-branded cars in the listed company. While Brilliance is
now known as a proxy play with 102% of operating profit from BMW, with the
imminent launch of new self-branded cars, it is possible to return back to the
years of 2006 to 2009 but more than likely the profits generated from BMW will
be significantly diluted. While many investors are hoping the listed company will
only sell BMWs, the government expects its auto companies to make self-
branded cars. Indeed, future capacity expansions are depending on it.
As a result, there is a need to expand production capacity. We believe this is
which is why BMW Brilliance created the electric vehicle (EV) co-brand, just
like other automakers, in order to gain approval from government for capacity
expansion. Foreign automakers have been worried about the threat by the
central government that a lack of sharing technology could result in a freeze
on production capacity expansion.
However, since BMW is helping to build this car, the company may be able to
launch more cars of much better quality. We believe the ultimate quality of
this car will depend on how much BMW puts into it. However, with all
domestic Chinese carmakers, there is the dilemma of improving quality at the
expense of a higher selling price. Will Chinese consumers want to buy a car
made by a company with a poor brand at a high price even though the car is
better quality? Also the mid-end of the car market is extremely crowded with
the JV car companies slugging it out.
Co-branded car
to be an EV
We always worry about
the return back to
self-branded cars
We prefer co-branded vs
self-branded cars for
Brilliance in order to build
a good brand image
It is believed a JV needs
to produce an EV in
order to continue to
expand production

Figure 62
Brilliance China SWOT
Strengths:
 The only BMW JV in China and likely to
stay that way.
 BMW remains the best luxury car brand
in the China market.
 BMW localisation of models going from
55% to 68% in 15CL.
Weakness:
 Complete dependence, with 108% of net
profit coming from BMW.
 Proportion of 5 Series models will
continue to drop.
 Focus on smaller lower-priced ASP models
means average ASP will continue to fall.
 Factory utilisation levels will fall to 81% in
2014.
 Only one small BMW X1 SUV, falling
behind competitors in this high-growth
segment.
Opportunities:
 Benefiting from further capacity
expansion at BMW Brilliance
 Potential localisation of the X3, X5 and
Mini
 Possible exports of BMWs to other
Asian or Middle East markets with its
long-version cars.
 Pollution concerns by the government
are acting like a catalyst for buying
luxury cars as consumers are worried
they may be later restricted.
Threats:
 JV self-brand may bring the company
back to its money losing Zhonghua days.
 Overall margins likely to drop once it
produces JV self-brands.
 Mercedes Benz model cycle about to peak
after hitting bottom in 2013.
 BMW could choose a second partner,
though we think this is unlikely.
 Overly high pricing in luxury cars in China
has caught the interest of the government
and it may retaliate if the premium is not
controlled.
 Taxes could be raised for luxury vehicles,
especially if they are inefficient on fuel
consumption.
Source: CLSA
Brilliance is not the strongest automaker in China; the company generally
makes money-losing cars. However, visibility is poor as it can hide details in
the group company.
Figure 63
Self-branded cars have historically made almost no profit
2009 2010 2011 2012 2013 14CL 15CL 16CL
Revenue 6,149 8,949 6,443 5,916 6,103 5,668 5,838 6,013
YoY (%) 45.5 (28.0) (8.2) 3.2 (7.1) 3.0 3.0
Gross profit 855 1,224 856 696 687 578 595 613
YoY (%) 43.1 (30.1) (18.6) (1.4) (15.8) 3.0 3.0
Ebitda 818 709 369 83 (36) 67 81 92
YoY (%) (13.4) (48.0) (77.4) (142.7) (288.7) 21.0 13.5
Operating profit 357 569 231 (57) (178) (168) (173) (178)
YoY (%) 59.4 (59.4) (124.6) 213.1 (5.9) 3.0 3.0
Share of BMW Brilliance 355 896 1,720 2,325 3,435 4,250 5,214 0
YoY (%) 152.2 92.0 35.2 47.7 23.7 22.7 (100.0)
Net profit (1,640) 1,271 1,812 2,301 3,374 4,173 5,139 5,931
YoY (%) (177.5) 42.6 27.0 46.6 23.7 23.1 15.4
EPS (Rmb/share) (0.37) 0.25 0.36 0.46 0.67 0.83 1.02 1.18
YoY (%) (169.5) 42.5 26.3 46.6 23.2 23.1 15.4
We rank Brilliance about 20th
among the top automakers in China; we don’t
see its self-branded business as sustainable in the long term. Brilliance China
only turned profitable after selling its money-losing Zhonghua sedan business
back to the group company and focusing on its BMW business.
Not the strongest
automaker in China
BMW remains the best
luxury car brand in China

If we compare Brilliance China’s PE and PB with Dongfeng, which usually trades
around the industry average, we find the latter’s PE and PB much higher until
mid-2010. Brilliance China sold its Zhonghua business back to the parent group
at the end of 2009 to raise money for another production line with BMW. Given
the history of the company’s self-branded Zhonghua sedan, we are concerned at
the prospects of BMW Brilliance starting to work on self-branded automobiles.
Figure 64 Figure 65
Brilliance vs Dongfeng - PE Brilliance vs Dongfeng - PB
Source: CLSA evalu@tor
Money-losing self-branded Zhonghua
Incorporated in June 1992, Brilliance was a state-owned auto factory
specialising in minibuses from 1991 to 2002. It began as a self-branded
carmaker before its JV with BMW in 2003. In 2008, the company expected that
it could sell a self-branded car into the Europe market, but due to safety and
quality concerns, it failed. We visited the Brilliance dealerships at that time as
they promoted the cars as being sold in Europe as a major selling point. In
2010, it stopped selling overseas and the whole export project was a failure
due to crash-test problems and overall quality being not up to standard.
Brilliance has sold vehicles under several brand names, including minibuses
under the Jinbei and Granse brands, and sedans under the Zhonghua and
BMW brands. Brilliance sold off the loss-making Zhonghua business on 31
December 2009 to its shareholder, Huachen Automotive Group, which
continues to sell the Zhonghua today.
Figure 66
Zhonghua sedan shipments
Source: CAAM
avg12.6x
avg8.5x
6
8
10
12
14
16
18
20
Apr 11 Apr 12 Apr 13 Apr 14
Brilliance Auto
Dongfeng
(x)
avg3.09x
avg1.40x
0.8
1.3
1.8
2.3
2.8
3.3
3.8
4.3
4.8
Apr 11 Apr 12 Apr 13 Apr 14
Brilliance Auto
Dongfeng
(x)
0
4,000
8,000
12,000
16,000
20,000
2008 2009 2010 2011 2012 2013
(units)
Company began as a
Chinese self-branded
carmaker
Declining
sales YoY
Self-branded
autos a concern

Brilliance China announced in October 2009 that it would sell its Zhonghua
sedan business back to the parent group for Rmb494m. The business made a
loss of Rmb729.5m in 2008 and Rmb934.8m by 1H09. The loss was mainly due
to its poor sales and expensive initial investment, as the company tried to
make a mid-end sedan at an ASP of Rmb100,000. This was a high price at the
time and the company did not succeed. The issue with making mid-end sedans
and selling at low prices is that usually quality is impacted since the company
will tend to source parts from lower-quality and inexpensive parts suppliers.
We expect that Brilliance China will repeat the mistake of making JV self-branded
vehicles in the long run. Although BMW Brilliance has yet to announce its plans
for self-branded vehicles (only co-branded cars so far), we believe the company
would need to spend Rmb3bn to make 100,000 units, or invest about
Rmb30,0000 per car produced per year. If we assume each car is selling for
Rmb150,000 with a net margin of 7%, then it will have to sell over 285,000 units
to breakeven. However, we believe such a self-branded car to sell only around
50,000 units or less per year and we are neither confident that the company can
get Rmb150,000 per car. We highlight again that brand awareness is the single
most important factor in the Chinese market and Brilliance China doesn’t have a
brand it can use, so the company will need to develop one.
The only exception we have seen in a JV self-branded car so far is the GAC
Trumpchi, which fully leveraged the compact SUV story (similar to Great Wall
Motor). Its strategy of ‘offering full features at a slightly higher price’ has
granted it a sub-segment between domestic makers and JV brands. The
company made good profit on the self-brand at GAC in 2Q13 and 3Q13 but just
recently issued a profit warning for 4Q13 (which was well below expectations),
and we believe considerable cost was put into the self-branded car.
Figure 67
Major self-brand shipment performance
2012 2013 YoY (%)
GAC Trumpchi 32,611 84,602 159.4
Honda Everus 24,576 13,913 (43.4)
Dongfeng Aeolus 60,201 80,077 33.0
Dongfeng Venucia 41,805 105,641 152.7
Figure 68
GAC Trumpchi shipped 84,602 units in 2013
GAC Motor 2011 2012 2013 YoY (%)
CS6 0 5 502 9,940
Feiteng 0 0 1,624 na
Trumpchi GS5 0 22,999 65,010 183
TrumpchiGA3 0 0 11,800 na
TrumpchiGA5 17,006 9,612 7,792 (19)
Heijingang 0 3,220 8,207 155
Qibing 0 2,944 14,065 378
Total 17,006 38,780 109,000 181
Source: CAAM
Cars in China are still used as a means to show off wealth, so branding means
more to Chinese consumers than features and quality. We do expect this to
change over time as younger people move further out in the suburbs for
affordable housing and commuting really takes off. Even though this new brand
No JV self-brand can
be successful with the
one exception of
GAC Trumpchi
Self-branded cars had a
history of losing money
Margins could be under
pressure with self-
branded cars
The GAC Trumpchi was
somewhat more
successful than
the others

scott.laprise@clsa.com 17 April 2014
Company cashflow
Operating profit and cashflow
Net profit, capex and free cashflow
Net debt/Ebitda and net gearing
(800)
(600)
(400)
(200)
0
200
400
600
800
1,000
1,200
1,400
2010A 2011A 2012A 2013CL 2014CL 2015CL
Op profit Op cashflow
(Rmbm)
We remain cautious on the company’s self-branded
minibus segment and expect it to record losses in
the next two years. Operating cash will remain low
as the BMW Brilliance JV income, the group's most
profitable business, is excluded from operating
cashflow and the dividends received from the JV are
included into investing cashflow. The JV is reported
as an equity gain providing little transparency.
We expect the company to keep capex relativley
stable in the next few years. We see less correlation
between the company's FCF and net profit as the
BMW Brilliance JV income is excluded from
operating cashflow. We expect the company to
continue to record negative FCF in the next few
years with relatively stable working capital
managment.
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
6,000
2010A 2011A 2012A 2013CL 2014CL 2015CL
Free cashflow Net profit Capex
(Rmbm)
Net gearing should remain healthy and decline
gradually. The company does not have a lot of cash
on hand as the BMW Brilliance JV does not give a
high dividend payout ratio. In 2012, the JV had a
dividend payout ratio of 20.5%. We expect it to
increase to 25% by 2015. On the other hand, the
company does not have a lot of debt, making its net
gearing relatively healthy.
0
10
20
30
40
50
60
70
(2,000)
(1,800)
(1,600)
(1,400)
(1,200)
(1,000)
(800)
(600)
(400)
(200)
0
200
2010A 2011A 2012A 2013CL 2014CL 2015CL
Net debt/Ebitda (LHS) Net debt(cash)/equity
(%)(x)
Connecting data with best ideas

17 April 2014 scott.laprise@clsa.com
Corporate governance & ESG
Score versus country average
Criteria Score (%) Country avg (%) Country rank Asia-xJ avg (%) Sector rank
Discipline 46 51 75 57 21
Transparency 4 64 140 80 33
Independence 0 21 118 6 13
Responsibility 55 44 33 49 13
Fairness 50 61 58 70 18
CSR/C&G 52 48 55 49 18
Wtd CG score 33 48 131/147 52 30/33
(70)
(60)
(50)
(40)
(30)
(20)
(10)
0
10
20
Discipline Transparency Independence Responsibility Fairness CSR/C&G Wtd CG score
(ppts)
CLSA CG score
Brilliance’s overall corporate governance score is below
industry peers. The company scores worst in
transparency. It has stuck to its core business and
established a JV company with BMW in 2002. However,
the company in general doesn’t give detailed guidance
on its operation, especially information on its BMW JV.
Its scores on independence, fairness and discipline are
all below the country coverage, due to the company’s
local SOE background. We don’t expect to see
significant improvement in CG in the short term.
Environmental, social and governance (ESG)
The company’s C&G score is below industry peers.
Brilliance doesn’t disclose its environmental policies in
its annual report and has no specific environmental
targets like reducing greenhouse gas emissions. One
of its BMW JV plants - Tiexi III - was delayed by the
government due to environmental concerns.
There has been no major health and safety incident,
bribery or corruption in the past three years. Regarding
fuel efficiency, Brilliance’s factory and products are
poor in fuel-efficiency and its mini-vans are mostly
over 2.0L in engine size.
Conclusion
Overall, we believe the company’s corporate
governance and ESG is below the industry average. Its
major shareholder is Huachen Automotive Group
Holdings Company with equity interest of 42.5%,
which is controlled by Liaoning province.
The company’s major profit-making division is BMW
Brilliance and we believe it can maximise shareholder
value without undue interference from government and
politicians. Within the JV, BMW has more control in
management decisions and business plan, which we
think is a very smart move for BMW to pick Brilliance
as its JV partner.
Board composition
The board comprises four executive directors, one non-
executive director and three independent non-
executive directors, which mean independent directors
account for less than half the board.
The audit committee comprises Xu Bingjin, Song Jian
and Jiang Bo, all of whom are independent non-
executive directors. Xu holds a degree in engineering
economics and Song has a degree in engineering
science. Both do not have financial experience.
CG WATCH

will be jointly developed with BMW and may have the halo of BMW quality, this
will likely be viewed as a domestic brand and will receive a poor brand awareness
penalty as a result. It will also need to compete with the JV competitors and we
don’t expect Chinese buyers to choose this car over JV brands.
The other issue with JV self-brand automobiles is that neither the Germans
nor the Chinese want to spend much energy in developing the brand. This is
because the overall margin of BMW Brilliance will likely fall with the self-brand
due to a lower ASP and lower margin compared to the BMW 3 Series, 5 Series
and X1. The Germans are also not likely going to contribute much up-to-date
technology so Brilliance will only likely get out dated or inferior technology.
We believe both Brilliance China and BMW realise these issues and may only
produce limited JV co-branded cars to sell in China so they can appear to the
central government to be following the rules. We assume 500 and 1,000 units
in 14CL and 15CL, respectively, which we expect to have a neutral impact on
the company’s performance. But there is a risk the company could lose
money. As the company reports using equity accounting it also means we will
likely not have any visibility into the profitability of the co-branded cars.
However, we also highlight that Brilliance will eventually have to develop its
own self-branded automobiles at some point because this is the only way to
survive and grow. There is also the prospect that one day the government may
clamp down on not producing Chinese brands as the company is required to
under the JV structure. To our amazement the company has been able to get
away with mainly being the producer for BMW since 2010, far longer than we
would have expected. Looking at the JV from the central government’s point of
view, we would assume it has been classified as a failure. This also means that
Brilliance might be made to merge with a bigger automaker down the road.
Brilliance (the group company) was the seventh-biggest automaker in China
in 2013. The only growth driver for the listed company is its BMW business,
which shipped 207,430 units in 2013, according to CAAM.
Figure 69
Automakers by shipment - Brilliance Auto was the seventh biggest automaker in China in 2013
2011 2012 2013 YoY chg (%)
(2012-13)
Shanghai Automotive Industry Corporation (SAIC) 3,966,003 4,461,393 5,073,338 13.7
Dongfeng Motor 3,058,587 3,078,494 3,534,946 14.8
China FAW Group 2,601,351 2,645,924 2,908,399 9.9
Beijing Automotive Group 1,526,336 1,821,277 2,164,061 18.8
China Changan Automobile 2,008,540 1,826,231 2,150,361 17.7
Guangzhou Automobile 665,506 612,567 815,392 33.1
Brilliance 566,799 637,979 777,379 21.9
Great Wall 486,811 624,602 754,242 20.8
Geely Holding. 432,752 491,444 549,393 11.8
Anhui Jianghuai Automobile 494,822 486,760 514,282 5.7
BYD Auto 448,484 456,056 506,190 11.0
Chery. 641,715 563,305 469,390 (16.7)
Chongqing Lifan Passenger Vehicle. 202,144 270,303 248,288 (8.1)
Guangzhou Automobile. 665,506 99,597 188,811 89.6
Others 739,758 1,230,473 1,329,607 8.1
Total 18,505,114 19,306,405 21,984,079 13.9
Source: CAAM
Brilliance will have
to launch more self-
branded cars in the
listed company one day
Brilliance Group was
the seventh-biggest
automaker in China
Neither the Germans nor
the Chinese want to spend
much energy in developing
the JV self-brand

CLSA-BrillianceAuto-20140416

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