HSBC-China Electric Vehicle Components Initiate Coverage Plugged in and Ready For The Boom

Equity Research Report
Electrical Equipment
October 2019
By: Corey Chan (S1700518100001) www.research.hsbc.com
SPOTLIGHT
China Electric Vehicle

Components
Initiate coverage: Plugged in and ready for the
boom
We forecast an industry upcycle in

2019-21e, driven by an expected boom
in global electric vehicle sales
Strong growth in component orders

should lift the sector’s valuation
Initiate on five A-shares in the supply

chain – Eve, Faratronic, Yinghe and
Sanhua with Buy ratings, and Putailai
with a Hold
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Equities ● Electrical Equipment
October 2019
Why read this report?
 We are bullish on the global electric vehicle component market over

2019-21e due to rising electric vehicle penetration driven by policy
support and improving technology
 Chinese producers stand to benefit as they increase their dominance
along the global supply chain
 We initiate on Eve, Faratronic, Yinghe and Sanhua with Buy ratings
and Putailai with a Hold
The key messages
Corey Chan* (S1700518100001) Two sets of numbers explain why we are so bullish. First, our global team forecasts that the
Head, A-share Infrastructure & penetration rate of electric vehicles will increase from 2% in 2018 to 14% in 2025e. Second,
Renewables Research
HSBC Qianhai Securities Limited China supplies between 40% and 70% of all global EV components depending on the product
corey.chan@hsbcqh.com.cn category. In our view, the transition to EVs appears to be inevitable, driven by policy support
+86 21 6081 3801
and improving battery technology.
* Employed by a non-US affiliate of HSBC This report takes an in-depth look at the supply chain and explains why we think China’s
Securities (USA) Inc, and is not registered/
qualified pursuant to FINRA regulations component makers are likely to tighten their grip on the global market. We also highlight that,
although we expect prices to keep falling across the industry, we think the pricing power of
certain components will be more resilient than others.
Where our views differs from consensus

 We believe the market leaders in capacitors and heat management systems will find it
relatively easy to maintain their pricing power given the low share of these components in
the total cost of an EV and the relatively high level of market concentration.
 It is uncertain which battery technology will prevail. The phasing out of EV subsidies in
China could reduce the competitiveness of the more expensive ternary cathode batteries
relative to lithium iron phosphate (LFP) technology.
 In our view, improved battery technology is positive for equipment, heat management and
capacitor suppliers given the need to replace and upgrade existing stock.
Initiate coverage
We initiate coverage of five A-share EV component makers: Eve, Faratronic, Yinghe and
Sanhua with Buys, and Putailai with a Hold. Eve and Faratronic, the respective market leaders
in primary lithium batteries and capacitors, are our preferred stocks in the sector given their low
valuations compared with peers.
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October 2019
Contents
Why read this report? 1
Facts and figures 4
Related research 5
Moving into the fast lane 6
What the EV boom means for

component makers 17
Company section 29
Eve Energy (300014 CH) 30
Sanhua (002050 CH) 45
Yinghe Tech (300457 CH) 59
Faratronic (600563 CH) 69
Putailai (603659 CH) 81
Disclosure appendix 93
Disclaimer 96
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October 2019
China EV component makers
3
October 2019
Facts and figures
2% 14%
Global plug-in vehicle’s sales Our global team’s forecast of
penetration in 2018 penetration in 2025e
Growth is driven by sustained policy

pushes in China and Europe, and
41% CAGR
improving battery technology Our global team’s forecast for growth in
plug-in vehicle sales over 2018-21e
38% 41% 44%

Global EV lithium ion Global EV film capacitor Global EV heat
battery revenue CAGR in revenue CAGR in 2018-21e management revenue
2018-21e CAGR in 2018-21e
40-70% We expect a global EV boom to drive

growth for China EV component suppliers
China suppliers’ share of the global EV
components supply chain
4 years 2.5x
Average replacement cycle of lithium The value of the heat management system
battery equipment on an EV is about 2.5x that on a comparable
internal combustion engine vehicle
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October 2019
Related research
Recommended reading ...

 Spotlight: China Solar Equipment – Initiate coverage: Brighter days ahead, 20 June 2019
 Spotlight: Asia EV Battery – Charge! The race to be the Li-ion king heats up, 14 June 2019
 Spotlight: China Power T&D Equipment – Initiate coverage: Time to power up, 11 April 2019
5
October 2019
Moving into the fast lane
 Global EV demand is set to boom

 We see opportunities for selected Chinese component makers along
the supply chain
 We initiate on five stocks in the sector – prefer Eve and Faratronic
which have stronger pricing power
Ready to accelerate
China supplies between 40% and 70% of global EV components, depending on the product
category, and is expanding its dominance along the supply chain. At the same time, our global
team expects global EV penetration to rise from 2% in 2018 to 14% in 2025 (see Asia/Europe
EV Battery – Who will take the Li-ion’s share, 14 June 2019). Hence, we see plenty of upside
potential for Chinese EV component producers.
Despite challenges along the way, the transition from internal combustion engine (ICE) vehicles
The transition to EVs
continues to gather
to EVs continues to gather momentum. For example, countries around the world have rolled out
momentum a series of policies to promote the use of EVs (Exhibit 1). In China, the government plans to
implement stricter standards – N6A next year and N6B in 2023 – to cut CO2 emissions per
passenger vehicle (PV) by 30% and 29% respectively. In Europe, EU regulators target a 15%
cut in CO2 emissions per PV in 2020-25 (the EU’s 2020 emission standard is already 19% lower
than China’s N6A standard).
Our global team expects these efforts, along with improving technology, to drive a 41% sales
CAGR for EVs over 2018-21e. In turn, we expect Chinese EV component makers to see a
2018-21e revenue CAGR of 36-44%.
Exhibit 1. Global policies to encourage the adoption of EV

EU China US
CO2 target for PV: -15% in 2020-25, - CO2 target for PV: -21% in 2020-25, - CO2 target for PV: -27% in 2020-25, -
26% in 2025-30 25% in 2025-30 14% in 2025-30
CO2 emission penalty: From 2019: Licensing unlimited for NEV but limited CO2 emission penalty: USD14 per
EUR95 per vehicle for each g/km for ICE vehicle in six cities vehicle for every 0.1mpg exceeded
exceeded target
Super credits for low emission vehicle Traffic ban for ICE vehicle in certain Super credits for BEVs, FCEVs, PHEVs
(<50g/km) in 2020-22e; capped to area or times and CNGVs
7.5g/km over three years
A maximum of 7g/km emission savings Prioritise the use of NEVs in public Credits for off-cycle technologies
through econ-innovations transportation
CO2 target for automakers will be CAFC and NEV credit policy: Credit system allows carry forward and
relaxed if the share of zero and low (1) automakers need to bundle ICE backward, trading and exchanging of
emission vehicles exceeds 15% in 2025 vehicle production with 10-20% NEV credits
and 30% in 2030 production; (2) automakers need to meet
a fuel-efficiency target which can be
relaxed by NEV credits
Source: ICCT, ICET, HSBC
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October 2019
But policy measures can cut both ways. For example, in China, which accounted for 52% of
Policy measures can cut both
ways global EV demand in 2018, sales have been less than rosy year-to-date. In the first eight months
of 2019, the average monthly sales of new energy vehicles (NEV) were 5% below that of full-
year 2018 due to NEV subsidy cuts and an economic slowdown. The current run rate is 40%
below the government’s target of 2m units of NEV production by 2020 (Exhibit 3) as set out in
the “Energy-Saving and NEV Development Plan 2012-20”. As a result, we see potential for
policy support to lift demand.
In addition, to enforce a minimum NEV production target on the auto makers, the government
has rolled out the Corporate Average Fuel Consumption (CAFC) and the NEV Credits Joint
Management Method, with which auto makers with ICE vehicle volumes of more than 30,000
units need to comply. Companies failing to meet their CAFC and NEV credit requirements will
face penalties, including the suspension of production.
The CAFC credit regime requires that the average fuel consumption for new cars to be cut by
15% in 2018-21, which in our view is aggressive. Auto makers which do not to meet the target
will accumulate negative CAFC credits, which can be compensated for by NEV production.
Based on these policies, we calculate that NEV production would need to increase to 3m units
in 2021 from 1m units in 2018 (Exhibit 2), implying good prospects for EV component suppliers.
Exhibit 2. China: NEV production needs to reach 3m by 2021e to meet NEV and CAFC
requirements
2018 2019e 2020e 2021e 2022e 2023e
a) NEV credit regime
Passenger car sales (m units) 23.9 24.0 24.0 24.0 24.0 24.0
NEV target share % 8% 10% 12% 14% 16% 18%
Total NEV credits required (m) 1.9 2.4 2.9 3.36 3.8 4.32
Average NEV credit/car 4.1 4.1 3.0 3.1 3.2
NEV production required (m units) 0.59 0.70 1.13 1.24 1.34
b) CAFC credit regime

Passenger car sales (m units) 23.9 24.0 24.0 24.0 24.0 24.0
National CAFC target (L/100km) 6.0 5.5 5.0 4.9 4.8 4.6
Actual CAFC (L/100km) 5.8 5.6 5.5 5.3 5.1 5.0
CAFC credits addition (m) 4.8 (3.0) (11.0) (9.0) (8.0) (9.1)
CAFC credits cumulative (m) 18.0 11.4 (0.7) (9.6) (16.7) (24.2)
NEV production to offset CAFC deficits (m units) 0.2 3.0 2.6 2.8
NEV production calculated from a) and b) 0.59 0.70 3.01 2.59 2.82
whichever is higher (m units)
Source: MIIT, HSBC Qianhai Securities (E = HSBC Qianhai Securities estimates)
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October 2019
Exhibit 3. China: NEV production y-t-d is Exhibit 4. EV COGS breakdown, 2018

below the government’s 2020 target
Heat management
180 k units system Others
160 5.0% 12.9%
140
Battery unit
120 Capacitors
38.0%
100 0.4%
80 Body parts
60 5.0%
40
20 Chassis
14.0%
- Electric
2018 8M19 Government's Auto motor
2020 Target electronics 7.0%
12.0% Motor controller ex capacitors
Monthly NEV production 5.7%
Source: Company, HSBC Qianhai Securities estimates Source: Company, HSBC Qianhai Securities estimates
Despite our optimism about the long-term outlook for the industry we see looming price
We see looming price
pressure for component pressure for component makers, given the phasing out of NEV subsidies in China. We expect
makers the subsidies, accounting for 10-15% of the EV’s value, to be completely eliminated in 2020,
causing auto makers to squeeze costs along the supply chain.
However, certain parts of the supply chain are likely to be more resilient than others. Compared
with other EV components, we believe heat management products and capacitors are less
exposed to the risk of an ASP squeeze given their relative low share of an EV’s total cost and
relative high market concentration.
We also analyze the impact of the evolution of the battery technology on component makers.
We see uncertainty as the cut in subsidies could make the high-energy density and also more
expensive ternary cathode batteries less appealing than lithium iron phosphate (LFP) batteries.
However, we believe the evolution of the battery technology is positive for equipment, capacitor
and heat management demand given the need to upgrade and replace existing installations.
Chinese players spend a larger share of revenue on R&D than their global peers
Given the important role that technology plays in the EV industry, suppliers willing to invest in
Chinese companies have a
competitive edge in R&D cutting edge equipment and processes are likely to become tomorrow’s winners. Chinese
companies have a competitive edge in this area as their R&D expenses as a percentage of
revenue are higher than their global peers (Exhibit 5-6).
 In the battery segment, Eve’s R&D expense ratio at 7% in 2018 was well above SK
Innovation’s 0.4% despite a similar level of EV lithium battery (LIB) production capacity at
5GWh.
 In equipment, Yinghe’s 2018 R&D ratio was double that of CKD, a Japanese competitor
with a similar level of equipment revenue.
 In anode materials, Putailai is competing with Nippon Carbon from Japan with a similar
level of revenue. Nippon Carbon’s R&D expense ratio at 0.6% in 2018 was well below
Putailai’s 4.4%.
 In the capacitor space, Faratronic competes with Nichicon with a similar level of film
capacitor revenue. However, Nichicon’s R&D expense ratio in 2018 was only one-third of
Faratronic’s.
 In heat management, Sanhua’s R&D expense ratio was 4% in 2018 vs the 3% of rival
Hanon Systems. Sanhua’s revenue was about one-third of Hanon Systems’ in 2018.
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October 2019
Exhibit 5. Chinese EV component Exhibit 6. International counterparts: R&D

suppliers: R&D expense ratio, 2018 expense ratio, 2018
R&D expense as % of revenue(2018) R&D expense as % of revenue(2018)
8.0% 7.2% 8.0%
7.0% 7.0%
6.0%
6.0% 6.0%
5.0% 4.4% 5.0%
4.2% 4.0%
4.0% 4.0% 3.1% 2.9%
3.0%
3.0%
2.0% 1.4%
2.0% 0.4% 0.6%
1.0%
1.0%
0.0%
0.0% SK CKD Nippon Nichicon Hanon
Eve Yinghe Putailai Faratronic Sanhua Innovation Carbon Systems
2018 2018
Source: Company, HSBC Qianhai Securities Source: Company, HSBC Qianhai Securities
Initiate coverage of five A-share EV component makers
We initiate coverage of five A-share EV component makers – Eve, Faratronic, Yinghe and
Sanhua with Buys, and Putailai with a Hold.
Eve (300014 CH, RMB33.39, Buy, TP RMB47.40): As the largest player in primary lithium
batteries in China with c60% market share, Eve is well positioned to benefit from the market
upcycle in 2019-21, driven by the start of the smart meter replacement cycle and rising
electronic toll collection (ETC) penetration. We expect Eve’s LFP battery to be increasingly
competitive against NCM technology given the new energy vehicle (NEV) subsidy cuts in China.
We see a potential catalyst from the potential listing of Smoore, a leading global e-cigarette
original design manufacturer (ODM) which is 37.5% held by Eve. The stock’s current valuation,
at 19x 2020e PE, is well below its historical average of 38x, which is attractive, in our view.
Sanhua (002050 CH, RMB13.20, Buy, TP RMB16.10): The company is a global market leader
in pumps and valves used in heat management. It is penetrating the auto heat management
market and has a dominant market share in key components like auto-use electronic expansion
valve (EXV). We expect rising EV heat management orders to drive a 15% earnings CAGR in
2018-21e. Our target price of RMB16.10 implies a 2020e PE multiple of 28x, above the current
valuation of 23x 2020e PE.
Yinghe (300457 CH, RMB24.20, Buy, TP RMB32.1): The company has a c19% share in the
LIB equipment market in China and is one of the two Chinese companies that can provide
whole line solutions. We expect an earnings CAGR of 27% in 2018-21e, benefiting from the
doubling of LIB capacity globally during the period. The stock’s current valuation, at 14x 2020e
PE, is well below its historical average of 36x, which attractive, in our view.
Faratronic (600563 CH, RMB43.80, Buy, TP RMB57.6): We expect rising EV penetration,

together with a strong outlook for global solar installations, to drive a 9% earnings CAGR in
2018-21e. Globally, the company has a c30% market share in film capacitors used in EV and a
50% market share in film capacitors used in solar plants. The stock’s current valuation, at 19x
2020e PE, is below its historical average of 20x, which attractive, in our view, and its 2020e
dividend yield is high, at 3.4%.
Putailai (603659 CH, RMB50.40, Hold, TP RMB56.10): The company is an industry leader in
both anode materials and wet separator coating in China. However, given the overcapacity
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October 2019
forecast for the anode materials industry in the next 2-3 years and unfavourable changes to its
product mix, we see a chance of deteriorating gross margins. The stock’s current valuation, at
25x 2020e PE, is close to its historical average, which is fair, in our view.
Preferred stocks
Eve, China’s largest primary lithium battery supplier, and Faratronic, China’s largest film
Eve and Faratronic are our
preferred stocks capacitor supplier, are our preferred stocks. Both stocks trade at low valuations compared with
peers (Exhibit 8). Faratronic also has the best operating cash flow and free cash flow (FCF) to
net profit multiple among peers in 2018 (Exhibit 9).
For Eve and Putailai, FCF were negative in 2018 due to investments in new capacity to cater for
the growth in EV battery demand. Yinghe’s operating cash flow and free cash flow (FCF) to net
profit multiple were the lowest among peers in 2018. This was due to long receivable days (285
days) and capex in new production facility in Huizhou in Guangdong province. However, we
expect its capex to drop in 2019-21e following the completion of the new production facility,
leading to improvements in FCF.
Exhibit 7. Market share of the five EV component suppliers, 2018
Eve (EV LIB) 1%

2%
Putailai (LIB equipment) 3%

5%
Putailai (Anode) 12%

17%
Yinghe (LIB equipment) 11%

19%
Sanhua (EV heat management) 11%

21%
Faratronic (EV capacitor) 30%

40%
Eve (Primary Li battery) 8%

60%
0% 10% 20% 30% 40% 50% 60% 70%

Global market share (2018) Market share in China (2018)
Source: Company, HSBC Qianhai Securities estimates
Exhibit 8. PE comparison, 2020e Exhibit 9. Cash flow comparison, 2018
PE x
30.0 2.00 1.28
25.1 1.00 0.76
1.00 0.55
25.0 22.5 0.27 0.24
0.01
19.4 19.2 0.00
20.0
14.4 -1.00 -0.47
15.0 -1.01
-2.00
10.0 -3.00
5.0 -4.00 -3.33
Faratronic Sanhua Eve Putailai Yinghe
0.0
Putailai Sanhua Eve Faratronic Yinghe Operating cash flow / Net profit (2018)
2020 PE FCF / Net profit (2018)
Source: Company, HSBC Qianhai Securities estimates Source: Company, HSBC Qianhai Securities
10
October 2019
Potential company-specific catalysts

Eve: (1) Potential listing of Smoore, (2) stronger-than-expected demand for primary LIB, and
(3) better-than-expected EV battery new orders.
Sanhua: (1) Potential asset injection from parent, (2) announcement of auto heat management
new orders from leading auto makers, and (3) A/C component sales better-than-expected on
market share gains.
Yinghe: (1) Better-than-expected equipment new orders, (2) contributions from the OLED and
e-cigarette businesses better-than-expected, and (3) faster-than-expected accounts receivable
collection.
Faratronic: (1) Announcement of new film capacitor orders from leading auto makers, (2) stronger-
than-expected film capacitor demand from the solar and wind industry, and (3) penetration of
downstream markets, such as grid and rail.
Where we are different from consensus

Eve: Our 2019-21 earnings estimates are 4-7% above consensus. We are more bullish than
consensus on the demand forecasts for LFP batteries in 2019-21 as we expect the phasing out
of NEV subsidies in China to lift the battery’s competitiveness against NCM.
Sanhua: Our 2019-21 earnings estimates are 5-10% above consensus. We are more bullish
than consensus on the gross margin forecasts of Sanhua’s auto heat management products in
2019-21 as we expect resilient product pricing due to a highly consolidated market.
Yinghe: Our 2019-21 earnings estimates are 8-22% above consensus as we expect stronger EV
LIB equipment new orders, driven by rapid LIB product upgrades.
Faratronic: Our 2019-21 earnings estimate is 3-11% above consensus. We are more bullish
than consensus on the gross margin forecasts for Faratronic’s EV film capacitors in 2019-21 as
we expect resilient pricing due to the product’s low share of EV costs.
Putailai: Our 2019-21 earnings estimates are 2-5% below consensus. We are more bearish
than consensus on the gross margin forecasts of Putailai’s anode materials business in 2019-21
in view of an expected industry overcapacity and unfavourable product-mix shifts.
Exhibit 10. HSBC Qianhai Securities estimates vs consensus

__ HSBC Qianhai estimates __ ___ Consensus estimates ____ ________ Variance _________
Company RMBm 2019 2020 2021 2019 2020 2021 2019 2020 2021
Eve Revenue 7,288 11,238 13,537 6,522 9,221 12,159 12% 22% 11%
Net profit 1,526 1,669 1,777 1,450 1,608 1,661 5% 4% 7%
Sanhua Revenue 11,497 12,873 14,575 10,626 12,056 13,725 8% 7% 6%
Net profit 1,361 1,620 1,987 1,272 1,550 1,800 7% 5% 10%
Yinghe Revenue 3,026 3,695 3,778 2,451 3,025 3,627 23% 22% 4%
Net profit 477 630 672 415 517 622 15% 22% 8%
Faratronic Revenue 1,743 1,915 2,155 1,655 1,839 2,078 5% 4% 4%
Net profit 456 513 590 444 487 531 3% 5% 11%
Putailai Revenue 5,097 5,904 6,675 4,943 5,941 6,609 3% -1% 1%
Net profit 716 873 954 754 896 1,001 -5% -2% -5%
Source: Wind, HSBC Qianhai Securities (E = HSBC Qianhai Securities estimates)
Sector catalysts and downside risks

Potential catalysts: (1) Stronger-than-expected EV sales globally underpinned by additional policy
support, (2) resilient component prices driven by better EV demand, (3) market consolidation that
could help leaders, (4) evolution of technologies in favour of existing players; and 5) stronger-than-
expected cost reduction via economies of scale.
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October 2019
Downside risks: (1) Weaker-than-expected global EV sales on lack of additional policy

support, (2) auto makers call for stronger-than-expected price cuts, (3) market consolidation
could squeeze out small players, (4) equity dilution risks stemming from heavy capex, and
(5) market-shifting new technologies unfavourable to incumbents.
ESG
We believe the electrification of road transport can make a significant contribution towards the
decarbonisation of transportation. In the transport sector, road transportation accounts for
around 70% of emissions.
The five companies have all set detailed guidelines for ethical management, safety
management and social contributions, and also follow China’s market rules on corporate
governance. Average board tenure for each of the five companies are all over two years. All five
companies have independent board members accounting for over 20% of the board.
Exhibit 11. ESG indicators, 2018

Eve Sanhua Putailai Yinghe Faratronic
Number of board members 7 11 5 10 10
Average board tenure (years) 5.4 6.6 2.6 2.3 4.7
Number of female board members 1 1 0 0 0
Female board members (%) 14.3% 9.1% 0.0% 0.0% 0.0%
Number of independent board members 3 3 2 3 3
Board member independence (%) 42.9% 27.3% 40.0% 30.0% 30.0%
Source: Company, HSBC Qianhai Securities
12
Exhibit 12. Global EV components: Valuation comps
Market 3M _____ P/E ______ ____ P/B _____ __ ROE___ ___ DY ____
Company Stock Code Cur Rating TP Closing Cap. ADTV
Name 11/10/2019 US bn US mn 19e 20e 19e 20e 19e 20e 19e 20e
Battery makers
Eve Energy 300014 CH RMB Buy 47.4 33.4 4.57 106 20.0 19.4 4.4 3.8 28% 21% 1.5% 1.5%
CATL 300750 CH RMB 71.5 22.26 107 30.1 25.6 3.7 3.3 12% 13% 0.3% 0.4%
BYD 002594 CH RMB 48.4 16.90 70 39.0 31.6 2.2 2.1 6% 7% 0.7% 0.9%
Sunwoda 300207 CH RMB 14.0 3.06 39 17.0 12.4 3.0 2.5 17% 20% 1.2% 1.4%
Guoxuan High-tech 002074 CH RMB 12.4 1.99 28 16.7 14.7 1.4 1.3 9% 9% 0.8% 0.8%
Narada 300068 CH RMB 11.7 1.43 20 22.4 NA 1.5 NA 7% NA 1.4% NA
Samsung SDI 006400 KS KRW 227000.0 13.23 45 14.3 11.3 1.2 1.1 8% 9% 0.5% 0.5%
LG Chem 051910 KS KRW 302500.0 18.10 47 15.5 12.2 1.2 1.2 8% 9% 2.0% 2.1%
SK Innovation 096770 KS KRW 167500.0 13.13 28 9.1 8.6 0.8 0.7 9% 9% 4.6% 4.7%
Panasonic 6752 JP JPY 877.9 19.72 53 10.3 9.3 1.0 0.9 9% 10% 3.5% 3.7%
Battery equipment suppliers

Yinghe Technology 300457 CH RMB Buy 32.1 24.2 1.28 12 19.0 14.4 2.7 2.3 14% 16% 0.5% 0.7%
Lead Intelligent 300450 CH RMB 32.6 4.06 45 20.5 15.8 5.2 4.0 25% 25% 1.2% 1.6%
Kanhoo Industry 300340 CH RMB 13.0 0.39 18 14.3 11.7 1.7 1.5 12% 13% NA NA
Golden Milky Way 300619 CH RMB 24.9 0.26 3 20.5 12.2 3.6 2.8 17% 23% NA NA
Nebula Electronics 300648 CH RMB 16.8 0.32 15 16.1 NA NA NA NA NA NA NA
Hangke Technology 688006 CH RMB 46.5 2.63 56 38.3 29.2 8.5 6.9 22% 24% 0.6% 0.7%
CKD 6407 JP JPY 1390.0 0.88 8 17.2 11.9 1.0 0.9 6% 8% 1.6% 2.2%
Battery anode suppliers

Putailai 603659 CH RMB Hold 56.1 50.4 3.09 9 30.6 25.1 6.4 5.3 23% 23% 1.0% 1.2%
Shanshan 600884 CH RMB 11.0 1.75 14 16.3 14.8 1.0 0.9 6% 6% 0.6% 0.7%
Hitachi chemical 4217 JP JPY 3520.0 6.72 20 22.4 20.2 1.6 1.6 7% 8% 1.8% 1.9%
Nippon Carbon Company 5302 JP JPY 3895.0 0.42 6 4.6 4.5 NA NA NA NA 5.1% 5.1%
Auto heat management product suppliers

Sanhua Intelligent 002050 CH RMB Buy 16.1 13.2 5.15 21 26.8 22.5 4.0 3.5 15% 16% 1.1% 1.3%
Aotecar 002239 CH RMB 1.7 0.76 5 NA NA NA NA NA NA NA NA
Songz 002454 CH RMB 4.9 0.44 3 11.6 8.9 0.9 0.8 7% 9% NA NA
Yinlun 002126 CH RMB 7.3 0.82 5 13.2 11.0 1.3 1.2 10% 11% 0.4% 0.3%
Denso 6902 JP JPY 4700.0 33.92 62 11.4 10.2 0.9 0.9 8% 9% 3.2% 3.5%
Valeo FR FP EUR 32.0 8.51 41 11.9 9.3 1.5 1.4 13% 15% 3.6% 4.1%
Hanon Systems 018880 KS KRW 11600.0 5.25 6 15.9 14.5 2.6 2.4 16% 16% 3.1% 3.3%

Capacitor suppliers
Faratronic 600563 CH RMB Buy 57.6 43.8 1.39 11 21.6 19.2 3.8 3.5 18% 19% 3.0% 3.4%
Tongfeng 600237 CH RMB 3.9 0.31 6 NA NA NA NA NA NA NA NA
Aihua Group 603989 CH RMB 19.5 1.07 4 17.9 14.8 3.0 2.8 17% 19% NA NA
JHCC 002484 CH RMB 6.8 0.79 10 13.7 11.0 1.3 1.2 9% 11% NA NA
Nichicon 6996 JP JPY 1026.0 0.73 3 14.4 11.9 0.8 0.8 6% 7% 2.3% 2.5%
TDK 6762 JP JPY 10060.0 11.94 84 13.2 11.6 1.3 1.2 10% 10% 1.9% 2.1%
Vishay VPG US USD 31.4 0.42 2 14.5 NA 1.5 NA 10% NA NA NA
October 2019
Vishay VPG US Equity USD 34.5 0.47 2 15.9 NA 1.6 NA 10% NA NA NA
Note: E= Bloomberg consensus estimates unless otherwise stated
*HSBC Qianhai Securities estimates
Source: Company data, Bloomberg, Wind, HSBC Qianhai Securities
13

14
Exhibit 13. Key suppliers along the EV supply chain
Capacitor: Motor controller:

Cathode: Panasonic(6752.T) Continental AG (CON.F)
Umicore (UMI.BR) Kemet (KEM.N) Delphi (DLPH.N)
Sumitomo metal mining (5713.T) Nichicon (6996.T) Bosch (500530.BO)
ECOPRO (086520.KS) TDK (6762.T) Valeo (FR.PA)
Ronbay new energy (688005.SH) Vishay (VPG.N) BYD (002594.SZ)
Easpring material (300073.SZ) Faratronic (600563.SH) Inovance (300124.SZ)
EV OEM:
Aihua Group (603989.SH) Tesla (TSLA.O)
Broad-Ocean Motor
JHCC (002484.SZ) VW (VW.SIX)
(002249.SZ)
Anode: Tongfeng (600237.SH) GM (GM.N)
Hitachi chemical (4217.T) BMW (BMW.F)
Nippon Carbon Company (5302.T) Audi (NSU.F)
JFE (5411.T) Nissan (7201.T)
Mitsubishi Chemical (4188.T) Ford (F.N)
Heat management product/system: Daimler (DAI.F)
Putailai (603659.SH) Denso (6902.T)
Kaijin new energy Volvo (VOLVB.ST)
Valeo (FR.PA) BYD (002594.SZ)
Shanshan (600884.SH) Hanon Systems (018880.KS)
XFH BAIC (1958.HK)
Mahle Geely (0175.HK)
BTR (835185.OC) Sanhua Intelligent (002050.SZ) JAC Motors (600418.SH)
Aotecar (002239.SZ)
Songz (002454.SZ)
Separator: Yinlun 002126.SZ)
Asahi-Kasei (3407.T)
Toray(3402.T)
W-Scope (6619.T) Lithium-ion battery:
Semcorp (603806.SH) Samsung SDI (006400.KS)
Green Power New Energy LG Chem (051910.KS)
Senior Technology Material (300568.SZ) SK Innovation (096770.KS)
Putailai (603659.SH) Panasonic (6752.T)
AESC
CATL (300750.SZ)
Battery Equipment: BYD (002594.SZ)
CKD (6407.T) Guoxuan high-tech (002074.SZ)
PNT Eve energy (300014.SZ)
Lishen

Hirano Tecseed (6245.T) Electrolytes:
Yinghe Tech (300457.SZ) Ube Industries (4208.T) Farasis
Lead intelligent (300450.SZ) ECOPRO (086520.KS)
Kanhoo Industry (300340.SZ) Mitsubishi Chemical (4188.T)
Putailai (603659.SH) Soulbrain (036830.KS)
Hangke (688006.SH) Capchem Technology (300037.SZ)
Tinci Materials Technology (002709.SZ)
October 2019

October 2019
Valuation and risks
Valuation methodology Risks to our view

Current price: We base our target price of RMB47.40 on a DCF valuation model. Downside risks:
Eve
RMB33.39 Key assumptions in our model include the following. (1) Cost of  Weaker-than-expected primary Li battery demand
300014 CH
Target price: equity (COE): We use a COE of 10.4%. This is derived from a  Weaker-than-expected power battery margin on
RMB47.40 risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta intensified competition
of 1.22. (2) Cost of debt (COD): We assume the pre-tax cost of  Risk of equity dilution from potential fundraising exercise
Buy Upside:
debt to be 5.0% and after-tax cost of debt to be 4.3%. We use our  Weaker-than-expected contribution from power battery
42%
2020e debt-to-capital ratio of 37% as our long-term debt-to-capital business
ratio. (3) Operating cash flow to grow 14% per annum: We expect  Re-negotiation of supply contract with auto makers
operating cash flow (before changes in working capital) to expand  E-cigarette business faces policy risks
at a CAGR of 14% in 2018-29e, reflecting solid growth in demand.  Selling pressure from big shareholders
(4) Capital expenditure: We expect capex of around RMB4bn and
RMB5bn per annum in 2019 and 2020e respectively, reflecting the
expansion of its power battery capacity. Thereafter, we expect
capex to be stable at around RMB0.3-0.4bn per annum in 2021-
29e, reflecting steady investment in maintenance. (5) Terminal
growth rate at 2%, and we assume the company reaches a steady
growth period after 2029. Our target implies upside of 42%. We
initiate with a Buy rating.
Corey Chan | corey.chan@hsbcqh.com.cn | +86 755 8898 3404
Sanhua
RMB13.20 Key assumptions in our model include the following. (1) Cost of  Weaker-than-expected property market
002050 CH
Target price: equity (COE): We use a COE of 9.8%. This is derived from a risk-  Lower-than-expected copper price
RMB16.10 free rate of 2.5%, a market risk premium of 6.5%, and a beta of  Weaker-than-expected global EV demand
1.12. (2) Cost of debt (COD): We assume the pre-tax cost of debt  Re-negotiation of supply contract with auto makers
Buy Upside:
to be 5.0% and after-tax cost of debt to be 4.3%. We use our  Weaker-than-expected global dish washer demand
22%
2020e debt-to-capital ratio of 15% as our long-term debt-to-capital  Selling pressure from big shareholders
ratio. (3) Operating cash flow to grow 8% per annum: We expect
operating cash flow (before changes in working capital) to expand
at a CAGR of 8% in 2018-29e, reflecting solid growth in demand.
(4) Capital expenditure: We expect capex of RMB0.8bn in 2019-
20e, driven by auto parts capacity expansion. Thereafter, we
expect capex to drop to around RMB0.3bn per annum in 2021-29e,
reflecting steady maintenance capex. (5) Terminal growth rate at
2%, and we assume the company reaches a steady growth period
after 2029. Our target implies upside of 22%. We initiate with a Buy
rating.
Yinghe
RMB24.20 Key assumptions in our model include the following. (1) Cost of  Weaker-than-expected LIB capacity cycle;
300457 CH
Target price: equity (COE): We use a COE of 10.1%. This is derived from a  Weaker-than-expected ASPs on deteriorating pricing
RMB32.10 risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta power;
of 1.16. (2) Cost of debt (COD): We assume the pre-tax cost of  Higher-than-expected receivable provision;
Buy Upside:
debt to be 5.0% and the after-tax cost of debt to be 4.3%. We use  Weaker-than-expected margin on intensified competition;
33%
our 2020e debt-to-capital ratio of 15% as our long-term debt-to-  Re-negotiation of supply contract with battery makers;
capital ratio. (3) Operating cash flow to grow 9% per annum: We  Expanding into the e-cigarette business could entail policy
expect operating cash flow (before changes in working capital) to risks;
expand at a CAGR of 9% in 2018-29e, reflecting stable growth in  Selling pressure from big shareholders
demand. (4) Capital expenditure: We expect capex of around
RMB400m, RMB350m, and RMB200m in 2019e, 2020e and 2021e
respectively, reflecting the company’s LIB equipment capacity
expansion. Thereafter, we expect a steady capex of around
RMB100mn per annum in 2022-29e, reflecting maintenance capex.
(5) Terminal growth rate at 2%, and we assume the company
reaches a steady growth period after 2029e. Our target implies
upside of 33%. We initiate with a Buy rating.
(
15
October 2019
Valuation methodology Risks to our view

Faratronic
RMB43.80 Key assumptions in our model include the following. (1) Cost of  Weaker-than-expected global EV demand;
600563 CH
Target price: equity (COE): We use a COE of 8.6%. This is derived from a risk-  Weaker-than-expected margin on intensified competition;
RMB57.60 free rate of 2.5%, a market risk premium of 6.5%, and a beta of  Weaker-than-expected solar and wind installation;
0.95. (2) Cost of debt (COD): We assume the pre-tax cost of debt  Re-negotiation of supply contract with auto makers;
Buy Upside:
to be 5.0% and after-tax cost of debt to be 4.3%. We use our 2020e  Worsening trade disputes globally.
32%
debt-to-capital ratio of 1% as our long-term debt-to-capital ratio. (3)
Operating cash flow to grow 6% per annum: We expect operating
cash flow (before changes in working capital) to expand at a CAGR
of 6% in 2018-29e, reflecting steady growth in demand. (4) Capital
expenditure: We expect steady capex of around RMB10-60m per
annum in 2019-29e, reflecting steady investment in maintenance.
(5) Terminal growth rate at 2%, and we assume the company
reaches a steady growth period after 2029e. Our target implies
upside of 32%. We initiate with a Buy rating.
Current price: We base our target price of RMB56.10 on a DCF valuation model. Upside risks:
Putailai
RMB50.40 Key assumptions in our model include the following. (1) Cost of  Stronger-than-expected global EV sales on additional
603659 CH
Target price: equity (COE): We use a COE of 7.9%. This is derived from a risk- policy support
RMB56.10 free rate of 2.5%, a market risk premium of 6.5%, and a beta of  Better-than-expected market share in the anode materials
0.83.(2) Cost of debt (COD): We assume the pre-tax cost of debt market
Hold Upside:
to be 5.0% and after-tax cost of debt to be 4.3%. We use our  Stronger-than-expected demand for wet separator coating
11%
2020e debt-to-capital ratio of 20% as our long-term debt-to-capital  Faster-than-expected expansion of the equipment product
ratio. (3) Operating cash flow to grow 7% per annum: We expect portfolio.
operating cash flow (before changes in working capital) to expand
Downside risks:
at a CAGR of 7% in 2018-29e, reflecting solid growth in demand.
(4) Capital expenditure: We assume higher capex of around  Weaker-than-expected global EV sales on lack of policy
RMB0.55bn in 2019-21e, and a steady capex of around RMB0.2bn support
per annum in 2022-29e, reflecting steady maintenance capex. (5)  Competition in anode materials business stronger-than-
Terminal growth rate at 2%, and we assume the company expected
reaches a steady growth period after 2029. Our target price implies  The advance of technology could be disruptive;
upside of 11%. We initiate with a Hold rating given our expectation  Selling pressure from big shareholders
of overcapacity in the anode materials industry.
Note: Priced at close of 11 October 2019

*Employed by a non-US affiliate of HSBC Securities (USA) Inc. and not registered/qualified pursuant to FINRA regulations
Source: HSBC Qianhai Securities estimates
16
October 2019
What the EV boom means for

component makers
 We expect a surge in demand for EV components. This should

benefit China’s suppliers, which dominate the global supply chain
 Prices of capacitor and heat management products should be
resilient, given their low share of EV costs and high market share
 Main risk: We see uncertainties related to battery technology
China’s component suppliers to benefit from the global EV boom
A 30% CAGR in the global plug-in vehicle deliveries in 2018-25e

Global plug-in vehicle deliveries reached 2.1m units in 2018, a penetration rate of 2%. Our
global team expects deliveries to increase by a CAGR of 30% in the next seven years, rising to
15m in 2025e, resulting in a penetration rate of 14%, on sustained policy pushes in China and
Europe and improving battery technology. We believe this should drive revenue growth for
China EV component suppliers. As shown in Exhibit 15, China supplies between 40% and 70%
of global EV components, depending on the product category.
Exhibit 14. Plug-in vehicle deliveries to Exhibit 15. Global EV components: China’s
rise at a 41% CAGR in 2018-21e share of production
8,000 k units 8.0%

Film capacitor 42%
6,000 6.0% EV LIB 56%
LIB equipment 60%
4,000 4.0%
Separator 67%
2,000 2.0% Anode material 73%
Cathode material 73%
- 0.0%
2016 2017 2018 2019E 2020E 2021E 0% 20% 40% 60% 80%
BEV
China's share of global supply
PHEV
2018
PHEV/BEV penetration rate (RHS)
Source: HSBC estimates Source: GGII, HSBC Qianhai Securities estimates
Key EV component and equipment demand

 EV lithium-ion battery (LIB): Our global EV battery team expects global EV LIB market
revenue to rise at a 38% CAGR in 2018-21e, driven by a 41% sales CAGR for plug-in
vehicles.
17
October 2019
Exhibit 16. EV LIB: Market revenue to grow Exhibit 17. EV LIB: Global shipment
at a 38% CAGR in 2018-21e breakdown, 2018
GWh RMB bn EVE energy Others

350 250 1% 15%
BAK
Thousands
300 2% CATL
200 23%
250 Lishen
200 150 Farasis 2%
2%
150 100 Guoxuan
High-Tech
100
50 3%
50 Vision AESC
- 0 4%
2018 2019E 2020E 2021E Samsung SDI Panasonic
6% 22%
Global EV LIB revenue BYD
LG Chem
Global EV LIB demand (LHS) 9% 11%
Source: Company data, Bloomberg, HSBC estimates Source: Company data, CBEA, Bloomberg, SNE Research , HSBC estimates
 Anode materials: In general, 1kWh of LIB requires 1.4kg of anode material. Based on our
global team’s EV LIB demand forecasts of 317GWh in 2021e, we estimate EV anode
material demand of 444k tonnes for the year, or a 2018-21e sales volume CAGR of 56%.
However, we expect a lower 36% CAGR for sales value during the same period due to
price cuts.
Exhibit 18. EV anode materials: Market Exhibit 19. Anode materials: China
revenue to rise at a 36% CAGR in 2018-21e production breakdown, 2018
k tonnes RMB bn Share by weight

500 14
Others
Thousands
Thousands
12 ZETO BTR
400 14% 22%
10 4%
300 8 XFH
200 6 5%
4
100 Kaijin new energy
2
14%
- -
2018 2019E 2020E 2021E Putailai
17%
Global EV anode material revenue XC graphite
Shanshan
6%
Global EV anode material demand (LHS) 18%
Source: Company data, Bloomberg, HSBC estimates, HSBC Qianhai Securities estimates Source: Company data, GGII, HSBC Qianhai Securities
 EV separators: The separator is the membrane between the anode and cathode in LIB. It
enables flow of ions while serving as a barrier to prevent short-circuits of the electrode
materials. Depending on the manufacturing process, separators can be divided into two
types – wet and dry. Wet separators are mostly used in EV LIBs, while dry separators are
used in utility-scale power storage batteries. In general, 1kWh of LIB requires 20 sqm of
separator. Hence, we forecast separator demand of 6.3bn sqm in 2021 based on our global
team’s EV LIB demand forecasts of 317GWh, rising from 1.5bn sqm in 2018.
18
October 2019
Exhibit 20. EV separator: Market revenue Exhibit 21. Wet separator: China
to triple in 2018-21e production breakdown, 2018
mn sq.m RMB bn
7 16
Thousands Semcorp
Thousands
6 14 Others 36%
5 12 37%
10
4
8
3
6
2 4
1 2 Senior Technology
- - Material
2018 2019E 2020E 2021E 3% Green Power New
Energy*
Global EV separator revenue Cangzhou 11%
CYG Zhongli
Mingzhu 8%
Global EV separator demand (LHS) 5%
Source: Company data, Bloomberg, HSBC estimates, HSBC Qianhai Securities *Semcorp proposed to acquire the company in Aug. 2019
estimates Source: Company data, GGII, HSBC Qianhai Securities
 LIB equipment: Our global team expects global EV LIB capacity to increase from 220GWh
in 2018 to 496GWh in 2021e, an annual addition of 80-100GWh. The additional capacity
should be fulfilled mostly by new equipment orders given the rapid rate of upgrades to the
manufacturing process, which makes existing machines less competitive. In general, 1GWh
of LIB capacity translates into RMB250m invested in Chinese-made equipment. We forecast
that the addressable market for Chinese equipment suppliers will rise from RMB18bn in
2018 to RMB20-30bn per annum in 2019-21e.
Exhibit 22. LIB equipment: Demand to Exhibit 23. LIB equipment: China new
peak in 2020e contract share, 2018
GWh RMB bn
120 30 Yinghe Tech.
19%
100 25
Others
80 20 38%
60 15
40 10
20 5
- -
2018 2019E 2020E 2021E Putailai Wuxi Lead
5% Hangke 31%
Global LIB equipment revenue
7%
Global EV LIB capacity addition (LHS)
Source: Company data, Bloomberg, HSBC estimates, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
estimates
 Film capacitors: Capacitors are needed for the motor controller and the on-board-charger
(OBC) in an EV. We estimate a per vehicle value of RMB300-1,000 for motor controller
capacitors and RMB50-60 for the OBC capacitors. Based on our global team’s forecasts of
6.8m units of plug-in vehicle deliveries in 2021e, we forecast global film capacitor demand of
RMB2.7bn in 2021e (6.8m units x RMB400/unit). Faratronic has a 10% share in the overall
film capacitor market and a share of more than 30% in supplying film capacitors to EVs.
19
October 2019
Exhibit 24. Film capacitor: Market revenue Exhibit 25. Film capacitor: Global market
to rise at a 41% CAGR in 2018-21e share breakdown, 2018
k units RMB mn Faratronic
8,000 3,000 10%
7,000 2,500 Tongfeng
6,000
2,000 3%
5,000
4,000 1,500
3,000 1,000
2,000
1,000 500
- - Other Chinese
2018 2019E 2020E 2021E players
Oversea players
Global EV film capacitor revenue 58% 29%
BEV+PHEV sales (LHS)
Source: Company data, Bloomberg, HSBC estimates, HSBC Qianhai Securities Source: Company data, Qianzhan research, HSBC Qianhai Securities estimates
estimates
 Heat management: The heat management system of an EV is more sophisticated than

that of an internal combustion engine (ICE) vehicle. In an ICE vehicle, it only has to deal
with air conditioner (A/C) and engine heat management. In an EV, the system also needs to
cool down the battery when it is overheating. This leads to a higher value for the heat
management products on an EV (cRMB5,000/vehicle) than for an ICE vehicle (cRMB2,000
per vehicle). Based on our global team’s forecast of 6.8m units of plug-in vehicle deliveries
in 2021e, we forecast global EV heat management product demand of RMB36bn in 2021e
(Exhibit 26).
Exhibit 26. EV heat management: Market Exhibit 27. EV heat management products:
revenue to rise at a 44% CAGR in 2018-21e Sanhua is a dominant player
k units RMB bn
8,000 40 90% 80%
80%
Thousands
70%
6,000 30 60%
50%
4,000 20 40%
30% 20%
2,000 10 20% 10%
10%
- - 0%
2018 2019E 2020E 2021E EV-use Electronic IC Vehicle-use Accumulator
Expansion Valve Thermal
Global EV heat management component revenue (EXV) Expansion Valve
BEV+PHEV sales (LHS) (TXV)
Sanhua's global market share
Source: Company data, Bloomberg, HSBC estimates, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
estimates
20
October 2019
Which sub-segment is more defensive against price cuts?
Pricing pressure building up in the supply chain due to NEV subsidy cuts in China
According to the 2019 NEV subsidy policy, effective on 26 June 2019, the central government’s
subsidy on EV new sales (c25% of the EV value in 2018) was cut by c50% y-o-y. In addition,
the local-government’s subsidy, accounting for 20-25% of the EV value in 2018, was removed.
So, all together, the subsidy on EV new sales was cut by 70-80%. This effectively lifted auto
makers’ cost if they chose not to raise the post-subsidy retail prices of their vehicles. As the
subsidies, which account for 10-15% of the EV value, could be completely eliminated in 2020,
we see pricing pressure building up along the supply chain.
Exhibit 28. China: The central government’s subsidy on new EV down 50% in 2019
RMB 2013 2014 2015 2016 2017 2018 2019
BEV (mileage under EV mode, in km):
100-150 35,000 33,250 31,500 25,000 20,000
150-200 50,000 47,500 45,000 45,000 36,000 15,000
200-250 50,000 47,500 45,000 45,000 36,000 24,000
250-300 60,000 57,000 54,000 55,000 44,000 34,000 18,000
300-400 60,000 57,000 54,000 55,000 44,000 45,000 18,000
>400 60,000 57,000 54,000 55,000 44,000 50,000 25,000
PHEV (mileage under EV mode, in km):

>50 35,000 33,250 31,500 30,000 24,000 22,000 10,000
Source: MIIT, Ministry of Finance, HSBC Qianhai Securities estimates
Exhibit 29. EV COGS breakdown: LIB is Exhibit 30. Within LIB, cathode is the
the single-largest block largest cost contributor
Labor &
Heat management
system Others fixed costs
5.0% 12.9% 14%
Cathode
Capacitors
Battery unit Shell 30%
38.0% 14%
0.4%
Body parts
5.0%
Chassis Anode
14.0% Others 8%
Electric
motor
14%
Auto
electronics 7.0% Separator Electrolyte
12.0% Motor controller ex capacitors 12% 8%
5.7%
Source: Company, HSBC Qianhai Securities estimates Source: Company, HSBC Qianhai Securities estimates
LIB is most relevant to EV COGS, less so for other components

As shown in Exhibit 29, LIB is the largest contributor to an EV’s cost, accounting for a 38% share of
its COGS in 2018. This is followed by chassis (14%) and auto electronics (12%). The percentage
for heat management systems and capacitors is much lower, at 5% and 0.4% respectively.
Heat management systems and capacitors are more defensive against price cuts
To evaluate the potential pricing pressures of different sub-segments, we compare the sub-
segments base on their respective shares of EV costs, profitability, market concentrations, and
entry barriers. A high cost share or profitability could lead to a high risk of being targeted by
auto makers for price cuts. Conversely, a high market concentration or barrier to entry could
strengthen incumbents’ pricing power. In our view, the order of defensiveness against price cuts
is heat management > capacitors > equipment > separators > LIB > anode materials.
21
October 2019
 EV LIB: LIB is the single-largest contributor to EV COGS, accounting for c40% of the EV
cost (Exhibit 29). We therefore see a high likelihood of auto makers passing through the
cost hikes to EV LIB suppliers. However, given relatively strong bargaining power compared
with upstream suppliers, we believe LIB suppliers can pass on the pricing pressure upstream.
 Anode materials: This market is fragmented, with the top four players in China (BTR,
Shanshan, Putailai, Kaijin) having market shares of 14-22% (Exhibit 19). We see potential
overcapacity in the segment, with the top four all planning to double or triple their capacity
in the next 2-3 years. This could lead to rising price competition.
 EV separators: Despite a high gross margin for industry leaders, small players are exiting
the industry because they lack scale and technology. This has resulted in high market
concentration, with the largest player, Semcorp, having a 36% market share in 2018. On
5 August 2019, Semcorp announced a proposal to acquire Green Power New Energy, the
second-largest player. Should the acquisition be completed, Semcorp’s market share would
increase to 47%. Technology barriers are also high, with the manufacturing process
comprising more than 200 stages, making it hard for new players to enter.
 LIB equipment: Equipment depreciation accounted for just 6% of LIB’s COGS in 2018.
Therefore, we don’t see LIB equipment as a good target for auto makers to squeeze cost.
In fact, given rising demand for better quality machines, we expect ASP for certain type of
equipment to rise.
 Capacitors: Capacitors only accounts for 0.4% of an EV’s cost, the lowest among all sub-
segments. We therefore see low pricing pressure for this market.
 Heat management: This market is highly concentrated, with Sanhua having a c80% market
share in key components like EXV. The GM of industry leaders at 20-30% is also not high
enough to entice new suppliers, we believe (Exhibit 37).
Exhibit 31. Gross margin along EV LIB supply chain: Separator the highest
Industry leaders' GM
60%
48%
50%
40% 36%
30% 24% 24% 23%

20% 17%
10%
0%
Separator LIB equipment Anode Electrolyte EV LIB Cathode
2018
22
October 2019
Exhibit 32. Gross margin: LIB producers Exhibit 33. Gross margin: Anode materials
suppliers
Power Battery GM Anode Material GM
40%
34.1% 45% 42.6%
35% 30.4%
28.8% 28.9% 40%
30% 33.9%
35%
25% 20.3% 30% 24.4% 23.8% 23.6%
20% 17.6% 17.5% 25%
15% 20%
15%
10%
3.6% 10%
5% 5%
0% 0%
Guoxuan CATL Eve Farasis SZ Sinuo Putailai Shanshan Kaijin New XFH
High-tech Energy 2018 Energy
2018 1H19
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Exhibit 34. Gross margin: Wet separator Exhibit 35. Gross margin: LIB equipment
suppliers makers
Separator GM LIB equipment GM
70% 60.3% 50% 46.7% 45.3%
60% 45%
48.4% 38.7%
50% 45.4% 40%
32.8% 32.8% 30.7%
35%
40% 30.5% 30%
30% 25%
20% 20%
15%
10%
10%
0% 5%
Semcorp Senior Putailai Green Power 0%
Technology New Energy Hangke Nebula Lead Yinghe Putailai Kanhoo
Material Elec Tech Industry
2018 2018
Exhibit 36. Gross margin: Capacitor Exhibit 37. Gross margin: Heat
suppliers management suppliers
Kemet 7.5% Auto Heat Management GM

Nichicon 19.0% 35%
29.4%
30% 26.2%
Tongfeng 21.7% 24.9%
25%
Vishay 23.0% 19.3%
20%
Jianghai 27.3%
15%
Aihua 33.0%
10%
Faratronic 43.20%
5%
0% 20% 40% 60% 0%
Sanhua Yinlun Songz Aotecar
Gross Margin (2018)
Note: Use comprehensive gross margin for Nichicon, film and electrolytic capacitor Note: Use Sanhua's auto parts segment gross margin for Sanhua, heat exchanger
segment gross margin for Kemet, and capacitor segment gross margin for Vishay, plus auto A/C gross margin for Yinlun, comprehensive gross margin for Songz, and
Tongfeng, Jianghai, and Aihua. The measured period for Nichicon and Kemet is compressor plus auto A/C segment gross margin for Aotocar
2018.3-2019.3
Source: Company data, HSBC Qianhai Securities Source: Company, HSBC Qianhai Securities
23
October 2019
The impact of LIB technology trends
The rapid evolution of LIB technology could bring uncertainty to companies along the EV supply
chain. In this section, we analyze the impact of the LIB technology trends on each sub-segment.
For equipment, heat management and capacitor suppliers, we see opportunities given the need
for replacements and upgrading; but, for LIB, separator and anode materials suppliers, different
LIB technology roadmaps could present risks.
LIB: Flipping between LFP and NCM

There are two major types of LIB: Nickel Cobalt Manganese (NCM) and Lithium Iron Phosphate
There are two major types of
LIB (LFP). Compared with NCM, the energy density of LFP is 15% lower. Due to a tiered subsidy
scheme in China which favours EV models with a greater driving distance, NCM took share
from LFP in 2017-18. However, with the cut of NEV subsidies in China, we believe the playing
field is becoming more level.
China has removed the subsidy for battery electric vehicles (BEV) with a driving range (per
charge) below 250km starting 2019 and plans to remove the remaining subsidy completely in
2020. We believe this should benefit LFP, which is cheaper than NCM. The average price of
LFP battery is RMB0.15/Wh lower than that of NCM. Hence, for the model with a 40kWh battery
set, the cost per car with LFP battery could be RMB6k or 6% lower than that with NCM battery.
In mass production, the cost advantage of LFP could strengthen, given a larger share of labour
and fixed costs in its COGS (Exhibit 40). LFP also has a longer life span (more charge cycles),
higher charge rate (shorter time to charge up), and is safer than NCM (Exhibit 38). We believe
this should make LFP increasingly competitive with NCM in 2019-20. This should benefit Eve,
which plans to increase its LFP capacity from 2.5GWh in 2018 to 12GWh in 2020.
In addition to rising LFP adoption on EVs, we also see LFP demand from the following areas:
 Utility-scale power storage: We expect demand in China to rise from 7.7GWh in 2018 to
11.5GWh in 2021, driven by rising demand from grid and industrial users.
 5G communication base stations: We expect a total demand of 70GWh assuming 1.4m
base station additions/replacements and a LIB demand of 50kwh/station. LIB is used as the
back-up power source for the base stations.
Exhibit 38. LIB: Comparison of different battery technologies

LCO LFP LMO NCM NCA
Voltage (V) 3.7 3.2 3.8 3.6 3.7
Capacity (mAh/g) 150 150 120 160-190 190
Density (g/cm3) 2.8-3.0 1.0-1.4 2.2-2.4 2.0-2.3 2.0-2.4
Life span (# of charge cycles) 500-1000 <5000 500-1000 1500-2000 1500-2000
Safety Poor Good Very good Good Good
Environmental friendliness Very poor Good Good Poor Poor
Source: Company data, HSBC Qianhai Securities
24
October 2019
Exhibit 39. ASP: LFP battery is 18% Exhibit 40. Labour and fixed costs: Share
cheaper than NCM of COGS is higher for LFP batteries
RMB/Wh
3.50 Labor & fixed costs as % of LIB COGS
18% 16%
3.00 15%
16% 14% 14% 14%
2.50 14%
2.00 12%
10%
1.50 8%
1.00 6%
4%
0.50
2%
0.00 0%
1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18 2Q19 LFP NCM 811 NCM 523 NCM 622 NCM 111
NCM LFP 2018
Source: Wind, HSBC Qianhai Securities Source: HSBC estimates
Exhibit 41. Energy density of LFP is rising Exhibit 42. China: LFP’s share of power
battery output has risen since 1Q19
160
Wh/kg 60%
140
120 50%
100 40%
80 30%
60
20%
40
10%
20
0 0%
2014 2015 2016 2017 2018 2019E 2020E Jan-18 May-18 Sep-18 Jan-19 May-19
LFP LFP's share of power battery output
Source: HSBC estimates Source: Company data, HSBC estimates
Anode materials: Artificial graphite has become the mainstream

Compared with cathode, there is less uncertainty associated with the anode technology, with
graphite being used as the major anode materials for different types of LIB. We believe the role
of graphite is unlikely to be replaced in the medium term, as it is a mature technology. A new
technology such as adding silicon can theoretically lift lithium storage capacity to 4,200mAh/g (vs
graphite’s 360mAh/g), but faces issues like silicon swelling that could damage the battery structure.
There are two major graphite anode materials – artificial and natural graphite. Artificial graphite
is safer, quicker to charge up, and has a longer life span (in terms of charge cycles). Given
these advantages, artificial graphite has become a commonly-used material for LIB anode,
accounting for 69% of global anode production in 2018. We expect the trend to continue and its
share to rise to 78% by 2021e.
Exhibit 43. LIB anode: Pros and cons of different material

Artificial graphite Natural graphite MCMB Silicon-carbon
Capacity (mAh/g) 310-360 340-370 280-340 380-950
Charge rate Good Poor Very good Fair
Life span (# of charge cycles) >1500 >1000 >1000 300-500
Safety Good Fair Good Good
25
October 2019
Exhibit 44. LIB anode: Artificial graphite’s Exhibit 45. Global LIB anode sales, 2018-
share to rise further in 2019-21e 21e
100%
700,000 tonnes
80% 600,000
500,000
60%
400,000
40% 300,000
200,000
20%
100,000
0% -
2017 2018 2019E 2020E 2021E 2018 2019E 2020E 2021E
Natural graphite Artificial graphite Other graphite China Overseas
Source: GGII, HSBC Qianhai Securities (E = HSBC Qianhai Securities estimates) HSBC Qianhai Securities (E = HSBC Qianhai Securities estimates)
Separators: The introduction of solid-state battery could be disruptive

There are two major types of separators – wet and dry. Wet separators have lower short-circuit
rates and can be made thinner. However, they are also more costly to produce than dry
separators. Given better quality and a narrower price gap, we expect the wet share of global
separator output to rise from 52% in 2018 to 56% in 2021e (Exhibit 47). While the trend of wet
replacing dry looks highly probable, the introduction of new battery technologies such as the
solid-state battery could be disruptive to the overall market. A solid-state battery uses solid
electrolyte and does not need separator materials. Should that become a mainstream technology,
we see a risk to demand for separators, wet and dry alike.
Exhibit 46. Separators: Pros and cons of different production technologies

Pros Cons
Dry process Cheaper and easier to produce Lacks flexibility in design
Wet process Can be made thinner and of lower short- Harder to produce and more expensive
circuit rate
Exhibit 47. Global separators: Wet method Exhibit 48. The price gap between wet and
share to rise dry separators has narrowed
Global separator Rmb/sqm

57% 6.00
output share
56% 5.00
55%
4.00
54%
53% 3.00
52% 2.00
51%
1.00
50%
2018 2019E 2020E 2021E 0.00
Share of wet separator Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19
Wet process Dry process
26
October 2019
Equipment: LIB technology evolution means shorter equipment replacement cycles

We believe equipment suppliers are positioned to benefit from the evolution of LIB technology
as it implies replacement and upgrading demand for equipment. Due to rapid evolution of LIB
technology and manufacturing techniques in the last decade, the average replacement cycle of
LIB equipment is just four years, well below the designed life span.
Exhibit 49. Global chemical battery’s Exhibit 50. The average replacement cycle
energy density: up 24% in the last decade of LIB equipment is just 4 years
Wh/Kg 12 Yr
300 10 10
260 10
250
210 8 7
200
6
135 4
150 4
100
100 70 2
45 45
50 0
LIB Solar Excavator Plastic
0 equipment equipment injection
1960 1970 1980 1990 2000 2010 2018 machine
Chemical battery energy density Average useful life (replacement cycle) of major equipment
Source: HSBC estimates Source: HSBC Qianhai Securities estimates
Capacitor: Rising per vehicle power requirement positive for demand

We believe the improvement in battery technology should give rise to greater EV penetration,
especially for autos in the high horsepower category such as SUVs. Since capacitor demand
has a positive correlation with the power output of the electric motor, rising power requirement
should lift per vehicle capacitor demand.
Heat management: To benefit from LIB technology evolution

Like capacitors, we expect heat management products to benefit from rising EV penetration,
driven by the improvement of battery technology. The value of heat management system on an
EV is about 2.5x that of a comparable ICE vehicle.
27
October 2019
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28
October 2019
Company section
29
October 2019
Eve Energy (300014 CH)
 Largest primary Li battery maker in China, with c60% market share

 Potential listing of e-cigarette associate offers a catalyst
 Initiate with a Buy rating and a TP of RMB47.40
Investment summary
Multiple earnings drivers

The company is the largest primary lithium battery supplier in China with c60% market share. It
is well positioned to benefit from the market upcycle in 2019-21, driven by the start of the smart
meter replacement cycle and rising electronic toll collection (ETC) penetration. Moreover, we
expect its LFP battery to see rising competitiveness against NCM, given the NEV subsidy cuts
in China. We see a potential catalyst in the form of the potential listing of Smoore, a leading
global e-cigarette ODM that is 37.5% held by Eve. According to a Securities Daily report of 17
September 2019, Smoore is plans to go public. Hong Kong-listed tobacco plays such as China
Tobacco International (HK) (6055 HK) are trading at a 2019 PE of 53x. If we use this multiple to
value Eve’s holdings of Smoore, the stake could be worth RMB50bn, well above Eve’s own
market capitalisation of RMB32bn. Hence, we see the potential for opportunities to unlock
value, should the listing take place.
Exhibit 51. Eve: We expect earnings to rise Exhibit 52. Eve: Revenue breakdown, 2018
at a 46% CAGR in 2018-21e
Consumer electronics
Rmb mn Primary Lithium battery
28% battery
2,000 180% 23%
1,800 160%
1,600 140% Utility-scale
1,400 power storage
120% 3%
1,200
100%
1,000
80%
800
600 60%
400 40%
200 20%
Power battery NCM cylindrical
0 0%
26% 20%
2016 2017 2018 2019E 2020E 2021E
Net profit YoY
Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
estimates)
30
October 2019
Investment positives
Largest supplier of primary Li battery in China

Eve is the largest producer of primary Li batteries in China, with c60% market share. These
batteries are used in ETC cards, smart meters, and consumer electronics. Given its dominant
market position, the gross margin for this product is 40% (Exhibit 55). We expect the business
to see a robust 61% revenue CAGR in 2018-20e, thanks to the start of the smart meter
replacement cycle and rising ETC penetration. The primary Li battery also has much faster
payment terms than a power battery (Exhibit 57).
Smart meters have a user-life of around eight years. Hence, we expect the meters installed in
2014-15 to be replaced in 2022-23. Around 105m units of smart meters were tendered by the
State Grid in 2014, almost double that in 2018. We therefore expect strong growth of smart
meter tendering activity in 2019-22 (Exhibit 56). In addition, the Chinese government targets
ETC penetration to increase from 45% in June 2019 to 90% in December 2019. This implies
that 110m units of ETC cards need to be issued in 2H19. About 54m new cards have been
issued y-t-d, most of them in 2H19, up 70% y-o-y. Eve has a c90% market share in primary Li
battery installed on ETC cards and the value of a primary Li battery is cRMB9/card. We hence
expect the promotion of ETC on toll roads to contribute RMB0.9bn revenue to Eve in 2H19
(110m cards x RMB9/card x 90% market share), or 12% of its 2019e revenue.
Exhibit 53. Three key types of primary Li batteries

Lithium-Thionyl Chloride Lithium-Manganese Dioxide Lithium-Iron Disulfide
Voltage (v) 3.6 3.0 1.5
Energy Density 420Wh/kg 200Wh/kg 300Wh/kg
Shelf-life (years) 10-15 5-10 10-15
Applications Smart meters, Surveillance 3C, RFID products 3C, GPS
devices, ETC
Exhibit 54. Eve: A cyclical ride for primary Exhibit 55. Eve: High gross margin for
Li battery sales in 2018-21e primary Li battery
RMB mn 45% Primary Lithium battery

40% Gross Margin
3,500 140%
35% 40% 40%
3,000 120% 36%
36%
100% 30% 34%
2,500
80% 25%
2,000 60% 20%
1,500 40%
15%
20%
1,000 10%
0%
500 -20% 5%
- -40% 0%
2016 2017 2018 2019E 2020E 2021E 2014 2015 2016 2017 2018
Primary Li battery sales YoY
estimates)
31
October 2019
Exhibit 56. China: State Grid smart meter tendering volume to rise in 2018-20e
mn units
120
100
80
60
40
20
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E
State Grid smart meters tendering volume
Source: State Grid, HSBC Qianhai Securities (E = HSBC Qianhai Securities estimates)
Exhibit 57. Eve: Primary Li battery has better payment terms than that of a power battery
Downstream Battery type Receivable days (months)
Consumer electronics Primary Li battery 1
EV Power battery 3-6
Power storage LFP 3
Power tools NCM cylindrical 2-3
Strong growth potential for the electronic cigarette business

Eve has a 37.5% stake in Smoore, a leading global e-cigarette ODM and private label owner.
We believe that the e-cigarette industry, with a global market size of USD28bn in 2018, has
enormous growth potential, especially in China, where penetration is low at 0.6% (Exhibit 61).
Smoore is a key supplier of atomiser, an e-cigarette component that vaporises the liquid. Vape,
the type of e-cigarette that requires atomiser, accounted for 57% of global e-cigarette sales or
USD16bn in 2018. Atomisers accounted for c30% of Vape’s COGS (Exhibit 62).
We estimate an addressable market of cUSD2-3bn for atomiser in 2018. Smoore has a high
gross margin of 40% in 1Q19 (Exhibit 63). Its key customers include leading Vape makers such
as Reynolds and NJOY. We expect Smoore to contribute earnings of RMB949m to Eve in 2019,
rising to RMB1.3bn in 2021 driven by rising penetration of Vape. In addition to Smoore’s
contribution, Eve also recorded revenue of cRMB100m in 2018 from the sale of batteries for e-
cigarette use.
32
October 2019
Exhibit 58. Market size comparison (2018): Exhibit 59. E-cigarette sales comparison:
E-cigarette vs traditional cigarette Vape vs Heat-Not-Burn
2018 market size (USD bn) Market size (bn USD)
18.0
800 714 16.0
700 14.0
600 12.0
500 10.0
400 8.0
300 6.0
200 4.0
100 28 2.0
0 0.0
Traditional cigarette e-cigarette 2010 2011 2012 2013 2014 2015 2016 2017 2018
E-cigarette: Vape E-cigarette: Heat-Not-Burn
Source: Euromonitor, HSBC Qianhai Securities estimates Source: Euromonitor, HSBC Qianhai Securities estimates
Exhibit 60. E-cigarette sales breakdown by Exhibit 61. E-cigarette penetration

geography, 2018 comparison (2018): China is only 0.6%
Canada Malaysia 14.0% 13.0%

China
2% 1%
3% 12.0%
Others
18% 10.0%
US 8.0%
47%
6.0%
4.2%
4.0% 3.1%
Europe 2.0% 0.6%

29%
0.0%
US UK France China
E-cigarette user as % of smoking population
Source: Euromonitor, HSBC Qianhai Securities estimates Source: Euromonitor, HSBC Qianhai Securities estimates
Exhibit 62. Vape: COGS breakdown, 2018 Exhibit 63. Smoore: Gross margin, 2016-
1Q19
Assembly and others Battery 45% 40.2%

15% 13% 40%
Stick 35.6%
8% 35%
29.7%
30% 28.0%
25%
20%
15%
Atomizer
29% 10%
5%
Micro-processor
35% 0%
2016 2017 2018 1Q19
Gross margin of Smoore
Source: HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities
33
October 2019
Reposition NCM cylindrical to cater for the power tool market

The shape of Li-ion battery cells can be divided into three types – pouch, prismatic, and
cylindrical. The cylindrical cells are the most expensive and hardest to produce for battery
modules on EVs, which hampers the competitiveness of the product for EV applications. For
this reason, Eve repositioned its NCM cylindrical product in 2018 to cater for the demand from
the power tool equipment makers like Techtronic Industries (TTI: 0669.HK). Eve is now the only
Chinese battery maker supplying NCM cylindrical products to TTI. The company has 3.5GWh in
this capacity as of end-June 2019. We expect its NCM cylindrical revenue to rise 85% in 2019
due to the incremental sales from the power tool industry (Exhibit 65).
Exhibit 64. TTI: Consensus forecast a 11% Exhibit 65. Global power tool LIB market:
revenue CAGR in 2018-21e To expand at a 10% CAGR in 2018-21e
70 Rmb bn 25.0% GWh

60 18 16
20.0% 16 15
50 13
14 12
15.0% 12 11 11
40
10
30 10.0% 8
20 6
5.0% 4
10
2
0 0.0% -
2016 2017 2018 2019E 2020E 2021E 2016 2017 2018 2019E 2020E 2021E
Power tool LIB demand
Source: Company data, Bloomberg consensus, HSBC Qianhai Securities (E = Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities
HSBC Qianhai Securities estimates) estimates)
LFP battery is more defensive against NEV subsidy cuts

Compared with NCM, the energy density of LFP is 15% lower. However, the latter is 18%
cheaper, safer and has a longer life span. With the cut of NEV subsidies in China, we expect
the competitiveness of LFP to rise against NCM. We expect Eve to benefit from this trend. Eve
plans to increase its LFP capacity from 2.5GWh at end-2018 to 12GWh by end-2020e. We
believe this should support a 16% revenue CAGR for the business in 2018-21e.
Exhibit 66. Eve: LFP capacity to quadruple Exhibit 67. Eve: LFP revenue to rise at a
in 2018-20e 16% CAGR in 2018-21e
14.0 GWH RMB mn

12.0 12.0
12.0 2,500 30%
10.0 2,000 25%
8.0 20%
6.0 1,500
6.0 15%
1,000
4.0 10%
2.5
500 5%
2.0
- 0%
0.0
2018 2019E 2020E 2021E
2018 2019E 2020E 2021E
LFP total capacity LFP revenue YoY
Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities
estimates) estimates)
34
October 2019
Investment concerns
Heavy capex planned for in 2019-21e

The company has a net gearing of 16% as of end 2018. We expect that to grow to 69% by end-
2020e due to heavy capex. We expect the company to incur capex of RMB4bn and RMB5bn
respectively in 2019e and 2020e due to the expansion of its battery capacity (Exhibit 68). This
should lead to negative FCF of RMB2.9bn and RMB3.3bn respectively in 2019e and 2020e
(Exhibit 70).
Exhibit 68. Eve: Capacity planned for 2019-21e
Capacity (GWh)
25.0
20.0
20.0
15.0
10.0 9.0 10.0
10.0
5.0 6.0
3.5 4.0 3.0 3.5 3.5 3.5
5.0 2.0 2.0 2.0
1.5 1.0 1.5 1.5 1.5
-
2018 2019E 2020E 2021E
LFP prismatic LFP Power Storage NCM prismatic NCM pouch NCM cylindrical
Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities estimates)
Exhibit 69. Eve: Net gearing to peak in Exhibit 70. Eve: We expect FCF to turn
2020, subsiding thereafter positive in 2021e
2.0
70%
60% 1.0
50%
0.0
40%
30%
Rmb bn
(1.0)
20%
10% (2.0)
0%
-10% (3.0)
-20%
(4.0)
-30% 2015 2016 2017 2018 2019E 2020E 2021E
2015 2016 2017 2018 2019E 2020E 2021E
FCF
Net debt / Equity
Market consolidation could hurt small players

Eve shipped 1.3GWh of power batteries in 2018, accounting for a 2% market share in China.
The power battery market in China is consolidating, with the combined market share of the top
two players (CATL and BYD) rising from 42% in 2017 to 63% in 2018. We expect industry
consolidation to continue given downward pricing pressure, and the smaller players be
squeezed out.
35
October 2019
Exhibit 71. China power battery market Exhibit 72. China power battery market
share, 2017 share, 2018
Others
CATL 18%
Others 27% CATL
40%
Guoneng 42%
1%
Eve engergy
Guoneng 2%
2%
Bak
Eve engergy 3%
2%
Farasis
3%
Bak
4% BYD
Guoxuan 15% Lishen Guoxuan
Lishen 4% high-tech BYD
Farasis high-tech
2% 6% 21%
3% 5%
Source: GGII, HSBC Qianhai Securities Source: GGII, HSBC Qianhai Securities
NCM pouch business could face overcapacity in 2021e

Among the three major types of battery modules, a module composed of pouch cells has the
highest energy density and level of safety (Exhibit 73). It also has a longer life cycle and is
easier to manufacture than a battery module composed of cylindrical cells. The disadvantage is
that the manufacturing cost is higher for pouch cells than that for prismatic cells (Exhibit 74).
As more equipment is made domestically, we expect the cost of pouch cells to match that of
prismatic cells by 2021e (Exhibit 74). This should lead to a rise in pouch cell market share from
14% in 2018 to 20% in 2021e (Exhibit 75). While demand is growing, supply is rising at an even
faster rate. We expect the industry capacity of pouch cells to rise from 20GWh in 2018 to
145GWh in 2021e, based on capacity expansion plans announced by industry players (Exhibit
76). This is above our industry demand forecast of 63GWh for 2021e, implying potential
overcapacity.
As of end-2018, Eve has 1.5GWh capacity in NCM pouch. It targets to expand capacity to
9GWh by end-2020 and 20GWh by end-2021 to cater for the demand from Daimler, Dongfeng
and Kia. In view of the upcoming industry overcapacity, we expect the gross margin of the
business to decline from 21% in 2019e to 18% in 2021e.
Exhibit 73. Pros and cons of different shapes of battery cells

Energy density Safety Rate of domestic Battery Production
manufacturing module cost difficulty
Pouch Highest Highest Lowest Median Median
Cylindrical Median Lower Median Highest Highest
Prismatic Lowest Lower Highest Lowest Lowest
36
October 2019
Exhibit 74. EV LIB: Pricing trend of Exhibit 75. EV LIB: Market share of
different cell types different cell types
100%
1.40 RMB/Wh
90%
1.20 80%
1.00 70%
60%
0.80
50%
0.60 40%
0.40 30%
20%
0.20
10%
- 0%
2019E 2020E 2021E 2016 2017 2018 2019E 2020E 2021E
Pouch Cylindrical Prismatic Pouch Cylindrical Prismatic
Source:ICCsino, HSBC Qianhai Securities Source: ICCsino, HSBC Qianhai Securities
Exhibit 76. Global pouch-shape EV LIB capacity and demand forecasts, 2019-21e
GWh
160
140
120
100
80
60
40
20
-
2019E 2020E 2021E
Aoyou National Battery CENAT Farasis EVE Others Demand

Exhibit 77. Pouch cell cost breakdown, Exhibit 78. China pouch cell penetration,
2018 2018
Penetration
Others 80%
Electrolyte 10% Cathode
10% 29% 70%
60%
50%
40%
30%
Aluminum-
laminated film Anode 20%
17% 10% 10%
Separator
0%
24%
Consumer battery Power battery Energy storage
Source: GGII, HSBC Qianhai Securities estimates Source: Company, HSBC Qianhai Securities estimates
37
October 2019
Risk of earnings dilution for NCM pouch business on convertible bond conversion
The company has a convertible bond (CB) of RMB850m on its books which is owed to SK, the
third largest LIB supplier globally. The CB has an interest rate of 2% and a duration of 54
months. After 54 months, the CB can be converted into a 60% equity stake of Eve’s NCM pouch
subsidiary, which share SK’s technology. Should the conversion right be executed, we see a
dilution to Eve’s earnings from its NCM pouch business.
Financial forecasts
Earnings forecasts
We expect a 46% earnings CAGR in 2018-21e, down from 56% in 2015-18. We base our
forecasts on the following key assumptions:
 Revenue: We forecast a revenue CAGR of 46% in 2018-21e, driven by the strong growth
of the power battery segment (85% revenue CAGR in 2018-21e).
 Gross margin: We forecast gross margin to decline from 23.7% in 2018 to 23.2% in
2021e, dragged down by lower gross margin in the power battery segment.
Exhibit 79. Eve: Segments and full P&L forecasts

RMB mn 2018 2019E 2020E 2021e 2018-21e CAGR
Turnover 4351 7288 11238 13537 46%
Li-ion battery 3151 4687 8117 10915 51%
-Consumer electronics battery 1000 1260 1400 1400 12%
-Utility-scale power storage 150 272 544 680 66%
-NCM cylindrical 850 1575 1575 1575 23%
-Power battery 1151 1580 4598 7260 85%
Primary Lithium battery 1200 2601 3121 2622 30%
Other main business 0 0 0 0 NM
Gross Profit 1033 2051 2847 3136 45%

Li-ion battery 556 932 1505 2008 53%
-Consumer electronics battery 239 280 280 NM
-Utility-scale power storage 46 98 122 NM
-NCM cylindrical 315 299 299 NM
-Power battery 332 828 1307 NM
Primary Lithium battery 477 1118 1342 1127 33%
Other main business 0 0 0 0 NM
Gross Margin 23.7% 28.1% 25.3% 23.2%
Business tax -19 -31 -48 -58 46%

Selling expenses -169 -283 -437 -526 46%
Admin. expenses -454 -761 -1,174 -1,354 44%
Asset impairment losses / Fair value changes -84 -163 -245 -191 31%
Other gain / (losses) 89 40 40 40 -23%
Operating profit 395 852 984 1047 38%
Net finance charges -93 -142 -261 -364 57%

Share of JCE 304 949 1,091 1,255 60%
Profit before taxes 606 1,659 1,814 1,938 47%

Tax -23 -107 -108 -102 65%
Minorities -12 -26 -37 -58 68%
Pre-exceptional profit 571 1,526 1,669 1,777 46%

Dividend to preferred shareholders and 0 0 0 0
perpetual capital securities
Exceptionals 0 0 0 0
Net profit 571 1,526 1,669 1,777 46%
Source: Wind, company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities estimates)
38
October 2019
Balance sheet and cash flow forecasts

We forecast Eve’s net gearing to grow from 16% in 2018 to 61% by end-2020e on heavy capex. We
expect capex of RMB4bn and RMB5bn respectively in 2019e and 2020e due to the expansion of its
battery capacity. This should lead to negative FCF of RMB2.9bn and RMB3.3bn respectively in
2019e and 2020e.
Exhibit 80. Eve: Net debt and cash flow forecasts

RMB mn 2018 2019E 2020E 2021e
Net debt/(cash) 585 1,315 5,364 4,716
Net debt to equity 16% 17% 61% 47%
Cash Fr Operations 434 890 1,559 1,851
Cash Fr Investing -704 -3,763 -4,888 -338
FCF -269 -2,873 -3,329 1,513
Valuation and risks
Target price of RMB47.40

We base our target price of RMB47.40 on a DCF valuation model. Our target price implies a
2020e PE of 28x. Key assumptions in our model include the following.
 Cost of equity (COE): We use a COE of 10.4%. This is derived from a risk-free rate of
2.5%, a market risk premium of 6.5%, and a beta of 1.22.
 Cost of debt (COD): We assume the pre-tax cost of debt to be 5.0% and after-tax cost of
debt to be 4.3%. We use our 2020e debt-to-capital ratio of 37% as our long-term debt-to-
capital ratio.
 Operating cash flow to grow 14% per annum: We expect operating cash flow (before
changes in working capital) to expand at a CAGR of 14% in 2018-29e, reflecting solid growth in
demand.
 Capital expenditure: We expect capex of around RMB4bn and RMB5bn per annum in
2019 and 2020e respectively, reflecting the expansion of its power battery capacity.
Thereafter, we expect capex to be stable at around RMB0.3-0.4bn per annum in 2021-29e,
reflecting steady investment in maintenance.
 Terminal growth rate at 2%, and we assume the company reaches a steady growth period
after 2029.
Downside risks
 Weaker-than-expected primary Li battery demand: The primary Li battery business
accounted for c30% of Eve’s revenue in 2018. Hence a weaker-than-expected sales of
primary Li battery due to delays in the State Grid’s smart meter tendering could affect our
earnings forecasts.
 Weaker-than-expected power battery margin on intensified competition: Rising
competition could undercut power battery prices and adversely affect the company’s
earnings.
 Risk of equity dilution from potential fundraising exercise: Eve has done two rounds of
private placements since 2014. We expect a high capex burden in 2019-20e on planned
capacity expansion. We see risks of equity dilution should the company fail to fulfill its
capex needs via debt financing.
39
October 2019
 Weaker-than-expected contribution from power battery business: We expect the

power battery business to contribute 57% of revenue in 2021e. Therefore, a weaker-than-
expected global EV demand could negatively impact our earnings forecasts.
 Renegotiation of supply contract with auto makers: An unfavourable change in contract
terms could negatively impact our earnings forecasts.
 E-cigarette business faces policy risks: We expect the e-cigarette business to account
for 61% of earnings of the company in 2019. Unfavourable policy and tax changes towards
e-cigarettes could impact our earnings forecasts.
 Selling pressure from big shareholders: Tibet Eve Holding Ltd. has 167.6m shares (17%
of shares outstanding) of Eve pledged as collateral for loans. We see risks of forced sale of
these shares, should the share price fall below the watermark. In addition, Eve has 115m
shares (12% of shares outstanding) to be unlocked in May 2020. The sale of a significant
portion of these shares could also pressure the share price.
40
October 2019
Exhibit 81. Eve: Discounted cash flow valuation

RMBm 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Profit after tax 166 315 433 583 1,553 1,706 1,835 1,982
y-o-y growth 90% 37% 35% 166% 10% 8% 8%
Add: Depreciation & amortisation 116 93 137 245 175 291 507 508
Net finance expense 13 3 59 89 142 261 364 374
Operating cash flow before W/C 296 412 629 918 1,870 2,258 2,707 2,864
changes
Changes in working capital -242 -382 -395 -222 -31 392 399
Net operating cash flow 54 30 234 695 1,839 2,650 3,106 2,864
Capex -395 -914 -1,739 -704 -3,763 -4,888 -338 -350
Free cash flow -341 -884 -1,506 -8 -1,924 -2,238 2,768 2,514
Discount Factor 1.00 0.92
Gross PPE 691 1,382 2,002 3,297 4,160 7,923 12,812 13,162
Depreciation Rate 17% 7% 7% 7% 4% 4% 4% 4%
PV of FCF 2,768 2,325
RMBm 2023e 2024e 2025e 2026e 2027e 2028e 2029e Terminal
Value
Profit after tax 2,141 2,312 2,497 2,622 2,753 2,891 3,035
y-o-y growth 8% 8% 8% 5% 5% 5% 5%
Add: Depreciation & amortisation 508 509 508 508 507 505 503
Net finance expense 384 395 406 417 429 440 453
Operating cash flow before W/C 3,034 3,216 3,411 3,547 3,688 3,836 3,991
changes
Changes in working capital 0 0 0 0 0 0 0
Net operating cash flow 3,034 3,216 3,411 3,547 3,688 3,836 3,991
Capex -361 -371 -382 -394 -406 -418 -430
Free cash flow 2,673 2,844 3,029 3,153 3,282 3,418 3,561 59,243
Discount Factor 0.86 0.79 0.73 0.68 0.63 0.58 0.54 0.54
Gross PPE 13,522 13,893 14,276 14,670 15,076 15,493 15,924

Depreciation Rate 4% 4% 4% 3% 3% 3% 3%
PV of FCF 2,286 2,250 2,215 2,133 2,054 1,978 1,905 31,700
Summary of PV (enterprise value) 51,614
Less: Net debt (incl. perpetual) -5,364
Equity value 46,250
Less: Minority interest -203
Shareholder equity value 46,047
Total share issued by year-end 2020 970
Per-share value – RMB 47.4
Assumptions
Risk free rate 2.5%
ERPch 6.5%
Beta 1.22
Cost of equity = RFR + BETA × ERPch 10.4%
Cost of debt 5.0%
Income tax 15%
After tax cost of debt 4.3%
Debt/Capital 37%
WACC 8.1%
Terminal growth 2%
41
October 2019
Exhibit 82. Eve forward PE: Trading below Exhibit 83. Eve forward PB: Trading below
the historical average the historical average
90.0 10.0
80.0 9.0
70.0 8.0
60.0 7.0
50.0 6.0
40.0 5.0
30.0
4.0
3.0
20.0
2.0
10.0
1.0
-
0.0
Jan-13 Jan-15 Jan-17 Jan-19
PE Mean +1SD -1SD
PB Mean +1SD -1SD
Source: Wind, HSBC Qianhai Securities Source: Wind, HSBC Qianhai Securities
Exhibit 84. Eve: Earnings sensitivity to gross margin and revenue changes, 2020e
_____________________________________ Gross margin ______________________________________
Revenue -3% -2% -1% 0% 1% 2% 3%
20% 8.5% 18.2% 27.9% 37.6% 47.4% 57.1% 66.8%
15% 0.3% 9.6% 18.9% 28.2% 37.5% 46.9% 56.2%
10% -7.9% 1.0% 9.9% 18.8% 27.7% 36.6% 45.6%
5% -16.1% -7.6% 0.9% 9.4% 17.9% 26.4% 34.9%
0% -24.3% -16.2% -8.1% 0.0% 8.1% 16.2% 24.3%
-5% -32.5% -24.8% -17.1% -9.4% -1.7% 6.0% 13.7%
-10% -40.7% -33.4% -26.1% -18.8% -11.5% -4.2% 3.1%
-15% -48.9% -42.0% -35.1% -28.2% -21.3% -14.4% -7.6%
-20% -57.1% -50.6% -44.1% -37.6% -31.1% -24.7% -18.2%
42
October 2019
Financials & valuation: Eve Energy Co Ltd Buy
Financial statements Valuation data

Year to 12/2018a 12/2019e 12/2020e 12/2021e Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (RMBm) EV/sales 7.5 4.6 3.3 2.7
Revenue 4,351 7,288 11,238 13,537 EV/EBITDA 34.7 16.9 15.9 13.1
EBITDA 944 1,977 2,366 2,809 EV/IC 11.6 5.2 3.5 3.7
Depreciation & amortisation -245 -175 -291 -507 PE* 49.8 20.0 19.4 18.2
Operating profit/EBIT 699 1,801 2,075 2,302 PB 8.0 4.4 3.8 3.3
Net interest -93 -142 -261 -364 FCF yield (%) -0.8 -8.9 -10.3 4.7
PBT 606 1,659 1,814 1,938 Dividend yield (%) 0.6 1.5 1.5 1.6
HSBC Qianhai PBT 606 1,659 1,814 1,938 *Based on HSBC Qianhai EPS (diluted)
Taxation -23 -107 -108 -102 Source: Company data, HSBC Qianhai Securities estimates
Net profit 571 1,526 1,669 1,777
HSBC Qianhai net profit 571 1,526 1,669 1,777
Cash flow summary (RMBm) ESG metrics
Cash flow from operations 434 890 1,559 1,851 Environmental Indicators 12/2018a Governance Indicators 12/2018a
Capex -704 -3,763 -4,888 -338
GHG emission intensity* n/a Number of board members 7
Cash flow from investment -704 -3,763 -4,888 -338
Energy intensity* n/a Average board tenure (years) 5.4
Dividends -182 -183 -458 -501
Change in net debt -382 730 4,048 -648 CO2 reduction policy Yes Female board members (%) 14.3
FCF equity -269 -2,873 -3,329 1,513 Social Indicators Board members’ independence (%) 42.9
Balance sheet summary (RMBm) Employee costs as % of revenues n/a
Intangible fixed assets 347 340 332 325 Employee turnover (%) n/a
Tangible fixed assets 3,829 7,424 12,028 11,866 Diversity policy Yes
Current assets 4,585 6,564 7,381 9,387 *GHG intensity and energy intensity are measured in kg and kWh, respectively, against revenue in USD’000
Cash & others 1,122 1,392 -156 492 Source: Company data, HSBC Qianhai Securities
Total assets 10,032 16,548 23,053 26,146
Operating liabilities 4,823 6,502 9,259 11,017
Gross debt 1,507 2,507 5,007 5,007 Issuer information
Net debt 384 1,115 5,163 4,515
Share price (RMB) 33.39 Free float 84%
Shareholders' funds 3,562 7,373 8,583 9,860
Invested capital 2,815 6,434 10,638 10,070 Target price (RMB) 47.40 Sector Electrical Equipment
RIC (Equity) 300014.SZ Country China
Bloomberg (Equity) 300014 CH Analyst Corey Chan
Ratio, growth and per share analysis Market cap (USDm) 4,563 Contact +86 21 6081 3801
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change
Revenue 45.9 67.5 54.2 20.5 Price relative
EBITDA 42.1 109.4 19.7 18.7
Operating profit 32.3 157.8 15.2 10.9 47.30 47.30
PBT 25.6 174.0 9.3 6.8 42.30 42.30
HSBC Qianhai EPS 42.6 149.5 2.8 6.5 37.30 37.30
Ratios (%) 32.30 32.30
Revenue/IC (x) 1.5 1.6 1.3 1.3 27.30 27.30
ROIC 25.0 36.6 22.9 21.1 22.30 22.30
ROE 17.2 27.9 20.9 19.3 17.30 17.30
ROA 6.7 11.7 8.6 7.5 12.30 12.30
EBITDA margin 21.7 27.1 21.1 20.8 7.30 7.30
Operating profit margin 16.1 24.7 18.5 17.0 2017 2018 2019
EBITDA/net interest (x) 10.1 13.9 9.1 7.7 Eve Energy Co Ltd Rel to CSI 300 Index
Net debt/equity 10.4 14.8 58.8 44.6
Net debt/EBITDA (x) 0.4 0.6 2.2 1.6
CF from operations/net debt 113.1 79.9 30.2 41.0 Source: HSBC Qianhai Securities
Per share data (RMB)

EPS Rep (diluted) 0.67 1.67 1.72 1.83
HSBC Qianhai EPS (diluted) 0.67 1.67 1.72 1.83
DPS 0.21 0.50 0.52 0.55
Book value 4.16 7.60 8.84 10.16
Source: Company data, HSBC Qianhai Securities estimates
43
44
Exhibit 85. Eve energy: Company structure, August 2019
Liu Yuan
Liu Jincheng Luo Jinhong
Jianhua Zhongzhi
50% 50%
2.62% 0.75%
2.24% 1.15%
Tibet Eve Holding ltd
Public
32.93%
60.31%
Tianjin Zhonghuan Semiconductor

Eve Energy (300014 CH)
（002129.SZ)
37.55%

Primary Li-ion battery Battery for Smoore (E-cigarette
Power battery
consumer components)
products
October 2019

October 2019
Sanhua (002050 CH)
 Leading global supplier of pumps and valves in heat management

 Penetrating into auto heat management with >20% market share in
key components
Investment summary
Home appliance component maker finds a new growth driver

The company is a global market leader in pumps and valves used in heat management of home
The company is a global
market leader in pumps and appliances. Building on its strength in technology, it is penetrating the auto heat management
valves for heat management market and has first-mover advantage in key components like the auto-use electronic expansion
valve (EXV). We expect rising EV heat management orders to drive a 15% earnings CAGR in
2018-21e.
Exhibit 86. Sanhua: Revenue breakdown, Exhibit 87. Sanhua: We expect earnings to
2018 grow at a 15% CAGR in 2018-21e
AWECO Others Rmb mn
10% 11% 2,500 70%
60%
2,000
50%
Micro-channel
heat exchanger 1,500 40%
11%
1,000 30%
20%
500
10%
A/C and refrigeration
0 0%
Auto parts 55%
2016 2017 2018 2019E 2020E 2021E
13%
Net profit YoY
Note: E = HSBC Qianhai Securities estimates

Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities
Asset injection to fuel growth

The parent Sanhua Holding Group has been injecting assets into the listco since the latter’s
listing in 2005. In 2015, the listco bought Sanhua Micro-channel Heat Exchanger from Sanhua
Lvneng for RMB1.3bn, or a PE of 17x. Sanhua Lvneng is a subsidiary of Sanhua Holding
Group. In 2017, the listco acquired Sanhua Auto Parts from Sanhua Lvneng for RMB2.15bn, or
a PE of 16x. The consideration was paid by issuing 231m shares to the seller at RMB9.32/share
(Exhibit 89). The listco also raised RMB1.3bn in a subsequent non-public share issuance to
45
October 2019
raise funds for its in NEV component projects (Exhibit 90). We see a chance of potential asset
injections from the parent in the future that could be value accretive. The parent acquired
Fuerda in July 2018. Fuerda manufactures auto air vents, automotive electronics, auto lamps
and other auto parts. It generated a net profit of RMB118m in 2018. We see potential synergies
between Fuerda and Sanhua Auto Parts.
Exhibit 88. Sanhua: Historical asset injections valued at 16-17 PE

Year Assets Injected Book Value Stake Consideration Net profit attri. PE PB ROE
(RMBm) (RMBm) (RMBm)
2015 Sanhua Micro-channel Heat Exchanger 184 100% 1,280 74 17.4 6.9 40.0%
2017 Sanhua Auto Parts 557 100% 2,150 134 16.1 3.9 24.0%
Exhibit 89. Sanhua: Shareholding pre and post injection of the auto parts business
__________ Before___________ ___________ After ____________
Shr (m) Stake Shr (m) Stake
Sanhua Holding Group 788 44% 788 37%
Sanhua Lvneng business Group Limited 209 12% 439 21%
Zhang Yabo 38 2% 38 2%
Public 766 43% 854 40%
Total 1,801 100% 2,120 100%
Exhibit 90. Sanhua: Details of the RMB1.3bn non-public share issuance, 2017
Uses RMBm
NEV components project (capacity 11.5m units) 504
NEV heat management system upgrade project (capacity 7.3m units) 455
NEV air conditioner control parts upgrade project (capacity 12.7m units) 209
Production facility expansion 134
Consulting fee 21
Total 1,322
Auto parts to see strong growth on deep backlog for NEV components
Sanhua Auto Parts is the leading supplier of heat management system components for vehicles
globally, with an 80-90% market share in key components like the auto-use electronic
expansion valve (EXV). In 2018, the business generated a revenue of RMB1.4bn, 35% of which
was NEV related. GM for NEV components is also higher at 35% vs 30% for ICE vehicle
components in 1H19. As of September 2019, the business has an order backlog of RMB14bn
for NEV components, lasting until 2024. Given the deep backlog, we expect revenue to double
in 2018-21e and to account for a 21% revenue share in 2021e (Exhibit 93).
46
October 2019
Exhibit 91. Heat management system value comparison: ICE vehicle vs NEV
ICE Vehicle NEV
Air conditioner system RMB Air conditioner system RMB
Air Compressor 600 Heat Pump 900
Condenser 150 Electric Air Compressor 1,500
Accumulator 100
Thermal Expansion Valve 60
Evaporator 100
Fan 100
Pipe 150
Sub-total 1,260 Sub-total 2,400
Engine heat management Water cooling system

Water cooling tube 230 Water tank 700
Water Pump 100 Electric Water Pump 300
Fan 100 Electronic Expansion Valve 250
Radiator 600 Radiator 600
Thermostat 150 Cooling Plate 1000
Circulating tube 50
Sub-total 1,230 Sub-total 2,850
Total 2,490 Total 5,250
Source: Company, HSBC Qianhai Securities. Estimates
Exhibit 92. Sanhua Auto Parts: Gross Exhibit 93. Sanhua Auto Parts: Revenue to
margin on an upward trend double in 2018-21e
3,500
GM Rmb mn
33%
35% 31% 29% 30% 3,000
28%
30%
2,500
25%
20% 2,000
15% 1,500
10%
1,000
5%
0% 500
2017 2018 2019E 2020E 2021E
-
2017 2018 2019E 2020E 2021E
ICE NEV
Source: Company, HSBC Qianhai Securities (E = HSBC Qianhai Securities Note: E = HSBC Qianhai Securities estimates
estimates). Source: Company data, HSBC Qianhai Securities
Exhibit 94. Sanhua Auto Parts: Key customers

Type Key customers
Auto Heat Management System Integrator Valeo, Mahle
Auto makers VW, Volvo, Daimler, BMW, Tesla, GM, BYD, Geely
Higher energy efficiency requirement drives A/C electronic expansion valve sales
The company is the largest supplier of electronic expansion valves (EXV) used in A/C, with a
43% market share globally. Due to its dominant market position, Sanhua’s A/C EXV had a gross
margin of over 35% in 2018. EXV is used to control the flow of refrigerant in A/C by responding
to electronic signals sent by an electronic controller. It is a substitute for the thermal expansion
valve (TXV), which works mechanically via springs. An EXV can control the flow volume (hence
temperature) more precisely and effectively than a TXV. Given these advantages, EXV is used
47
October 2019
in inverter A/C which has a higher energy efficiency than that of the conventional fixed-
frequency A/C. In 2018, 30% of the A/C units sold globally installed EXV (Exhibit 96).
Energy efficiency upgrades have been a major driver of inverter A/C sales and, in turn, EXV
sales. In June 2018, the Standardisation Administration of the People’s Republic of China
issued a consultation paper on the latest version of “The minimum allowable values of the
energy efficiency and energy efficiency grades for room A/C” (GB21455-2019) proposing the
phasing out of A/Cs with energy efficiency grades below 3 (out of 5).
Should the proposal be implemented, we expect EXV’s penetration in China to rise from 20-
30% in 2018 to 50-60% in 2021 at the expense of TXV. We believe this should drive sales of
Sanhua’s A/C EXV as China accounted for c80% of global household A/C sales volumes in
2018. In our model, we forecast a 9% revenue CAGR for Sanhua’s A/C and refrigeration
components segment in 2018-21e, driven by the increase in penetration.
Exhibit 95. A/C and refrigeration Exhibit 96. Electronic Expansion Valve:
components: Sanhua’s global market Global penetration at 30% in 2018
share, 2018
50% Share of global sales volume, 2018

43%
45%
A/C Electronic Expansion Valve
40% 36% 30%
35%
30% 28%
25%
20%
15%
10%
5%
0%
A/C Thermal Expansion
Electronic 4-Way Reversing Service Valve
Valve
Expansion Valve Valve
70%
Exhibit 97. Global household A/C (2017): Penetration low for developing countries
2017 A/C penetration (measured by A/C units per 100 household)
300% 276%
250%
200%
150% 129%
100%
53%
50% 28% 19% 17% 15%
0%
Japan Urban China Rural China Thailand Indonesia Vietnam India
Source: Euromonitor, HSBC Qianhai Securities
48
October 2019
FCF to improve in 2018-21, reducing net gearing further

Sanhua has a low net gearing of 6% as of December 2018. It maintained a positive FCF in
2015-16 but FCF turned negative in 2017 due to the acquisition of Sanhua Auto Parts and
investment in NEV components projects. We expect capex to drop from RMB1.3bn in 2018 to
RMB800m in 2019-20 as major projects are close to completion. This should lead to FCF
increasing significantly from RMB8m in 2018 to cRMB769m in 2020e. As such, we expect the
company’s net gearing to drop from 6% in 2018 to 3% in 2020e.
Exhibit 98. Sanhua: Net gearing to drop in Exhibit 99. Sanhua: FCF to improve in
2018-21e 2018-21e
2.0
10%
8% 1.5
6% 1.0
4%
2% 0.5
Rmb bn
0%
0.0
-2%
-4% (0.5)
-6%
-8% (1.0)
-10%
(1.5)
-12% 2015 2016 2017 2018 2019E 2020E 2021E
2015 2016 2017 2018 2019E 2020E 2021E
FCF
Net debt / Equity
Note: E = HSBC Qianhai Securities estimates Note: E = HSBC Qianhai Securities estimates
Investment concerns
Micro-channel heat exchanger sales growth could taper off on low copper prices
The sale of micro-channel heat exchangers accounted for 11% of revenue in 2018. The
company has a 45% global market share in A/C-use micro-channel heat exchangers. Globally,
the product has an addressable market size of RMB50bn and micro-channel heat exchanger’s
penetration rate is only 5%. As the micro-channel heat exchanger has a number of advantages
over the traditional finned heat exchanger (Exhibit 100), we expect the latter to be gradually
replaced in the long run.
However, in the near term, the 19% decline in copper prices since early 2018 makes the
substitution of the copper-based finned heat exchanger by the aluminum-based micro-channel
heat exchanger economically unviable (Exhibit 101). We believe the pace of substitution could
re-accelerate should the copper price increase from the current level of USD5,700/t to over
USD7,800/t.
Exhibit 100. Micro-channel heat exchanger has a number of advantages over the
traditional finned heat exchanger
Item Improvements
Heat transfer efficiency 30% improvement
Size 30% reduction
Weight 50% reduction
Coolant usage 30% reduction
Material Aluminum can be 100% recycled
49
October 2019
Exhibit 101. Copper price has dropped Exhibit 102. Sanhua’s micro-channel heat
19% since early 2018 exchanger segment: sales growth to taper
off in 2019e
USD/ton USD/ton Rmb mn

1600
3,000 1,351
12,000 1400 1,252 1,216 1,250 1,288
2,500 1200 1,076
10,000
2,000 1000 899
8,000
800 726
6,000 1,500
600 526
4,000 1,000
400
2,000 500
200
0 0
0
Jan-14 Mar-15 May-16 Jul-17 Sep-18
2013 2015 2017 2019E 2021E
Copper Price (LHS) Aluminium Price (RHS)
Source: Wind, HSBC Qianhai Securities Note: E = HSBC Qianhai Securities estimates
AWECO could continue to make losses in 2019-20e on high production cost

AWECO accounted for 10% of revenue in 2018. AWECO supplies components for home
appliances, including dishwashers (c70% of AWECO’s revenue in 2018), washing machines,
and coffee machines. The Germany-based company was acquired by Sanhua in 2012 but was
still unable to generate a profit in 2018. We believe this is due to high production costs. To
reduce cost, Sanhua has relocated the production facilities from Germany to Poland, Turkey
and China. We expect China’s dishwasher market to register a 39% sales CAGR in 2018-21e
given the low penetration rate (1% in 2018) and rising household income. However, AWECO is
unlikely to breakeven at the net profit level until 2021e given its high production cost.
Exhibit 103. AWECO: We expect loss- Exhibit 104. AWECO: Gross margin down
making to continue in 2019-20e from 20% in 2015 to 15% in 2018
Rmb mn 25%
1400 1205
1093 20%
1200 1043 1,034 18%
929 985 20% 17% 17%
16%
1000 860
805 15% 15% 16%
800 666 14%
15%
600
400 10%
200 9 18 0
0 5%
-200 -22 -28 -30 -10
-135 -69
-400 0%
2013 2015 2017 2019E 2021E 2013 2015 2017 2019E 2021E
Revenue (Rmb mn) Net profit (Rmb mn)
50
October 2019
Exhibit 105. China dishwasher market: We Exhibit 106. Global dishwasher (2018):
expect strong growth in 2018-21e China’s penetration rate low at just 1%
mn units 90%
4.50 80%
4.0 80%
4.00
70%
3.50 3.0
3.00 60% 50%
2.50 50%
2.0
2.00 40% 30%
1.50
1.50 30%
0.99
1.00 20%
0.43
0.50 0.05 0.08 0.12 0.21 10% 1%
0.00 0%
2012 2014 2016 2018 2020E Western North Eastern China
Europe America Europe

Source: ChinaIOL, HSBC Qianhai Securities Source: Euromonitor, HSBC Qianhai Securities
China’s A/C volume growth could taper off on a weaker property market
Sanhua’s A/C and refrigeration components segment accounted for 55% of revenue in 2018. In
1H19, the segment registered revenue growth of 4% y-o-y, down from 21% y-o-y in 2018, due
to a weaker household A/C market in China, which accounted for c80% of global A/C sales
volume in 2018 (Exhibit 110). We expect China’s household A/C sales volumes to drop by 4%
y-o-y in 2019e on a weaker outlook for the property market (Exhibit 109). In 7M19, the amount
of property area sold was down 1% y-o-y. We believe a weaker A/C market should be partially
offset by growth from the rising penetration of Sanhua’s key A/C components like EXV.
Exhibit 107. China household A/C: Exhibit 108. China household A/C market
Production volume down 11% y-o-y in July (2018): Top 3 have 78% market share
2019
mn units AUX Others

16.0 14.1 9%
4%
14.0 12.5
12.0 Midea
Haier 22%
10.0 18%
8.0
6.0 Hisense
4.0 9%
GREE
2.0 38%
-
July 2018 July 2019
Source: ChinaIOL, HSBC Qianhai Securities Source: ChinaIOL, HSBC Qianhai Securities
51
October 2019
Exhibit 109. China household A/C: Sales to Exhibit 110. Household A/C (2018): China
drop 4% in 2019e on soft property sales accounted for c80% of global sales volume
180
mn units
160
ROW
140 20%
120
100
80
60
40
20 China
80%
0
2014 2015 2016 2017 2018 2019E 2020E 2021E
China household A/C sales
Source: ChinaIOL, HSBC Qianhai Securities Source: ChinaIOL, HSBC Qianhai Securities
Vulnerable to global trade dispute, given high exposure to exports

Exports accounted for 46% of Sanhua’s revenue in 2018 and it could be higher in 2020e given
the rapid growth of its auto component business, which has higher export exposure (Exhibit
112). This means Sanhua is vulnerable to the impact of China-US trade dispute. For example,
c60% of revenue from micro-channel heat exchanger sales came from the US market in 2018.
To reduce the impact of tariffs, Sanhua is setting up factories in Vietnam, Mexico, and Poland to
supply the overseas markets.
Exhibit 111. Sanhua: 46% of revenue came Exhibit 112. Sanhua: Auto component
from exports in 2018 export exposure at 51% in 2018
Domestic sales
Mainland China Oversea sales
Oversea 49%
54% 51%
46%
Source: Company, HSBC Qianhai Securities Source: Company, HSBC Qianhai Securities
Financial forecasts
Earnings forecasts
We expect a 15% earnings CAGR in 2018-21e. We base our forecasts on the following key
assumptions:
 Revenue: We forecast a revenue CAGR of 10% in 2018-21e, driven by strong growth of
the NEV segment (56% revenue CAGR in 2018-21e).
52
October 2019
 Gross margin: We forecast the gross margin to slightly increase from 28.6% in 2018 to
31.1% in 2021e.
Exhibit 113. Sanhua: Segments and full P&L forecasts

RMB m 2018 2019e 2020e 2021e 2018-2021e CAGR
Turnover 10836 11497 12873 14575 10%
A/C and refrigeration components 5961 6211 6882 7661 9%
Auto parts 1432 1860 2347 3020 28%
-ICE 931 967 1037 1117 6%
-NEV 501 893 1310 1903 56%
Micro-channel heat exchanger and components 1216 1250 1288 1351 4%
Home appliance components (AWECO) 1093 929 985 1034 -2%
Other main business 1134 1247 1372 1509 10%
Gross Profit 3098 3278 3835 4530 14%

A/C and refrigeration components 1941 2023 2340 2681 11%
Auto parts 421 513 704 1001 33%
Micro-channel heat exchanger and components 369 379 391 410 4%
Home appliance components (AWECO) 162 138 153 165 1%
Other main business 204 225 247 272 10%
Gross Margin 28.6% 28.5% 29.8% 31.1%
Business tax -86 -91 -102 -115 10%

Selling expenses -532 -565 -632 -716 10%
Admin. expenses -1,020 -1,082 -1,211 -1,372 10%
Asset impairment losses / Fair value changes -76 -28 -16 -20 -36%
Other gain / (losses) 101 101 101 101 0%
Net finance charges 52 8 -43 -40 -191%

Share of JCE 2 2 2 2 0%
Profit before taxes 1,540 1,624 1,934 2,371 15%

Tax -228 -243 -290 -355 16%
Minorities -19 -20 -24 -29 15%
Pre-exceptional profit 1,293 1,361 1,620 1,987 15%

Dividend to preferred shareholders and perpetual capital securities 0 0 0 0
Net profit 1,293 1,361 1,620 1,987 15%

We forecast net gearing to decrease and turn into a net cash position in 2021e, driven by strong
OCF. With the completion of NEV project investment in 2019e, we expect capex to fall in 2020e and
2021e.
Exhibit 114. Sanhua: Net debt and cash flow forecasts

RMB m 2018 2019e 2020e 2021e
Net debt/(cash) 550 633 316 -735
Net debt to equity 6% 7% 3% -6%
Cash Fr Operations 1,288 1,450 1,569 1,876
Cash Fr Investing -1,279 -800 -800 -300
FCF 8 650 769 1,576
53
October 2019
Valuation and risks

capital ratio.
changes in working capital) to expand at a CAGR of 8% in 2018-29e, reflecting solid growth
in demand.
 Capital expenditure: We expect capex of RMB0.8bn in 2019-20e, driven by auto parts
capacity expansion. Thereafter, we expect capex to drop to around RMB0.3bn per annum
in 2021-29e, reflecting steady maintenance capex.
after 2029.
Downside risks
 Weaker-than-expected property market: Sanhua’s A/C and refrigeration components
segment accounted for 55% of the company’s revenue in 2018. Should the property market
correct, we see a negative impact on our earnings forecasts for this business.
 Lower-than-expected copper price: We expect the micro-channel heat exchanger
business to contribute 10% revenue in 2021e. Since the product is competing with the
copper-based finned heat exchanger, a lower-than-expected copper price could be
negative to the growth of the business.
 Weaker-than-expected global EV demand: We expect the EV heat management
business to contribute 13% of revenue in 2021e. Weaker-than-expected global EV demand
could negatively impact our earnings forecasts for this business.
 Weaker-than-expected global dish washer demand: We expect AWECO to contribute
7% of revenue in 2021e. Therefore, weaker-than-expected global dish washer sales (c70%
of AWECO’s revenue in 2018) could negatively impact our earnings forecasts.
 Renegotiation of supply contract with auto makers: Unfavourable changes in contract
 Selling pressure from big shareholders: Sanhua Holding Group has 594m shares (22%
of shares outstanding) in Sanhua pledged as collateral for loans. We see risks of forced
sale of these shares, should the share price fall below the watermark. In addition, Sanhua
has 300m shares (11% of shares outstanding) held by Sanhua Lvneng Business Group, to
be unlocked in September 2020. The sale of a significant portion of these shares could also
pressure the share price.
54
October 2019
Exhibit 115. Sanhua: Discounted cash flow valuation

Rmb m 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Profit after tax 608 995 1,251 1,312 1,381 1,644 2,016 2,218
y-o-y growth 64% 26% 5% 5% 19% 23% 10%
Net finance expense 72 32 35 50 -8 43 40 41
Operating cash flow before W/C 921 1,310 1,583 1,676 1,641 1,987 2,394 2,602
changes
Changes in working capital -130 187 -925 -439 -190 -416 -516
Net operating cash flow 790 1,497 659 1,237 1,451 1,571 1,878 2,602
CAPEX -332 -176 -1,772 -1,279 -800 -800 -300 -300
Free cash flow 459 1,321 -1,113 -43 651 771 1,578 2,302
Gross PPE 3,712 5,712 4,758 5,591 6,108 6,852 7,640 7,940
PV of FCF 1,578 2,113
Rmb m 2023e 2024e 2025e 2026e 2027e 2028e 2029e Terminal
Value
Profit after tax 2,439 2,634 2,845 3,073 3,226 3,388 3,557
y-o-y growth 10% 8% 8% 8% 5% 5% 5%
Operating cash flow before W/C 2,830 3,032 3,248 3,480 3,639 3,804 3,977
changes
CAPEX -303 -306 -309 -312 -315 -318 -322
Free cash flow 2,527 2,726 2,939 3,168 3,323 3,486 3,655 53,736
Discount Factor 0.84 0.77 0.71 0.65 0.60 0.55 0.50 0.50
Gross PPE 8,243 8,549 8,858 9,171 9,486 9,804 10,126

PV of FCF 2,130 2,108 2,087 2,065 1,988 1,914 1,843 27,091
Less: Net debt (incl. perpetual) -316
Equity value 44,602
Less: Minority interest -129
Total share issued by year-end 2020 2,766
Per Share Value - Rmb 16.1
Assumptions
Risk free rate 2.5%
ERPch 6.5%
Beta 1.12
Cost of debt 5.0%
Income tax 15%
Debt/Capital 15%
WACC 8.9%
Terminal growth 2%
Source: Wind, company data, HSBC Qianhai Securities
55
October 2019
Exhibit 116. Sanhua forward PE: Trading in Exhibit 117. Sanhua forward PB: Trading
line with the historical average above the historical average
40.0 6.0
35.0 5.0
30.0
4.0
25.0
20.0 3.0
15.0
2.0
10.0
5.0 1.0
- 0.0
Jan-13 Jan-15 Jan-17 Jan-19 Jan-13 Jan-15 Jan-17 Jan-19
PE Mean +1SD -1SD PB Mean +1SD -1SD
Exhibit 118. Sanhua: Earnings sensitivity to gross margin and revenue changes, 2020e
_____________________________________ Gross Margin ______________________________________
Revenue -3% -2% -1% 0% 1% 2% 3%
20% 15.4% 24.4% 33.4% 42.4% 51.4% 60.4% 69.4%
15% 6.0% 14.6% 23.2% 31.8% 40.4% 49.0% 57.7%
10% -3.5% 4.7% 13.0% 21.2% 29.5% 37.7% 45.9%
5% -13.0% -5.1% 2.7% 10.6% 18.5% 26.3% 34.2%
0% -22.5% -15.0% -7.5% 0.0% 7.5% 15.0% 22.5%
-5% -32.0% -24.8% -17.7% -10.6% -3.5% 3.6% 10.8%
-10% -41.4% -34.7% -28.0% -21.2% -14.5% -7.7% -1.0%
-15% -50.9% -44.5% -38.2% -31.8% -25.4% -19.1% -12.7%
-20% -60.4% -54.4% -48.4% -42.4% -36.4% -30.4% -24.4%
56
October 2019
Financials & valuation: Zhejiang Sanhua Co Buy

EBITDA 1,802 1,885 2,277 2,749 EV/IC 4.2 3.9 3.5 3.2
Operating profit/EBIT 1,487 1,616 1,977 2,411 PB 3.3 4.0 3.5 3.1
Net interest 52 8 -43 -40 FCF yield (%) 0.0 1.8 2.1 4.3
PBT 1,540 1,624 1,934 2,371 Dividend yield (%) 2.6 1.1 1.3 1.6
HSBC Qianhai PBT 1,540 1,624 1,934 2,371 *Based on HSBC Qianhai EPS (diluted)
Net profit 1,293 1,361 1,620 1,987
HSBC Qianhai net profit 1,293 1,361 1,620 1,987
Cash flow from operations 1,288 1,450 1,569 1,876 Environmental Indicators 12/2018a Governance Indicators 12/2018a
Capex -1,279 -800 -800 -300
Cash flow from investment -1,279 -800 -800 -300
Dividends -589 -741 -408 -486
Change in net debt 399 83 -318 -1,051 CO2 reduction policy Yes Female board members (%) 9.1
FCF equity 8 650 769 1,576 Social Indicators Board members’ independence (%) 27.3
Cash & others 1,351 1,268 1,586 2,636 Source: Company data, HSBC Qianhai Securities
Total assets 13,932 14,742 16,267 18,152
Gross debt 1,542 1,542 1,542 1,542 Issuer information
Net debt 191 274 -43 -1,094
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change Price relative
Revenue 13.1 6.1 12.0 13.2
EBITDA -5.1 4.6 20.8 20.8
Operating profit -7.1 8.7 22.3 22.0 16.50 16.50
PBT 4.3 5.5 19.1 22.6
14.50 14.50
HSBC Qianhai EPS -7.2 -19.3 19.1 22.6
Ratios (%) 12.50 12.50
Revenue/IC (x) 1.3 1.3 1.3 1.4
10.50 10.50
ROIC 15.7 15.1 17.0 19.3
ROE 15.7 15.2 16.5 17.7 8.50 8.50
ROA 10.0 9.6 10.6 11.7
6.50 6.50
EBITDA margin 16.6 16.4 17.7 18.9
2017 2018 2019
Operating profit margin 13.7 14.1 15.4 16.5
Zhejiang Sanhua Co Rel to CSI 300 Index
EBITDA/net interest (x) 52.9 69.5
Net debt/equity 2.2 2.9 -0.4 -9.0 Note: Priced at close of 11 October 2019
Net debt/EBITDA (x) 0.1 0.1 0.0 -0.4 Source: HSBC Qianhai Securities
CF from operations/net debt 675.5 528.8 – –
EPS Rep (diluted) 0.61 0.49 0.59 0.72
DPS 0.35 0.15 0.18 0.22
Book value 4.04 3.34 3.78 4.32
57
58
Exhibit 119. Sanhua: Company structure, August 2019
Zhang Yu Zhang Zhejiang

Zhang Yabo Daocai Qingjuan Shaobo Huateng
31%
Investment
64.06% 33% 30% 6%
and 38
other
Xinchang Huaxin
Xinchang Huaqing Investment individuals
Investment
12.88% 11.81% 27.27% 10.85% 37.19%
Sanhua Holding Group

100%
Haoyide International Limited of Hong Kong

100% 62.11%
37.00%
Fuxun Limited
37.89%
Public Zhejiang Sanhua Lvneng Industry Group
1.81% Limited

40.56%
20.63%
Sanhua Intelligent (002050 CH)
October 2019

October 2019
Yinghe Tech (300457 CH)
 Top two LIB equipment supplier in China, with c19% market share
 Early cycle name benefiting from the LIB capacity upcycle
Investment summary
Benefitting from the LIB capacity upcycle

We view Yinghe as the best name to play the EV LIB capacity upcycle among our coverage,
given the company’s market leadership in LIB equipment in China. Yinghe has a c19% market
share in LIB equipment in China and is one of the two Chinese companies that can provide
whole line solutions. We expect an earnings CAGR of 27% in 2018-21e, benefiting from the
doubling of global LIB capacity during this period.
Exhibit 120. Yinghe: Revenue breakdown, Exhibit 121. Yinghe: We expect earnings to
2018 rise at a 27% CAGR in 2018-21e
Rmb mn
Others business Front End 700 120%
34% 42% 600 100%
500
80%
400
60%
300
Back End 40%
200
2%
100 20%
Middle Stage 0 0%
22% 2016 2017 2018 2019E 2020E 2021E
Net profit YoY
Source: Wind, company data, HSBC Qianhai Securities Note: E = HSBC Qianhai Securities estimates
59
October 2019
To benefit from the EV LIB capacity upcycle

Yinghe is the second-largest LIB equipment supplier in China, with a 19% market share. China
accounted for 56% of global EV LIB shipments in 2018. We expect the company to benefit from
the global EV LIB capacity upcycle (please refer to our discussion on page 18). We expect
Yinghe’s equipment new orders to rise from RMB2.9bn in 2018 to RMB4.2bn in 2020e (Exhibit
123). In 2018, the company penetrated the equipment supply chain of LG Chemical and CATL.
Exhibit 122. Yinghe: 2018 new contract Exhibit 123. Yinghe: We expect new orders
breakdown by customer to peak at RMB4.2bn in 2020e
4,500 RMB mn
Guoxuan High-Tech
27% 4,000
Other 3,500
46% 3,000
2,500
BYD 2,000
11% 1,500
CATL 1,000
3% 500
Funeng LG Chemical -
Wanxiang 3%
5% 2017 2018 2019E 2020E 2021E
5%
New contract
Source: Company data, HSBC Qianhai Securities estimates Note: E = HSBC Qianhai Securities estimates
One of the two Chinese company that can provide full-line solutions
Yinghe is one of the two Chinese equipment suppliers that are capable of providing full-line
solutions (the other is Wuxi Lead Intelligent). We see rising demand for full-line solutions as
increasing automation levels of production lines require better integration between the different
stages. Full-line solutions accounted for 62% of Yinghe’s revenue in 2018 (Exhibit 127).
Exhibit 124. LIB equipment: Product coverage, by major supplier

_________________________ Front-end _________________________ ________ Intermediate_________ _________ Back-end __________
Mixing Coating Calender Slitting Tab welding Die Cutting Winding Stacking Electrolyte Formation Grading & Packing
injection testing
Yinghe Tech √ √ √ √ √ √ √ √ √ √ √ √
Naura √ √ √ √
Nebula Elec √ √
Kanhoo Industry √ √ √ √
Golden Milky Way √ √ √
Geesun √ √ √ √ √
Yixinfeng √ √ √
Wuxi Lead √ √ √ √ √ √ √ √ √ √ √ √
Han's Laser √ √ √ √ √ √
Putailai √ √ √
Higrand Tech √ √
Naknor √
Hangke √ √
Source: company data, HSBC Qianhai Securities
60
October 2019
Exhibit 125. LIB equipment: Value breakdown by stage of production

Stage Equipment Value % (Cylindrical) Value % (Prismatic)
Front-end Material Blending Blender 5% 5%
Coating Coater 25% 25%
Compressing & Drying Calender 2% 2%
Slitting Slitting Machine 3% 3%
Tab Welding & Die Electrode Cutting 5% 5%
Cutting Machine
Intermediate Winding Winding Machine 23%
Stacking Stacking Machine 23%
Sub Assembly & Sealing Welding Machine, 2% 2%
Sealing Machine
Electrolyte Injection Liquid Injection Machine 5% 5%
Back-end Formation & Aging Cell Formation Machine 12% 12%
Grading & Testing Grading & Testing 10% 10%
Machine
Packaging Pack line 8% 8%
Total 100% 100%
Exhibit 126. Yinghe: Better automation for Exhibit 127. Yinghe: Integrated solution
new LIB production lines accounts for a major piece of revenue
Persons
300 Others
250 7%
250 Independent
equipment
200 31%
150
100
50 25
Production line
0 solution
2014 2019 62%
Number of worker / production line 2018 revenue breakdown
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities
Employee incentive programme could enhance performance

On 28 December 2017, the company awarded 4.9m shares (1.3% of the outstanding shares) to
73 key personnel. The lock-up period will expire in three batches. As key performance indicators
include Yinghe’s net profit growth, we expect the share incentive scheme to enhance the
operating performance of the company.
Exhibit 128. Yinghe: Details of the share incentive programme

Items Details
Date Draft announced in Oct. 2017; completed in Dec. 2017
No. of shares (m) 4.9
# of employee involved 73
Source of incentive stock Private placement
Execution price Rmb17.05/share
Condition to unlock 1st lock-up expiry: 2017 net profit≥RMB198m
2nd lock-up expiry: 2018 net profit≥RMB297m
3rd lock up expiry: 2019 net profit≥RMB446m
Lock-up expiration starts 30% on 11/27/2018, 30% on 11/27/2019, and 40% on 27/12/2020
61
October 2019
Investment concerns
EV LIB market consolidation is negative for equipment suppliers

The downstream EV LIB market has seen market concentration rising dramatically since 2015.
In 2018, CATL and BYD – the top 2 EV LIB suppliers in China – accounted for a combined 63%
market share, up from 42% in 2017 (Exhibit 130). If the market consolidation continues, we see
a chance of weaker pricing power for the equipment makers.
Exhibit 129. China EV LIB: The number of Exhibit 130. China EV LIB: Market
producers has dropped 80% since 2015 concentration is increasing
# of EV LIB makers 100%
500 90%
450
450 80%
400 70%
350 60%
300 240 50%
250
40%
200 140
150 30%
90
100 20%
50 10%
0 0%
2015 2016 2017 2018 2017 2018
CATL BYD Others
Source: GGII, HSBC Qianhai Securities estimates Source: GGII, HSBC Qianhai Securities estimates
Long receivable days

Given a rapidly changing market for the EV LIB downstream, it could be risky for equipment
makers to keep a large amount of receivables on its book. As of end-June 2019, Yinghe has
RMB2bn of trade and notes receivables, equivalent to 66% of its revenue in 2019e; 18% of the
receivables is in the form of commercial bills, a large portion of which owed by BYD. The
company booked a 10% bad debt allowance for its trade receivables in 1H19. To reduce the
receivables risk, the company has relinquished a number of new contracts since 2018.
Exhibit 131. Yinghe: Trade and notes Exhibit 132. Wuxi Lead Intelligent: Trade
receivables breakdown,1H19 and notes receivables breakdown,1H19
Commercial bill owed by Gree (Yinlong)

Commercial bill
29%
18%
Bank
acceptance bill
5%
Trade receivables
77% Other trade and bill receivables
71%
62
October 2019
Financial forecasts
Earnings forecasts
 Revenue: We forecast a revenue CAGR of 22% in 2018-21e, driven by 18% revenue
CAGR for Li-ion battery equipment products.
 Gross margin: We forecast gross margin to improve from 32.8% in 2018 to 34.0% in
2021e.
Exhibit 133. Yinghe: Segments and full P&L forecasts

RMBm 2018 2019e 2020e 2021e 2018-21e CAGR
Turnover 2087 3026 3695 3778 22%
Li-ion battery equipment 2087 2755 3370 3388 18%
E-cigarette 271 325 390 NM
Gross Profit 685 998 1256 1284 23%
Gross Margin 32.8% 33.0% 34.0% 34.0%
Business tax (19) (27) (33) (33) 22%

Selling expenses (63) (92) (112) (115) 22%
Admin. expenses (212) (287) (351) (359) 19%
Asset impairment losses / Fair value changes (49) (63) (46) (14) -35%
Net finance charges (31) (27) (29) (27) -4%

Share of JCE 0 0 0 0
Profit before taxes 380 572 754 805 28%

Tax (49) (86) (113) (121) 35%
Minorities (6) (9) (12) (12) 27%
Pre-exceptional profit 325 477 630 672 27%

Net profit 325 477 630 672 27%

We expect Yinghe’s net gearing to fall in 2019-21e on strengthening FCF. We expect capex to
decline from RMB1.16bn in 2018 to RMB400m in 2019e and RMB350m in 2020e. The capex
will be spent mostly on two projects: the Li-ion automatic equipment production line, and the
intelligent plant & operational management system.
Exhibit 134. Yinghe: Net debt and cash flow forecasts

RMBm 2018 2019e 2020e 2021e
Net debt/(cash) (54) 47 (28) (412)
Net debt to equity -2% 1% -1% -9%
Cash from operations 78 338 502 675
Cash from investing (1,160) (400) (350) (200)
FCF (1,081) (62) 152 475
63
October 2019
Valuation and risks

 Cost of debt (COD): We assume the pre-tax cost of debt to be 5.0% and the after-tax cost
of debt to be 4.3%. We use our 2020e debt-to-capital ratio of 15% as our long-term debt-to-
capital ratio.
changes in working capital) to expand at a CAGR of 9% in 2018-29e, reflecting stable
growth in demand.
 Capital expenditure: We expect capex of around RMB400m, RMB350m, and RMB200m in
2019e, 2020e and 2021e respectively, reflecting the company’s LIB equipment capacity
expansion. Thereafter, we expect a steady capex of around RMB100m per annum in 2022-
29e, reflecting maintenance capex.
after 2029e.
Downside risks
 Weaker-than-expected LIB capacity cycle: Yinghe manufactures a wide range of LIB
equipment. Hence a weaker-than-expected LIB capacity cycle could affect Yinghe’s
earnings negatively.
 Weaker-than-expected ASPs on deteriorating pricing power: The consolidation in the
downstream LIB market could lead to weaker-than-expected ASPs for Yinghe.
 Higher-than-expected receivable provisions: Should battery customers delay their
payments, Yinghe could see an uptick in its receivables provision rate which could in turn
affect its earnings adversely.
 Weaker-than-expected margin on intensified competition: Rising competition could
undercut prices and adversely affect the company’s gross margins.
 Renegotiation of supply contract with battery makers: Unfavourable changes in
contract terms could negatively impact our earnings forecasts.
 Expanding into the e-cigarette business could entail policy risks: The e-cigarette
business contributed RMB135m to revenue in 1H19. We note that the Chinese government
has not imposed heavy taxes on e-cigarettes as it does to traditional ones. Unfavourable
policy and tax changes could impact the business negatively.
 Selling pressure from big shareholders: Weidong Wang, the controlling shareholder of
Yinghe has 54m shares (14% of shares outstanding) of Yinghe pledged as collateral for
loans. We see risks of forced sale of these shares, should the share price fall below the
watermark.
64
October 2019
Exhibit 135. Yinghe: Discounted cash flow valuation

RMBm 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Profit after tax 60 128 226 331 486 641 685 719
y-o-y growth 113% 76% 46% 47% 32% 7% 5%
Operating cash flow before W/C 80 158 278 410 555 731 791 828
changes
Changes in working capital (70) (147) (348) (357) (217) (229) (116)
Net operating cash flow 10 11 (70) 53 338 502 675 828
Capex (234) (46) (198) (1,160) (400) (350) (200) (100)
Free cash flow (224) (35) (268) (1,107) (62) 152 475 728
Gross PPE 333 553 692 924 1,242 1,642 1,992 2,092
PV of FCF 475 667
Value
Profit after tax 755 793 832 874 918 945 973
y-o-y growth 5% 5% 5% 5% 5% 3% 3%
Operating cash flow before W/C 868 908 951 995 1,041 1,071 1,101
changes
Net operating cash flow 868 908 951 995 1,041 1,071 1,101
Capex (101) (102) (103) (104) (105) (106) (107)
Free cash flow 767 806 848 891 936 965 994 14,092
Discount Factor 0.84 0.77 0.70 0.64 0.59 0.54 0.49 0.49
Gross PPE 2,193 2,295 2,398 2,502 2,607 2,714 2,821

PV of FCF 643 619 596 574 552 521 492 6,971
Less: Net debt (incl. perpetual) 28
Equity value 12,138
Less: Minority interest (61)
Assumptions
Risk free rate 2.5%
ERPch 6.5%
Beta 1.16
Cost of debt 5.0%
Income tax 15%
Debt/Capital 15%
WACC 9.2%
Terminal growth 2%
65
October 2019
Exhibit 136. Yinghe forward PE: Trading at Exhibit 137. Yinghe forward PB: Trading at
low-end of the historical valuation low-end of the historical average
80.0 16.0
70.0 14.0
60.0 12.0
50.0 10.0
40.0 8.0
30.0 6.0
20.0 4.0
10.0 2.0
- 0.0
May-15 May-16 May-17 May-18 May-19 May-15 May-16 May-17 May-18 May-19
PE Mean +1SD -1SD PB Mean +1SD -1SD
Exhibit 138. Yinghe: Earnings sensitivity to gross margin and revenue changes, 2020e
_____________________________________ Gross Margin ______________________________________
Revenue -3% -2% -1% 0% 1% 2% 3%
20% 18.9% 25.5% 32.2% 38.8% 45.5% 52.2% 58.8%
15% 10.0% 16.4% 22.8% 29.1% 35.5% 41.9% 48.3%
10% 1.1% 7.2% 13.3% 19.4% 25.5% 31.6% 37.7%
5% -7.8% -1.9% 3.9% 9.7% 15.5% 21.4% 27.2%
0% -16.6% -11.1% -5.5% 0.0% 5.5% 11.1% 16.6%
-5% -25.5% -20.3% -15.0% -9.7% -4.4% 0.8% 6.1%
-10% -34.4% -29.4% -24.4% -19.4% -14.4% -9.4% -4.4%
-15% -43.3% -38.6% -33.8% -29.1% -24.4% -19.7% -15.0%
-20% -52.2% -47.7% -43.3% -38.8% -34.4% -30.0% -25.5%
66
October 2019
Financials & valuation: Shenzhen Yinghe Tech Co Buy

EBITDA 450 641 844 912 EV/IC 3.3 2.7 2.3 2.1
Operating profit/EBIT 410 598 783 833 PB 3.1 2.7 2.3 2.0
Net interest -31 -27 -29 -27 FCF yield (%) -11.9 -0.7 1.7 5.2
PBT 380 572 754 805 Dividend yield (%) 3.6 0.5 0.7 0.7
HSBC Qianhai PBT 380 572 754 805 *Based on HSBC Qianhai EPS (diluted)
Net profit 325 477 630 672
HSBC Qianhai net profit 325 477 630 672
Cash flow from operations 78 338 502 675 Environmental Indicators 12/2018a Governance Indicators 12/2018a
Capex -1,160 -400 -350 -200
Cash flow from investment -1,160 -400 -350 -200
Dividends -72 -13 -48 -63
Change in net debt -90 101 -75 -384 CO2 reduction policy Yes Female board members (%) 0
FCF equity -1,081 -62 152 475 Social Indicators Board members’ independence (%) 30
Tangible fixed assets 903 1,265 1,558 1,683 Diversity policy Yes
Cash & others 765 664 739 1,123 Source: Company data, HSBC Qianhai Securities
Total assets 5,143 6,148 7,091 7,759
Gross debt 715 715 715 715 Issuer information
Net debt -50 51 -24 -408
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Revenue 31.6 45.0 22.1 2.3
EBITDA 46.9 42.3 31.7 8.1
PBT 50.1 50.6 31.9 6.8 39.00 39.00
HSBC Qianhai EPS 27.8 37.9 31.9 6.8
34.00 34.00
Ratios (%)
29.00 29.00
Revenue/IC (x) 1.0 1.0 1.0 0.9
ROIC 18.2 16.7 18.5 17.8 24.00 24.00
ROE 15.4 14.9 16.9 15.6 19.00 19.00
ROA 8.0 8.6 9.7 9.2
14.00 14.00
EBITDA margin 21.6 21.2 22.8 24.1
2017 2018 2019
Shenzhen Yinghe Tech Co Rel to CSI 300 Index
EBITDA/net interest (x) 14.7 24.1 29.0 33.5
Net debt/equity -1.7 1.5 -0.6 -8.7 Note: Priced at close of 11 October 2019
Net debt/EBITDA (x) -0.1 0.1 0.0 -0.4 Source: HSBC Qianhai Securities
CF from operations/net debt – 663.5 – –
EPS Rep (diluted) 0.92 1.27 1.67 1.79
DPS 0.86 0.13 0.17 0.18
Book value 7.88 9.11 10.66 12.28
67
68
Exhibit 139. Yinghe: Company structure, August 2019
Shenzhen Areconn Precision

Wang Weidong Xu Xiaoju
Machinery Co. Ltd.
Public
35.22% 3.71% 2.04%
59.03%

Yinghe Tech (300457 CH)
（002129.SZ)

Li-ion battery production equipment Other business (OLED equipment
and electronic cigarette)
October 2019

October 2019
Faratronic (600563 CH)
 Top five film capacitor maker globally

 Company to benefit from rising EV penetration, with over 30%
market share in EV film capacitors globally
Investment summary
EV and solar drive the upside

This company has over 50 years of experience in making film capacitors. We expect rising EV
penetration, together with a strong outlook for global solar installations, to drive a 9% earnings
CAGR for the company in 2018-21e. The company has 30-50% global market share in film
capacitors used in EV and solar. Given limited capex ahead, we expect the company to stay in
net cash positions in 2019-21e, supporting a high dividend payout ratio at 65%.
Exhibit 140. Faratronic: We expect Exhibit 141. Faratronic: Revenue

earnings to rise at a 9% CAGR in 2018-21e breakdown, 2018
Rmb mn Other business
Transformer Capacitor: Home
2%
700 20% 12% appliances
18% 21%
600 Capacitor: Others
16% 4%
500 14%
400 12%
Capacitor: NEV
10% 13%
300 8% Capacitor:
200 6% Illumination
4% 13%
100
2%
0 0% Capacitor: Solar / Wind Power
2016 2017 2018 2019E 2020E 2021E Capacitor: Industrial
15%
automation
Net profit YoY 20%
estimates)
Leading producer of film capacitor globally

Faratronic is a leading film capacitor producer globally with c10% market share globally and
c20% market share in China. The global capacitor market had a market size of RMB150bn in
2018. There are three key types of capacitors – film, electrolytic, and ceramic – and each uses
different material as the dielectric. The two conductive plates are separated by plastic film in a
film capacitor, by ceramic material in ceramic capacitor, and by an electrolyte and a metal oxide
69
October 2019
layer in electrolytic capacitor. Of the three, the film capacitor is the only one that can self-heal,
reducing the risk of a short circuit after overloading. In addition, a film capacitor can withstand
voltage up to 1000v, much higher than an electrolytic capacitor can (<600v). These
characteristics make it ideal for use in high-voltage power circuits. While the price of a film
capacitor is around 2-3x that of an electrolytic capacitor it lasts 2-3x longer, so the cost is
similar.
Exhibit 142. Film capacitor accounted for Exhibit 143. China film capacitor sales,
14% of global capacitor sales in 2018 2010-18
Global capacitor market (2018) RMB bn

10 40%
9 35%
Other capacitor 8 30%
6%
7 25%
6 20%
Film
capacitor
Electrolytic 5 15%
capacitor 4 10%
14%
33%
3 5%
2 0%
Ceramic 1 -5%
capacitor
47%
0 -10%
2010 2012 2014 2016 2018
China film capacitor sales YoY
Source: Company data, HSBC Qianhai Securities Source: Company data, Qianzhan research, HSBC Qianhai Securities
Exhibit 144. Film capacitor has self-repair ability and relative long life-span, ideal for high
voltage power circuit
Life-span ASP Size Frequency Self-healing Voltage Key supplier
Film capacitor Long High Median Median Yes HighFaratronic, TDK,
Kemet, Jianghai,
Tongfeng
Aluminum electrolytic capacitor Short Median Large Low No Median NCC, Nichicon,
Jianghai
Ceramic capacitor Long Low Small High No Low TDK
High dividend payout ratio to be maintained in 2019-21e

The company has maintained a high dividend payout ratio of 64-69% since 2015. We believe
this is due to its strong net cash position and positive FCF. The company has maintained a net
cash position in the last five years. As of end 2018, the company had a net cash balance of
RMB130m or a net gearing ratio of -5%. Given that the production facilities are running at a 50-
70% utilisation rate, we see limited need for further capacity expansion in the medium term. We
believe this should result in strong FCF and a further decline in the net gearing ratio in 2019-
21e, supporting a dividend payout at the current level of 65%.
70
October 2019
Exhibit 145. Faratronic: We expect positive Exhibit 146. Faratronic: Net gearing to
FCF in 2019-21e decline in 2019-21e
0.7
0%
0.6
0.5 -5%
0.4 -10%
0.3 -15%
Rmb bn
0.2 -20%
0.1 -25%
0.0
-30%
(0.1)
-35%
(0.2)
(0.3) -40%
2015 2016 2017 2018 2019E 2020E 2021E 2015 2016 2017 2018 2019E 2020E 2021E
Net debt / Equity
FCF
EV capacitor business to register a 42% revenue CAGR in 2018-21e

Due to its longer life-span, higher safety level, and better voltage tolerance, the film capacitor is
gradually replacing the electrolytic capacitor in EVs. For example, Toyota used electrolytic
capacitors in its Prius generation I model but replaced them with film capacitors in the
generation II model. Tesla Model 3 and BYD Qin also use film capacitors. Faratronic has over a
30% market share in supplying EV-use film capacitors globally. The company’s Dongfu plant
has sufficient capacity to supply film capacitors to c2m EVs per annum. Its customers include
leading global powertrain system suppliers like Bosch and Valeo. As discussed in the “China’s
component suppliers to benefit from the global EV boom” section on page 18, we forecast a
global EV film capacitor demand of RMB2.7bn in 2021e, translating into a sales contribution of
RMB816m for Fartronic, assuming a 30% market share.
Exhibit 147. Global EV film capacitor Exhibit 148. Faratronic: EV capacitor

demand forecasts, 2018-21e business revenue to rise on a 42% CAGR
in 2018-21e
k units RMB mn RMB mn
8,000 3,000 700 50%
7,000 45%
2,500 600
40%
6,000 500
2,000 35%
5,000 30%
400
4,000 1,500 25%
3,000 300 20%
1,000
2,000 200 15%
500 10%
1,000 100
5%
- - - 0%
2018 2019E 2020E 2021E 2016 2017 2018 2019E 2020E 2021E
Global EV film capacitor revenue
EV capacitor revenue YoY
BEV+PHEV sales (LHS)
Source: Company data, Bloomberg, HSBC estimates, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities
estimates estimates)
Solar & wind segment to see double-digit growth in 2018-21e

Film capacitors sold to solar and wind farms accounted for 15% of revenue in 2018. The
company has a c50% market share in film capacitors sold to solar projects. Its major customers
include Huawei and Sungrow, the top two solar inverter suppliers in the world. In general, 1GW
71
October 2019
of solar capacity corresponds to a RMB5m investment in film capacitors. Hence, based on our
global team’s forecast of 130GW of solar installations in 2020, we estimate a market demand of
RMB650m, translating into RMB325m of sales for Faratronic, given its 50% market share. This
is 28% above Faratronic’s solar and wind segment sales of RMB253m in 2018.
Exhibit 149. HSBC forecasts global PV Exhibit 150. Faratronic: Solar & wind
installations to rise at a 11% CAGR in business revenue to rise on a 16% CAGR
2018-20e in 2018-21e
140 RMB mn
500 25%
120
20%
solar installations (GW)
100 400
15%
80 300 10%
5%
60
200 0%
40
-5%
100
20 -10%
0 - -15%
2015 2016 2017 2018 2019e 2020e 2016 2017 2018 2019E 2020E 2021E
China ROW Solar & Wind business revenue YoY (RHS)
Source: CPIA, HSBC estimates, HSBC Qianhai Securities, E= HSBC estimates Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities
estimates)
Lower depreciation expense ratio should lift gross margin

Faratronic generated a 43% gross margin in 2018, well above the level of its capacitor peers
(Exhibit 151). We believe this is due to the company’s low cost structure. Given its long
operating history since the 1960s and its limited expansion in the last decade, many fixed
assets have been fully depreciated. As of end-2018, the book value of its fixed assets at
cRMB600m was only 43% of the investment cost of RMB1.4bn. As shown in Exhibit 152, the
depreciation & amortisation (D&A) charge as a percentage of revenue has declined from 9% in
2009 to 4% in 2018. We expect the ratio to fall to 2-3% in 2019-21e, lifting its gross margin
further.
Exhibit 151. Peers Comparison: Capacitor Exhibit 152. Faratronic: Gross margin to
segment’s gross margin, 2018 rise in 2019-21e on lower D&A ratio
Kemet 7.5% % of revenue

Nichicon 19.0% 50% 10%
Tongfeng 21.7% 40% 8%
Vishay 23.0% 30% 6%
Jianghai 27.3% 20% 4%
Aihua 33.0% 10% 2%
Faratronic 43.20% 0% 0%
2009 2011 2013 2015 2017 2019E 2021E
0% 20% 40% 60%
Gross margin (LHS) D&A as % of revenue
Gross Margin (2018)
Note: FY19 number for Nichicon and Kemet. We use film and electrolytic capacitor
segment’s gross margin for Kemet and capacitor segment’s gross margin for Vishay,
Tongfeng, Jianghai and Aihua Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities
Source: Company data, HSBC Qianhai Securities estimates)
72
October 2019
Investment concerns
Illumination business to shrink on rising LED substitution

Film capacitors used in light bulbs accounted for 13% of revenue in 2018. The business is
facing headwinds given the substitution of incandescent light (conventional bulbs) by Light
Emitting Diode (LED). LED light consumes less power and therefore requires less film capacitor
(only LED light with power over 8W requires a film capacitor). Hence, rising penetration of LED
light from 1% in 2011 to 60% in 2018 has led to a declining market for film capacitors used in
light bulbs. In 2016-18, sales of Faratronic’s illumination segment dropped by 26%. As the trend
of rising LED substitution is likely to continue, we expect the illumination segment’s sales to
dwindle in 2018-21e.
Exhibit 153. China: LED light penetration Exhibit 154. Faratronic: Illumination
climbing segment sales to half in 2018-21e
RMB mn
70%
LED Light Penetraion 350 0%
60% 300 -5%

250 -10%
50%
200 -15%
40%
150 -20%
30%
100 -25%
20%
50 -30%
10%
- -35%
0% 2016 2017 2018 2019E 2020E 2021E
2011 2012 2013 2014 2015 2016 2017 2018
China Illumination business revenue YoY
Source: Wind, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities
estimates)
A weak outlook for the home appliance business

Film capacitors used in home appliances accounted for 21% of revenue in 2018. We have a
bearish outlook for the business and expect revenue to drop by 10% y-o-y in 2019e on a soft
property market in China. In 7M19, China’s property area sold was down 1% y-o-y (Exhibit 155).
In addition, since capacitor demand has a positive correlation with power output, dropping
power output for home appliances driven by energy efficiency upgrades could also impact the
home appliance capacitor market negatively.
Exhibit 155. China property area sold: Exhibit 156. China household A/C:
Lacks growth y-t-d Production volume down 11% y-o-y in July
2019
YoY
60% mn units
16.0 14.1
50%
14.0 12.5
40%
30% 12.0
20% 10.0
10% 8.0
0% 6.0
-10% 4.0
-20%
2.0
-30%
Feb-12 Jun-13 Oct-14 Feb-16 Jun-17 Oct-18 -
July 2018 July 2019
China property area sold
Source: Wind, HSBC Qianhai Securities Source: ChinaIOL, HSBC Qianhai Securities
73
October 2019
Exhibit 157. China household A/C: Sales to Exhibit 158. Faratronic: We expect home
drop 4% in 2019e on soft property sales appliance segment sales to drop 10% y-o-y
in 2019e
180 RMB mn
mn units 400 40.0%
160 35.0%
350
140 30.0%
300 25.0%
120 250 20.0%
100 15.0%
200
10.0%
80 150 5.0%
60 100 0.0%
-5.0%
40 50 -10.0%
20 - -15.0%
2016 2017 2018 2019E 2020E 2021E
0
2014 2015 2016 2017 2018 2019E 2020E 2021E Home appliance business revenue YOY
China household A/C sales
Source: ChinaIOL, HSBC Qianhai Securities (E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities (E = HSBC Qianhai Securities
Exports to US subject to tariffs

Exports accounted for 35% of the company’s revenue in 2018. The illumination segment has
the highest exposure to overseas markets, followed by solar & wind and EV. This represents a
risk as the company’s exports to the US are subject to a 25% additional tariff. The company is
considering setting up assembly plant overseas to reduce the impact of the tariff.
Financial forecasts
Earnings forecasts
 Revenue: We forecast a revenue CAGR of 8% in 2018-21e, led by the EV segment. We
forecast a 42% revenue CAGR for the EV segment in 2018-21e, driven by new capacity
expansion and robust EV demand.
 Gross margin: We forecast gross margin to rise from 43.2% in 2018 to 45.1% in 2021e.
74
October 2019
Exhibit 159. Faratronic: Segments and full P&L forecasts

RMBm 2018 2019e 2020e 2021e 2018-21e CAGR
Turnover 1,721 1,743 1,915 2,155 8%
Capacitor 1,488 1,513 1,689 1,933 9%
-Home appliances 372 335 348 362 -1%
-Illumination 223 156 133 119 -19%
-Industrial automation 342 332 332 348 1%
-Solar / Wind Power 253 304 349 395 16%
-EV 223 312 453 634 42%
-Others 75 75 75 75 0%
Transformer 201 197 193 189 -2%
Other business 33 33 33 33 0%
Gross Profit 744 763 851 972 9%
Gross Margin 43.2% 43.8% 44.4% 45.1%
Business tax (23) (23) (26) (29) 8%

Admin. expenses (175) (177) (195) (219) 8%
Asset impairment losses / Fair value changes (20) 1 (3) (4) -43%
Other gain / (losses) 27 20 20 20 -9%
Net finance charges 16 4 11 17 1%

Share of JCE 0 0 0 0 NM
Profit before taxes 530 546 615 708 10%

Tax (70) (82) (92) (106) 15%
Minorities (8) (8) (9) (11) 9%

Net profit 452 456 513 590 9%

We expect the company to maintain net cash position in 2019-21e, with net gearing falling from
-5% in 2018 to -24% in 2021e. We expect the company to generate positive FCF in 2019-21e,
Exhibit 160. Faratronic: Net debt and cash flow forecasts

RMBm 2018 2019e 2020e 2021e
Net debt/(cash) (130) (351) (547) (756)
Net debt to equity -5% -13% -19% -24%
Cash from operations 579 519 491 534
Cash from investing (457) (10) (10) (10)
FCF 122 509 481 524
75
October 2019
Valuation and risks

capital ratio.
changes in working capital) to expand at a CAGR of 6% in 2018-29e, reflecting steady
growth in demand.
 Capital expenditure: We expect a steady capex of around RMB10-60m per annum in
2019-29e, reflecting steady investment in maintenance.
after 2029e.
Downside risks
 Weaker-than-expected global EV demand: Faratronic is expanding its production
capacity for EV-use film capacitors. We expect this business to contribute 30% of revenue
in 2021e. Therefore, weaker-than-expected global EV demand could negatively impact our
earnings forecasts.
 Renegotiation of supply contracts with auto makers: Unfavourable changes in contract
 Weaker-than-expected margin on intensified competition: Faratronic is facing
competition from Panasonic, Nichicon, and Murata. This could undercut prices and
adversely affect the company’s margins.
 Weaker-than-expected solar and wind installation: The solar/wind business accounted
for 15% of Faratronic’s revenue in 2018. Weaker-than-expected global solar and wind
installations could negatively impact our earnings forecasts.
 Worsening trade disputes: Exports accounted for 35% of Faratronic’s 2018 revenue.
Deepening global trade disputes could negatively impact overseas new orders.
76
October 2019
Exhibit 161. Faratronic: Discounted cash flow valuation

RMBm 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Profit after tax 342 402 437 460 464 522 601 649
y-o-y growth 17% 9% 5% 1% 12% 15% 8%
Net finance expense (11) (3) 8 (2) (4) (10) (16) (16)
Operating cash flow before W/C 404 454 506 525 534 570 644 692
changes
Changes in working capital (72) 9 (77) 39 (14) (79) (110)
Net operating cash flow 331 463 429 564 519 491 534 692
Capex (143) 150 (604) (457) (10) (10) (10) (40)
Free cash flow 188 612 (175) 107 509 481 524 652
Gross PPE 1,292 1,315 1,479 1,571 1,561 1,567 1,577 1,617
PV of FCF 524 600
Value
Profit after tax 701 757 795 835 877 921 967
y-o-y growth 8% 8% 5% 5% 5% 5% 5%
Net finance expense (17) (17) (18) (18) (19) (19) (20)
Operating cash flow before W/C 743 799 836 875 916 959 1,004
changes
Net operating cash flow 743 799 836 875 916 959 1,004
Capex (42) (44) (46) (49) (51) (54) (56)
Free cash flow 701 754 790 826 865 905 948 14,591
Discount Factor 0.85 0.78 0.72 0.66 0.61 0.56 0.52 0.52
Gross PPE 1,659 1,703 1,749 1,798 1,849 1,902 1,959

PV of FCF 594 589 567 546 526 507 489 7,527
Equity value 13,017
Assumptions
Risk free rate 2.5%
ERPch 6.5%
Beta 0.95
Cost of debt 5.0%
Income tax 15%
Debt/Capital 1%
WACC 8.6%
Terminal growth 2%
77
October 2019
Exhibit 162. Faratronic forward PE: Exhibit 163. Faratronic forward PB:
Trading around the historical average Trading around the historical average
35.0 6.0
30.0 5.0
25.0 4.0
20.0 3.0
15.0
2.0
10.0
1.0
5.0
0.0
-
PB Mean +1SD -1SD
PE Mean +1SD -1SD
Exhibit 164. Faratronic: Earnings sensitivity to gross margin and revenue changes,
2020e
_____________________________________ Gross margin ______________________________________
Revenue -3% -2% -1% 0% 1% 2% 3%
20% 19.7% 24.2% 28.7% 33.1% 37.6% 42.1% 46.6%
15% 12.0% 16.3% 20.6% 24.9% 29.2% 33.4% 37.7%
10% 4.3% 8.4% 12.5% 16.6% 20.7% 24.8% 28.9%
5% -3.5% 0.5% 4.4% 8.3% 12.2% 16.1% 20.0%
0% -11.2% -7.5% -3.7% 0.0% 3.7% 7.5% 11.2%
-5% -18.9% -15.4% -11.8% -8.3% -4.7% -1.2% 2.3%
-10% -26.6% -23.3% -19.9% -16.6% -13.2% -9.9% -6.5%
-15% -34.4% -31.2% -28.0% -24.9% -21.7% -18.5% -15.3%
-20% -42.1% -39.1% -36.1% -33.1% -30.2% -27.2% -24.2%
78
October 2019
Financials & valuation: Xiamen Faratronic Co Buy

EBITDA 581 616 662 750 EV/IC 4.1 4.1 4.0 3.8
Operating profit/EBIT 514 543 604 691 PB 4.0 3.8 3.5 3.2
Net interest 16 4 10 16 FCF yield (%) 1.2 5.2 4.9 5.3
PBT 530 546 614 707 Dividend yield (%) 3.0 3.0 3.4 3.9
HSBC Qianhai PBT 530 546 614 707 *Based on HSBC Qianhai EPS (diluted)
Net profit 452 456 513 590
Cash flow from operations 579 519 491 534 Environmental Indicators 12/2018a Governance Indicators 12/2018a
Capex -457 -10 -10 -10
Cash flow from investment -457 -10 -10 -10
Dividends -287 -293 -295 -332
Change in net debt 131 -221 -196 -208 CO2 reduction policy Yes Female board members (%) 0
FCF equity 122 509 481 524 Social Indicators Board members’ independence (%) 30
Tangible fixed assets 626 564 517 469 Diversity policy Yes
Cash & others 195 416 612 821 Source: Company data, HSBC Qianhai Securities
Total assets 3,003 3,176 3,428 3,734
Operating liabilities 377 378 403 439
Net debt -70 -290 -487 -695
RIC (Equity) 600563.SS Country China
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Revenue 1.4 1.2 9.9 12.5
EBITDA -0.6 5.9 7.6 13.3
Operating profit -2.0 5.6 11.3 14.5 61.00 61.00
PBT 3.0 3.1 12.4 15.2 56.00 56.00
HSBC Qianhai EPS 6.9 0.8 12.4 15.2 51.00 51.00
Ratios (%) 46.00 46.00
Revenue/IC (x) 0.8 0.7 0.8 0.9 41.00 41.00
ROIC 21.4 19.6 21.9 24.6 36.00 36.00
ROE 19.1 18.0 18.8 19.9 31.00 31.00
ROA 16.2 15.0 15.8 16.8
26.00 26.00
EBITDA margin 33.8 35.3 34.6 34.8
2017 2018 2019
Xiamen Faratronic Co Rel to CSI 300 Index
Net debt/equity -2.8 -10.9 -16.8 -21.9
Net debt/EBITDA (x) -0.1 -0.5 -0.7 -0.9 Note: Priced at close of 11 October 2019
Per share data (RMB) Source: HSBC Qianhai Securities
EPS Rep (diluted) 2.01 2.03 2.28 2.62

DPS 1.30 1.31 1.47 1.70
Book value 10.91 11.64 12.61 13.76
79
80
Exhibit 165. Faratronic: Company structure, August 2019
Xiamen Faratronic Development Co.

Xiamen SASAC
Worker Representative Assembly
100% 100%
Xiamen Faratronic Development Co.

Xiamen C&D Group
Public (collectively-owned enterprise)
10.11%
37.33%
52.56%
Faratronic (600563 CH) 11 individuals
60.00%
40.00%
Shanghai Meixing Electronics

Film Capacitor (Transformer)
October 2019

October 2019
Putailai (603659 CH)
 Top three anode materials supplier in China, with c17% market share
 Largest wet separator coating company in the country
 Initiate with a Hold rating and a TP of RMB56.10
Investment summary
Anode materials business to face industry headwinds

The company is an industry leader in both anode materials and wet separator coating in China.
Anode materials and separators are key parts of LIBs. The company is aggressively expanding
in the two areas to meet the demand from EV LIB makers. It plans to raise its anode materials
capacity from 50k tonnes now to 70-80k tonnes in 2021, and separator coating capacity from
500m sqm now to 1.5bn sqm in 2021. We expect this expansion to lead to a 17% earnings
CAGR in 2018-21e. However, given a forecast for overcapacity for the anode materials industry
in the next 2-3 years and a deteriorating product mix, we expect the company’s gross margin to
drop from 32% in 2018 to 28% in 2021e.
Exhibit 166. Putailai: Revenue breakdown, Exhibit 167. Putailai: We expect a 17%
2018 earnings CAGR in 2018-21e
Separator Aluminum-plastic Rmb mn

coating films 900 300%
10% 2% 800 250%
700
200%
Graphitization 600
11% 500 150%
400 100%
300
50%
200
100 0%
0 -50%
Li-ion battery 2016 2017 2018 2019E 2020E 2021E
Li-ion battery
equipment (coater) anode materials Net profit YoY
17% 60%
E = HSBC Qianhai Securities estimates

Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities estimates
Leading player in artificial graphite anode

With a 24% market share in 2018, Putailai is the largest supplier of artificial graphite in China,
followed by Kaijin and Shanshan. As discussed on page 24, we expect artificial graphite’s share
of global anode production to rise from 69% in 2018 to 78% in 2021e. We expect this, together
81
October 2019
with planned capacity expansion, to lift Putailai’s global market share in anode materials from
12% in 2018 to 15% in 2021e (Exhibit 168). The company registered a 34% gross margin for
the anode materials business in 2018, above the average gross margin of 30% for peers
(Exhibit 33). We believe this is due to the price premium for its products and higher utilization
rate for its plants (nearly 100% in 2018). As shown in Exhibit 170, Putailai’s anode materials are
priced close to the high-end of the industry range in 2018.
Exhibit 168. Global anode materials: Exhibit 169. China artificial graphite anode
Putailai’s market share has risen from 3% market share, 2018
in 2014 to 12% in 2018
XFH ZETO
18% XC graphite Putailai
6% 4%
16% 7% 24%
14%
12%
10% Others
8% 9%
6%
4% BTR
9%
2%
0%
2014 2015 2016 2017 2018 2019E 2020E 2021E Kaijin new energy
Shanshan 23%
Putailai's market share 18%
Source: GGII, HSBC Qianhai Securities Source: GGII, HSBC Qianhai Securities
Exhibit 170. Anode materials suppliers: Exhibit 171. Anode materials suppliers:
Anode material ASP comparison, 2018 Capacity utilization comparison, 2018
SZ Sinuo 33.3 SZ Sinuo

ZETO
Kaijin New Energy 37.6
Shanshan
XFH 43.1
BTR
Shanshan 57.2 Kaijin new energy
Putailai
Putailai 67.7
XC graphite
Hitachi chemical 110
XFH
0 20 40 60 80 100 120 0% 20% 40% 60% 80% 100% 120%
ASP (000 Rmb/t) Capacity utilization
Largest wet separator coating company in China

Wet separators need coating to give them their heat resistance and strength, and Putailai is the
largest wet separator coating company in China. Its key customers include CATL (50% of its
separators are coated by Putailai). Putailai plans to expand its coating capacity from 300m sqm
at end-2018 to 1,200-1,400m sqm by end-2019 (600m sqm of the additional capacity is for
CATL). We expect Putailai’s separator coating revenue to rise at a 63% CAGR in 2018-21e,
driven by the capacity expansion and rising share of the wet process share of overall separator
production.
82
October 2019
Exhibit 172. Separator: Pros and cons of different production technologies

Pros Cons
Dry process Cheaper and easier to produce Lacks flexibility in design
Wet process Can be made thinner and of lower short- Harder to produce and more expensive
circuit rate
Exhibit 173. China wet separators: 18% Exhibit 174. Putailai: Separator coating
were coated by Putailai in 2018 segment enjoys a high gross margin
mn in sqm Putailai coating as % of wet 50% GM 45% 45%
42% 41%
1,400 20% 45% 40%
37%
1,200 40% 34%
33%
15% 35%
1,000
30%
800 25%
10%
600 20%
400 5% 15%
200 10%
5%
0 0%
2017 2018 0%
2014 2015 2016 2017 2018 2019E 2020E 2021E
China LIB wet separator output
Putailai's market share
Note: The price is for 16um domestic medium level wet separator Note: E = HSBC Qianhai Securities estimates
Source: Wind, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
Investment in upstream suppliers should lower cost volatility of anode materials segment
For Putailai’s anode materials segment, direct material’s share of total cost is high at 41% in
2018 (Exhibit 176). Hence, the gross margin of the anode materials business has declined from
39% in 2017 to 23% in 1H19 when raw material needle coke prices were rallying. To solve this
problem, in June 2019 the company took a 28.6% stake in Zhenxing, which has 40k tonnes of
needle coke capacity (c70% of Putailai’s demand in 2018). In addition, to reduce the
graphitisation cost (40-60% of total cost), the company plans to increase its graphitisation
capacity from 10k tonnes in 2018 to 60k tonnes by the end-2019. We believe these could lead
to a less volatile gross margin for the anode materials business.
Exhibit 175. Putailai: Anode materials’ cost Exhibit 176. Putailai: Direct material’s cost
breakdown, 2014-18 share can be as high as 43%
60 000 Rmb / tonne Direct material's cost share
50%
45%
40 40%
35%
30%
20 25%
20%
15%
0 10%
2014 2015 2016 2017 2018 5%
Manufacturing cost (crash, granulate, carbonize) 0%
Processing (graphitize)
Labor 2014 2015 2016 2017 2018
Direct material (mostly needle coke)
83
October 2019
Employee incentive programme should boost performance

On 5 December 2018, the company completed the issuance of 2m incentive shares (0.46% of
outstanding shares) to 170 key personnel. The lock-up period will expire in five batches for 110
people and three batches for the other 60. As conditions to unlock the shares involve revenue
and operational KPIs (Exhibit 177), we expect the share incentive programme to boost the
performance of the company. In addition to the share incentive programme, key management
(General Manager, R&D Director, Board Secretary, and management of major business lines)
have stakes in Ningbo Huineng Investment (Limited partnership), which owns 11.8% of the
listco.
Exhibit 177. Putailai: Details of share incentive programme, 2018

Items Details
Date Draft announced in October 2018, completed in Dec. 2018
No. of shares (m) 2.0
# of employee involved 170
Source of incentive stock Private placement
Execution price Rmb22.59/share
Conditions to unlock For middle management and core position staff (110 people) For important position staff (60 people)
1st lock-up expiry: 2018 Revenue≥RMB2,700m 1st lock-up expiry: 2018 revenue≥
RMB2,700m
2nd lock-up expiry: 2019 Revenue≥RMB3,200m 2nd lock-up expiry: 2019 revenue≥
RMB3,200m
3rd lock up expiry: 2020 Revenue≥RMB3,900m 3rd lock up expiry: 2020 revenue≥
RMB3,900m
4th lock-up expiry: 2021 Revenue≥RMB4,700m
5th lock-up expiry: 2022 Revenue≥RMB5,600m
Lock-up expiration starts 20% on 11/12/2019, 20% on 11/12/2020, 20% on 30% on 11/12/2019, 30% on
11/12/2021,20% on 11/12/2022 and 20% on 2/20/2023 11/12/2020, and 40% on 11/12/2021
84
October 2019
Investment concerns
LIB anode materials’ margin for EV is lower than that for consumer electronics
In 2018, c70% of Putailai’s anode materials sold was used for consumer electronics batteries,
and the rest for EV batteries. We expect the share of the former to drop to c40% by 2020e due
faster growth in the EV segment. However, the consumer electronics segment has a gross
margin 5-10ppt higher than that of the EV segment. Hence, the change in product mix is likely
to cause a decline in the gross margin of the anode materials business.
Exhibit 178. Putailai: Anode materials gross Exhibit 179. Putailai: Anode materials
margin to decline in 2019-21e revenue breakdown by downstream, 2018
GM
45% EV battery
38% 36% 39%
40% 34% 30%
35%
30%
27% 25% 27% 25%
25%
20%
15%
10%
5%
0% Consumer electronics
2014 2015 2016 2017 2018 2019E 2020E 2021E battery
70%
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities
Overcapacity concern for the anode materials industry in the next 2-3 years
We forecast a capacity of 610k tonnes for the China anode materials industry in 2021e, up from
270k tonnes in 2018e, based on the announced capacity expansion plans of key industry
players (Exhibit 182). This will be higher than our forecast China’s anode materials demand of
521k tonnes, implying industry overcapacity.
Exhibit 180. Anode materials: Industry Exhibit 181. Putailai: Anode materials
capacity to double in 2018-21e capacity to rise over 130% in 2018-20e
Capacity: tonnes
tonnes
700,000 80,000
610,000 70,000 70,000
600,000 70,000
500,000 60,000
50,000
400,000 50,000
270,000 40,000
300,000 30,000
30,000
200,000
20,000
100,000
10,000
-
-
2018 2021E
2018 2019E 2020E 2021E
China anode material capacity
Source: GGII, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
85
October 2019
Exhibit 182. Anode materials: Capacity plan of major players

Tonnes 2018 2021e
BTR 60,000 140,000
Putailai 30,000 70,000
Shanshan 50,000 120,000
XC graphite 12,000 50,000
Kaijin new energy 30,000 80,000
XFH 15,000 60,000
ZETO 16,000 21,000
Potential conversion of CB could be EPS dilutive

In March 2019, the company proposed to issue convertible bonds (CBs) of RMB870m to fund its
capacity expansion in separator coating and anode materials. Should the CB be issued and be
eventually converted into shares, we expect a potential dilution to our EPS forecasts.
Diversified business exposure could spread resources too thin

Putailai is exposed to four major business lines which do not share a clear synergy. While this
could be defensive in cyclical downturns, it also could lead to difficulties in resources allocation
in cyclical upturns. In nearly all of the segments, the company is facing strong competition from
domestic and overseas players (Exhibit 183).
Exhibit 183. Putailai: Keen competition on every front

Segment Competitors
Anode materials Kaijin new energy, Shanshan, BTR
Coated diaphragms Semcorp
Coater Lead, Yinghe
Aluminum-laminated film China Daoming, Selen
Source: HSBC Qianhai Securities
Financial forecasts
Earnings forecasts
We expect a 17% earnings CAGR in 2018-21e, down from 82% in 2015-18e. We base our
 Revenue: We forecast a revenue CAGR of 26% in 2018-21e, driven by strong growth of
both Putailai’s anode materials segment and separator coating segment. We expect the
anode materials segment and the separator coating segment to register 28% and 63%
revenue CAGR in 2018-21e respectively.
 Gross margin: We forecast gross margin to decrease from 32% in 2018 to 28% in 2021e,
due to downward ASP pressure on anode materials.
86
October 2019
Exhibit 184. Putailai: Segments and full P&L forecasts

RMBm 2018 2019e 2020e 2021e 2018-21e CAGR
Turnover 3,311 5,097 5,904 6,675 26%
Li-ion battery anode materials 1,981 3,368 3,840 4,147 28%
Li-ion battery equipment (coater) 553 581 610 640 5%
Graphitisation 381 381 381 381 0%
Separator coating 319 675 962 1,371 63%
Aluminum-plastic films 59 75 94 119 26%
Others 18 18 18 18 0%
Gross Profit 1,057 1,389 1,694 1,878 21%

Li-ion battery anode materials 672 854 1,034 1049 16%
Li-ion battery equipment (coater) 181 190 200 210 5%
Graphitisation 43 43 43 43 0%
Separator coating 145 284 394 548 56%
Aluminum-plastic films 12 15 19 24 26%
Others 5 5 5 5 0%
Gross Margin 31.9% 27.3% 28.7% 28.1%
Business tax (14) (21) (25) (28) 26%

Admin. expenses (267) (382) (443) (501) 23%
Asset impairment losses / Fair value changes (53) (5) (35) (40) -9%
Net finance charges (48) (81) (80) (79) 18%

Share of JCE (10) (10) (10) (10) 0%
Profit before taxes 668 853 1,040 1,136 19%

Tax (67) (129) (158) (172) 37%
Minorities (6) (8) (9) (10) 17%

Net profit 594 716 873 954 17%

We forecast that the company can maintain a net cash position in 2019-21e, and its net debt to
equity ratio to fall from -8% in 2018 to -29% in 2021e, supported by strong OCF and moderate
capex.
Exhibit 185. Putailai: Net debt and cash flow forecasts

RMB mn 2018 2019e 2020e 2021e
Net debt/(cash) (248) (702) (966) (1,472)
Net debt to equity -8% -19% -22% -29%
Cash from operations 326 1,269 1,158 1,347
Cash from Investing (929) (550) (600) (500)
FCF (603) 719 558 847
87
October 2019
Valuation and risks

2020e PE of 28x. Our target price implies upside of 11%. We initiate with a Hold rating, built on
our expectation of an overcapacity in the anode materials industry. Key assumptions in our
model include the following.
capital ratio.
changes in working capital) to expand at a CAGR of 7% in 2018-29e, reflecting solid growth
in demand.
 Capital expenditure: We assume a higher capex of around RMB0.55bn in 2019-21e, and
a steady capex of around RMB0.2bn per annum in 2022-29e, reflecting steady
maintenance capex.
after 2029.
Upside risks
 Stronger-than-expected global EV sales on additional policy supports: Putailai has
c40% revenue exposure to the EV industry in 2018. Hence, a stronger-than-expected
global EV demand could positively impact our earnings forecasts.
 Better-than-expected market share in the anode materials market: This could positively
impact our earnings forecasts for the anode materials business.
 Stronger-than-expected demand for wet separator coating: This could positively impact
our earnings forecasts for the separator coating business.
 Faster-than-expected expansion of the equipment product portfolio: This could
positively impact our earnings forecasts for the equipment business.
Downside risks
 Weaker-than-expected global EV sales on lack of policy supports: This could
negatively impact our earnings forecasts.
 Competition in anode materials business stronger than expected: Key players in
anode materials are expanding capacity. This could lead to a more competitive market and
adversely affect the company’s margins.
 The advance of technology could be disruptive: The separator market could experience
a decline should the solid-state battery, which does not need separator materials, become a
dominant battery technology in the future.
 Selling pressure from big shareholders: Putailai has 240m shares (55% of shares
outstanding), held by the management and the controlling shareholders, to be unlocked in
November 2020. The sale of a significant portion of these shares could pressure share
prices.
88
October 2019
Exhibit 186. Putailai: Discounted cash flow valuation

RMBm 2015 2016 2017 2018 2019e 2020e 2021e 2022e
Profit after tax 133 354 452 601 723 883 964 1,012
y-o-y growth 167% 28% 33% 20% 22% 9% 5%
Operating cash flow before W/C changes 146 372 503 731 865 1,053 1,162 1,221
Changes in working capital (202) (164) (493) (365) 394 95 176
Net operating cash flow (56) 208 11 366 1,259 1,148 1,338 1,221
Capex (126) (168) (396) (929) (550) (600) (500) (200)
Free cash flow (183) 41 (385) (563) 709 548 838 1,021
Gross PPE 119 265 636 1,016 1,653 2,220 2,814 3,014
PV of FCF 838 953
RMBm 2023E 2024E 2025E 2026E 2027E 2028E 2029E Terminal
Value
Profit after tax 1,063 1,116 1,172 1,207 1,243 1,280 1,319
y-o-y growth 5% 5% 5% 3% 3% 3% 3%
Operating cash flow before W/C changes 1,283 1,346 1,412 1,458 1,503 1,550 1,598
Capex (202) (204) (206) (208) (210) (212) (214)
Free cash flow 1,081 1,142 1,206 1,249 1,293 1,338 1,383 27,323
Discount Factor 0.87 0.81 0.76 0.71 0.66 0.62 0.57 0.57
Gross PPE 3,216 3,420 3,626 3,834 4,044 4,256 4,471

PV of FCF 941 928 915 884 854 824 795 15,709
Equity value 24,607
Assumptions
Risk free rate 2.5%
ERPch 6.5%
Beta 0.83
Cost of debt 5.0%
Income tax 15%
Debt/Capital 20%
WACC 7.2%
Terminal growth 2%
89
October 2019
Exhibit 187. Putailai forward PE: Trading Exhibit 188. Putailai forward PB: Trading
below the historical average below the historical average
50.0 10.0
45.0 9.0
40.0 8.0
35.0 7.0
30.0 6.0
25.0 5.0
20.0 4.0
15.0 3.0
10.0
2.0
5.0
1.0
-
Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19
0.0
Nov-17 May-18 Nov-18 May-19 Nov-19
PE Mean +1SD -1SD
PB Mean +1SD -1SD
Exhibit 189. Putailai: Earnings sensitivity to gross margin and revenue changes, 2020e
_____________________________________ Gross Margin ______________________________________
Revenue -3% -2% -1% 0% 1% 2% 3%
20% 16.6% 23.9% 31.2% 38.5% 45.8% 53.1% 60.4%
15% 7.9% 14.9% 21.8% 28.8% 35.8% 42.8% 49.8%
10% -0.9% 5.8% 12.5% 19.2% 25.9% 32.6% 39.3%
5% -9.6% -3.2% 3.2% 9.6% 16.0% 22.4% 28.8%
0% -18.3% -12.2% -6.1% 0.0% 6.1% 12.2% 18.3%
-5% -27.0% -21.2% -15.4% -9.6% -3.8% 1.9% 7.7%
-10% -35.7% -30.2% -24.7% -19.2% -13.8% -8.3% -2.8%
-15% -44.4% -39.2% -34.0% -28.8% -23.7% -18.5% -13.3%
-20% -53.1% -48.2% -43.3% -38.5% -33.6% -28.7% -23.9%
90
October 2019
Financials & valuation: Shanghai Putailai Tech Hold

EBITDA 786 994 1,210 1,334 EV/IC 8.2 7.8 6.7 6.1
Operating profit/EBIT 715 934 1,120 1,215 PB 7.5 6.4 5.3 4.6
Net interest -48 -81 -80 -79 FCF yield (%) -2.8 3.3 2.5 3.9
PBT 668 853 1,040 1,136 Dividend yield (%) 0.8 1.0 1.2 1.3
HSBC Qianhai PBT 668 853 1,040 1,136 *Based on HSBC Qianhai EPS (diluted)
Net profit 594 716 873 954
Cash flow from operations 326 1,269 1,158 1,347 Environmental Indicators 12/2018a Governance Indicators 12/2018a
Capex -929 -550 -600 -500
Cash flow from investment -929 -550 -600 -500
Dividends -187 -183 -215 -262
Change in net debt 464 -455 -263 -506 CO2 reduction policy Yes Female board members (%) 0
FCF equity -603 719 558 847 Social Indicators Board members’ independence (%) 40
Cash & others 1,334 1,789 2,052 2,558 Source: Company data, HSBC Qianhai Securities
Total assets 6,660 8,492 9,604 10,823
Net debt -345 -800 -1,063 -1,569
RIC (Equity) 603659.SS Country China
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change
Revenue 47.2 53.9 15.8 13.1 Price relative
EBITDA 33.9 26.4 21.8 10.2
PBT 25.5 27.8 22.0 9.2
HSBC Qianhai EPS 15.1 20.2 22.0 9.2 69.00 69.00
Ratios (%) 59.00 59.00
Revenue/IC (x) 1.6 1.9 2.0 2.1 49.00 49.00
ROIC 31.2 29.9 32.7 32.0
39.00 39.00
ROE 22.2 22.5 23.2 21.5
ROA 10.9 9.5 9.8 9.4 29.00 29.00
EBITDA margin 23.7 19.5 20.5 20.0 19.00 19.00
Operating profit margin 21.6 18.3 19.0 18.2 2017 2018 2019
EBITDA/net interest (x) 16.5 12.2 15.1 16.9 Shanghai Putailai Tech Rel to CSI 300 Index
Net debt/equity -11.1 -21.8 -24.5 -31.2
Net debt/EBITDA (x) -0.4 -0.8 -0.9 -1.2
CF from operations/net debt Source: HSBC Qianhai Securities

EPS Rep (diluted) 1.37 1.65 2.01 2.19
DPS 0.42 0.49 0.60 0.66
Book value 6.69 7.92 9.43 11.02
91
92
Exhibit 190. Putailai: Company structure, August 2019
Chen Wei Liang Feng

18 partners including
Shao Xiaomei
Shao
Xiaomei 84.50% 1.07% 98.93%
15.0% 0.50%
Ningbo Shengyue Investment Ningbo Huineng Investment

(Limited partnership) (Limited partnership)
Public 10.88% 30.12%
13.05% 11.95%
34.00%

Putailai (603659 CH)
（002129.SZ)

Li-ion battery anode Li-ion battery Graphitization Coated diaphragms
materials process equipment
October 2019

October 2019
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or
issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Corey Chan, Yuqian Ding, and Dun Wang
Important disclosures
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93
October 2019
Rating distribution for long-term investment opportunities

As of 17 October 2019, the distribution of all independent ratings published by HSBC is as follows:
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For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current
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HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price date Disclosure

SHENZHEN YINGHE TECHNOLOGY 300457.SZ 24.29 16 Oct 2019 7
ZHEJIANG SANHUA CO 002050.SZ 13.19 16 Oct 2019 7
Source: HSBC
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company.
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and/or paid compensation to HSBC in respect of investment banking services.
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and/or paid compensation to HSBC in respect of non-securities services.
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capital, calculated according to the SSR methodology.
94
October 2019
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October 2019
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Product, HSBC Qianhai Securities
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Li Quan
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Main contributors
Corey Chan Corey Chan joined HSBC Qianhai Securities Limited in 2018 as Head of A-share Infrastructure
Head, A-share Infrastructure & Renewables Research. Previously, Corey worked as an equity analyst for a US investment bank in Hong Kong,
Research where he focused on the China capital goods sector. He holds a bachelor of finance degree from
HSBC Qianhai Securities Limited the University of Hong Kong.
corey.chan@hsbcqh.com.cn
+86 21 6081 3801
Dun Wang Yuqian Ding

Analyst, A-share Infrastructure & Head of A-share Auto Research
Renewables HSBC Qianhai Securities Limited
HSBC Qianhai Securities Limited yuqian.ding@hsbcqh.com.cn
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HSBC-China Electric Vehicle Components Initiate Coverage Plugged in and Ready For The Boom

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HSBC-China Electric Vehicle Components Initiate Coverage Plugged in and Ready For The Boom

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Equity Research Report

China Electric Vehicle

We forecast an industry upcycle in

Strong growth in component orders

Initiate on five A-shares in the supply

Why read this report?

 We are bullish on the global electric vehicle component market over

The key messages

Where our views differs from consensus

Why read this report? 1

Facts and figures 4

Moving into the fast lane 6

What the EV boom means for

China EV component makers

Facts and figures

Growth is driven by sustained policy

38% 41% 44%

40-70% We expect a global EV boom to drive

Recommended reading ...

Moving into the fast lane

 Global EV demand is set to boom

Exhibit 1. Global policies to encourage the adoption of EV

b) CAFC credit regime

Exhibit 3. China: NEV production y-t-d is Exhibit 4. EV COGS breakdown, 2018

Exhibit 5. Chinese EV component Exhibit 6. International counterparts: R&D

Initiate coverage of five A-share EV component makers

Faratronic (600563 CH, RMB43.80, Buy, TP RMB57.6): We expect rising EV penetration,

Exhibit 7. Market share of the five EV component suppliers, 2018

Eve (EV LIB) 1%

Putailai (LIB equipment) 3%

Putailai (Anode) 12%

Yinghe (LIB equipment) 11%

Sanhua (EV heat management) 11%

Faratronic (EV capacitor) 30%

Eve (Primary Li battery) 8%

0% 10% 20% 30% 40% 50% 60% 70%

Exhibit 8. PE comparison, 2020e Exhibit 9. Cash flow comparison, 2018

Potential company-specific catalysts

Where we are different from consensus

Exhibit 10. HSBC Qianhai Securities estimates vs consensus

Sector catalysts and downside risks

Downside risks: (1) Weaker-than-expected global EV sales on lack of additional policy

Exhibit 11. ESG indicators, 2018

Battery equipment suppliers

Battery anode suppliers

Auto heat management product suppliers

Equities ● Electrical Equipment

Exhibit 13. Key suppliers along the EV supply chain

Capacitor: Motor controller:

Equities ● Electrical Equipment

Valuation and risks

Valuation methodology Risks to our view

Valuation methodology Risks to our view

Note: Priced at close of 11 October 2019

What the EV boom means for

 We expect a surge in demand for EV components. This should

China’s component suppliers to benefit from the global EV boom

A 30% CAGR in the global plug-in vehicle deliveries in 2018-25e

8,000 k units 8.0%

Key EV component and equipment demand

GWh RMB bn EVE energy Others

k tonnes RMB bn Share by weight

 Heat management: The heat management system of an EV is more sophisticated than