EV INDUSTRY UPDATE:MOMENTUM PICKING UP AFTER A SLOWER Q1

　　According to CAAM figures, May output and sales of EVs reached 37,000 and 35,000, respectively, soaring 131.3% and 128% yearon-year (YoY), among which output and sales of pure EVs were 29,000 and 26,000, up by 177% and 161.6%, and output and salesof PHEVs reached 9,000 and 9,000, up by 49.3% and 68.7%. In terms of passenger EVs, sales growth momentum gradually recoveredafter a weak Q1. CPCA data revealed that May sales of passenger EVs reached 26,208, up 141% YoY and 27% month-onmonth(MoM). Looking back over previous years, the sales trend of EVs always follows an accelerated upward direction in the secondhalf. The temporary cooling down in Q1 is therefore within market expectations, while the gradual recovery in April and May, featuredby strong sequential growth, is an encouraging sign. By product mix, 9,045 PHEV passenger cars were sold in May (+97% YoY and+31% MoM), and 17,163 pure passenger EVs were sold in May (+162% YoY and +25% MoM). Pure EVs had stronger momentum inthe sector, with a ~66% market share in Q2 2016, compared to 59% in Q215. Geely [0175.HK] sold 1000 Emgrand EVs (released lastNov) in May (+ 66% MoM), for a total of 2461 in 5M16. BYD’s [1211.HK] e6 recorded 313% YoY sales volume growth in 5M16, 1172e5s were sold in May (+66% MoM), and 681 Qin EVs (launched in March) were sold in Mar-May. In the PHEV passenger car segment,BYD dominated the market with a 73.4% share in 5M16 sales, with the BYD Qin up 121% MoM in May, while Tang sold 15,615PHEVs in 5M16. On June 16, MIIT released the eighth batch of EVs exempt from the car-purchasing tax, covering 414 types of cars.

　　These include 39 passenger vehicles (29 pure EVs and 10 PHEVs), 268 EV buses (186 pure EV buses and 82 PHEV buses), 3 pureEV trucks, 103 pure EV SPVs and 1 pure electric forklift. The BYD Song and Yuan EV were listed in this batch.

　　The verification and review of the fourth batch of automotive lithium battery makers is complete, and the results are expected to beannounced in the near term. They are expected to benefit more domestic battery manufacturers. The data reveals that 4M16 outputof LFP batteries reached 2.6GWh, accounting for a 75% market share. NMC batteries accounted for 23% of the less than 1GWh market.

　　Hong Kong-listed battery plays, including BYD [1211.HK], Coslight Technology [1043.HK], FDG [0729.HK] and Tianneng Power[0819.HK], were in the first three batches. MIIT is making the entry rules for EV makers and their products (currently at the revisiondraft stage for solicitation of comments), which are expected to be released as early as Q3 2016. This will further help mark et consolidationand raise the overall product standard, benefiting existing players with an established track record and good product quality.

　　Q3 is normally characterized as the low season for traditional fueled automobiles. Fundamentals for the EV sector remain intact, withgrowth still on track with the relevant subsidy policies settled. Inspiring May sales figures and the potential release of th e fourth batchof auto power batteries in late June has regained market attention. However, the risk-off mode and lack of trading volume still dominatenear-term price performance amid weak broad equity market sentiment filled with uncertainty, so we do not expect sizable fu ndflows to some small-mid caps in the Hong Kong market at the moment . Some industry concern has been factored into share prices,especially considering the upcoming blackout period with less company-specific news flow. We will continue to monitor the sector andprovide updates for investors.