cs auto 9.15.2010 global update 88 pages

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

15 September 2010 Global

Equity Research

Automotive CONNECTIONS SERIES

Overdue Multiple Conversion ■ A global outlook is overdue: We believe that better visibility will trigger

valuations to follow business reality: globalisation in business models should lead to multiple conversion. We show that this has already happened in other sectors and within the automotive supplier base, but for carmakers global valuation spreads are in our view far from reasonable.

■ Fundamental scoring vs valuation reality: We present a globally standardised Enterprise Value based valuation methodology, which highlights that European OEMs are exceptionally cheap vs global peers. We have developed a global scoring model in order to analyse whether observed valuation differences are justified by fundamentals. This is clearly not the case—measures such as growth, margins, earnings volatility and regional diversification highlight that the financial market appears to attribute valuations which bear little relation to companies’ profiles.

■ Europe cheap, US expensive, stock picking in Asia: We favour German carmakers BMW (a European Focus List stock), Daimler and VW (all Outperform) from a global perspective. Ford, the only investable US OEM currently, looks too expensive and we rate the stock Underperform. We see no good fundamental reason why Ford shares are trading at a 2011E EV/sales multiple that is 4x higher than VW and 2x higher than BMW (on 2011E EV/EBITDA, BMW is on 1.5x versus Ford at 4.6x). We hope our findings help investors better assess valuations of imminent flotation of Ford’s US peers. In Asia, Tata and Dongfeng both Outperform) score well on our analysis, while Korean makers appear to offer limited valuation upside.

Figure 1: Credit Suisse Scorecard / Valuation Framework

Honda

Dongfeng

Hyundai

KiaMaruti

DaimlerBMW

Volkswagen

Nissan

Tata

Fiat

Ford

RenaultGeely

BYD

PSA

Toyota

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

456789101112CS Global Auto Score

Pre

miu

m /

(Dis

coun

t) on

EV/

Sale

s ba

sis

Premium valuation / challenged business

Challenged business, attractive multiple ?Strong fundamentals, attractive multiples

Premium valuation, strong fundamentals

Source: Company data, Credit Suisse estimates, 2012 data, IBES estimates for Nissan,

Honda, Toyota

The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients.

Research Analysts

Arndt Ellinghorst 44 20 7888 0295

[email protected]

Christopher J. Ceraso, CFA 212 538 4529

[email protected]

Govindarajan Chellappa 9122 6777 3715

[email protected]

Henry Kwon 822 3707 3732

[email protected]

HungBin Toh 852 2101 7481

[email protected]

Specialist Sales: David Arnold 44 20 7883 3549

[email protected]

In most of our conversations, investors express their dissatisfaction with the sell side's lack of global scope. This report and the work behind it are designed to put more visibility into material global valuation differences and to lead the debate on why these shouldn’t occur.

15 September 2010

Automotive 2

Table of contents From Divergence to Convergence? 3

Credit Suisse global automotive research 4 Large performance differential across the globe 7 Where are global auto stocks trading currently? 7 What is the right multiple to pay? 11 Multiple Convergence – already the case with suppliers 13 Multiple Convergence – a reality in other global industries 14

Where do we stand on volumes? 17 Key global trends by region 19

Europe - without incentives 19 US – Where is underlying demand? 20 Brazil – more moderate growth ahead 22 Japan stagnated, ASEAN going strong 23 Korea: Advancing to the next stage 24 China – Subsidies, subsidies, subsidies... a structural theme longer-term 27 India: How to make money with low-cost vehicles 31

Emission regulation 36 EU legislation: Leader in CO2 action 36 US regulation: 156g CO2/km by 2016 38 Technology drives costs drives need for price hikes 39

Demographics: Selling cars in the old world is a phase-out model 41 From “Baby Boomers” to “Empty Nesters“ 43 40% of car buyers older than 60 years by 2020E 43 Replacement demand: Drive less – replace less 45 Older vs. Younger Drivers 46 Premium OEMs need to transform 47 Corporate business set to reach its limits 49 The quintessence: Premium makers need to redefine their business model 50

Company Overviews 52 BMW 53 Daimler 55 Fiat 57 PSA 59 Renault 61 Volkswagen 63 Ford 65 BYD 67 Dongfeng Motors 69 Geely Automobile 71 Maruti Suzuki 73 Tata Motors 75 Hyundai Motor 77 Kia Motors 79

Global Autos at Credit Suisse 81

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Automotive 3

From Divergence to Convergence? ■ Material valuation divergence: Based on our standardised global valuation analysis,

we monitor material valuation differences comparing carmakers’ valuations across the globe. This comes despite a truly globalised nature of the automotive industry –almost all players are active in similar end-markets, but the financial market attributes valuations which bear little relation to companies’ fundamental profiles. When we compare global valuation differences across other industries, other sectors including the automotive supplier sub-sector have seen emerging market premiums contract substantially since 2009 while the opposite appears to have happened at carmakers.

■ Credit Suisse Global Scoring doesn’t support valuation anomaly: We present a global scoring model in order to figure out whether observed valuation differences can be justified by fundamentals. This is clearly not the case – measures such as growth, margins, earnings volatility, regional diversification send a clear message: some EM players, Korean makers and Ford look relatively overvalued. We see best value in German premium names BMW (Outperform, TP €60) and Daimler (Outperform, TP €55). VW (Outperform, TP €102) is our best global mass market pick.

■ BRIC valuations justified? Valuations of emerging market OEMs appear stretched versus the ’old world’ given that in a global industry these companies are tapping into the same sources of earnings. Our analysis shows that neither growth nor profitability justifies the material premium of some emerging market OEMs versus German peers.

■ Detroit’s vehicles might be cheap – it’s the companies’ equity that looks expensive: We see no reason why Ford in the US should be trading at 4x the valuation compared to VW in Europe based on 2011E EV/sales (or 2x the 2011E EV/sales multiple BMW is trading on). On EV/EBITDA Ford trades on 4.6x versus VW at 1.3x, BMW at 1.5x and Daimler at 2.6x.

■ Germany offers best risk/reward globally on our analysis: We favour German carmakers BMW, Daimler and VW from a global perspective. In our view, current valuations do not reflect that: (1) Emerging markets already contribute materially to their business (c15% of PBT) and that this will likely increase to >30% in a few years; (2) Their strong balance sheet and residual values enable them to run highly profitable Financial Services businesses, which offer major support to the autos business; (3) Unlike others, the German carmakers restructured their cost base during the downturn; and (4) BMW/Daimler/VW had combined net cash of €35bn end of H1 10, which not only highlights strong fundamentals but is also one reason for their exceptionally low EV valuation multiples in a global context.

Figure 2: Growth expectations vs. current valuations on 2012E EV/sales

0%

20%

40%

60%

80%

100%

120%

-3% 2% 7% 12% 17% 22% 27%2009-12 industrial Sales CAGR

2012

EV/

Sale

s

Hyundai

Kia

Toyota

PSA

FordFiat

Volkswagen

Daimler

BMW

DongfengTata

Maruti

Geely

Renault

Nissan

Honda

BYD

Source: Company data, Credit Suisse estimates, 2012 data, IBES estimates for Nissan, Honda, Toyota

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Automotive 4

Credit Suisse global automotive research In our view, a global research franchise and harmonised analytical assessment is crucial in order to advise clients investing in a truly global sector. With this is mind Credit Suisse’s global automotive research team is streamlining its resources. We are standardising the way we present companies’ valuations, utilise the team’s regional setup in order to better understand trends and use the same macro framework (see team details Figure 98).

We believe that a broader perspective is not just valuable for global investors but also enhances the quality of our work for investors with a regional focus.

Besides using the same regional sales and production forecasts, Credit Suisse analysts all have access to sector specific financial, valuation, performance and other data via our databases. This should add significant value to our work and ultimately help us to provide best in class service to investors.

Credit Suisse Standardised valuations methodology

We present a valuation framework across all companies and regions. In this, we are using EV multiples for the industrial business and book value for Financial Services operations. Using EVs rather than simple PE is of particular importance in the automotive sector given high capital intensity and corresponding material differences in net debt/cash.

Figure 3: Enterprise Value Walk Down Market Capitalisation Group

- Financial Services Book Value

= Industrial Market Capitalisation

+ Industrial net cash (-debt)

- Pension liabilities

- Equity holdings

- Minorities

Enterprise Value Industrial Business

Source: Credit Suisse research

We show where companies under coverage are trading based on industrial business EV multiples (ie industrial EV / industrial sales versus profitability/growth/cash flow) and open the discussion as to whether valuations look rich, fair or low.

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Automotive 5

Figure 4: Global EV/sales (industrial business) EV/Sales 2005 2006 2007 2008 2009 2010E 2011E 2012E

Volkswagen 24% 15% 37% 69% 23% 17% 13% 7%

BMW 47% 51% 43% 23% 35% 37% 24% 14%

Daimler 48% 48% 57% 27% 48% 40% 33% 28%

PSA Peugeot Citroen 19% 19% 16% 7% 11% 9% 8% 6%

Renault 4% 14% 39% -1% 2% -1% -1% -3%

Fiat 34% 46% 43% 25% 41% 38% 38% 36%

Ford Motor Co. 27% 20% 17% 4% 20% 40% 39% 36%

Tata Motors 78% 158% 91% 71% 43% 59% 57% 48%

Maruti Suzuki 90% 179% 131% 106% 86% 117% 92% 79%

BYD Co Ltd 71% 52% 121% 356% 206% 160% 129%

Geely Auto 1305% 3015% 3021% 102% 199% 112% 88% 65%

Dongfeng Group 48% 74% 77% 26% 77% 65% 52% 40%

Hyundai Motor 78% 54% 51% 27% 84% 98% 103% 102%

Kia Motors 58% 27% 22% 14% 42% 65% 66% 65%

Toyota Motor 66% 98% 102% 54% 46% 55% 40% 41%

Honda Motor 66% 46% 51% 36% 47% 65% 51% 42%

Nissan Motor 54% 61% 50% 29% 22% 48% 32% 28%

Based on prices as of 10 September 2010. Source: Company data, Credit Suisse estimates, 2012 data,

IBES estimates for Nissan, Honda, Toyota

Figure 5: Global EV/EBITDA (industrial business) EV/EBITDA 2005 2006 2007 2008 2009 2010E 2011E 2012E

Volkswagen 2.7x 3.3x 3.3x 6.4x 3.0x 1.7x 1.3x 0.7x

BMW 3.5x 3.9x 3.3x 2.6x 4.8x 2.5x 1.5x 0.8x

Daimler 5.4x 3.6x 4.6x 2.8x 13.3x 3.5x 2.7x 2.2x

PSA Peugeot Citroen 2.3x 2.5x 1.9x 1.1x 2.6x 1.1x 0.9x 0.7x

Renault 0.4x 1.6x 4.1x -0.2x 0.3x -0.1x -0.1x -0.2x

Fiat 4.7x 5.2x 4.3x 2.4x 5.5x 4.7x 4.3x 3.7x

Ford Motor Co. 7.4x NM 4.3x NM 6.8x 4.4x 4.6x 4.1x

Tata Motors 7.2x NM 10.1x 9.3x NM 6.8x 4.5x 3.6x

Maruti Suzuki 5.9x 10.6x 8.6x 7.9x 10.3x 9.1x 8.5x 7.1x

BYD Co Ltd NM 4.7x 3.8x 11.5x NM 13.6x 10.5x 8.5x

Geely Auto NM NM NM 4.4x 13.8x 7.3x 5.8x 4.3x

Dongfeng Group 4.9x 7.3x 7.4x 2.5x 6.3x 4.1x 3.4x 2.7x

Hyundai Motor 9.1x 5.9x 5.1x 2.7x 7.3x 8.0x 11.1x 10.1x

Kia Motors 13.4x 8.0x 5.6x 2.2x 4.3x 6.8x 8.8x 7.7x

Toyota Motor 5.2x 7.4x 7.5x 4.1x 12.2x 10.1x 6.6x 5.1x

Honda Motor 7.6x 4.4x 5.2x 3.4x 9.2x 9.8x 7.2x 5.1x

Nissan Motor 3.9x 4.5x 4.2x 2.4x 6.1x 5.2x 3.6x 2.9x



15 September 2010

Automotive 6

Figure 6: Global PE multiples (group numbers) P/E 2005 2006 2007 2008 2009 2010E 2011E 2012E

Volkswagen 15.7x 15.3x 13.3x 16.3x NM 8.7x 6.7x 5.1x

BMW 10.3x 9.2x 8.2x NM NM 9.8x 7.4x 6.2x

Daimler 15.4x 12.7x 17.2x 19.1x NM 12.3x 8.8x 7.0x

PSA Peugeot Citroen 11.1x NM 13.7x NM NM 6.8x 5.9x 4.0x

Renault 5.8x 9.0x 10.4x 9.3x NM 11.0x 7.7x 5.1x

Fiat 6.9x 17.0x 11.1x 3.4x NM 17.8x 13.2x 7.7x

Ford Motor Co. 5.5x NM NM NM NM 6.9x 8.4x 7.9x

Tata Motors 10.4x 19.9x 12.5x 11.7x NM NM 7.8x 6.9x

Maruti Suzuki 15.0x 21.2x 15.2x 13.1x 17.3x 16.4x 15.4x 13.3x

BYD Co Ltd 3.5x 3.8x 4.3x 22.4x NM 23.0x 17.7x 14.4x

Geely Auto 11.9x 15.0x 14.0x 4.1x 23.2x 14.1x 11.7x 9.3x

Dongfeng Group 10.9x 15.7x 11.8x 4.8x 13.6x 8.8x 8.6x 8.3x

Hyundai Motor 9.1x 9.7x 9.4x 6.0x 9.0x 9.0x 14.2x 12.1x

Kia Motors 13.5x NM NM 20.0x 5.4x 9.1x 13.4x 10.8x

Toyota Motor 12.3x 16.9x 16.6x 10.0x NM NM 17.2x 11.5x

Honda Motor 10.3x 10.7x 11.9x 8.0x 25.8x 20.4x 11.7x 9.8x

Nissan Motor 8.1x 10.7x 10.5x 7.2x NM NM 6.3x 4.6x



15 September 2010

Automotive 7

Large performance differential across the globe One of the most striking features of the global auto sector over the past 3 years has been the wide spread between regional share price performances. While investors buying into the growth in non-Japan Asia via Chinese and Korean OEMs should have made high returns over this period, investors in Japanese or European auto names are still down on their initial investment.

Below we show the return of market cap weighted portfolios consisting of OEM and supplier stocks across different geographies.

Figure 7: Returns of auto sector indices by region Figure 8: Substantial returns in China and Korea

-5.9%+8.1%

+114%

-58.7%

+324%

+22.5%

0

100

200

300

400

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700

02/0

1/07

02/0

5/07

02/0

9/07

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5/09

02/0

9/09

02/0

1/10

02/0

5/10

02/0

9/10

Europe US Korea

Japan China India

-5.9%

8.1%

22.5%

67.3%

113.5%

324.4%

-58.7%

-100% 0% 100% 200% 300% 400%

Japan

Europe

US

India

Average

Korea

China

abs performance

Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service

This performance gap is not so much driven by substantially better earnings delivery in emerging markets, but is by and large a reflection of a widening emerging market valuation premium. While we understand and appreciate to some extent the existence of such a premium we are trying to show below that valuations now appear removed from the economic reality of operating in this industry, which is characterised by global trends. We therefore argue that the sector should see a global multiple convergence going forward.

Where are global auto stocks trading currently? The autos industry is global, and in this context, it is suprising that companies with very similar business models, regional mix and comparable earnings are trading on materially different valuation multiples.

Our analysis supports the view that there is a reason behind the valuation difference between a European mass market manufacturer and the rest of the car producing world, given the lack of global diversification and excess capacities in Europe. EU mass makers report some of the lowest margins, the worst balance sheets and the least growth globally and that’s why they are trading on very low multiples.

However, it appears that the financial market also applies a similar discount to much better capitalised, profitable and regionally diversified German premium carmakers (which we believe will potentially generate 30-40% of their earnings in the developing world in future) and VW, which we regard as one of the best global players. This, in our view, is not justifiable.

Emerging market versus old world: Companies such as Tata generate the majority of their earnings from selling products in maturing Western markets (Land Rover, Jaguar). At the same time, players such as VW, Daimler and BMW will potentially generate 30-40% of their earnings in the developing world, in our view.

15 September 2010

Automotive 8

Figure 9: Price/sales Emerging Market versus Developed world auto stocks. Developed

world trades at a 55% discount to emerging market (average since 2004: 36%)

0.30

0.40

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0.70

0.80

0.90

1.00

1.10

1.20

1.30

2004 2005 2006 2007 2008 2009 2010

P / Sales

Auto & Compo

Source: Thomson Reuters

US versus Europe: We also raise the question as to why Ford shares are trading at more than double the valuation of much better capitalised and profitable VW and BMW (Ford trading on c0.39x 2011E EV/sales when VW is trading on a low 0.13x and BMW is on 0.24x.)

Figure 10: Discounted Europe: 2012E EV/Sales vs. clean industrial EBIT margins

0%

20%

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60%

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100%

120%

0% 2% 4% 6% 8% 10% 12%2012 clean industrial EBIT margin

2012

EV/

Sale

s

Hyundai

Kia

Toyota

PSA

FordFiat

Volkswagen

Daimler

BMW

DongfengTata

Maruti

Geely

Renault

Nissan

Honda

BYD


We understand that some of the valuation premium attached to emerging market OEMs is due to the difference in growth expectations. But once again the expected growth rates based on Credit Suisse analysts’ forecasts, particularly for Japanese and Korean OEMs (end of scrappage incentives in Japan, FX appreciation in the Korean Won), appear insufficient to warrant the valuation premium these stocks command over the European OEMs.

15 September 2010

Automotive 9

Furthermore we believe that Figure 11 illustrates quite clearly that the growth opportunities we see for our Germany based coverage universe are substantially higher than those we expect to see in Japan, Korea and the US. In fact we believe that sales growth for Daimler, BMW and VW will only be outpaced by the pure-play emerging market OEMs from India and China. The main reason for this is the untapped market potential for premium vehicles in emerging markets (wealth effects enabling German brands to leverage their superior brand equity) and the strategic decision to gain greater exposure to growth markets through acquisitions (VW/Suzuki).

Figure 11: Growth expectations vs. current valuationson 2012E EV/sales

0%

20%

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60%

80%

100%

120%

-3% 2% 7% 12% 17% 22% 27%2009-12 industrial Sales CAGR

2012

EV/

Sale

s

Hyundai

Kia

Toyota

PSA

FordFiat

Volkswagen

Daimler

BMW

DongfengTata

Maruti

Geely

Renault

Nissan

Honda

BYD


Figure 12 suggests that global investors are willing to pay greatly diverging multiples for similar levels of cash generation. Again valuations for European OEMs and some Asian OEMs such as Dongfeng do not seem to reflect the earnings growth or earnings quality offered by these companies.

Figure 12: EV/EBITDA versus ind. FCF: European cash generation not priced in

-1.0x

1.0x

3.0x

5.0x

7.0x

9.0x

11.0x

-5% 0% 5% 10% 15% 20%2012 Ind. FCF yield

2012

EV/

EBIT

DA

Hyundai

Kia

Toyota

PSA

FordFiat

VolkswagenDaimler

BMW

Dongfeng

Tata

Maruti

Geely

Renault

Nissan

Honda

BYD


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Automotive 10

We acknowledge that players with limited global reach such as PSA should be trading at a discount to a more diversified peer group. Yet the above brief discussion already raises several issues.

■ Is a 100% premium of an emerging market stock which has half of its business in the western world justified? (e.g., Tata).

■ Should a US OEM trade at a material premium to a European one? This is an especially interesting point given two out of three US players went through Chapter 11.

■ Even best in class European car makers are trading at the low end of global valuation multiples. Does this properly reflect their strong brand heritage and thus growing exposure to new end markets?

We believe that a market characterised by global asset allocation should remove such valuation differentials based on fundamental misperceptions about the origin of earnings and drivers of sales growth. We understand that in the past there were structural reasons to explain a valuation discount between Europe and the US such as structure and liquidity of the market or the shareholder structure of a company. Yet at this point in time, these issues are even more pronounced in emerging markets and the US at the advent of GM returning to the market.

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Automotive 11

What is the right multiple to pay? To assess which stocks should be trading on a premium or discount versus the rest of the sector we have devised a sector scorecard that ranks the stocks in our coverage universe according to different characteristics which we consider to be most relevant to equity investors.

We believe these characteristics are

■ Growth outlook: measured by industrial sales CAGR between 2009 and 2012E.

■ Historical margin volatility: this metric is trying to assess the downside deviation of the historical clean EBIT margin distribution. A higher score is awarded to companies where the lowest margin since 2002 is relatively close to the average margin over the same time period (expressed as a percentage of the average clean EBIT margin).

■ Margin resilience: as measured by the number of negative EBIT quarters since 2002 (or since data has become available).

■ Regional diversity: We assume that a broader spread across global geographies is preferred by equity investors. We measure this by looking at the spread between a company’s most important region (in terms of share in group sales) and its smallest region. The smaller the spread between these regions, the better balanced a company’s regional profile.

■ Capex Cycle: We set a normalised capex level for different companies (7% for European premium OEMs, 5% for volume OEMs in developed markets, Korea and China and 4% for Indian OEMs) and compare a company’s expected capex level in 2011/12E to this normalised level. We award a higher score for companies where capex levels are likely to fall below the normalised level over the coming years.

Each company can score between 1 and 16 points per dimension. In the next stage these dimensions are weighted based on their relative importance to the equity market. The highest relative weight therefore is attached to growth (35%), margin volatility and margin resilience (20%), while regional diversity and relative position in the capex cycle receive weights of 15% and 10% respectively.

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Automotive 12

Figure 13: Credit Suisse Global Auto Scorecard Growth

Outlook Margin

Volatility Profit

Resilience Regional diversity

Capex Cycle Total Score Rank

BYD Co Ltd 5.6 2.8 2.8 0.5 0.1 11.8 1

Daimler 3.9 1.8 1.4 2.3 1.7 11.0 2

Maruti Suzuki 5.3 2.2 2.8 0.3 0.2 10.8 3

BMW 3.5 2.0 2.2 1.4 1.4 10.5 4

Volkswagen 3.2 2.6 2.8 1.1 0.5 10.1 5

Tata Motors 4.6 1.4 1.8 2.0 0.3 10.0 6

Dongfeng Group 4.2 3.0 0.8 0.2 1.2 9.4 7

Hyundai Motor 0.7 3.2 2.8 1.2 1.3 9.2 8

Honda Motor 0.0 2.4 2.6 2.4 0.9 8.3 9

Kia Motors 1.4 1.6 0.8 2.6 1.6 8.0 10

Nissan Motor 1.1 1.2 2.2 1.8 1.5 7.8 11

Geely Auto 4.9 0.6 0.2 0.8 1.0 7.5 12

Toyota Motor 0.4 1.0 1.8 2.1 0.7 6.0 13

Ford Motor Co. 2.8 0.0 0.4 1.5 1.1 5.8 14

PSA Peugeot Citroen 2.5 0.4 1.4 0.6 0.8 5.7 15

Fiat 2.1 0.8 0.6 1.7 0.4 5.6 16

Renault 1.8 0.2 0.8 0.9 0.6 4.3 17


While there is always some subjectivity involved in preparing such a ranking system it is still surprising that the top spots in this ranking are taken by what we would refer to as quality names that have proven their qualities during the last downturn (Daimler, BMW, and VW) and BYD, a company that in 2010 will have c40% of its gross profit from non-automotive operations on our estimates. At the other end of the spectrum we find the European volume names which exhibit high margin volatility, long periods of negative earnings, little diversity and the likely need for higher capex levels.

The Indian OEMs and Dongfeng score favourably based on a strong growth outlook and solid historical earnings performance while Geely was loss making almost every quarter between 2002 and H2 2008 and is therefore awarded a lower score than its immediate peers.

The Korean and Japanese OEMs are placed in the middle of this distribution, offering a strong historical margin track record and high levels of regional diversity. Yet the growth prospects for these companies are below those of their peers (on IBES consensus for the Japanese stocks, and Credit Suisse estimates for the Korean stocks) as a result of the appreciating Won and the end of scrappage incentives in Japan impacting domestic sales for Toyota, Nissan and Honda.

Below we combine the current stock valuation levels with our assessment of the relative attractiveness of an investment based on the scorecard above. To do this, we define the level of valuation premium/discount not by a company’s absolute valuation level versus its peers, but by the difference between the current EV/Sales level and what we believe would be a fair EV/Sales multiple given margin expectations for 2011.

15 September 2010

Automotive 13

Figure 14: Credit Suisse Scorecard / Valuation Framework

Hond a

Dongfeng

Hyun dai

KiaMarut i

Daim lerBMW

Volkswa gen

Nissan

Tata

Fiat

Ford

Ren aultGeel y

BYD

PSA

Toyota

-100%

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-60%

-40%

-20%

0%

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100%

456789101 112CS Global Auto Score

Pre

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on E

V/S

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Premium valuation / challen ged bu siness

Challenged business, attract ive mult iple ?St rong fundamentals, at tractive multiples

Premiu m valuation, s tro ng fundamentals


As Figure 14 shows, we see particular value in the German premium space as BMW, Daimler and VW offer geographical diversification, strong brands and a strong historical track record while at the same time trading at discounts to the rest of the sector and to what we would consider to be a fair EV/Sales multiple. Tata and Dongfeng also screen well relative to their current valuation levels.

Geely and Kia offer decent franchises in our view, yet are fully valued given earnings expectations. Furthermore for the Japanese OEMs we see little near term room for topline growth while a strengthening yen could provide further earnings headwinds.

The volume makers most exposed to the developed markets all score relatively low marks in our framework. The French OEMs could offer some upside from attractive valuation levels while Fiat and Ford appear fairly valued given our margin expectations.

Multiple Convergence – already the case with suppliers Suppliers are another part of the auto food chain which is truly global. However compared with their OEM peers, global multiples do not diverge as much. While one can argue about whether or not the entire supplier space is under or overvalued it seems evident that relative to one another, valuations seem relatively converged. The graph below shows that on a 10% EV/Sales = 1% EBIT margin methodology, the whole space seems relatively undervalued. However as shown by the relatively linear nature of the data points, relative to one another valuations price in profitability – we do not see the disconnect that we see in the OEM space

15 September 2010

Automotive 14

Figure 15: 2012E Supplier, EV/Sales (lhs) vs EBIT margin

0%

10%

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30%

40%

50%

60%

70%

80%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Autoliv

American Axle

Lear Corp

Magna

Superior

TRW

JCIHarman

Tenneco

Michelin

Borg

Conti

Source: Company data, Credit Suisse estimates

Multiple Convergence – a reality in other global industries If prospects for emerging market companies really are substantially better than they are in developed regions, then the same emerging market premium should be reflected across the market. Using 2 year forward Bloomberg consensus PE estimates, we attempt to illustrate the premium/discount of emerging market stocks versus their peer group. We draw two main conclusions from this exercise:

a) Emerging market premiums are highest in the auto sector

b) Most other sectors have seen the emerging market premium contract since January 2009 as economic conditions in Europe and the US have stabilised – this did not happen in the global auto industry.

The charts below show the PE premium of emerging market names versus their developed market counterparts. We try to choose sectors that are either equally global (consumer staples, consumer goods, construction equipment), are exposed to similar economic patterns (construction equipment, airlines, steel and consumer goods) or have similar issues of over capacity in developed markets (airlines, steel). We try to use a representative sample of large-cap companies for each region excluding those with long periods of negative or very low earnings.

15 September 2010

Automotive 15

Figure 16: Autos: EMs still at a substantial premium Figure 17: Airlines: Similar valuations across the sector

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Figure 18: EU & US Consumer Goods at premium again Figure 19: Consumer Staples: EMs at slight premium

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Figure 20:Const. Equip: Higher returns – higher PE in DM Figure 21: Steel: Relative valuations similar across globe

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15 September 2010

Automotive 16

While it is not uncommon to find emerging market stocks trading at a premium to developed market peers across a range of sectors, it is still striking that this premium is almost twice as large in the auto space.

Figure 22: Emerging market premium almost twice as big in autos Based on 2 year forward consensus PE multiples

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This disparity is particularly surprising given the global nature of the headwinds that the auto industry is facing. Emission regulations, input cost inflation, product price deflation, mix shifts and demographic changes are by and large global developments that will impact all OEMs to some extent.

To us the ability of a company to deal with these challenges is not pre-determined by the location of its headquarters or on which exchange the shares are listed, but by the appeal of its products and its global industrial footprint. In this respect we think issues such as brand equity and access to growth markets should be the key drivers for relative valuation levels.

15 September 2010

Automotive 17

Where do we stand on volumes? We expect global light vehicle sales to increase by 6-7% over the next 4 years. This implies a “back to normal” market environment post the 2008/09 reported declines in the Western markets. Having said that, we see Western markets recovering from their lows, while the exceptional (and in our view unhealthy) growth in emerging markets should come down to more normal levels.

Asia represents the biggest growth not just percentage-wise but more importantly from an absolute level. We expect Asia to represent 42% of global car sales in 2013E versus only 30% in 2005.

Key take: With global vehicle sales moving from c63m in 2009 to 82m in 2013E, we see no reason for major bearishness. In terms of earnings and sales performance, we expect a further widening of the gap between companies with a global franchise, appealing brand equity and technology leadership, and those that areoverly exposed to mature markets.

Figure 23: Global light vehicle forecast

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Figure 24: Credit Suisse Global Production Estimates Units, m 2005 2006 2007 2008 2009 2010E 2011E 2012E

Asia 26.10 26.33 28.41 26.87 27.2 33.2 35.0 37.8

North America 15.75 15.40 14.88 12.64 8.6 11.5 12.1 13.1

South America 3.05 3.17 3.67 3.52 3.7 4.1 4.3 4.6

Pan-Europe 17.79 20.74 21.81 20.49 16.3 17.5 18.0 19.0

Africa/ME 1.40 1.66 1.63 1.72 1.8 1.9 2.1 2.3

GRAND TOTAL 64.10 67.30 70.40 65.24 57.43 68.18 71.45 76.77

Asia 1% 8% -5% 1% 22% 10% 8%

North America -2% -3% -15% -32% 34% 6% 8%

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Pan-Europe 17% 5% -6% -21% 8% 3% 6%

Africa/ME 18% -2% 6% 3% 8% 7% 10%

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Source: CSM, Credit Suisse estimates

15 Septem

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Figure 25: Credit Suisse global light vehicle forecast ‘000 units, unless otherwise stated Unit sales in millions: YoY% 2007-13E

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2008 2009 2010E 2011E 2012E 2013E CAGR

China 4.74 6.61 7.93 8.05 12.67 15.20 16.72 18.07 19.51 2% 57% 20% 10% 8% 8% 16%

Japan 5.64 5.51 5.16 4.91 4.50 4.60 4.60 4.65 4.85 -5% -8% 2% 0% 1% 4% -1%

India 1.24 1.49 1.67 1.72 2.02 2.38 2.72 3.04 3.41 3% 17% 18% 14% 12% 12% 13%

Asia 18.77 19.78 21.47 22.33 25.97 29.35 32.28 35.02 37.48 4% 16% 13% 10% 9% 7% 10%

Canada 1.57 1.60 1.71 1.71 1.49 1.59 1.75 1.89 1.95 0% -13% 6% 11% 8% 3% 2%

US 16.95 16.56 16.16 13.20 10.40 11.35 12.75 13.80 13.80 -18% -21% 9% 12% 8% 0% -3%

Mexico 1.12 1.14 1.10 1.02 0.75 0.64 0.70 0.75 0.83 -7% -26% -15% 10% 8% 11% -5%

N. America 19.82 19.30 18.97 15.93 12.64 13.57 15.20 16.45 16.58 -16% -21% 9% 12% 7% 1% -2%

Brazil 1.62 1.84 2.38 2.71 3.07 3.22 3.29 3.42 3.55 14% 13% 5% 2% 4% 4% 7%

Argentina 0.36 0.42 0.53 0.57 0.49 0.54 0.61 0.70 0.75 8% -14% 10% 12% 15% 7% 6%

S. America 2.92 3.38 4.25 4.44 4.47 4.80 5.27 5.62 6.00 4% 1% 7% 10% 7% 7% 6%

Russia 1.56 1.99 2.60 3.11 1.55 1.75 2.10 2.31 2.54 19% -50% 13% 20% 10% 10% 0%

Turkey 0.71 0.62 0.60 0.50 0.55 0.55 0.60 0.62 0.65 -17% 11% 0% 9% 3% 5% 1%

Romania 0.25 0.29 0.35 0.31 0.15 0.15 0.17 0.19 0.21 -12% -60% 0% 13% 12% 12% -8%

Poland 0.27 0.28 0.35 0.39 0.36 0.35 0.37 0.38 0.41 12% -7% -3% 6% 3% 8% 3%

Other E.Europe 1.14 1.33 1.61 1.51 0.99 0.90 0.90 0.97 1.02 -6% -35% -9% 0% 8% 5% -7%

E. Europe 3.93 4.51 5.51 5.81 3.60 3.70 4.14 4.48 4.83 5% -38% 3% 12% 8% 8% -2%

France 2.49 2.44 2.53 2.51 2.64 2.61 2.57 2.61 2.66 -1% 5.2% -1% -2% 2% 2% 1%

Germany 3.53 3.68 3.37 3.31 3.98 3.00 3.30 3.40 3.50 -2% 20% -25% 10% 3% 3% 1%

Italy 2.46 2.57 2.73 2.39 2.34 2.15 2.32 2.62 2.92 -12% -2% -8% 8% 13% 11% 1%

UK 2.77 2.68 2.75 2.42 2.18 2.40 2.21 2.30 2.38 -12% -10% 10% -8% 4% 4% -2%

Spain 1.92 1.91 1.89 1.33 1.06 1.11 1.14 1.25 1.37 -30% -20% 5% 2% 10% 10% -5%

Other W.Europe 3.32 3.42 3.59 3.43 2.78 2.65 2.89 2.95 2.99 -5% -19% -5% 9% 2% 1% -3%

W. Europe 16.49 16.70 16.86 15.39 14.97 13.92 14.41 15.14 15.84 -9% -3% -7% 4% 5% 5% -1% Pan-Europe 20.42 21.21 22.37 21.20 18.57 17.62 18.55 19.62 20.67 -5% -12% -5% 5% 6% 5% -1%

- Excl. Russia 18.86 19.22 19.77 18.10 17.02 15.87 16.45 17.31 18.13 -8% -6% -7% 4% 5% 5% -1%

Other (Africa) 1.22 1.38 1.50 1.37 1.18 1.18 1.18 1.18 1.18 -9% -14% 7% 4% 8% 9% 1%

GRAND TOTAL 63.15 65.05 68.57 65.27 62.83 66.52 72.49 77.89 81.91 -5% -4% 6% 9% 7% 5% 3%

Source: Polk, CSM, JD Power, Credit Suisse estimates

15 September 2010

Automotive 19

Key global trends by region Europe - without incentives Yet to see the bottom?: With the majority of Europe having experienced a recession in 2009 and with consumer confidence falling significantly, it is perhaps surprising that car sales did not drop materially in 2009. Following nearly 17m LV sales in 2007 in W.Europe, LV sales fell just 9% in 2008 and only 3% in 2009. With LV sales in 2010 likely to be down a further 7% on our estimates, LV sales are only down 17% from peak to trough. Compared to the US (a similarly penetrated and developed market), where we expect sales to finish the year down some 30% from 2006 highs, Europe has not seen a material downturn.

Figure 26: Western European car sales vs. consumer confidence

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With scrappage incentives having fuelled the market in 2009 and H1 10, Europe’s downturn has been moderate. However, as we have seen during the first few months of H2 10, in an environment perhaps representative of the new normal (absent scrappage incentives), volumes have begun to decline. European volumes were down some 17% in July and we expect them to finish August down 15%. With consensus forecasts requiring 20% declines for the remainder of the year, it seemsthe market expects a continued decline into the remainder of the year with comps getting tougher.

Shallow 2011? Our forecasts assume a 4% increase in volumes in 2011 but this remains contingent on sustained economic recovery. Comparing H1 11E with H2 10E, at this stage it remains difficult to explain why there should be any difference (H1 11 faces similarly tough comps to H2 10, and there will still be overhang from incentives, while the economy is unlikely to take a big step up). Thus Europe’s recovery should be shallower than the US’s in our view.

Our European estimates assume the following for Europe’s big 5 markets:

■ Germany: Our estimates assume a 10% bounce back in German sales in 2011 with sales falling by 25% this year. With scrappage incentives having ended relatively early (by EU standards) in late 2009, German registrations have seen the sharpest decline in 2010. We believe that the German economy (one of the more resilient in Western Europe) will continue to grow, fuelling car sales by 10% in 2011E.

15 September 2010

Automotive 20

■ France: With incentives ongoing but tapering down to zero by end of the year (incentives were €1,000 last year, €700 in H1 2010 and €500 in H2 10) we expect the overhang to materialise in earnest in H2 10. Our estimates see sales down 1% for FY10 with sales having been up 2.7% in the first 8 months. Into 2011E we see a small decline but given that 2011 will mark the first year in 3 without incentives, risk to our -2% forecast could be to the downside.

■ Italy: With sales already down 2.6% this year and the run rate c -20-25%, the overhang has already begun. We expect sales to fall by 8% this year, a figure consistent with a c -20% run rate for the remainder of the year. Into 2011E, we expect a moderate bounce back (+5%) – in part a response to low comparators in 2010E.

■ Spain: Incentives have only just ended in Spain, and the market was up 40% in H1 10, but with sales now trending down c25% YoY we expect them to finish at +5% for FY10, highlighting a sharp drop-off into H2E. We see little reason to expect sales to improve materially in H1 11 and our forecast of +2% for FY2011 illustrates our expectations of a slow recovery.

■ UK: Incentives ended in early 2010, but the market continued to be fuelled by orders until June. With sales now falling in the UK (August -18%), the UK is finally entering the overhang. We expect LV sales to end the year up 10% (YTD +13%) largely due to a strong H1. Into 2011E we see no reason why H1 11E will be materially different to H2 10E. With sales now trending down c15% YoY we expect H1 11 to be similarly tough. For FY11E we expect sales to fall some 8%.

Pricing the other issue: After a very strong state-supported 2009 and H1 10, the auto sector must now start to be more self-sufficient. Weaning itself off reduced or discontinued scrappage discounts and cheap money will not be easy: price discipline in the retail market faces its toughest test in over a decade as OEMs attempt to restore pricing to pre-scrappage levels (a hike of up to 25%). Conference calls from European mass makers and announced H1 earnings already show the difficulties facing mass makers with all indicating negative pricing developments.

Private vs Corporate: We continue to prefer premium names vs. mass names in Europe. Cheap privately exposed cars were the main beneficiaries from scrappage incentives (both in terms of volumes and pricing) and thus look like the biggest victims as these incentives roll off across Europe (we already have seen this in Germany and Italy).

Long term demographics/CO2: Longer term profitability in Europe will remain under pressure in our view. Continued CO2 legislation tightening and an ageing population are likely to continue to put downsizing at the forefront of OEMS plans.

US – Where is underlying demand? Lowering US Sales Forecast The US economic recovery is not progressing as strongly as we had hoped. Most notable is the failure of payroll jobs to grow at a sufficient pace to chip away at the unemployment rate. A close second is the persistent sluggishness of the housing market, where home prices have shown further declines (according to the FHFA index) rather than begin to rebound, as we had anticipated.

The net result is that we are lowering our US sales forecast for 2010–12. Our new estimates are as follows:

■ 2010E falls to 11.4 million from 12.0 million

■ 2011E drops to 12.8 million from 13.5 million.

■ 2012E slips to 13.8 million from 14.5 million.

15 September 2010

Automotive 21

The changes in our forecast are not a result of any change to the mechanics of our demand model; rather they are a function of a change to the macro assumptions that populate the model; indeed, the ytd run rate of US sales – in light of the prevailing trend in the 4 macro variables that inform our model (unemployment, real income growth, interest rates, and home price growth) – suggest that our model is still working. It seems instead to be the economy that remains challenging. We include in this report a full review of our demand model, including our view of trend demand and our forecast for the 4 macro variables.

North America Production Forecast Unchanged While the reduction in our US sales forecast is disappointing, it is critical to note that our North American production forecast – which is the primary earnings driver for the whole sector – is not changing at all. How is that possible? We will spend a fair amount of time answering that question in this report, but for now, we’ll pin the answer on three items: imports, exports, and inventory. The bottom line is that our production forecast remains unchanged, as follows:

■ 2010 stands at 11.5 million. (This was not our original forecast when we first projected 12.0 million US sales, but it is what is currently reflected in our earnings models based on 1H10 actuals and our explicit forecast for 3Q10 and 4Q10 production.)

■ 2011 is unchanged at 12.1 million.

■ 2012 is unchanged at 13.1 million.

Since our North American production forecast is not changing, we note that our earnings estimates across the sector also remain intact at this time.

We think Consensus Estimates Need to Come Down Based on our new forecast for US sales and NA production, we think that consensus estimates for the same are likely to move lower over the coming months – most notably for 2011 and 2012.

As we recap in the table below, our production estimates for 2011 and 2012 are about 5% lower than consensus.

And for most companies (with the notable exceptions of Ford, Lear, and TRW), our earnings estimates for 2011 and 2012 are also ~ 5% below consensus.

Figure 27: US forecasts (millions of units) Consensus CS Old CS New CS vs.

Consensus 2010 US Sales 11.7 12.0 11.4 -2.6%

2010 NA Production 11.5 11.5 11.5 0.0%

2011 US Sales 13.4 13.5 12.8 -4.5%

2011 NA Production 12.8 12.1 12.1 -5.5%

2012 US Sales 14.9 14.5 13.8 -7.4%

2012 NA Production 13.8 13.1 13.1 -5.1%

Source: Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service

For more details on our model for forecasting US auto demand, please refer to our US team’s September 7 report titled, Rules of Thumb and Conspiracy Theories.

15 September 2010

Automotive 22

Brazil – more moderate growth ahead While LV volumes in the Brazilian market have almost doubled over the past 5 years, we believe that going forward we are likely to enter a period of more muted sales growth following the end of government incentives earlier this year and already relatively high vehicle penetration rates. Furthermore we’ve seen a steady decline in the growth rates of personal loans while overall household consumption growth is back to 2008 record levels.

Figure 28: Personal Loan Growth rates slowing... Figure 29: ...while household consumption back to peak

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Our economists forecast GDP growth in Brazil to remain strong in 2011 at 8% (vs. 8.8% in Q2 2010), however we believe that much incremental car demand has already been satisfied over the past years as auto financing availability increased and the overall interest rate environment has become more supportive.

Considering Brazil’s dependence on exports to China, higher vehicle penetration rates and overall higher loan rates, we believe that sales growth in this country will likely lag Chinese or Indian growth rates.

Figure 30: Penetration rates in Brazil relatively high Figure 31: Lending rates down – but still relatively high

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15 September 2010

Automotive 23

The general operating environment for OEMs in Brazil is also likely to become more competitive going forward as more OEMs such as GM and Toyota are all planning to expand manufacturing capacities in the country by 2012. In the case of Fiat, the company is expecting the market to grow by 7.4% every year between now and 2014 while GM is hoping to expand its sales by 13% every year. With OEMs expecting to see continuing strong volume growth, we believe the risks associated with operating in Brazil are currently weighted towards the downside.

Japan stagnated, ASEAN going strong Non-China Asia can be split into two categories when looking at recent auto sales performance. One region, ASEAN, experienced real growth with the 6 ASEAN countries experiencing a 40% YTD increase. On the other hand both Korean and Japan (the second group) have shown much more moderate growth with YTD sales up 10-20% for the same period. From a demand perspective the ASEAN countries remain the main structural growth area in Asia outside of China.

With Japan and Korea being the traditional domestic focus for non-China Asian producers, monitoring production volumes has also been important. Production in those countries has kept up good momentum thanks to regional/global demand recovery, with production increasing by 30% to over 100% (depending on the economy) thus far this year. Longer term given the increasing importance of non Japan and non-Korean demand in Asia and yen strengthening, we expect to see capacity increases into the ASEAN block.

■ Japan (Market size: 4.5M, Production size; 7.93M (CY2009)): Domestic demand has recovered since September 2009 thanks to government scrappage incentives: YTD, new car sales increased by 20% YoY. However, with the incentives due to end mid-September (at the earliest), we think the risk of a demand overhang is very real into the last 3 months of the year and 2011E. We forecast registrations in Japan to rise just 2% this year and be flat next year.

Domestic production has also recovered since last November. YTD, domestic output has increased by 40% YoY. However, with the end of incentives, output is likely to decrease in October-December. In addition, companies are likely to increase overseas production faster if Yen appreciation continues.

■ Indonesia (Demand size: 0.48M, Production size: 0.6M (CY2009)): Domestic demand has recovered since last November due to macro rebound and stable political conditions. YTD, new car sales have increased by 75% YoY. With growth rates showing historical highs Indonesia seems to have shifted into ‘a period for real growth’ from ’a period for recovery’. Like China the question is now for how long and this growth can continue and how strong but with penetration of vehicles per head still significantly below developed markets, Indonesia remains a structural growth market.

■ Thailand (Demand size: 0.55M, Production size: 1.0M (CY2009)): Domestic demand has recovered since September 2009 thanks to government tax incentives: YTD, new car sales have increased by 54% YoY to 0.52m units. Domestic production has also recovered since last November thanks for global demand recovery. YTD, domestic production has increased by 116% yoy to 0.91M. Now that Thailand is one of the production bases for Japanese OEMs (partly due to government tariff incentives) production momentum should be robust for a while irrespective of local politics.

■ Malaysia (Market size: 0.54M, Production size; 0.49M (CY2009)): Domestic demand has recovered since last October in response to government scrappage incentives: YTD, new car sales have increased by 17% YoY. However given the recent increase in interest rates and the knock on effect to auto loans, sales momentum has begun to flatten (July: +3% YoY). Domestic production has also recovered since last December thanks in part to domestic demand recovery. YTD, domestic output has increased 27% YoY.

15 September 2010

Automotive 24

Korea: Advancing to the next stage Not a Growth End Market but an important global product centre

In 1990 Korea was the second largest automotive market after Japan in the Asia Pacific region, entering the last phase of its growth market stage. However, like Japan, Korea remained largely closed to foreign competition through direct/indirect barriers such as access to distribution until the Asian Crisis, which made it relatively uninteresting from a foreign automaker perspective for gaining the direct benefits of its growth and by the time the market opened to foreign competition it was no longer in growth phase. Nevertheless, some foreign players such as Visteon (Ford, more specifically via Halla Climate Controls) indirectly captured the growth of the Korean auto industry during its growth phase.

Korea has become one of the three major mature end markets in Asia Pacific along with Japan and Australia since the mid 1990s, meaning its domestic market size accounts for only 6% of the Asia Pacific automotive market, but approximately 77% of its global production will be sold outside of Korea in 2010, according to our estimates. This means that Korea remains an important product centre in the Asia Pacific region today alongside Japan, with the Korean auto industry more focused on global market share gains rather than relying largely on domestic market growth.

Figure 32: Historical Auto Demand Composition in the Asia Pacific ('000 units) 1990 1995 2000 2005 2006 2007 2008 2009 CAGR

'00-'09 CAGR '05-'09

Australia 617 643 787 988 963 1,050 1,012 938 2.0% -1.3%

Share of Asia Pac 5.3% 4.9% 6.1% 5.5% 5.0% 5.0% 4.7% 3.7%

China 500 1,424 2,086 5,767 7,216 8,792 9,381 13,622 23.2% 24.0%

Share of Asia Pac 4.3% 10.8% 16.3% 31.9% 37.3% 42.0% 44.0% 54.0%

India 357 635 842 1,440 1,751 1,990 1,978 2,258 11.6% 11.9%

Share of Asia Pac 3.0% 4.8% 6.6% 8.0% 9.1% 9.5% 9.3% 9.0%

Korea 957 1,563 1,435 1,173 1,205 1,273 1,216 1,454 0.1% 5.5%

Share of Asia Pac 8.1% 11.8% 11.2% 6.5% 6.2% 6.1% 5.7% 5.8%

Japan 7,777 6,865 5,963 5,852 5,740 5,354 5,082 4,609 -2.8% -5.8%

Share of Asia Pac 66.2% 51.9% 46.6% 32.4% 29.7% 25.5% 23.8% 18.3%

Other 1,536 2,090 1,693 2,859 2,463 2,499 2,671 2,336 3.6% -4.9%

Share of Asia Pac 13.1% 15.8% 13.2% 15.8% 12.7% 11.9% 12.5% 9.3%

Asia Pacific 11,744 13,218 12,807 18,080 19,337 20,957 21,340 25,217 7.8% 8.7%

Source: Industry Associations

Since the Asian Crisis Hyundai Motor Group has been busy redefining itself. It initially acquired Kia during the Asian Crisis to quickly gain economies of scale, but since then it has been working to integrate the two companies’ technology platforms and increasing local production overseas. By 2013 we estimate that with the addition of Hyundai’s 3rd China plant, the Russian plant and the Brazilian plant, the Group will have reached a global footprint of 6.9m units together with Kia, its captive brand. With cost efficiency gained from increased transplant scale, Hyundai plans to begin producing compact passenger cars in the US market for instance, which the company estimates that it can do profitably now. Three years ago this would not have been possible for Hyundai, with the capacity footprint that it had then.

By 2013, we estimate that 42% of the Korean auto industry’s global production will come from overseas transplants and for the Hyundai Motor Group, 53% of global production will come from overseas transplants according to our estimates. As low cost producers rise from China and India, we believe it is critical for Korean automakers to be closer to Japan than to China and India in terms of global competitive positioning in the coming decade. While we estimate that over 35% of Hyundai Motor Group’s global production will continue to come from compact vehicles in 2014 the group is now beginning to focus on middle segments as the next area of expansion, not withstanding a public relations focus on the luxury line-up which will continue to remain quite small as a percentage of total production

15 September 2010

Automotive 25

in the next 5 years. We believe this is a credible strategy, which can be potentially aided by the difficulties being experienced by both US and Japanese competition in the US market, which could prove to be similar to the benefits the Japanese automakers experienced during the oil shocks of the 1970s and 1980s in the US.

Figure 33: Korean Auto Industry’s Global Production Outlook 000s of vehicles

0

2 ,000

4 ,000

6 ,000

8 ,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E

Domestic Transplant

Source: KAMA, Company data, Credit Suisse estimates

Branding is evolutionary and the Korean auto makers seem to be headed in the right direction

While our views currently differ from current market consensus in that we see the global market share gains seen from Korean brands in the past 18 months as rebranding at work, but rather something that will likely serve as a springboard for sustainable share gains in the post 2012 global automotive market place. We have confidence in the Hyundai Motor Group’s historical records and current management plans to be upbeat about the companies’ ability to redefine their brands over the next 2 product generations—but simply believe current share price levels more than price these factors in.

Historically, Hyundai’s branding efforts began in earnest in the 1990s which should be seen as a period when production processes were being tightened to enhance quality while proprietary powertrain technology was being developed organically. By the end of the 1990s, despite negative popular perception, we recall Hyundai was ready to tackle the quality issue which was addressed by the 10 year product warranty in the US market—one of the most innovative marketing strategies introduced by an automaker. In fact, following the new product warranty introduction, Hyundai managed almost to triple its market share in the US market over a 2 year period and began outselling the non-Japan Big3 automakers by 2001, thereby setting the foundation for further penetration in the following product generation which would coincide with the general public perception that Hyundai products began improving from about 2005. In our view, this achievement would not have been possible without the efforts that the company put into its product development and production process improvements during the 1990s.

Hyundai’s innovative marketing prowess was demonstrated once again in the US recently when in 2009 the company introduced the Hyundai Assurance Program in which qualified buyers who lost their jobs could walk away from their financial obligations with no black marks on their credit. While most investors believed this to be a short sighted gimmick, our discussions with the company suggested in 2009 that the program was intended for a long term perception change, not a hope for quick short term gains (see our report by Henry Kwon, Allowing Customers Who Lost Their Jobs to Return Their Purchased Vehicles – A Great Marketing Gimmick, 16 January 2009).

15 September 2010

Automotive 26

Figure 34: Hyundai Motor: Quality-backed market share gains in the US Lt Vehicle

market, 1995-2005

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Hyundai Share

Impact of 10 Year ProductWarranty Introduction

Source: Autodata

A key execution plan for long term market share gains/sustenance in the global markets at Hyundai is the completion of its current Hyundai-Kia platform integration initiative. One of the key drivers to gaining and sustaining market share in mature developed markets is the ability of an automaker to turn over a greater percentage of an automaker’s product line and this task becomes easier with fewer platforms in our view. This is because common platforms allow automakers to a) spread the cost of powertrain development over a greater number of units throughout a product lifecycle, while b) reducing the time required to introduce new products by developing model variations based on a common platform. Reducing the number of platforms carries the added effect of potentially enhancing ROIC over a longer period.

Figure 35: Average number of units per platform, HMC-Kia vs. Japan Big 3, FY2008 Company No. of Platforms Unit Sales, FY08 Avg units/platform

Toyota 15 7,567 504.5

Honda 7 3,517 502.4

Nissan 8 3,138 392.2

Hyundai-Kia 18 4,166 231.5

Source: Company data

Automakers typically spend US$1bn–2bn on new platform development which is likely to be used over a 5-15 year period. If an automaker cannot maximise the number of units over a single platform chances increase that the life cycle of the platform also increases, with negative implications on sustained product acceptance by end customers the longer it takes to introduce new platforms. We believe it likely that the post-2012 outlook for the Hyundai Motor Group is likely to be very positive from a strategic planning perspective.

Figure 36: HMC Group: Platform Integration Plan (Number) Integrated platforms Total platforms in use Total # of models

2002 0 22 29

2009 6 18 32

2012 Co. E 6 6 44


15 September 2010

Automotive 27

Figure 37: HMC Group: Post Integration Model Development Process Outlook (Months) Planning Development Total

2002 16 24 40

2009 15 18 33

2012 Co. E 9 15 24


China – Subsidies, subsidies, subsidies... a structural theme longer-term China has been among the most prolific countries in establishing stimulus measures in the auto sector following the financial crisis. While we believe these measures had been one of the key reasons for the strong growth in 2009, looking ahead, we think rising auto sales growth is still a longer term structural theme, driven by key factors including 1) rising income level; 2) low PV penetration and 3) improving infrastructure. Furthermore, government support is likely to remain strong, with alternative-fuel cars and energy-saving identified as one of the seven strategic sectors to drive the country’s growth in the country’s 12th Five Year Plan. We expect passenger car sales to grow at a CAGR of 10% between 2010E-20E, with annual growth declining due to the higher base effect. Concurrently, PV penetration is likely to grow at 15% CAGR over the same period, rising to about 18% in 2020E.

Figure 38: Passenger car sales forecast Figure 39: PV penetration to rise with GDP

0

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10,000

15,000

20,000

25,000

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2003

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('000) YoY% growth

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90,00019

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0

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GDP per capita (LHS) PV penetration (RHS)

2020

E

RMB Cars per TH people

GDP per capita CAGR1991 - 2008: 16%

2009E - 2020E: 11%

PV penetration CAGR1991 - 2008: 19%

2009E - 2020E: 15%

Source: CEIC, China Statistical Yearbook, Credit Suisse estimates Source: CEIC, China Statistical Yearbook, Credit Suisse estimates

Generous subsidies drove strong demand in 2009

To boost domestic consumption and economic growth, China introduced the first auto subsidy in mid January 2009, reducing purchase tax to 5% from the usual 10%. Subsidies amounting to a 10% discount for light truck and minivan purchases (capped at Rmb 5,000) were also offered to rural residents scrapping and/or purchasing new light vehicles to replace their older vehicles. On top of the central government’s stimulus plan, provincial and city governments introduced their own auto stimulus package, offering subsidies for local car purchases. To further encourage the replacement of old and polluting vehicles, trade-in subsidies were introduced from mid-2009 (see Figure 40 below).

While all the policies were scheduled to expire at the end of 2009 initally, they were subsequently extended to 31 December 2010, with some modifications. In particular, the purchase tax subsidy was reduced from 5% to 2.5% from 1 January 2010 while trade-in subsidies were increased.

15 September 2010

Automotive 28

Figure 40: Trade-in subsidies for outdated and polluting vehicles Old New

Effective 1 June 2009 – 31 May 2010 28 December 2009 – 31 December 2010

Old for new

Mini/light/medium trucks Rmb4,000 /5,000 /6,000 Rmb6,000 /9,000 /13,000

Medium buses Rmb5,000 Rmb11,000

Polluting vehicles

Mini/light/medium/heavy trucks Rmb4,000 /5,000 /6,000 /6,000 Rmb6,000 /9,000 /13,000 /18,000

Mini/small/medium/large buses* Rmb3,000 /4,000 /5,000 /6,000 Rmb5,000 /7,000 /11,000 /18,000

Cars (<1L, 1-1.35L and >1.35L)** Rmb6,000 (for all sizes) Rmb6,000 /10,000 /18,000

* exclude passenger cars for mini and small size; ** new rules were introduced from 18 Jan 2010 allowing cars which qualify for the above

subsidy to simultaneously enjoy the purchase tax subsidy of 2.5% for vehicles 1.6L and below.

Source: Ministry of Commerce

Entry-level small cars the key beneficiaries from subsidies

Driven by the various tax incentives and subsidies, China passenger vehicle sales rose 52% in 2009, with small cars (<1.0L to 1.6L) exhibiting the fastest growth of 70-77%. Concurrently, the market share of the mass market segment (<1.0L to 1.6L) increased 7pp YoY to 71%. YTD, the small cars segment has broadly maintained similar market share of about 70%.

Figure 41: Small cars sales grew the fastest in 2009 Figure 42: Product mix shifting to small cars

52%

77%70%

19% 22%

39%

-10%

-92%-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Total <= 1L >1 to <=1.6L

>1.6 to<= 2L

>2 to <=2.5L

>2.5 to<= 3L

>3 to <=4L

>4L

17% 12% 11% 12% 15%

49%49% 53%

59% 55%

21% 25% 24%19% 20%

10% 12% 11% 9% 8%2%3% 2% 2% 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 YTD

<= 1 L >1 to <= 1.6 L >1.6 to <= 2 L >2 to <= 2.5 L <2.5L

Source: CAAM Source: CAAM

New energy vehicles policies to kickstart alternative energy vehicles penetration

Subsequent to the above subsidies, as China steps up its efforts to reduce carbon emissions in the world's largest auto market, the central government launched a pilot scheme involving 20 cities of 1,000 new energy vehicles each in February 2009. Subsidies up to Rmb 420,000 per hybrid bus, Rmb 500,000 per electric bus and Rmb 600,000 per fuel cells were offered. While the new energy vehicles had been concentrated on taxis, buses, sanitation and post office use vehicles initially, consumer subsidies were also rolled out from early June 2010 in 5 pilot test cities (Shanghai, Shenzhen, Hangzhou, Hefei and Changchun) for the purchase of renewable energy vehicles. Subsidy amounts ranged up to Rmb 50,000 for plug-in hybrid vehicles and Rmb 60,000 for pure electric vehicles, while fuel efficient vehicles with engine sizes 1.6L and below that are able to reduce fuel consumption by about 20% from current standards are eligible for subsidy of Rmb 3,000 per vehicle. Besides central government funding, local governments of the test cities have also announced their own additional subsidies.

15 September 2010

Automotive 29

Figure 43: Subsidies for renewable energy vehicles Maximum subsidy for vehicle:

in Rmb Plug-in hybrid Pure electric Fuel efficient

Central government 50,000 60,000 3,000

Local governments:

- Shenzhen 30,000 60,000

- Shanghai 40,000-60,000 40,000-60,000

- Changchun, Jilin 40,000 40,000

Source: auto.sina.com.cn

Limited near-term impact of subsidies on renewable energy vehicles sales

While the provision of subsidies for renewable energy vehicles are likely to help boost initial penetration of such vehicles, we see limited sales and bottom-line contribution from plug-in hybrids or pure electric vehicles near-term, mainly due to a lack of charging network infrastructure and high battery costs inhibiting the launch of commercial models for mass production. From our understanding, only BYD's F3DM and E6 are the known models that have been launched commercially but volume production is still relatively small. Other automakers showcased prototypes during the Beijing Auto Show in April this year and claim to have models ready for launch but have held back commercial production due to lack of market readiness to adopt this new technology, thus vehicles at still a relatively steep price (even when factoring in the subsidies).

While the fuel efficiency subsidy is meant to encourage automakers to improve the fuel consumption of existing models, our discussions with automakers suggest the standards are not very scentific as fuel consumption is based on vehicle weight and not standards such as carbon emissions. Accordingly, automakers suggest most of their 1.6L and below models qualify for this subsidy, with minor modifications required. So far 2 batches of models have been approved in July and August respectively, with another 2 batches likely to be approved by year end. In our view, considering the timing of the policy (first announced in June), we think this could be an indirect subsidy given by the government to boost auto sales especially after 3 consecutive months of weakening monthly sales. Going into the seasonally stronger 4Q, we think the fuel efficiency subsidy combined with existing subsidies could potentially spur higher sales, especially from consumers looking to maximise the subsidies ahead of expiry at year-end.

Near term volatility from inventory overhang

While domestic brands have largely maintained their market share YTD for 7M10, with market share rising 1pp to 32% compared to 2009, a closer look at monthly market share suggests domestic brands have been losing market share fairly rapidly since the beginning of 2010.

15 September 2010

Automotive 30

Figure 44: While domestic brands have largely maintained

their market share YTD…

Figure 45: ... a closer look suggests market share erosion

for domestic brands as inventory builds up

71% 70% 71% 69% 68%

29% 30% 29% 31% 32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 7M10

Foreign brand Domestic brand

64% 66% 67% 68% 69% 71% 74%

36% 34% 33% 32% 31% 29% 26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

Foreign brand Domestic brand

Source: CBU-Autostats Source: CBU-Autostats

According to data from China Automotive Technology and Research Centre (CATARC), auto inventory have been rising since March, driven by weakening sales and expanding production as automakers increased capacity in response to the record sales at the beginning of the year. In particular, the inventory overhang is more serious at domestic automakers, with average dealers’ inventory of 1.5-2 months, as they have been the ones expanding capacity aggressively in 2010. In contrast, foreign JVs have been relatively restrained due to capacity shortages. Coupled with stronger sales for medium to large cars in 2010, foreign brands dealers are now holding about 1 month or less inventory.

Figure 46: Inventory build-up more severe in domestic

brands

Figure 47: Medium and large cars growing the fastest in

2010

30

40

50

60

70

80

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Days

Aug-

10

43%54%

36%

58%

33%

113%

165%

512%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Total <= 1L >1 to <=1.6L

>1.6 to<= 2L

>2 to <=2.5L

>2.5 to<= 3L

>3 to <=4L

>4L

Source: CATARC Source: CEIC, Credit Suisse estimates

Sales bottoming ahead of a seasonally stronger 4Q

According to data released by the China Association of Automobile Manufacturers (CAAM), China autos’ August 2010 overall sales rebounded off the trough in July, rising 6% MoM. With price declines continuing, albeit at a slower pace, the stronger MoM PV sales (+8% MoM) likely reflect both higher dealers’ discounts and higher sell-in from automakers on the back of new model launches in 2H. Moving into the seasonally stronger

15 September 2010

Automotive 31

4Q, we expect price cuts to diminish further, but do not expect the premium pricing seen in 1Q10. While PV inventory remains high for the industry, the pressure has eased marginally, declining by two days to 58 days in August, according to CATRC. In view of the higher PV inventory pressure at domestic brands, we continue to prefer foreign brands as domestic brands could disappoint with below-target full-year sales.

Figure 48: Sales bottoming ahead of 4Q peak season Figure 49: Price declines moderating

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2006 2007 2008 2009 2010

Units

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

Jan Feb Mar Apr May Jun Jul

Small cars Mid-end cars Large cars Luxury cars

Auto Price Index MoM change for 2010

Source: CEIC Source: cheshi.com

India: How to make money with low-cost vehicles After the sharp downturn in the passenger vehicle industry in 2008, domestic demand improved significantly in the early part of 2009, much to the surprise of many. Government actions helped – duty cuts across the board resulted in lower prices and attracted buyers back into the market. State owned banks stepped up financing activity and credit availability eased significantly. Demand from tier II cities and rural areas remained largely unaffected by the economic turmoil. Moreover, additional demand from pay commission beneficiaries resulted in the market reverting to growth in 1QCY09. Thus, the Indian passenger vehicle industry remained almost flat in FY09 (year ending Mar-2009).

The recovery continued well into the next year, despite the government rolling back the duty cuts, with the industry registering a growth of 26% in FY10 (ending March 31st 2010). We expect the Indian passenger vehicle industry, especially cars, to grow at 20%-plus for the next few years. Owing to strong domestic demand, India will likely account for 15-20% of the global incremental demand in the next 6 years and probably a higher proportion of global production. Consequently, almost all the big global players have plans to expand presence. Keeping in mind local consumer preferences, most of them are investing in developing (India specific at times) small cars (which account for significant portion of the Indian car market). However, we believe that the new players are still underestimating the growth potential in the market. We believe capacity utilisation in the industry will be higher two years from now than it is today. More critically, we think most new players aren’t investing aggressively enough in expanding small car portfolio.

Personal mobility demand largely utilitarian in nature

India has close to 550,000 villages which are home to 70% of the country’s population. Personal mobility requirements in most parts of the country are largely utilitarian in nature – related to ease of travelling and confined to relatively shorter distances. Similarly, businesses in India are widely dispersed and fragmented - the country has the largest retail network in the world with over 13mn outlets (3x those in China). Thus, last mile connectivity, especially on unpaved rural roads, is essential.

15 September 2010

Automotive 32

Cost effectiveness and ease of transportation determine choice of vehicles

Vehicle ownership in India is heavily skewed towards the basic, entry-level means of transport – bicycle penetration is twice that of motorcycles which in turn is 6 times that of passenger vehicle ownership. This is driven by both income levels and lack of infrastructure. Public transportation is by far the most economical means of travel, but is severely constrained in terms of capacity and level of modernisation. While the metro rail system is expanding, it is hardly keeping pace with the increase in demand.

Figure 50: Vehicle ownership pattern in India (% of households possessing the vehicle)

0

5

10

15

20

25

30

35

40

45

50

Bicycles Motorcycles Cars

Source: NCAER

The vehicle ownership pattern is largely explained by a similar skew in income distribution in the country, where about 50% households earn less than Rs90,000 (or $2,000) per annum. Assuming that the annual income roughly equals purchasing power in vehicles, a majority of the demand is, therefore, likely to be concentrated in segments such as motorcycles (priced at ~ Rs 50,000) or small / low-end cars (priced ~ Rs 100,000-200,000).

This is also reflected in the product mix within segments – small cars (engine size less than 1200cc) form close to 80% of the market, while in motorcycles, the commuter segment (engine size less than 125cc) forms 75% of the market.

15 September 2010

Automotive 33

Figure 51: Household income distribution in India (Rs/annum)

0

20

40

60

80

100

120

> 1000K 500K-1000K 200K-500K 90K-200K <90K

Source: NCAER

Cost structure key to profitability

Given that passenger vehicle demand in India is mainly driven by low-priced products, manufacturers’ profitability hinges entirely on an efficient cost structure. In the case of Maruti, high productivity of assets and low manufacturing costs (apart from scale benefits). are the main sources of cost efficiency. Maruti’s asset turnover at close to 4x is probably one of the highest among auto manufacturers.

Yet another challenge for Indian auto players is to be profitable even at low volumes – which is the case with models like Tata Indica (~ 10,000/month) and Mahindra’s Scorpio (~ 4000/month). This is enabled by significantly low development costs, driven by a large surplus of engineering skills in the country.

Figure 52: Development cost in automotives ($ Mn)

0

100

200

300

400

500

600

700

Scorpio (M&M) Indica (Tata Motors) Global average


Labour costs in the Indian auto industry are also among the lowest in the world, which helps reduce overall costs further.

15 September 2010

Automotive 34

Figure 53: Labour costs in the auto industry (indexed to 100)

0

10

20

30

40

50

60

70

80

90

100U

SA

Fran

ce

Aus

tralia

Japa

n

Taiw

an

Turk

ey

Pol

and

Rom

ania

Chi

na

Indi

a

Source: Autoliv - AHO, 2009

What Western OEMs need to learn

We believe increasing local content - in sourcing, engineering and more importantly R&D – is key to achieving an efficient cost structure.

Most players in India have localisation rates close to 90%, which is invariably more cost efficient than importing the more expensive components from abroad. Besides, India already has a well-developed vendor base, with expertise across major components in the value chain. Here, we also note the difference in manufacturing capabilities between China and India. While China is most efficient at large-scale production, India’s expertise lies in manufacturing products in smaller batches which require extensive engineering. India exports close to 18-20% of its production mostly to OEMs across the world.

Figure 54: Growing auto component exports Figure 55: Wide product range in auto components

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

10-yr CAGR of 20%

($ bn)

Engine parts31%

Drive transmission & steering parts

19%

Body & Chassis12%

Suspension & braking parts

12%

Equipments10%

Electrical parts9%

Others7%

Source: ACMA Source: ACMA

In addition, India has achieved significant scale in small car and two-wheeler production, which lends the country a well-established supply-chain and manufacturing capability for these products. For instance, India produces close to 20% of world’s mini cars (as defined by ProCar), with domestic two-wheeler production comparable to or higher than the worldwide production of most global players (including Honda and Yamaha).

15 September 2010

Automotive 35

Figure 56: India produces 20% of the world’s mini cars… Figure 57: …and produces more two-wheelers than the

worldwide production of key global players

0

5

10

15

20

25

30

W.Europe Japan China India

Mini Mini+Small

(%)

-

2,000

4,000

6,000

8,000

10,000

12,000

Piag

gio

Kaw

asak

i

TVS

Baj

aj

Suz

uki

Yam

aha

Hon

da

Tota

l Ind

ia

('000 units)

Source: ProCar, Credit Suisse research Source: Company data, SIAM, 2010

We also believe western OEMs would benefit by increasing R&D activity in India. The country is being increasingly recognised for its capabilities in this area, with many companies are setting up large product development centres in India. While Maruti plans to make India the R&D hub for Suzuki in Asia ex-Japan, Bosch already has a global development centre in India – the first outside Europe. A direct result of increased local R&D presence has been the development of India-specific products. Bosch in India, for instance, has developed a common-rail diesel unit exclusively for the Tata Nano which it now plans to introduce in other markets as well.

Consolidation and capacity trend

The domestic passenger vehicle (PV) market has almost 17 players, but continues to be dominated by the top three companies– Maruti, Tata Motors and Hyundai – which hold a 74% share of the market. Given the considerable potential of PV demand in India, many international players are in the process of setting up capacities or increasing their presence. Overall, we expect a cumulative 30% growth in industry capacity by FY2012E. This, however, is less compared to the growth in demand we expect over this period.

Figure 58: Industry utilsation likely to remain high

-

500

1,000

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FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E F12E

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Effective Capacity Sales Utilisation (RHS)

('000 units)


15 September 2010

Automotive 36

Emission regulation We remain convinced that the change in awareness of the use of fossil energy sources is the biggest driver for the change of business model and costs for a carmaker – not just in Europe, but globally. The transportation industry, namely trucks and cars, contributes some 15% of global CO2 emissions. Given the fact that the global vehicle park will likely increase from c700m vehicles at the end of the 1990s to 1 billion vehicles in the next ten years, the urgency to improve fuel efficiency is enormous.

We continue to monitor tightening emission regulations across the globe and believe that brand equity, which leads to superior price elasticity and thus power to price expensive fuel efficiency technologies, is becoming more important. In addition, scale and balance sheet strength are even more crucial.

Figure 59: Global CO2 emission standards; a topic for all major markets

185

141

Values are transferred for better comparison to unit g/km without adjusting for different test cycle characteristics; for US: calendar years set to model years minus 1 year

g CO2/kmJapan and China with Weight Class System:Example A-/B-class

2008 2012 2020

140

2009 2014 2019

201

138

2010 2015

126

1.2

50-1

.360

kg

273

206201

2008 2015 2019

Pass. carsCAFE AB 1493

235

193

167

CAFELCVs

AB 1493

2009 2014 2019 2008 2015 2019 2008 2012

235 (AT)

155

221 (MT)

175

StageIIIII

120

1.3

60-1

.470

kg

1.26

6-1.

515

kg

130

95

127

tbd

tbd

1.32

1-1.

430

kg

1.32

1-1.

430

kg

185

141

Values are transferred for better comparison to unit g/km without adjusting for different test cycle characteristics; for US: calendar years set to model years minus 1 year

g CO2/kmJapan and China with Weight Class System:Example A-/B-class

2008 2012 2020

140

2009 2014 2019

201

138

2010 2015

126

1.2

50-1

.360

kg

273

206201

2008 2015 2019

Pass. carsCAFE AB 1493

235

193

167

CAFELCVs

AB 1493

2009 2014 2019 2008 2015 2019 2008 2012

235 (AT)

155

221 (MT)

175

StageIIIII

120

1.3

60-1

.470

kg

1.26

6-1.

515

kg

130

95

127

tbd

tbd

1.32

1-1.

430

kg

1.32

1-1.

430

kg

Source: Daimler, EPA, NHTSA, ACEA, Credit Suisse Research

EU legislation: Leader in CO2 action The EU Commission has a very clear commitment to enforce a further significant reduction of CO2 emissions, which involves an additional tightening of automotive related emission standards. Europe already has the tightest emission regulation and a further lowering of the average new car fleet emission from 130g (from 2012) to 95g by 2020 will continue to transform the industry in our view. We see European emission regulation as the biggest single consolidation driver.

As per Article 1 in conjunction with Article 13 of the European Parliament’s regulation from 23rd April 2009, there is a clear commitment to reduce the average CO2 emission of new cars sold to 95g/km by 2020.

“By 1 January 2013, the Commission shall complete a review of the specific emissions targets in Annex I and of the derogations in Article 11, with the aim of defining:

■ The modalities for reaching, by the year 2020, a long-term target of 95 g CO2/km in a cost-effective manner; and

15 September 2010

Automotive 37

■ The aspects of the implementation of that target, including the excess emissions premium.”

The regulation further states

“On the basis of such a review and its impact assessment, which includes an overall assessment of the impact on the car industry and its dependent industries, the Commission shall, if appropriate, make a proposal to amend this Regulation in a way which is as neutral as possible from the point of view of competition, and which is socially equitable and sustainable.”

Current legislation: 2012-2015 130g/km (120g including non-powertrain related technologies)

Current CO2 legislation (130g/km) is phasing in over three years starting from 2012 when 65% of a carmaker’s fleet has to comply with the individual OEM’s CO2 target, which is calculated using a weight based target function.

■ A reduction in average CO2 emissions from new cars to 130 g/m (120 g/km including non-powertrain related technologies). This is subject to a formula: Permitted specific emissions of CO2 = 130 + 0.0457 × (M – 1289)

■ A staggered approach to implementation: 65% of new cars will comply with requirements in 2012; 75% in 2013; 80% in 2014 and 100% in 2015.

■ Encompassing a 10g reduction to come from complementary measures including greater penetration of biofuels.

■ Eco-innovations will count for up to 7g of manufacturers’ fleet targets.

■ Super-credits for vehicles emitting less than 50g CO2/km.

■ Provisions for niche manufacturers (10,000 to 300,000 units) to achieve fleet average reduction of 25%.

■ Penalties will be imposed on a sliding scale; manufacturers exceeding their target by more than 3 g/km will pay €95 per excess gramme. Smaller charges between €5 and €25 for excesses of 1 – 3 g/km.

In 2014, any weight increase in new cars will be studied. Following review, CO2 targets may be adjusted in 2016, to be reviewed every three years.

Technology costs rather than penalties

Based on existing CO2 data (2009) and brand specific targets we believe it is very unlikely that carmakers will have to pay material fines from 2012 onwards. It appears that legislation has meant that OEMs decide to spend the money on technologies (content) and improve fuel efficiency rather than paying a fine. In any case, the potential negative impact of not having a state-of-the-art fuel efficient fleet is far too damaging (pricing, residual values), which is why in our view OEMs have no choice but to spend the money on content.

15 September 2010

Automotive 38

Figure 60: European 2012 target curve (130g) and 2020 target curve (95g)

80

90

100

110

120

130

140

150

160

170

180

1100 1125 1150 1175 1200 1225 1250 1275 1300 1325 1350 1375 1400 1425 1450 1475 1500 1525 1550 1575 1600

T arg et C u rve 13 0g

1 30g /km in d u stry a vera g e

B M W

D AI

P S A

R e nault

VW

T oyota

N issan

H yun daiFord G M

V e h icle m a ss, Kg

CO 2, g /km

Av e rage

T a rg et C u rve 95g

95g /k m in d u stry av erag e

F iat

2009

2008

Source: T&E, Credit Suisse research

US regulation: 156g CO2/km by 2016 Recently approved US emission regulation (EPA-420-R-10-901, approved in April this year) is less rigid compared to Europe, but given current fuel efficiency and low profitability, domestic US makers are facing a serious problem in our view. Based on our calculations, companies such as GM, Ford and Chrysler would need to increase prices by up to 7% in order to comply with 2012 targets. Given the fact that we are extremely sceptical regarding any leeway for price increases especially in the US, we would argue that a material amount of future efficiency gains would be needed just to secure the current level of earnings.

European importers need to do their homework: So far, it appears that Mercedes/BMW are shipping relatively old and large engines to the US. In order to comply, more expensive and likely smaller engines will need to be sold to US customers, which obviously bears the challenge of higher engine costs and pricing (asking for more money for a smaller, albeit more fuel efficient, engine).

Having already seen the impact from CO2 legislation on European carmakers’ earnings (for instance Daimler refers to incremental €250 higher costs per vehicle in 2010) and the inability to pass these costs on to customers suggests that similar headwinds are potentially on the horizon in the US.

Based on our analysis US fuel efficiency regulation should benefit Asian OEMs which are already close to complying with 2012 emission targets. US peers are facing material headwinds based on data published by EPS and NHTSA (following the jointly published technical support document).

The EPA/NHTSA is stating that the average cost per vehicle is expected to increase by US$1,100 in the US (c5% of the price of an average US vehicle). However, EPA/NHTSA argue that on a total cost of ownership (TCO) basis customers benefit due to fuel savings:

“U.S. consumers who purchase their vehicle outright would save enough in lower fuel costs over the first three years to offset these higher vehicle costs. However, most U.S. consumers purchase a new vehicle using credit rather than paying cash and the typical

15 September 2010

Automotive 39

car loan today is a five year, 60 month loan. These consumers would see immediate savings due to their vehicle’s lower fuel consumption in the form of reduced monthly costs of $12–$14 per month throughout the duration of the loan (that is, the fuel savings outweigh the increase in loan payments by $12– $14 per month).”

While the above mentioned TCO logic is correct, reality from Europe shows that it is hard if not impossible to pass on higher vehicle costs to end customers. And given U.S. customers’ price sensitivity we believe this will be true even more so in the U.S.

Figure 61: US emission regulation (passenger cars) Based on projected 2011 model year emission data

Figure 62: US emission regulation (light vehicles) Based on projected 2011 model year emission data

25

27

29

31

33

35

37

39

41

43

35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59

Fleet average footprint (sq feet)

Flee

t ave

rage

mpg

2015

2014

2013

2012

2016

BMW Daimler

VW

Toyota

Nissan

GMChrysler

Ford

Honda

Hyundai Kia

Porsche

20

22

24

26

28

30

32

34

36

35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

Fleet average footprint (sq feet)Fl

eet a

vera

ge m

pg

2015

2014

2013

2012

2016

BMW

Daimler

VW

Toyota

NissanGM

Chrysle Ford

HondaHyundai

Kia

Porsche

Source: EPA, NHTSA, Credit Suisse estimates Source: EPA, NHTSA, Credit Suisse estimates

Technology drives costs drives need for price hikes We remain convinced that technology costs – which show up in the material cost line – are the single biggest headwind for carmakers. Unit costs are likely to increase by more than €1,000, which requires the industry to increase prices by as much as 5% in order to keep earnings flat. Given the fact that hard consolidation (ie capacity elimination) is not happening (at least in Europe) we think price elasticity will remain a major differentiating factor when analysing earnings for carmakers.

■ Premium makers have a better price elasticity compared to mass makers—firstly because they are selling to higher income classes and secondly because their customers drive more (esp corporate buyers) and are thus more willing to pay for better fuel economy.

■ Mass makers have revenues per unit of only €12-15k, which leaves very little room for error (premium makers €30-€38k).

■ Suppliers of fuel efficiency enhancing combustion engine technologies such as Continental, Bosch and BorgWarner, (to name just a few) should continue to benefit from significantly tightening fuel efficiency regulation.

15 September 2010

Automotive 40

Figure 63: CO2 related technologies

0%

5%

10%

15%

20%

25%

0 500 1000 1500 2000 2500 3000 3500 4000

Cost per Vehicle (€)

% C

O2

Red

uctio

n

Petrol Engine Cars

Diesel Engine Cars

Full Hybrid

Mild-Hybrid (i.e. motor assist via small battery)

STAGE 1:Optimise ICE Technology

STAGE 2:Mild-Hybrids

STAGE 3:Full-Hybrids

Strong downsizing with turbocharging

Direct Fuel-Injection

Start-stop

Green tyres

Dual-clutch

Start-stop + regenerative braking

Strong downsizing Variable Valve

Control

Full-Hybrid (i.e. full electric drive)

Source: Bosch, Company data, Credit Suisse research

15 September 2010

Automotive 41

Demographics: Selling cars in the old world is a phase-out model Societies are ageing and so are car buyers. This demographical change is not just something that will impact the structure of vehicle demand some time in the distant future but rather it is impacting demand now. We highly recommend investors become familiar with the implications of ageing societies on the automotive industry.

Our key message is that we expect demographic change to be the major driver for vehicle downsizing and also a slowdown in replacement demand in mature markets (especially Europe and Japan). This, in our view, could lead to slower long term growth rates and is an important consideration when analysing ’normalised’ earnings. Premium makers need to adapt to this eventuality despite their brand values being best suited to attract ageing customers.

The impact on carmakers will be severe in both mature and emerging markets in our view. The share of population older than 60 years of age is likely to increase materially in every major region. However, the difference is that emerging markets are still offering material growth due to the wealth effect and thus higher vehicle density. In mature markets, we expect replacement demand will come down by 20-30% from the current normalised level of demand (older people tender to drive less than younger ones).

These are our key findings:

(1) Premium makers: Based on our analysis of the available data, customers above the age of 60 have a preference for buying vehicles from premium makers (Mercedes leads the field selling some 38% to customers >60 years). But, older customers tend prefer smaller premium cars. Therefore, growth is likely to take place in the small-premium segment, a trend that explains German premium OEMs’ plans to launch more small cars.

(2) Downsizing: Demographic change is potentially an even stronger driver of the size of vehicles than the shift towards more fuel efficient mobility. For the moment, German premium makers sell c32% of their vehicles in small, significantly less profitable segments (1 Series, Mini, A/B Class, Smart), which could increase to significantly more than 50% within the next 5-10 years. The dilution effect on core business profitability could increase from currently 100bps to some 200-300bps based on our assumptions. We think companies’ existing 9-10% mid term EBIT margin targets are unlikely to be reached unless carmakers find new ways of co-operation.

(3) Mass makers: Mass makers might have to change their product offering from ’young and fancy’ products towards vehicle concepts more suitable for older people. Offering good value products in this cluster could be an interesting opportunity. Nevertheless, declining or stagnating traditional end markets will likely lead to more consolidation. Otherwise future earnings will unlikely match those of the past.

(4) End markets: Due to a combination of ageing car buyers (>25% older than 60 years; trend increasing) who are driving significantly less, and the continuing technological improvement (higher lifetime mileage) traditional vehicle markets could shrink some 20-30% over the next decade. Referring to data from the US Department of Transportation, people above 65 years of age drive 45% fewer miles/year compared to the average US driver. The slowdown in replacement demand is structural in our view.

15 September 2010

Automotive 42

Figure 64: Population age transition in Western Europe Figure 65: Age of car customers 2006 vs 2020 (Germany)

0%

10%

20%

30%

40%

50%

60%

1980 2000 2020E 2050E

Over 60 20-59

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

below 29 30-39 40-49 50-59 60-69 70 and

abov e

2006 2020

Source: UN Source: GFK

Figure 66: % of customers older than 60 yrs (Germany) Figure 67: Mercedes customers >60 years (Germany)

20%

25%

30%

35%

40%

45%

Mercedes A Class Mercedes B Class Mercedes C Class Mercedes E Class

Source: KBA Source: Polk

Figure 68: Average mileage/year by age (US) Figure 69: BMW margin dilution from small cars (lhs €)

0

2,000

4,000

6,000

8,000

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16-19 20-34 35-54 55-64 65+ All

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60,000

1 Series 3 Series 5 Series

0%

2%

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6%

8%

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12%

Renenue per unit EBIT per unit Margin

Source: NHTS data Source: Credit Suisse estimates

10%

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35%

40%

Mer

cede

s

Toy

ota

VW

Ope

l

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i

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d

Citr

oen

Ren

ault

BM

W

Peu

geot

Fia

t

Por

sche

15 September 2010

Automotive 43

From “Baby Boomers” to “Empty Nesters“ We conclude that older customers have a higher preference for cars from premium makers, but the requested vehicles are smaller compared to the classic premium cars, which are currently delivering the vast majority of earnings.

Premium car makers are thus facing a challenge and an opportunity at the same time: there is growth in smaller premium cars, but in order to keep cycle average superior profit margins compared to their mass production peer group, new forms of co-operation are needed. In our view, this represents another major argument for premium makers to join forces and exploit economies of scale for the benefit of profitable growth. The backbone of a profitable Western European business, sales to corporate customers, will unlikely support much future growth.

As Figure 70 suggests, Mercedes is currently the most successful brand selling to the older generation. With 38% of its products being owned by customers aged above 60 years, Mercedes stands ahead of its German peers BMW (21.7%) and Audi (23.6%).

Figure 70: Germany: Example of age and gender distribution by brand (2008) Age up to 29 from 60 female male

Total market 7.2% 24.3% 31.7% 68.3%

BMW 7.3% 21.7% 22.3% 77.7%

Mercedes 2.7% 38.0% 21.5% 78.5%

Audi 7.3% 23.6% 20.0% 80.0%

Porsche 1.6% 17.6% 15.4% 84.6%

VW 10.5% 28.1% 43.0% 57.0%

Opel 7.7% 25.9% 33.4% 66.6%

Ford 7.3% 23.5% 34.1% 65.9%

Fiat 9.2% 19.5% 38.6% 61.4%

Peugeot 9.5% 21.7% 43.4% 56.6%

Citroen 6.1% 22.9% 36.7% 63.3%

Renault 8.0% 21.8% 39.2% 60.8%

Toyota 5.1% 28.7% 34.6% 65.4%

Source: KBA, Credit Suisse research

40% of car buyers older than 60 years by 2020E People over the age of 60 years, known as “empty nesters” or “the silver age” in sociological terms, represent the strongest growing part of the society. For instance, in 2010/20 26%/31% of the German population is estimated to be older than 60 years (US 18%/22%). This compares to only 20% in Germany in 1990 (US: 17%) (source: UN). Based on this projected demographic change, European customers above the age of 60 will represent some 40% of car buyers by 2020 (29% in 2006). This is almost the average age of Mercedes customers in Germany today.

The group of customers older than 60 years will develop from already being the largest to the dominant group of new car buyers in Western Europe. We think premium makers are the best positioned out of all auto makers to exploit this change, but they will have to transform themselves. Scale in smaller car production is becoming a key element of sustainable success.

15 September 2010

Automotive 44

Figure 71: Age of vehicle customers (Germany) Figure 72:Population age transition in W.Europe

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

below 29 30-39 40-49 50-59 60-69 70 and

abov e

2006 2020

0%

10%

20%

30%

40%

50%

60%

1980 2000 2020E 2050E

Over 60 20-59

Source: GFK, Credit Suisse research Source: UN

Figure 73: % of customers older than 60 years by brand in Germany % of vehicle park, 2008

Source: KBA, Credit Suisse research

The trend of an ageing population triggers changes in disposable income. People from all income classes are getting older, which will likely lead to a decreasing average wealth of the population above 60 years. This wealth effect should additionally enforce the shift towards smaller, less expensive cars.

10%

15%

20%

25%

30%

35%

40%

Me

rce

de

s

Toy

ota

VW

Op

el

Au

di

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rd

Citr

oe

n

Re

na

ult

BM

W

Pe

ug

eo

t

Fia

t

Po

rsch

e

15 September 2010

Automotive 45

Replacement demand: Drive less – replace less There is a direct correlation between replacement demand (vehicle age) and average kilometres driven by car owners: the more people drive, the quicker the cars need to be replaced. Based on the fact that older people tend to spend less time in their car (which arguably could change over time) and generally drive fewer km/year (for instance fewer people commuting to work), average km driven/year decline. This has a negative impact on replacement demand and increases the average age of the vehicle parc structurally.

European markets generally experience no structural growth – demand is driven by scrappage of used cars, i.e. replacement of old vehicles. Figure 75 shows that vehicle density (cars/1000 population) in traditional markets has increased since the 1970s but has largely stagnated since the start of the 20th century. In our view, it is reasonable to assume very little growth of vehicle density in any non-emerging market (if not negative, as recently seen in the US).

Leaving other factors such as regulation aside, replacement demand (X) is a function of average miles driven per year (J) over lifetime mileage (S) multiplied by the vehicle park (B).

X = J/S * B

Figure 74 shows the impact sensitivity of annual vehicle sales (replacement) dependent on average km/year driven and the lifetime mileage per vehicle. Both parameters will arguably change in an unfavourable way: an ageing population drives less and due to technological improvements, cars last longer. For the German market, as an example, our estimates show that car sales could structurally decline 20-30% from the reported 3.3m units in 2008 to a range of c2.5m to 3m units. Such a structural change would lead to major disruptions to the already struggling European auto industry, and Germany only serves as an example for the broader mature Western European market or potentially all markets in the Western world.

We appreciate that this effect does not come overnight, but we believe that ageing population and technological progress are already impacting replacement demand and the age of the vehicle park. This trend, which is also the key reason for the increasing age of the vehicle park, will more likely accelerate in the near future.

Figure 74: German market replacement demand (2008 3.29m units sold) Average km/year

17,500 17,000 15,500 14,000 13,500

200,000 4.6 4.5 4.1 3.7 3.6 225,000 4.1 4.0 3.7 3.3 3.2 Average km/car (lifetime) 250,000 3.7 3.6 3.29 3.0 2.9 275,000 3.4 3.3 3.0 2.7 2.6 300,000 3.1 3.0 2.7 2.5 2.4


15 September 2010

Automotive 46

Figure 75: Vehicle parc density (vehicles/1000 population) Figure 76: Vehicle age and density (per 100k population)

(2009)

0

100

200

300

400

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1978

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Germany France UK Italy Spain W. Europe US Japan

Average Vehicle Age (years) Vehicle Density (Cars per 100,000 inhabitants)

Source: ACEA, Anfac Source: Polk

Older vs. Younger Drivers It is difficult to provide hard numerical support due to lack of data but referring to a study by the US Department for Travel we observe several traits. We are aware that carmakers are conducting significant research in an effort to explore future clientele and demand trends. However, this data is treated as highly sensitive and not provided to us.

We believe some general remarks about older driver preferences (vs. younger drivers) can be made with some confidence:

■ Lower mileage/fewer journeys – less depreciation and hence less replacement

■ Less disposable income and hence lower cash balance to spend on vehicles and related costs (insurance/ maintenance etc) ! Lower capex for cars ! Smaller cars

■ More classic/conservative brand values (values include styling, reliability, safety)

■ Easy entry (higher seating position)

■ ‘Room at the back’ less important as the ‘nest’ is empty. No need for MPVs or big saloons.

Observing the split of passenger car use in the US we see that 24% of journeys are work or work related. Given that this figure is an average over all demographics, we would expect the penetration of trips that are work related to be greater for younger than older drivers. Then observing that, in most cases, people travel longer to get to work/ work related business than for social reasons we would expect that mileage would decrease as a population ages.

15 September 2010

Automotive 47

Figure 77: How do people use their cars? (US) Figure 78: Average Trip length (miles, US)

To/From work18%

Work Related Business

8%

Shopping14%

All Other Family/Personal

20%

School/Church6%

Social and Recreational

31%

Other3%

0 5 10 15 20 25 30 35 40 45

All

To/From work

Work Related Business

Shopping

All Other Family/Personal

School/Church

Social and Recreational

Other

Source: US Department of Transportation NHTS 2001 Source: US Department of Transportation NHTS 2001

In fact this prediction is supported by the results from the US Transport survey. Firstly annual average miles per licensed driver by age vary significantly among the age groups. 20-54 year olds travel an average annual mileage close to 16,000 miles in the US while those over 65 travel less than half that. Less driving equates to lower depreciation and hence lower replacement – something that is a vital for OEMS future strategy planning.

Figure 79: Average annual mileage (US) Figure 80: Number of Trips per day (US)

0

2,000

4,000

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10,000

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14,000

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16-19 20-34 35-54 55-64 65+ All

3 3.5 4 4.5 5

Total

Under 16

16-20

21-35

36-65

Ov er 65

Source: US Department of Transportation NHTS 2001 Source: US Department of Transportation NHTS 2001

The data also shows that over 65s make on average one less trip a day when compared to 21-35 and 36-65 year olds. A combination of fewer trips and generally lower mileage per trip equates to older drivers spending less time in a car on average daily. Implications for preferences are that these drivers do not need the comfort and ride that are synonymous with D/E segment premium end vehicles (e.g. E class) as they simply do not spend the time in vehicles, which naturally reduces replacement demand, even leaving technological progress (cars last longer) aside.

Premium OEMs need to transform The positive message for premium makers is the fact that an ageing customer base generally matches the brand identities of premium brands. The flip side, however, is that this growing clientele appears to demand smaller, less expensive and easy-to-handle vehicles which are diluting premium OEMs profitability – at least nowadays. In other words, premium makers are well positioned to exploit growth arising from the “Empty

15 September 2010

Automotive 48

Nesters” generation, but efficiency in small/medium car manufacturing has to improve in order to offset a potential risk of 200-300bps margin dilution (see Figure 82).

Daimler and BMW have both stated that the first generations of their small car products hardly earn their costs of capital, while the current second generations are also well below the average group profitability from volume/mix. It is thus clear that premium makers are generating materially lower returns on smaller vehicles.

As Figure 82 shows, based on our estimates premium makers are generating far fewer, if not negligable, returns on their existing small car range. The existing EBIT margin targets of c10% (cycle average) for Mercedes (+/- 100bps; from 2010) and 9% for BMW (+/- 100bps; from 2012) are hardly achievable if carmakers do not join forces on small cars at least.

Figure 81: BMW revenue/EBIT/margin by product —cycle

average (€)

Figure 82: BMW volume/mix dilution by small cars

0

10,000

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30,000

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50,000

60,000

1 Series 3 Series 5 Series

0%

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6.0%

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2010

E

Core premium range margin Group product mix margin

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

To be clear, without having grown via selling smaller, less profitable vehicles (i.e. 1 Series, Mini, A/B Class and Smart), premium makers would have reported only meagre growth over the past twenty years. It appears that the market for expensive premium cars is at its limits in mature markets (in fact OEMs try to keep it high via leasing/financing deals and corporate business). This does not mean that demand for highly innovative premium vehicles, offering superior safety and fuel efficiency, isn’t there anymore – it simply implies that future growth for premium vehicles will happen in smaller, more flexible vehicles.

Figure 83: BMW core premium growth (unit sales) Figure 84: Mercedes core premium growth (unit sales)

0

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BMW Group sales Medium size premium (Group - Mini - 1 Series)

CAGR 12.3%

CAGR 8.9%

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Mercedes Benz / Smart unit sales Medium size premium (Group - A/B Class - Smart)

CAGR 10.3%

CAGR 7.4%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

15 September 2010

Automotive 49

Corporate business set to reach its limits Sales to corporate customers are a major sales channel for carmakers. Generally speaking, mass producers sell a significant proportion of their products to rental fleets whereas premium makers exploit corporate fleet demand (company cars) and self-employed business people.

In Germany, premium makers sell almost 80% of their cars to ‘non-private customers’. This business is mostly based on leasing deals since corporate clients tend to avoid the residual value risk. This business practice is best described as a transfer of German tax-payers’ funds to the auto industry (predominantly German premium OEMs).

German tax regulations allow corporate customers (including self-employed business people, lawyers, dentists, etc) to charge the costs of a car to their corporate P&L, reducing the taxable income. In exchange, the private use of the vehicle has to be taxed (1% of the list price added to the individual’s monthly taxable income). As an example, the monthly tax resulting from a €70,000 vehicle (e.g. Porsche Cayenne) would come to c€350 based on a 50% individual tax rate. Our of their total global 2008 unit sales, German premium makers generated some 18% (Audi) to 11% (Porsche) from sales to non-private customers in Germany.

Even if German politicians and tax authorities continue to support corporate car taxation, (a positive for the standard products of premium OEMs), we think the significant decline in the private customer base already signals some change in demand for premium vehicles and the need to launch vehicles more suitable for an ageing private customer base.

Figure 85: German sales to non-privates / global sales

2008

Figure 86: Penetration of sales to non-private clients 2008

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Audi Mercedes BMW Porsche

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80%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Mercedes BMW Audi Porsche

Source: Polk, Credit Suisse research Source: Polk, Credit Suisse research

Figure 87: German sales to non-private customers (as % of total) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Mercedes 53% 51% 52% 51% 50% 49% 50% 50% 56% 58%

BMW 53% 58% 61% 60% 65% 68% 67% 69% 74% 68%

Audi 53% 59% 58% 60% 59% 67% 65% 66% 75% 74%

Porsche 55% 55% 61% 62% 62% 63% 59% 63% 69% 70%

BMW 3 Series 46% 50% 56% 54% 62% 71% 66% 67% 75% 69%

Mercedes C Class 50% 50% 50% 49% 47% 45% 52% 50% 54% 58%

Audi A4 51% 64% 55% 56% 57% 68% 65% 67% 76% 71%

BMW 5 Series 66% 72% 71% 75% 73% 72% 79% 80% 83% 84%

Mercedes E Class 59% 58% 58% 61% 61% 59% 58% 62% 65% 69%

Audi A6 73% 69% 72% 74% 70% 75% 73% 77% 85% 88%

Porsche 911 65% 60% 65% 60% 66% 67% 59% 60% 67% 68%

Porsche Cayenne 59% 54% 62% 73% 72% 76%

Source: Company data, Credit Suisse research

15 September 2010

Automotive 50

The quintessence: Premium makers need to redefine their business model We have discussed the issue of consolidation in different contexts before (cost of complexity, powertrain, Financial Services etc). Our conclusion is that there is an ever increasing need for scale for both premium and mass producers. We see the cost of complying with customer demand for more fuel efficient mobility, potentially negative growth in traditional markets and less supportive Financial Services divisions (leasing and financing deals) as being the central arguments to exploit economies of scale and reduce double spending (capex, R&D).

We think premium makers have the choice either to continue diluting their brands with hiking discounts (in order to keep capacity utilisation up) or finally to join forces for a better, because more efficient, business model.

■ The 1990s were driven by structural wealth effects and resulting market share gains in traditional markets

■ Since beginning of the 20th century, the availability of cheap credit has supported management teams’ strategies to exploit the leasing/financing business in order to make expensive vehicles more affordable for the wider public. This growth has now come to an end since the FS business is more expensive to run (lower residual values, higher credit defaults, increasing refinancing costs).

■ => The next chapter will involve growth with smaller premium cars, which requires smart alternatives to exploit economies of scale (ie co-operations).

■ => Classical premium car limousines and SUVs should focus on an increasing wealth creation and thus demand in emerging markets.

Figure 88: Our view of premium makers’ potential transformation

Source: Credit Suisse research

• Demand for premium SUVs/cars to develop from low basis

• Increase dealer and service network

• Local production

• Brand management crucial

• Standardised products (limited need for build-to-order) => Develop and exploit premium brand heritage

Mature markets (Western Europe, US, Japan)

Emerging markets (China, South America, Asia ex Japan, India)

• Limited growth in traditional premium segments

• Develop “small” cars for both younger and older generation

• Growth in smaller cars dilutes margins by 200-300bps

• Corporate customers (Germany) unlikely to buy more cars

• Manage Leasing and Financing business

• Restructure FS operations under banking license

• Fuel efficiency regulation to increase vehicle cost => Need for alliances in order to gain scale

Premium vehicles = a two-fold strategy

15 September 2010

Automotive 51

Figure 89: Western European population age transition Figure 90: US population age transition

0%

10%

20%

30%

40%

50%

60%

1980 2000 2020E 2050E

Over 60 20-59

0%

10%

20%

30%

40%

50%

60%

1980 2000 2020E 2050E

Over 60 20-59

Source: UN Source: UN

Figure 91: Japan population age transition Figure 92: Russia population age transition

0%

10%

20%

30%

40%

50%

60%

1980 2000 2020E 2050E

Over 60 20-59

0%

10%

20%

30%

40%

50%

60%

1980 2000 2020E 2050E

Over 60 20-59


Figure 93: China population age transition Figure 94: Brazil population age transition

0%

10%

20%

30%

40%

50%

60%

1980 2000 2020E 2050E

Over 60 20-59

0%

10%

20%

30%

40%

50%

60%

1980 2000 2020E 2050E

Over 60 20-59


15 September 2010

Automotive 52

Company Overviews

15 September 2010

Automotive 53

BMW OUTPERFORM, TP €60; EUROPEAN FOCUS LIST CONSTITUENT

COMPANY OVERVIEW BMW is the only sizeable pure-play premium car producer globally. It has a current manufacturing capacity of 1.5-1.7m vehicles annually and has developed a significant captive Financial Services business with a leasing/financing portfolio of €65bn on our 2010 estimates. ). The company is meanwhile addressing premium relevant customers in almost all segments and regions of the world.

Only recently, China has become a major new market for BMW. We expect BMW to sell 12% of its vehicles in China in 2010, increasing to 20% by 2014E. BMW reported a peak group EBIT margin of 8.7% in 2001 and stayed at that level until 2007. With China becoming a new third pillar of the business and efficiency having been boosted, we expect BMW to report a 10% margin for the next two to three years.

INVESTMENT CASE We think BMW is best placed among its peers to benefit from a significant renewal of its product range (strongest product momentum of all EU carmakers), a lower cost base and a more global regional setup. In this respect, we are confident that BMW can meet its 8-10% sustainable margin “window” within its core automotive division.

BMW is leading the field with respect to fuel efficiency and unlike other players, the company has invested significant amounts over the past years (peak cash R&D ratio 2005: 6.6%; peak capex ratio 7-8% 2003/04). With the majority of investment behind it, BMW should be in a position to generate €2-3bn in FCF per year from 2011–12E.

Figure 95: BMW product launches 2008 2009 2010E 2011E 2012E

X6, May, N Mini conv, Mar, S 5 Series, Mar, S 6 Series coupe Sep, S 3 Series, Mar, S

1 Series conv, Mar, N Z4, May, S 5 Series, Touring, Oct, S 6 Series conv, Mar, S 3 Series Touring, Sep, S

M3 conv, Jun, S 5GT, Nov, N Mini SAV, Oct, N 1 Series, Sep, S

7 Series, Nov, S X1, Nov, N X3, Nov, S M5, Sep, S

3 Series, Sep, F RR mid sedan, Dec, N

RR Coup, Sep, N

Source: N = New model, F = Facelift, S = Successor of existing model. Company data

CATALYSTS We are expecting a strong set of Q3 numbers on 03 November. After BMW’s strong 9.6% margin in Q2 this year (bearing in mind that the new 5 Series hadn’t been fully launched by then), we think the performance for the rest of this year and 2011 should be stronger than current consensus forecasts.

BMW hosts an investor/analyst event in China 15-17 September. This should confirm our view that BMW will benefit from increasing penetration of the Chinese market. Pricing should remain strong especially for top end products such as 7 Series, X5 and X6 models.

VALUATION BMW is trading on FY11/12E industrial EV/EBITDA of 1.5x/0.8x, PE of 7.4x and 6.2x and EV/sales of 0.24x/0.14x. We expect earnings and cash flow power to act as catalysts for the stock, potentially triggering a more deserving valuation for a company that managed the downturn well and which generates 8-10% EBIT margins. We also highlight our 2010 dividend expectation of €1.34 (30% pay out ratio, to be paid in 2011), which stands against Reuters consensus of €0.70.

15 September 2010

Automotive 54

BMW 2005 2006 2007 2008 2009 2010E 2011E 2012E

Eu mn

Group Revenues 46,656 48,999 56,018 53,197 50,681 57,700 64,541 71,893

EBIT 3,793 4,050 4,212 921 289 5,089 6,386 7,594

EBITDA 10,259 11,198 12,599 11,360 9,368 13,589 14,886 16,094

Net income 2,239 2,868 3,126 324 204 3,022 3,968 4,792

EPS (Eu) 3.33 4.38 4.78 0.50 0.31 4.62 6.07 7.33

DPS (Eu) 0.64 0.70 1.06 0.30 0.30 1.39 2.12 2.93

Revenues (Industrial) 47,206 49,227 55,263 50,012 44,806 52,871 58,687 65,729

Operating Profit (Industrial) 3,362 3,157 3,529 750 -246 4,059 5,221 6,419

EBITDA (Industrial) 6,364 6,476 7,198 4,323 3,263 7,959 9,321 10,919

Industrial EBIT Margin 7.1% 6.4% 6.4% 1.5% -0.5% 7.7% 8.9% 9.8%

Industrial EBITDA Margin 13.5% 13.2% 13.0% 8.6% 7.3% 15.1% 15.9% 16.6%

Unit Sales Cars (In Ths) 1,328 1,374 1,501 1,436 1,286 1,393 1,468 1,541

Unit Sales Trucks (In Ths) Valuation 2005 2006 2007 2008 2009 2010E 2011E 2012E

Market Cap 23,022 26,247 25,723 13,226 19,264 29,516 29,516 29,516

Financial Services Book Value 4,581 4,965 5,197 3,752 4,268 4,973 5,957 6,467

Industrial Market Cap 18,441 21,282 20,526 9,474 14,996 24,543 23,559 23,049

Industrial net cash (-debt) 1,669 1,294 1,294 1,190 1,002 6,360 10,125 14,556

Pension liabilities -5,220 -4,983 -4,595 -2,969 -1,726 -1,100 -400 -400

Equity holdings 0 0 0 0 0 0 0 0

Minorities 0 0 0 0 0 0 0 0

Industrial EV 21,992 24,971 23,827 11,253 15,720 19,283 13,834 8,893

Multiples

EV/Sales (Industrial) 47% 51% 43% 23% 35% 36% 24% 14%

EV/EBIT (Industrial) 6.5x 7.9x 6.8x 15.0x -63.9x 4.8x 2.6x 1.4x

EV/EBITDA (Industrial) 3.5x 3.9x 3.3x 2.6x 4.8x 2.4x 1.5x 0.8x

PE (Group) 10.3x 9.2x 8.2x 40.8x 94.4x 9.8x 7.4x 6.2x

Dividend yield (Group) 1.7% 1.6% 2.5% 1.4% 0.9% 3.0% 4.6% 6.4%

FCF yield (Industrial) 10.7% 3.1% 8.2% 2% 6.4% 8.7% 12.3% 15.5%

PB (Group) 1.4x 1.4x 1.2x 0.7x 1.0x 0.9x 0.8x 0.8x Geographical sales split 2009A Divisional Split 2009A

Source: Company Data, Credit Suisse Estimates

Europe

56%Americas

23%

Asia

17%

Other

4%

Cars

72%

Motorcy cl

es

2%

FS

26%

Based on prices as of 10 September 2010

15 September 2010

Automotive 55

Daimler OUTPERFORM, TP €55

COMPANY OVERVIEW After BMW, Mercedes is the second largest producer of premium cars globally. At the high end of the price range, Mercedes sells the largest number of premium vehicles. In addition, about 40% of Daimler’s ongoing revenues are generated from selling commercial vehicles (Trucks, Vans and Buses), which makes Daimler the world market leader in this sector. Daimler is targeting a 10% cycle average EBIT for Mercedes (from H2 2012) and an 8% margin for its trucks division.

INVESTMENT CASE Daimler’s equity story circles around the question why its shares are trading at a material discount to its full SOTP valuation. For instance, using current valuation multiples for Daimler’s best truck peer Volvo would imply that Mercedes would basically come ‘for free’ at the current share price. Daimler shares have underperformed German peer BMW by more than 40% since end of August 2007 when Daimler announced its spin off of Chrysler. We believe Daimler will deliver a strong earnings recovery on a more sustainable basis, which should remove some of the conglomerate discount. If this does not happen, we think management could face more discussion regarding the need for a trucks spinoff.

CATALYSTS We expect Daimler management to send a strong positive message during the Paris Motor show later in September. Consequently, we expect a very strong third quarter, which should trigger significant consensus upgrades. Furthermore, Volvo/MAN/Scania are hosting truck days in LATAM, which should underpin the recovery of truck markets. Daimler itself is hosting a trucks day 29 November in Germany.

VALUATION Our 2010/11/12 EPS estimates stand 21/34/39% above consensus. Daimler is now trading on 2011E/12E industrial EV/sales of 0.33x/0.28x and EV/EBITDA of 2.7x and 2.2x. Our €55 target price meanwhile reflects a 17% discount to the relevant 2011E SOTP valuation.

Figure 96: 2011E SOTP valuation €m Sales EV/Sales EV (I) EBITDA EV/EBITDA EV (II) EBIT EV/EBIT EV (III) EV

Mercedes 55,698 0.45x 25,064 7,031 4.00x 28,125 5,457 7.00x 38,200 30,463

Smart -1,500

Commercial Vehicles 27,267 0.60x 16,360 2,534 6.00x 15,201 1,894 8.00x 15,148 15,570

Vans 9,023 0.50x 4,512 833 5.00x 4,165 632 7.00x 4,421 4,366

Buses 5,314 0.50x 2,657 491 5.00x 2,453 372 7.00x 2,604 2,571

Eliminations -127 5.0x -633 -633

SOTP Industrial Business 50,838

Financial Services 6,720

SOTP Operating Business 57,558

Market Value Associated Companies 4,715

Net debt Industrial Business (- net debt / + net cash) 8,050

Market Value Group 70,323

Fair Value per share 66.3

Discounted to target price -17%

Target price, € 55

Source: Credit Suisse estimates

15 September 2010

Automotive 56

Daimler 2005 2006 2007 2008 2009 2010E 2011E 2012E

Eu mn

Group Revenues 149,776 99,222 101,569 98,469 78,924 94,627 103,726 114,751

EBIT 4,011 4,992 8,710 2,730 -1,513 6,479 8,029 9,658

EBITDA 16,661 17,936 12,856 5,753 1,751 9,829 11,479 13,208

Net income 2,846 3,744 3,979 1,348 -2,640 3,769 5,278 6,679

EPS (Eu) 2.80 3.66 3.83 1.41 -2.49 3.68 5.15 6.52

DPS (Eu) 1.50 1.50 2.00 0.60 0.00 1.30 2.06 2.61


Operating Profit (Industrial) 4,983 4,934 7,044 5,534 -790 5,706 7,039 8,609





Unit Sales Trucks (In Ths) 529 516 468 472 259 323 378 440 Valuation 2005 2006 2007 2008 2009 2010E 2011E 2012E

Market Cap 43,693 47,650 68,373 25,755 39,508 46,479 46,479 46,479



Industrial net cash (-debt) 7,250 8,456 12,769 787 4,614 11,000 12,850 14,850

Pension liabilities -45,389 -18,857 -3,686 -3,969 -3,901 -4,500 -4,800 -5,200

Equity holdings 8,093 5,883 5,068 2,275 3,199 4,042 4,042 4,042

Minorities -653 -421 -1,512 -1,508 -1,500 -1,500 -1,500 -1,500

Industrial EV 64,763 43,768 51,344 23,538 32,427 32,417 29,167 27,567

Multiples


EV/EBIT (Industrial) 13.0x 8.9x 7.3x 4.3x -41.0x 5.7x 4.1x 3.2x


PE (Group) 15.4x 12.7x 17.2x 19.1x -15.0x 12.3x 8.8x 7.0x


FCF yield (Industrial) -0.1% 5.3% 4.6% -17% 6.8% 3.6% 5.6% 8.1%



Europe

46%

Americas

29%

Asia

16%

Other

9%

Cars

57%Trucks

26%

FS

17%


15 September 2010

Automotive 57

Fiat NEUTRAL, TP €9

COMPANY OVERVIEW With 49% of (2009) revenues originating from outside of Europe and 31% stemming from non-automotive activities, Fiat is the most geographically and operationally diversified volume OEM under our coverage in Europe. The company has announced it will spin-off the industrial operations into a separately listed entity by January 2011 in an attempt to remove the perceived valuation discount currently attached to Fiat’s non-automotive businesses.

Fiat acquired a 20% stake in Chrysler in June 2009 and has options to increase its stake in the business to 35% after meeting a set of operational milestones at Chrysler. Fiat has said it hopes its involvement in Chrysler will provide both the necessary scale of the volume in the auto industry as well as access to the North American market. Fiat CEO Marchionne, who currently also serves as CEO of Chrysler, set out an ambitious plan for Fiat in April this year which should see the company almost double unit sales in Europe and generate more earnings than over the entire 1999-2007 period.

INVESTMENT CASE Unlike for the rest of the European auto sector, the market appears willing to price in a stronger earnings recovery at Fiat, based on management’s performance over the previous cycle. Given the current operating environment for a volume car maker, we remain cautious and believe that the share price already reflects a substantially better earnings performance at Fiat than has been the case historically. We believe it is still too early to price in expected improvements at Fiat based on the CEO’s plan given that the company is still losing market share in Europe, the headwinds from falling pricing and rising raw material costs. We believe that there is better risk reward elsewhere in the sector.

CATALYSTS As disclosed at the end of Q2, Fiat and Chrysler will both update their respective guidance statements for 2010 when they present Q3 results at the end of October. While higher earnings and lower net debt for 2010 than originally planned by Fiat are already reflected in consensus estimates, we believe the more relevant discussion is around the ability of Fiat Auto to de-leverage its balance sheet in 2011E given that capex investments in Italy had to be moved from 2010 to 2011 and beyond given recent labour disputes.

Furthermore we would expect Fiat to provide an update on current market conditions in Europe and Brazil at the Paris Motorshow in late September.

VALUATION Based on our 2011 forecasts, Fiat is currently trading on 38% EV/Sales, 4.3x EV/EBITDA and 13.2x P/E. While we understand that the spin-off could warrant higher multiples for Fiat compared to its pure-play auto peers, we struggle to understand why the shares should be trading at a substantial premium to stocks like BMW and Daimler, given the superior earnings performance of the latter two. Clearly a lot of good news is already reflected in the share price.

We base our €9.0 target price on a blended 2011E/2012E SOTP valuation.

15 September 2010

Automotive 58

Fiat 2005 2006 2007 2008 2009 2010E 2011E 2012E

Eu mn

Group Revenues 46,544 51,832 58,529 59,564 50,102 53,813 56,859 60,244

EBIT 2,215 2,061 3,152 2,972 359 1,570 1,921 2,718

EBITDA 4,805 5,030 5,890 5,783 3,032 4,336 4,811 5,798

Net income 1,331 1,065 1,953 1,612 -838 685 924 1,593

EPS (Eu) 1.25 0.84 1.55 1.30 -0.68 0.55 0.75 1.29

DPS (Eu) 0.31 0.16 0.40 0.00 0.17 0.17 0.17 0.35


Operating Profit (Industrial) 1,000 1,951 3,233 3,362 1,058 1,700 2,121 2,878


Industrial EBIT Margin 2.1% 3.8% 5.5% 5.6% 2.1% 3.2% 3.7% 4.8%




Market Cap 9,147 18,097 21,759 5,503 12,328 12,206 12,206 12,206

Financial Services Book Value 0 0 0 0 0 0 0 0


Industrial net cash (-debt) -3,219 -1,773 355 -5,949 -4,418 -4,658 -5,465 -5,475


Equity holdings 1,058 503 497 512 441 441 441 441

Minorities -732 -674 -673 -747 -814 -814 -814 -814

Industrial EV 15,990 23,802 25,177 15,053 20,566 20,691 21,499 21,509

Multiples


EV/EBIT (Industrial) 16.0x 12.2x 7.8x 4.5x 19.4x 12.2x 10.1x 7.5x




FCF yield (Industrial) -11.3% 0.3% 7.6% -60% 6.7% -4.7% -6.5% -0.2%



Europe

51%

Americas

27%

Asia

2%

Other

20%

Cars

51%

Others

18%

Trucks

13%

Constructi

on

Equipment

18%


15 September 2010

Automotive 59

PSA UNDERPERFORM, TP €21

COMPANY OVERVIEW With 85% of 2009 revenues generated within Europe, PSA is the most euro-centric OEM under our coverage. We consider PSA’s parts making business Faurecia to be well positioned to benefit from auto production growth in emerging markets as well as higher growth rates for premium vehicle demand following a string of acquisition and restructuring measures during the previous crisis. PSA’s auto business on the other hand is likely to continue to be impacted by a deteriorating pricing environment, a mix shift towards smaller vehicles and higher raw material / emission compliance costs.

INVESTMENT CASE We rate PSA Underperform with a Target Price of €21 to reflect our expectations of further deterioration in the operating environment for PSA’s automotive operations. While the auto business benefited from near peak-production levels in H1 10 with still low raw material costs, the business only generated an operating margin of 2.5% and an Industrial FCF of €313m over the period. With conditions become more challenging over the next 12 months, we see little reason to assume that automotive earnings will be above the break-even level. In the absence of earnings generation or the subsequent prospect for balance sheet deleveraging, we can think of few good reasons to invest in PSA currently.

So far the recovery plan presented by CEO Varin in November last year has failed to deliver higher levels of return. Given that PSA’s auto sales in Western Europe have been falling steadily since 2001 while the cost base has remained largely unchanged, we believe that more far-reaching measures are now needed to return margins to their pre-crisis levels.

CATALYSTS We expect to receive an update on current trading conditions from PSA at the Paris Motorshow where PSA will host an evening with company management and a plant visit on the 28th September.

VALUATION An appealing valuation is not enough in our view, when earnings momentum is missing: The stock is currently trading on 8% 2011E EV/Sales, 0.9x EV/EBITDA and 5.9x P/E. While this is is cheap relative to its peers, we would argue that valuation alone is not enough for PSA shares to outperform. We think the market will need to see earnings momentum return and also needs confidence in the company’s ability to address its balance sheet through cash generation. As long as these elements are not in place, we see little prospect of multiple expansion and share price outperformance.

15 September 2010

Automotive 60

PSA Peugeot Citroen 2005 2006 2007 2008 2009 2010E 2011E 2012E

Eu mn

Group Revenues 56,267 55,185 58,676 54,356 48,417 52,861 55,521 58,681

EBIT 1,940 1,119 1,752 550 -689 1,582 1,788 2,362

EBITDA 5,127 4,805 5,311 4,214 2,505 4,798 5,028 5,625

Net income 1,029 183 885 -363 -1,161 794 907 1,362

EPS (Eu) 4.47 0.80 3.88 -1.59 -5.12 3.50 4.00 6.00

DPS (Eu) 1.35 1.35 1.50 0.00 0.00 0.00 0.50 1.00


Operating Profit (Industrial) 1,333 515 1,144 -7 -1,187 1,002 1,307 1,857






Market Cap 11,426 11,778 12,147 2,844 5,539 5,397 5,397 5,397


Industrial Market Cap 9,006 9,126 9,253 -75 2,366 2,058 1,920 1,920

Industrial net cash (-debt) 381 116 1,404 -2,906 -1,993 -1,828 -1,325 -537

Pension liabilities -1,098 -1,020 -745 -819 -819 -819 -819 -819


Minorities -564 -465 -349 -222 -135 -135 -247 -314

Industrial EV 10,286 10,495 8,943 3,872 5,312 4,840 4,311 3,590

Multiples


EV/EBIT (Industrial) 7.7x 20.4x 7.8x -553.1x -4.5x 4.8x 3.3x 1.9x


PE (Group) 11.1x 64.4x 13.7x -7.8x -4.8x 6.8x 5.9x 4.0x


FCF yield (Industrial) -4.6% 0.4% 12.8% -130% 20.7% 3.1% 9.3% 16.7%



Europe

85%

Americas

7%

Other

8%

Cars

73%

FS

3%

Trucks

6%

Others

18%


15 September 2010

Automotive 61

Renault OUTPERFORM, TP €43

COMPANY OVERVIEW While the headwinds for Renault’s automotive business are broadly similar to what we have described for PSA, its 44% stake in Nissan and the potential disposal of its 21% stake in Volvo provides the company with additional strategic options to address the leverage of its balance sheet. Furthermore the Nissan stake gives Renault indirect access to an earnings stream stemming from a recovery of the North American auto market.

INVESTMENT CASE Renault remains our preferred play in the European volume space. This view is not based on the quality of its automotive operations, but on the additional optionality from its associates. We believe the market has not reflected this given that the YTD performance of Fiat, Renault and PSA is so similar (-9%,-10% and -12% respectively).

CATALYSTS We expect Renault to provide an update on current business conditions during an investor event at the Paris Motorshow on 27th September. At this event we will hear from Renault about the development of the business so far in H2 2010 and whether this development is more in line with the “pink” or “grey” scenario of volume declines (16% declines or -20%).

CFO Thormann stated at the H1 conference call that the company did not see any great urgency to address current levels of leverage through the disposal of additional assets. In our view this suggests that a sale of the Volvo stake is not imminent.

Renault/Nissan CEO Carlos Ghosn will present another strategic plan for the business in February 2011. Similar to the presentation of the “Commitment 2009” plan in February 2006, we expect to hear how the company can restore profitability in this new operating environment. While the previous plan aimed to transform Renault into the most profitable volume car maker in Europe (6% margin in 2009) by expanding the model lineup and moving the brand more up-market, we believe that the 2011 plan should be centered on the issue of adjusting the cost base in Europe to expected demand and moving the industrial footprint closer towards Renault’s most likely growth regions (North Africa, Eastern Europe, South America).

VALUATION On our 2011 forecasts, Renault remains a very lowly valued stock with a core industrial EV/Sales of -1% and -0.1x EV/EBITDA. In our view this suggests that the market is essentially attaching a negative value to the core operations, once we deduct the market value of the Volvo stake and the book value of Nissan.

We maintain our Outperform rating due to a relatively cheap valuation, growing associate profit contribution and deleveraging optionality. Our €43 target priced is based on a SOTP model.

15 September 2010

Automotive 62

Renault 2005 2006 2007 2008 2009 2010E 2011E 2012E

Eu mn

Group Revenues 41,338 40,332 40,682 37,791 33,712 36,165 38,344 40,302

EBIT 1,514 877 1,238 -117 -955 846 1,246 1,713

EBITDA 3,981 3,880 4,169 3,218 2,728 4,082 4,511 4,983

Net income 3,367 2,886 2,669 571 -3,125 964 1,375 2,072

EPS (Eu) 13.19 11.23 10.32 2.23 -12.14 3.75 5.35 7.50

DPS (Eu) 2.40 3.10 3.80 0.00 0.00 0.00 1.00 1.50


Operating Profit (Industrial) 858 571 882 -174 -915 354 850 1,256


Industrial EBIT Margin 2.2% 1.5% 2.3% -0.5% -2.9% 1.0% 2.3% 3.3%




Market Cap 19,632 25,929 27,642 5,286 10,315 10,613 10,613 10,613



Industrial net cash (-debt) -2,252 -2,414 -2,088 -7,944 -5,921 -4,816 -4,600 -3,970


Equity holdings 19,811 22,131 13,966 13,053 14,535 14,535 14,535 14,535

Minorities -463 -483 -492 -256 -11 -27 -71 -121

Industrial EV 1,561 5,472 15,063 -533 645 -186 -392 -1,011

Multiples

EV/Sales (Industrial) 4% 14% 39% -1% 2% -1% -1% -3%

EV/EBIT (Industrial) 1.8x 9.6x 17.1x 3.1x -0.7x -0.5x -0.5x -0.8x

EV/EBITDA (Industrial) 0.4x 1.6x 4.1x -0.2x 0.3x -0.1x -0.1x -0.2x



FCF yield (Industrial) 4.9% 0.2% 4.7% -50% 15.6% 10.6% 2.2% 8.7%



Europe

76%

Americas

8%

Asia

7%

Other

9%

Cars

95%

FS

5%


15 September 2010

Automotive 63

Volkswagen OUTPERFORM, TP €102

COMPANY OVERVIEW VW is the second largest carmaker in the world, being the only player with a significant presence in all major regions (VW is market leader in Europe and China). VW runs a multi brand portfolio with Audi and VW being the largest contributors. During the last downturn, VW has shown its strength, decoupling from its major European and global peers by not reporting a single loss making quarter and having €17.5bn of net cash by the end of the first half 2010.

Next to organic growth, VW is looking to integrate Porsche’s sports car business (valued at €12.4bn) and streamline its trucks operations (VW owns a 29.9% stake in in MAN and a 71% stake in Scania).

Figure 97: VW shareholders June 2010 (VW has a 20% blocking minority vs 25% generally in Germany) Number of shares Votes

Ordinary Preference TOTAL Ordinary Preference Capital

Lower Saxony 62 0 62 21% 0% 13%

Porsche Ords 75 0 75 25% 0% 16%

Porsche Prefs 75 0 75 25% 0% 16%

QIA (ex stake via Porsche) 50 25 75 17% 15% 16%

Free float 33 143 176 11% 85% 38%

TOTAL 295 168 463 100% 100% 100%

Source: Company data, Credit Suisse research

INVESTMENT CASE VW offers exposure to potentially the best large scale carmaker globally, at one of the cheapest valuations in the sector under our coverage. In our view, VW will continue to leverage its global scale and gain market share due to superior products and its ability to support itself via its own financial services operation. What will be important is how VW performs in what we expect to become a more challenging Western European market in H2 this year.

Key reasons for investor concerns are corporate governance concerns, potential future acquisitions (Porsche, trucks consolidation) and the fact that investors can only really invest in non voting preference shares (due to liquidity).

CATALYSTS We expect increased newsflow in the second half of related to VW (and Porsche). We expect VW to give more visibility regarding its stated plans to merge with Porsche SE and also on consolidating its trucks division.

VALUATION On our 2011 net cash projection of €20.2bn and using our 2011 forecasts, VW is trading on EV/sales of 0.13x and EV/EBITDA of 1.3x. Even including a 20% conglomerate discount our 2011E SOTP valuation yields a fair value of €102. We note that a scenario analysis incorporating a potential merger of VW and Porsche SE derives a similar fair value.

15 September 2010

Automotive 64

Volkswagen 2005 2006 2007 2008 2009 2010E 2011E 2012E

Eu mn

Group Revenues 95,268 104,875 108,897 113,808 105,187 118,256 125,520 135,374

EBIT 2,792 2,009 6,151 6,333 1,855 5,197 6,170 7,334

EBITDA 11,446 11,407 15,389 14,771 10,732 14,197 15,170 16,334

Net income 1,120 1,954 4,120 4,753 960 3,681 4,825 6,250

EPS (Eu) 2.91 4.98 10.45 11.94 2.40 7.91 10.37 13.44

DPS (Eu) 1.15 1.15 1.25 1.80 1.93 1.20 1.50 2.50







Unit Sales Trucks (In Ths) 43 56 62 69 Valuation 2005 2006 2007 2008 2009 2010E 2011E 2012E

Market Cap 17,580 29,820 54,898 77,238 29,380 32,159 32,159 32,159



Industrial net cash (-debt) 733 7,344 13,363 6,186 10,300 16,820 20,166 25,594


Equity holdings 4,091 7,284 10,720 6,189 5,183 6,909 6,909 6,909

Minorities -47 -55 -63 -2,123 -1,932 -2,200 -2,200 -2,200

Industrial EV 20,363 22,781 36,224 71,391 21,445 17,401 14,224 8,867

Multiples









Europe

71%

Americas

20%

Asia

9%

Cars

82%

Trucks

9%

FS

9%


15 September 2010

Automotive 65

Ford UNDERPERFORM, TP $11

COMPANY OVERVIEW After fighting for survival in the first half of 2009, Ford has generated significant earnings momentum over the last few quarters, topping consensus expectations. In the US, Ford’s market share is 16.7% YTD, up about 200 bps from 2008. One of the main earnings drivers for the company so far this year has been strong North American pricing (~$800m tailwind to EBIT in 1Q and $1.0 bln tailwind in 2Q), thanks to new product launches, tight inventory/incentive management, and strong commercial fleet sales in the US (which have helped boost sales on the more profitable F-Series and E vans). The Financial Services division has also been “over-earning,” due to gains on lease residuals and write-downs of credit-loss reserves.

INVESTMENT CASE Nevertheless, while Ford has proven for the past few quarters that it is capable of earning more than we thought possible, we have to maintain some caution towards the shares at this juncture. Our reasons are as follows:

(1) Earnings are likely to be lower in the third and fourth quarters than they were in the first and second;

■ Ford signaled that it faces significant cost headwinds in the second half (both structural and material), and that production volume will be lower than the first half;

■ The non-repeat of the Super-duty launch, which was an important driver behind Ford’s powerful 1H earnings, will likely also weigh on results sequentially;

■ Financial Services should also slow down in the second half, as off-lease volumes moderate and used vehicle pricing (and therefore auction values) start to come off record highs;

(2) Depending on the strength of the overall US light vehicle industry, we think that earnings in 2011 could conceivably be lower than earnings in 2010;

(3) If that is the case, and 2010 proves to be a local earnings ‘peak’, then the shares look appropriately valued at the current price; historically, Ford has consistently traded at 45% to 50% of the S&P multiple during peak earnings years.

CATALYSTS The most notable, high frequency catalyst for Ford is the monthly trend in US vehicle sales (SAAR) and Ford’s market share. So far this year, the US SAAR has been running at 11.2 million. The company has said it is looking for 2010 US sales to come in at about the 11.3-11.7 million range (we think sales are going to come in towards the lower end of those estimates). Absent a robust recovery in the US SAAR in 2011, 2010 earnings could prove to be a near-term peak, in which case the shares would struggle to move higher.

Another potential catalyst could be the GM IPO scheduled for Q410 (and the planned 2011 Chrysler IPO), which could draw investor interest away from Ford and thereby strip away some of the scarcity premium already baked into the share price.

VALUATION Based on our DCF analysis on Ford, we think the market is pricing in 2011E earnings of $1.47/share, well below the Street consensus of $1.88/share, but above our estimate of $1.40. On our 2011 estimate, Ford is trading at about 4.6x EV/EBITDA, above consensus, with FY11 P/E of 8.4x (vs consensus of 6.0x). Relative to the S&P multiple, Ford’s P/E is at about 50%, consistent with prior years when earnings were at a peak (i.e. when the following year was lower).

15 September 2010

Automotive 66

Ford Motor Co. 2005 2006 2007 2008 2009 2010E 2011E 2012E

US$ mn

Group Revenues 154,515 143,239 154,379 125,029 105,893 113,346 118,474 129,205

EBIT -4,240 -13,496 -4,035 -11,920 -2,528 6,378 5,957 6,863

EBITDA 3,781 -6,168 2,728 -5,898 1,565 10,265 10,157 11,363

Net income 2,517 -2,699 -389 -7,579 -374 7,094 5,799 6,196

EPS (US$) 1.22 -1.44 -0.18 -3.09 -0.12 1.72 1.40 1.50

DPS (US$) 0.41 0.27 0.00 0.00 0.00 0.00 0.00 0.00


Operating Profit (Industrial) -1,142 -5,359 -439 -6,873 -1,488 6,378 5,957 6,863

EBITDA (Industrial) 5,696 1,841 6,286 -1,373 3,112 10,228 10,157 11,363

Industrial EBIT Margin -0.7% -3.7% -0.3% -5.5% -1.4% 5.6% 5.0% 5.3%

Industrial EBITDA Margin 3.7% 1.3% 4.1% -1.1% 2.9% 9.0% 8.6% 8.8%



Market Cap 13,794 13,594 14,202 5,470 33,071 48,770 48,770 48,770


Industrial Market Cap 6,124 3,119 2,107 -3,831 23,053 37,765 37,765 37,765

Industrial net cash (-debt) -5,835 -2,573 -6,340 10,173 12,438 3,300 1,765 1,765


Equity holdings 1,122 1,159 1,421 1,195 1,305 1,325 1,325 1,325

Minorities 0 0 0 0 0 0 0 0

Industrial EV 42,006 29,057 26,814 4,590 21,010 44,840 46,375 46,375

Multiples


EV/EBIT (Industrial) -36.8x -5.4x -61.1x -0.7x -14.1x 7.0x 7.8x 6.8x

EV/EBITDA (Industrial) 7.4x 15.8x 4.3x -3.3x 6.8x 4.4x 4.6x 4.1x

PE (Group) 5.5x -5.0x -36.5x -0.7x -88.5x 6.9x 8.4x 7.9x


FCF yield (Industrial) 4.2% -47.9% -30.7% -356% 6.7% 10.5% 9.8% 11.6%

PB (Group) 1.1x -3.9x 2.5x -0.3x -4.2x -9.8x 63.1x 7.1x Geographical sales split 2009A Divisional Split 2009A


Europe

28%

Americas

55%

Asia

5%

Other

12%

Light

Vehicles

90%

FS

10%


15 September 2010

Automotive 67

BYD UNDERPERFORM, TP HK$40

COMPANY OVERVIEW From its beginnings as a batteries manufacturer, BYD has diversified into the handset components as well as automobile businesses. By 2009, BYD Auto was the company’s largest division, accounting for approximately three-quarters of earnings. Besides traditional gasoline vehicles, the company also offers plug-in hybrids as well as pure electric vehicles, and has built up its solar business in recent years.

INVESTMENT CASE BYD remains one of our top sell ideas in the China auto space. In our view, BYD has successfully built up its own automobile brand in China. On the back of its recent success, BYD has been promising—in our view—highly optimistic sales targets which appear overly difficult to achieve. Its latest 1H10 results fell 12% short of consensus forecast on weakening sales momentum and deteriorating margins.

CATALYSTS Auto division struggling. We expect the softer auto demand, along with higher costs and ASP cuts, to continue suppressing BYD’s vehicle sales as well as margins in the near-term. In addition, based on the current sales run-rate, we believe BYD is unlikely to meet management’s revised target of 600,000 (from 700,000).

EV & hybrids – too much expectation. BYD’s pure electric vehicle (EV) model, e6 and the F3DM plug-in hybrid have been gaining sales momentum in recent months, thanks to various subsidies offered by the government. According to management, the company has been receiving good orders for the e6 model, primarily from taxi companies. Despite the positive momentum, we highlight that sales of these vehicles remain insignificant and earnings from these models are unlikely in the near term. On the other hand, we view BYD’s JV with Daimler as a long-term positive, but we do not expect any meaningful profit contribution from the JV until at least 2013 or beyond.

A number of concerns. From a business perspective, the company continues to see deteriorating sales and margins in its auto division. In addition, the recovery of its battery and handset businesses continues to be slower than expected. Other concerns include:

■ BYD is considering entering the highly competitive home appliance market. In our view, home appliance products offer limited strategic fit for the company.

■ BYD is under investigation about alleged legal irregularities in its use of land in Xi’an.

■ BYD plans to spend up to Rmb10 bn in capex this year to further expand its auto capacity as well as boosting its capabilities in the solar business. Based on our model, BYD is unable to finance such expansion with its existing cash flow; hence in our view it may rely on debt financing or equity offering to fulfill its capex needs.

VALUATION On our 2011 forecasts, BYD trades at nearly 18x P/E, a significant premium to the industry average of 10-13x, which in our view is excessive. Besides the lacklustre performances of its three core businesses (auto, handset and batteries), we expect BYD to face numerous challenges in the medium term, including: 1) the potential foray into home appliances; 2) investigation by the Ministry of Land & Resources, and 3) mounting pressure on cash flow. Our HK$40 target price is derived from 0.65x PEG or 14.5x FY11 P/E.

15 September 2010

Automotive 68

BYD Co Ltd 2006 2007 2008 2009 2010E 2011E 2012E

rmb mn

Group Revenues 12,939 21,211 26,788 39,469 51,541 66,035 80,149

EBIT 1,408 2,038 1,500 4,817 5,372 7,098 8,718

EBITDA 1,934 2,936 2,831 6,548 7,822 10,040 12,200

Net income 1,117 1,612 1,021 3,794 4,194 5,451 6,691

EPS (rmb) 0.55 0.79 0.50 1.77 1.84 2.40 2.94

DPS (rmb) 0.11 0.34 0.00 0.33 0.37 0.54 0.70

Revenues (Industrial) 12,939 21,211 26,788 39,469 51,541 66,035 80,149

Operating Profit (Industrial) 1,408 2,038 1,500 4,817 5,372 7,098 8,718

EBITDA (Industrial) 1,934 2,936 2,831 6,548 7,822 10,040 12,200

Industrial EBIT Margin 10.9% 9.6% 5.6% 12.2% 10.4% 10.7% 10.9%

Industrial EBITDA Margin 14.9% 13.8% 10.6% 16.6% 15.2% 15.2% 15.2%

Unit Sales Cars (In Ths) 55 86 171 447 570 710 843

Unit Sales Trucks (In Ths) 0 0 0 0 0 0 0 Valuation 2006 2007 2008 2009 2010E 2011E 2012E

Market Cap 4,246 6,861 22,921 137,059 96,607 96,607 96,607

Financial Services Book Value 0 0 0 0 0 0 0

Industrial Market Cap 4,246 6,861 22,921 137,059 96,607 96,607 96,607

Industrial net cash (-debt) -4,823 -2,541 -7,456 -1,303 -6,978 -5,925 -3,713

Pension liabilities 0 0 0 0 0 0 0

Equity holdings 0 0 0 0 0 0 0

Minorities -75 -1,702 -2,052 -2,345 -2,646 -3,008 -3,416

Industrial EV 9,144 11,104 32,429 140,707 106,231 105,540 103,736

Multiples

EV/Sales (Industrial) 71% 52% 121% 356% 206% 160% 129%

EV/EBIT (Industrial) 6.5x 5.4x 21.6x 29.2x 19.8x 14.9x 11.9x

EV/EBITDA (Industrial) 4.7x 3.8x 11.5x 21.5x 13.6x 10.5x 8.5x

PE (Group) 3.8x 4.3x 22.4x 36.1x 23.0x 17.7x 14.4x

Dividend yield (Group) 1.3% 2.7% 0.0% 0.5% 0.9% 1.3% 1.7%

FCF yield (Industrial) -30.3% -25.6% -15% -0.4% -3.8% 1.0% 2.6%

PB (Group) 0.8x 0.6x 1.7x 7.2x 4.2x 3.5x 2.9x Geographical sales split 2009A Divisional Split 2009A


Europe

5%Americas

4%

Asia

86%

Other

5%

Cars

53%Others

47%


15 September 2010

Automotive 69

Dongfeng Motors OUTPERFORM, TP HK$14.3

COMPANY OVERVIEW Dongfeng is China’s third largest auto group, with key businesses including passenger vehicles, commercial vehicles, engine, auto parts and components, and equipment. Besides being the only domestic PV (passenger vehicle) partner for Nissan, Dongfeng also has JVs with Honda and Peugeot-Citroen in China and operates its own branded passenger cars. Annual production capacity is about 1.8mn units currently (1.33mn passenger vehicles and 470,000 commercial vehicles). The group currently has 2 auto plants with Nissan and Honda under construction (240,000 units annual capacity each and operational from 2012), with a potential third plant with Peugeot-Citroen JV to commence construction by year end. We expect total capacity to reach about 2.2mn units by 2012.

INVESTMENT CASE With steel costs falling 11% from the recent April peak and iron ore quarterly prices expected by us to be down QoQ in 4Q10, we believe margin erosion is not as severe as initially expected. Management reiterated it believes raw material cost hikes are unlikely to affect gross margin significantly, with productivity gains and continuous cost reductions likely to be sufficient to offset cost pressures.

On the back of the record gross margin achieved in 1H10 (22.7% versus our forecast of 20.1%) mainly driven by both product mix optimisation and lower unit production costs, we have recently revised up our margins assumptions significantly (Ride the rebound, dated 31 August 2010). Compared to 1H10, we have factored in some HoH margins erosion in 2H10E, with weaker heavy duty truck sales and passenger car product mix deterioration with the launch of the Nissan March in August 2010.

Net net, we expect gross margins to average 22.6% in 2H10E, with CV and PV margins of 15.6% and 24.9% respectively.

CATALYSTS With 4Q seasonally stronger as both dealers and automakers strive to meet full-year sales targets, we expect easing price discounting and the negative MoM sales growth trend to reverse in September, further boosted by increased auto purchases ahead of October’s Golden Week holidays.

For CV, sales have been normalising for the past four months after peaking in March, stabilising in August which may indicate a trough. While the MoM sales growth decline was more severe following the extended peak season, we believe sales may also be bottoming out and could improve seasonally with the potential launch of new infrastructure projects in 4Q10.

VALUATION We recently raised our FY10 CV and PV sales growth estimates by 12% and 7%, respectively, to reflect the stronger-than-expected sales YTD. We increased our FY10 CV ASP forecast by 5% to reflect the better-than-expected ASP increase in 1H10, mainly due to an improving product mix but reduced our FY10 PV ASP forecast by 4% to reflect the lower-than-expected ASP in 1H10.

Considering the delivery of consistent profitability through market outperformance, margins improvement, and superior cost controls, we believe Dongfeng deserves to trade above historical average valuations. Our target price of HK$14.30 is based on 9.1x FY11E P/E, the mid-point between the historical average and one standard deviation above.

15 September 2010

Automotive 70

Dongfeng Group 2005 2006 2007 2008 2009 2010E 2011E 2012E

rmb mn

Group Revenues 41,735 48,264 59,318 70,569 91,758 114,682 125,077 136,866

EBIT 2,670 3,281 4,131 5,105 8,459 15,161 15,903 16,838

EBITDA 4,088 4,915 6,157 7,382 11,148 18,028 19,167 20,516

Net income 1,601 2,081 3,770 3,955 6,250 11,464 11,725 12,098

EPS (rmb) 0.26 0.24 0.44 0.46 0.73 1.33 1.36 1.40

DPS (rmb) 0.16 0.04 0.05 0.05 0.09 0.17 0.17 0.17






Unit Sales Cars (In Ths) 351 495 638 727 1,059 1,329 1,451 1,614


Market Cap 17,484 32,601 44,384 18,963 84,779 100,472 100,472 100,472



Industrial net cash (-debt) -368 -611 1,233 3,704 17,722 30,226 39,650 51,011

Pension liabilities 0 0 0 0 0 0 0 0


Minorities -2,127 -2,534 -2,686 -2,837 -3,271 -3,823 -4,388 -4,971

Industrial EV 19,979 35,746 45,837 18,096 70,328 74,069 65,210 54,432

Multiples






FCF yield (Industrial) -5.1% 4.8% 7.0% 12% 6.9% 9.3% 8.2% 10.3%



Asia

100%

Cars

65%

Others

1%

Trucks

21%

C.

Equipment

13%


15 September 2010

Automotive 71

Geely Automobile UNDERPERFORM, TP HK$1.92

COMPANY OVERVIEW Geely Group is one of China’s four largest independent automakers and currently operates eight car assembly and power-train manufacturing plants located in Lanzhou (Gansu province), Linhai (Zhejiang province), Luqiao (Zhejiang province), Ningbo (Zhejiang province), Jinan (Shandong province), Chengdu (Sichuan province), Shanghai and Xiangtan (Hunan province). Total designed production capacity is about 625,000 units with targeted sales of 400,000 units in 2010. Besides the auto manufacturing facilities, Geely also owns a c20% stake in Manganese Bronze, maker of the iconic London Taxi, a DSI automatic transmission factory in Australia and a joint venture electric vehicle production base in Taiwan.

INVESTMENT CASE While Geely’s recent 1H10 net profit of Rmb805 mn (+35% YoY) was above consensus expectations, largely boosted by the stronger subsidy income, and partially offset by the share option expense and high startup costs at its new production plants, contribution from associates and acquired businesses could remain weak with continued losses from Manganese Bronze and Shanghai LTI (which manufactures London cabs in China) on weak sales, redundancy and impairment charge and low utilisation.

The management is confident of achieving full-year sales target of 400,000 units, driven by 2H10 new launches, more qualifying models for fuel efficiency subsidy, and rising exports (about 20,000 units in 2H10). However, we believe this remains a very challenging and unlikely target in our view, with implied monthly sales required to reach near-record levels of about 40,000 units. We recently lowered our FY10-12 EPS estimates by 6-11% on lower volumes forecast and higher share option expense, despite raising margins to reflect weaker steel price and higher subsidy income (China Auto Sector: Value? Not there yet, dated 26 May 2010).

Mitigating the above weaknesses, the product transformation strategy remains intact, with sales of higher-priced Geely Vision, Emgrand EC718, and Englon SC718 accounting for 43% of 1H10 volume sales, driving 1.5 pp HoH rebound in gross margin to 18.9% and offsetting the average industry CRC steel price YoY increase of about 9%.

CATALYSTS Despite Geely’s August sales rebounding surprisingly 10% YoY and 17% MoM to 25,303 units, versus management’s initial guidance for flat-to-down monthly sales, we think the stock could continue to underperform the sector in the next few months on weaker-than-expected sales and potential consensus earnings downgrade.

YTD, Geely has achieved only 61% of its full-year sales target of 400,000 units for 8M10. and we think it is unlikely the company can achieve near-peak sales of almost 40,000 units per month. Exports were stable MoM at around 1,500 units but stayed well below the 4,250 monthly units required to meet management’s target of 20,000 units for 2H10.

VALUATION While we believe in Geely’s medium-term potential with improving brand transformation, quality and ASP, valuations remain rich in our view, with the stock trading at c12x FY11E P/E versus peers at 9-10x—we think the premium remains unjustified. Our target price of HK$1.92 is based on 9x FY11E fully diluted P/E.

15 September 2010

Automotive 72

Geely Auto 2005 2006 2007 2008 2009 2010E 2011E 2012E

rmb mn

Group Revenues 107 130 132 4,289 14,069 17,307 20,766 25,828

EBIT -8 5 3 853 1,668 2,099 2,539 3,184

EBITDA -7 6 6 994 2,032 2,656 3,174 3,896

Net income 117 214 303 879 1,183 1,362 1,642 2,063

EPS (rmb) 0.03 0.05 0.06 0.15 0.17 0.19 0.22 0.28

DPS (rmb) 0.01 0.01 0.01 0.01 0.02 0.02 0.03 0.04

Revenues (Industrial) 107 130 132 4,289 14,069 17,307 20,766 25,828

Operating Profit (Industrial) -8 5 3 853 1,668 2,099 2,539 3,184

EBITDA (Industrial) -7 6 6 994 2,032 2,656 3,174 3,896

Industrial EBIT Margin -7.2% 3.9% 2.5% 19.9% 11.9% 12.1% 12.2% 12.3%

Industrial EBITDA Margin -6.4% 5.0% 4.2% 23.2% 14.4% 15.3% 15.3% 15.1%

Unit Sales Cars (In Ths) 133 164 182 204 327 369 440 532


Market Cap 1,393 3,208 4,221 3,599 27,474 19,159 19,159 19,159



Industrial net cash (-debt) 9 -702 445 -171 228 660 1,945 3,793



Minorities -9 -20 -203 -585 -721 -882 -1,075 -1,318

Industrial EV 1,394 3,931 3,979 4,355 27,967 19,380 18,289 16,684

Multiples


EV/EBIT (Industrial) -180.9x 782.4x 1201.1x 5.1x 16.8x 9.2x 7.2x 5.2x

EV/EBITDA (Industrial) -203.5x 608.1x 722.9x 4.4x 13.8x 7.3x 5.8x 4.3x






Asia

87%

Other

13%

Cars

93%

Others

7%


15 September 2010

Automotive 73

Maruti Suzuki OUTPERFORM, TP INR 1474.76

COMPANY OVERVIEW Maruti is the market leader in the Indian passenger vehicle industry (market share ~ 44%). It has a current manufacturing capacity of 1.2m vehicles which it plans to expand to 1.7m over the next 2-3 years. While the company is mainly focused on the domestic market, it exports about 15% of its sales, mostly to Europe (c70% of exports).

Maruti’s product portfolio is skewed towards small cars which form the largest segment in the Indian car industry. Just a few years ago, Maruti had multiple weaknesses in its portfolio. It had little, if any, presence in the sedan segment. The brand was known and respected for “value-for-money” cars but certainly not for trendy and larger cars. Over the last few years, however, Maruti has addressed many of its weaknesses. The company has made aggressive investments and model launches in the sedan segment. As a result, Maruti is today the largest player even in the sedan market (though mostly in entry level sedan).

INVESTMENT CASE We believe that the Indian car industry is set to witness sharp growth for the next few years. India is set to cross income of $3000 per capita (PPP), a point at which many markets have taken off. Demographics, income profile and car buying culture are all supportive of acceleration in car ownership. We believe India will likely account for 15-20% of the global incremental demand in the next 6 years and probably a higher proportion of global production.

Our analysis shows that the domestic passenger vehicle market could grow 16.5%-21.5% pa until 2015 (we forecast 20.3% pa FY10-12E). While there is an influx of competition, we believe that Indian consumer taste (generally for small cars) as well as tentativeness in new players’ plans augurs well for the incumbents. Maruti has bolstered its presence across all key segments of the market and is set to grow domestic volumes by 13% pa in FY10-12E, though market share is likely to drop to 41.6% by FY12E (from 50.1% in FY10). We also forecast capacity utilisation levels, of both the industry and Maruti, will remain strong through the forecast period.

CATALYSTS We expect continued strength in Maruti’s domestic volume to be the key catalyst. We believe that in a high growth market, excessive focus on market share numbers could be misleading.

VALUATION Maruti currently trades at a 12% discount to the market on 1-yr forward P/E. We believe Maruti benefits from India’s growth without being exposed to the typical cyclical problems of the auto industry and should trade at par, if not at a premium, to the market. We value the stock at 15x FY12E core EPS and add cash on balance sheet and set a TP of Rs1475.

Key risks for Maruti arise from changes in royalty payment structure and currency fluctuations. Maruti recently revised its royalty agreement with Suzuki, which led to a 150bps increase in royalty rates, impacting margins. The possibility of similar hikes in the future would likely pose a risk to earnings. In addition, currency risk arises from the fact that Maruti’s exports are primarily in euro while raw material imports are in yen, which do not offset each other.

15 September 2010

Automotive 74

Maruti Suzuki 2006 2007 2008 2009 2010 2011E 2012E 2013E

Rs mn

Group Revenues 122,508 149,038 183,144 208,875 295,720 338,364 385,253 431,577

EBIT 15,981 19,693 21,897 11,730 30,879 28,677 34,205 39,562

EBITDA 18,835 22,407 27,579 18,795 39,129 37,768 45,236 52,488

Net income 11,891 15,620 18,358 12,916 24,976 24,615 28,541 32,562

EPS (Rs) 41.15 54.05 63.52 44.69 86.42 85.17 98.76 112.67

DPS (Rs) 3.99 5.26 5.86 4.09 6.99 6.90 8.63 10.35






Unit Sales Cars (In Ths) 562 675 765 792 1,019 1,148 1,289 1,423


Market Cap 252,609 236,820 239,665 223,934 409,140 379,859 379,859 379,859






Minorities 0 0 0 0 0 0 0 0

Industrial EV 218,798 194,808 193,620 179,800 344,606 312,810 305,883 293,752

Multiples









Europe

11%

Asia

84%

Other

5%

Others

8%

Cars

92%


15 September 2010

Automotive 75

Tata Motors OUTPERFORM, TP Rs 1146

COMPANY OVERVIEW Tata Motors (TTMT) is India's largest automobile company. The company is the world's fifth-largest medium and heavy commercial vehicle (MHCV) manufacturer. Commercial vehicles contribute close to 70% of domestic revenues for Tata Motors, followed by passenger vehicles at 20%.

In June 2008, Tata Motors acquired UK-based Jaguar Land Rover (JLR) from Ford. With this, the company entered the global luxury car space with presence in over 150 countries. JLR now forms more than 50% of TTMT’s consolidated revenues and EBITDA. We note that TTMT has one of the most cyclical businesses in the Indian auto industry, given the high exposure to domestic CVs and the western luxury market.

INVESTMENT CASE Tata Motors is in a favourable position with tailwinds in both its domestic and overseas businesses.

Boosted by strong growth in underlying freight movement, we forecast the CV cycle to remain strong at least until FY14E. The upcoming change in emission norms (due October) will likely result in some pre-buying in September. However, our channel checks suggest that there isn’t enough capacity in the system at the moment and thus the momentum is likely to continue even post the emission norm changes. On the other hand, Tata Motors has managed to turn around its car business with the success of its sedan, Manza & ramp-up in Nano. We forecast volume growth of 22.4% pa (15% in MHCV) and EBITDA growth of 21.4% pa in FY10-13E.

However, the greater swing in profitability is likely to come from the JLR business. While global luxury car demand has bounced off its lows, capacities, which were cut in late CY08 and early CY09, have not kept pace. This has led to extremely low trade inventories, resulting in waiting periods for vehicles and considerable pricing power. Incentives and discounts across all major markets have fallen. JLR’s recovery so far needs to be seen in this context – the vastly improved pricing environment has led to the large increase in profitability. Going forward, we see mix boosting ASPs and profitability even further. We forecast JLR’s volumes to grow 11% pa and EBIDTA to grow 47.6% pa in FY10-13E.

CATALYSTS We expect TTMT to continue reporting strong volumes in the domestic truck and JLR business. We also see the improvement in JLR’s margins and profitability to sustain in the coming quarters. This should lead to further upgrades in consensus estimates, in our view, as confidence in the sustainability of the turnaround increases.

VALUATION We value the domestic business (Rs770/share) at 8.5x FY11E EBITDA, in line with its previous early cycle multiples and JLR (Rs585/share) at 4x FY11E EBITDA, at a discount to its peers. Including the value of other subsidiaries and net of debt (Rs334/share), we arrive at a TP of Rs1146. At our target price, Tata Motors would trade at 9.8x FY11E consolidated earnings (8.7x FY12E consolidated earnings).

The risks to our valuations and financial assumptions emanate primarily from the fortunes of the luxury car business in the Western world. A 1% lower volume at JLR would result in 3% lower EBITDA for JLR. More importantly, any weakening of sentiment in global markets has a direct impact on TTMT stock performance even if the underlying business momentum stays unaffected.

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Automotive 76

Tata Motors 2006 2007 2008 2009 2010 2011E 2012E 2013E

Rs mn

Group Revenues 235,879 322,941 355,318 714,408 924,130 1,125,728 1,264,865 1,381,141

EBIT 22,286 33,427 33,251 -6,787 42,288 102,632 114,527 127,838

EBITDA 29,236 41,158 41,741 21,767 86,142 147,975 166,467 185,708

Net income 17,355 21,720 19,820 -25,825 11,636 66,203 75,022 86,237

EPS (Rs) 45.33 56.35 51.41 -50.24 20.39 116.02 131.48 151.13

DPS (Rs) 14.83 17.55 17.11 6.75 17.38 20.39 23.30 25.63

Revenues (Industrial) 231,552 315,874 343,317 703,036 909,814 1,111,553 1,250,670 1,366,875

Operating Profit (Industrial) 15,462 20,800 17,923 -11,834 35,583 97,675 113,270 129,460


Industrial EBIT Margin 6.7% 6.6% 5.2% -1.7% 3.9% 8.8% 9.1% 9.5%


Unit Sales Cars (In Ths) 209 245 232 374 435 642 783 866


Market Cap 345,760 271,602 232,755 81,105 362,538 514,230 514,230 513,775

Financial Services Book Value 0 5,628 12,076 12,869 13,310 14,289 15,501 16,878


Industrial net cash (-debt) -19,927 -21,961 -24,587 -235,684 -190,818 -136,925 -97,711 -29,965



Minorities 0 0 0 0 0 0 0 0

Industrial EV 365,687 287,935 245,267 303,920 540,046 636,867 596,441 526,862

Multiples


EV/EBIT (Industrial) 23.7x 13.8x 13.7x -25.7x 15.2x 6.5x 5.3x 4.1x


PE (Group) 19.9x 12.5x 11.7x -3.1x 31.2x 7.8x 6.9x 6.0x


FCF yield (Industrial) -7.0% -0.6% 9.2% -181% 12.2% 2.3% 8.0% 10.9%



Europe

28%

Americas

10%Asia

52%

Other

10%

Cars

57%Trucks

27%

FS

2%Others

14%


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Automotive 77

Hyundai Motor UNDERPERFORM, UP KRW 110,000

COMPANY OVERVIEW The company has completed its major expansions with the completion of the Czech Republic plant. The no. 3 China plant and the no. 1 Brazil plant are scheduled to be completed by 2012 while the no. 1 Russian plant should begin commercial production in 1Q11. By the end of 2012 the company should have a consolidated production footprint of 6.9m units under current plans.

HMC is also in the midst of completing its platform integration plan scheduled for 2012 completion, from which we believe it will be able to achieve faster new product introduction timelines and greater product variety in the marketplace in the post 2012 global automotive market.

INVESTMENT CASE We like management’s long term execution plans on the back of major market share gains that were achieved during the economic downturn and subsidy environment of 2009 which favoured mass segment car makers such as Hyundai. As with the major market disruption seen during the oil shocks of the 1970s and early 1980s when major Japanese brands gained the foothold they needed to expand their presence we believe Hyundai now is similarly positioned. The post-platform integration product strategy is what is designed to lock in the gains made in the last 18-24 months in our view.

CATALYSTS While we remain upbeat about Hyundai’s management quality and long term vision, we believe the stock market priced in re-branding themes pre-maturely into the shares. We also believe that the absence of strong global auto stocks in the global sector partly caused flight to Hyundai over Japanese or US auto stocks in the past 2 years by investors.

We believe two catalysts for the stock at current price levels are a) better than expected industry demand outlook in the key global markets in 2011 (Europe, N America and China), and b) margin expansion over the next 6 months.

VALUATION The stock currently trades at 9.0x 2010E PE and 1.3x 2010 PB. In PB terms the stock trades near the top of its historical range and we believe this fully prices in the 14% ROE we are currently forecasting for the stock in 2010. Our residual income analysis suggests 1.0x 2010E PB or W110,000 as fair value for the stock.

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Automotive 78

Hyundai Motor 2005 2006 2007 2008 2009 2010E 2011E 2012E

W bn

Group Revenues 27,383,737 27,527,467 30,619,671 32,189,786 31,859,327 33,230,275 31,684,063 32,040,871

EBIT 1,384,143 1,426,547 1,945,523 1,877,218 2,234,962 2,592,883 1,446,693 1,748,889

EBITDA 2,724,672 2,793,346 3,444,967 4,027,976 3,893,989 4,849,528 3,723,710 4,080,371

Net income 2,348,721 1,526,063 1,682,419 1,447,904 2,961,509 3,619,469 2,302,238 2,702,158

EPS (W) 10,741.22 6,965.38 7,665.96 6,584.15 13,444.51 16,431.48 10,451.58 12,267.12

DPS (W) 1,250.00 1,000.00 1,000.00 850.00 850.00 850.00 850.00 850.00

Revenues (Industrial) 27,383,737 27,527,467 30,619,671 32,189,786 31,859,327 33,230,275 31,684,063 32,040,871

Operating Profit (Industrial) 1,384,143 1,426,547 1,945,523 1,877,218 2,234,962 2,592,883 1,446,693 1,748,889

EBITDA (Industrial) 2,339,375 2,522,612 3,111,933 3,221,449 3,649,386 4,052,813 2,925,880 3,241,304





Market Cap 21,314,412 14,792,026 15,742,965 8,700,921 26,653,454 32,600,919 32,600,919 32,600,919


Industrial Market Cap 21,314,412 14,792,026 15,742,965 8,700,921 26,653,454 32,600,919 32,600,919 32,600,919


Pension liabilities -367 -439 -445 -481 -460 -421 -422 -424

Equity holdings 7,792 7,803 9,564 10,507 12,087 12,508 13,008 13,508

Minorities 0 0 0 0 0 0 0 0

Industrial EV 21,303,148 14,781,903 15,731,190 8,688,830 26,636,584 32,581,871 32,579,676 32,577,162

Multiples






FCF yield (Industrial) 4.9% -3.0% 4.6% 5% 15.8% 7.7% 7.8% 8.8%



Europe

2% Americas

21%

Asia

59%

Middle

East

11%

Other

7%

Cars

72%

Trucks

18%

Others

10%


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Automotive 79

Kia Motors NEUTRAL, N KRW 27,000

COMPANY OVERVIEW Kia’s key focus for the past 5 years has been brand transformation, following the hiring of Peter Schreyer as global design centre chief. Following the relocation of the brand’s design headquarters to Frankfurt and freeing it from Hyundai brand’s control, the company has been working since late 2006 to reinvent its design philosophy. Kia is currently seeing the first full results of this structural shift in product strategy with the introduction of its mid-size K5 and large size K7 models in 2010.

The company has also been working on de-leveraging on the back of a favourable currency environment boosted by operating leverage from increased unit sales for the past few years. Consolidated interest bearing debt at the end of 2008 stood at W12.3trn, declining to W9.9trn at the end of 2009, and to W7.3trn as of the end of 1H10 according to the company. Consolidated net debt to equity ratio has declined from 186% to 98% to 57% during the respective periods under current Korean GAAP.

INVESTMENT CASE Re-branding and de-leveraging are key investment criteria in our view. While we believe the brand is on a long term positive momentum the key reason behind our Neutral call is that we believe much of these factors are priced into the shares at current price levels over a 6-12 month investment horizon.

CATALYSTS We believe that successful overseas launch of the Sportage R model overseas during 2H10 will likely provide another point of positive catalyst for the stock as improving mix and the depreciating Euro. The company has recently upwardly revised its FY10 global unit sales target from 1.9m units to 2.0m units.

VALUATION Kia currently trades at 9.1x 2010E PE and 1.5x 2010E PB. Based on our residual income analysis, we derive our current price target of W27,000 based on a 1.1x 2010E PB.

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Automotive 80

Kia Motors 2005 2006 2007 2008 2009 2010E 2011E 2012E

W bn

Group Revenues 15,999,356 17,439,910 15,948,542 16,382,231 18,415,739 20,374,036 20,066,884 20,425,082

EBIT 74,002 -125,291 -55,404 308,533 1,144,473 1,238,416 757,890 960,144

EBITDA 686,817 584,428 620,992 1,023,733 1,827,909 1,947,713 1,496,145 1,720,912

Net income 680,904 39,337 13,563 113,784 1,450,260 1,453,340 984,817 1,220,910

EPS (W) 1,960.96 113.29 39.06 327.69 4,040.70 3,918.69 2,654.03 3,290.29

DPS (W) 250.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Revenues (Industrial) 15,999,356 17,439,910 15,948,542 16,382,231 18,415,739 20,374,036 20,066,884 20,425,082

Operating Profit (Industrial) 74,002 -125,291 -55,404 308,533 1,144,473 1,238,416 757,890 960,144

EBITDA (Industrial) 686,817 584,428 620,992 1,023,733 1,827,909 1,947,713 1,496,145 1,720,912

Industrial EBIT Margin 0.5% -0.7% -0.3% 1.9% 6.2% 6.1% 3.8% 4.7%


Unit Sales Cars (In Ths) 1,019 1,057 1,035 974 1,063 1,157 1,196 1,262


Market Cap 9,218,969 4,670,250 3,507,028 2,274,359 7,773,414 13,240,337 13,240,337 13,240,337


Industrial Market Cap 9,218,969 4,670,250 3,507,028 2,274,359 7,773,414 13,240,337 13,240,337 13,240,337

Industrial net cash (-debt) -929 -2,309 -3,380 -4,614 -2,623 -1,706 -828 211

Pension liabilities -554 -531 -419 -492 -328 -347 -367 -388

Equity holdings 2,330 2,982 3,477 4,489 5,265 5,365 5,465 5,565

Minorities 0 0 0 0 0 0 0 0

Industrial EV 9,218,122 4,670,107 3,507,349 2,274,976 7,771,100 13,237,025 13,236,067 13,234,949

Multiples


EV/EBIT (Industrial) 124.6x -37.3x -63.3x 7.4x 6.8x 10.7x 17.5x 13.8x




FCF yield (Industrial) -7.3% -20.8% -20.9% -1% 23.8% 7.0% 6.9% 8.1%



Europe

13%

Americas

28%

Asia

41%

Middle

East

14%

Other

4%

Cars

85%

Trucks

6%

Others

9%


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Automotive 81

Global Autos at Credit Suisse

15 Septem

ber 2010

Au

tom

otive

82

Figure 98: Credit Suisse Coverage Company Ticker Share Price

Currency Share price Target price Rating Analyst Email Address

BMW BMWG.F EUR 46 60 OUTPERFORM* Arndt Ellinghorst [email protected]

Daimler DAIGn.DE EUR 44 55 OUTPERFORM Arndt Ellinghorst [email protected]

Porsche PSHG_p.F EUR 38 69 OUTPERFORM Arndt Ellinghorst [email protected]

Volkswagen VOWG_p.F EUR 87 102 OUTPERFORM Arndt Ellinghorst [email protected]

Scania SCVb.ST SEK 142 96 UNDERPERFORM Arndt Ellinghorst [email protected]

MAN MANG.DE EUR 75 78 OUTPERFORM Arndt Ellinghorst [email protected]

Fiat FIA.MI EUR 10 9 NEUTRAL Erich Hauser [email protected]

Michelin MICP.PA EUR 63 46 UNDERPERFORM Erich Hauser [email protected]

Volvo VOLVb.ST SEK 93 84 UNDERPERFORM Arndt Ellinghorst [email protected]

Continental CONG.DE EUR 54 52 OUTPERFORM Erich Hauser [email protected]

PSA PEUP.PA EUR 23 21 UNDERPERFORM Erich Hauser [email protected]

Renault RENA.PA EUR 36 43 OUTPERFORM Erich Hauser [email protected]

Autoliv ALV.N USD 59 51 UNDERPERFORM Nihal Shah [email protected]

American Axle AXL USD 9 12 NEUTRAL Chris Ceraso [email protected]

BorgWarner BWA USD 46 53 OUTPERFORM Chris Ceraso [email protected]

Ford F USD 12 11 UNDERPERFORM Chris Ceraso [email protected]

Johnson Controls JCI USD 28 41 OUTPERFORM Chris Ceraso [email protected]

Lear LEA USD 72 100 OUTPERFORM Chris Ceraso [email protected]

Superior Industries SUP USD 16 21 NEUTRAL Chris Ceraso [email protected]

Tenneco Inc TEN USD 25 35 OUTPERFORM Chris Ceraso [email protected]

TRW TRW USD 35 54 OUTPERFORM Chris Ceraso [email protected]

Magna International MGA USD 79 94 NEUTRAL Chris Ceraso [email protected]

Harman International HAR USD 32 38 NEUTRAL Chris Ceraso [email protected]

KAR Auction KAR USD 13 19 OUTPERFORM Chris Ceraso [email protected]

Geely Automobile 0175.HK HKD 3 2 UNDERPERFORM Hung Bin Toh [email protected]

Dongfeng Motors 0489.HK HKD 13 14 OUTPERFORM Hung Bin Toh [email protected]

SinoTruck 3808.HK HKD 7 4 UNDERPERFORM Hung Bin Toh [email protected]

BYD 1211.HK HKD 49 40 UNDERPERFORM Adrian Chan [email protected]

Ashok Leyland ASOK.BO INR 72 79 OUTPERFORM Govindarajan Chellappa [email protected]

Bajaj Auto BAJA.BO INR 1464 1140 NEUTRAL Govindarajan Chellappa [email protected]

Hero Honda HROH.BO INR 1734 1736 NEUTRAL Govindarajan Chellappa [email protected]

Mahindra & Mahindra MAHM.BO INR 656 620 NEUTRAL Govindarajan Chellappa [email protected]

Maruti Suzuki MRTI.BO INR 1315 1475 OUTPERFORM Govindarajan Chellappa [email protected]

Tata Motors TAMO.BO INR 1015 1146 OUTPERFORM Govindarajan Chellappa [email protected]

Hyundai Motors 005380.KS KRW 148000 148000 UNDERPERFORM Henry Kwon [email protected]

Hyundai Mobis 012330.KS KRW 232500 237000 OUTPERFORM Henry Kwon [email protected]

Kia Motors 000270.KS KRW 33600 27000 NEUTRAL Henry Kwon [email protected]

Current price is as of 10 September 2010 Source: Thomson Reuters, Credit Suisse estimates * Denotes a Focus List stockt

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Automotive 83

Companies Mentioned (Price as of 10 Sep 10) American Axle & Manufacturing Holdings Inc. (AXL, $8.55, NEUTRAL [V], TP $12.00) Ashok Leyland Ltd (ASOK.BO, Rs72.45, OUTPERFORM [V], TP Rs79.48) Autoliv Inc (ALV.N, $58.91, UNDERPERFORM [V], TP $51.00, MARKET WEIGHT) Bajaj Auto Limited (BAJA.BO, Rs1463.95, NEUTRAL [V], TP Rs1139.62) BMW (BMWG.F, Eu46.14, OUTPERFORM, TP Eu60.00, MARKET WEIGHT) BorgWarner, Inc. (BWA, $46.38, OUTPERFORM [V], TP $53.00) Bosch Limited (BOSH.BO, Rs6320.00, OUTPERFORM, TP Rs6122.63) BYD Co Ltd (1211.HK, HK$48.65, UNDERPERFORM [V], TP HK$40.00) Continental (CONG.DE, Eu53.92, OUTPERFORM [V], TP Eu52.00, MARKET WEIGHT) Daimler (DAIGn.DE, Eu43.78, OUTPERFORM, TP Eu55.00, MARKET WEIGHT) Dongfeng Motors Group Co Ltd (0489.HK, HK$13.36, OUTPERFORM [V], TP HK$14.30) Fiat (FIA.MI, Eu10.12, NEUTRAL [V], TP Eu9.00, MARKET WEIGHT) Ford Motor Co. (F, $11.79, UNDERPERFORM [V], TP $11.00) Geely Automobile Holdings Ltd (0175.HK, HK$2.97, UNDERPERFORM [V], TP HK$1.92) Harman International Industries (HAR, $32.02, NEUTRAL [V], TP $38.00) Hero Honda Motors Ltd (HROH.BO, Rs1734.00, NEUTRAL, TP Rs1736.19) Honda Motor Corp. (7267, ¥2,785) Hyundai Mobis (012330.KS, W232,500, OUTPERFORM [V], TP W237,000) Hyundai Motor (005380.KS, W148,000, UNDERPERFORM, TP W110,000) Johnson Controls, Inc. (JCI, $28.43, OUTPERFORM [V], TP $41.00) KAR Auction Services, Inc. (KAR, $12.66, OUTPERFORM [V], TP $19.00) Kia Motors (000270.KS, W33,600, NEUTRAL [V], TP W27,000) Lear Corp (LEA, $71.56, OUTPERFORM, TP $100.00) Magna International (MGA, $79.15, NEUTRAL [V], TP $94.00) Mahindra & Mahindra (MAHM.BO, Rs655.55, NEUTRAL [V], TP Rs619.75) MAN (MANG.DE, Eu75.27, OUTPERFORM [V], TP Eu78.00, MARKET WEIGHT) Maruti Suzuki India Ltd (MRTI.BO, Rs1314.70, OUTPERFORM [V], TP Rs1474.76) Michelin (MICP.PA, Eu63.46, UNDERPERFORM, TP Eu46.00, MARKET WEIGHT) Nissan Motor Co. (7201, ¥666) Porsche (PSHG_p.F, Eu38.26, OUTPERFORM [V], TP Eu69.00, MARKET WEIGHT) PSA Peugeot Citroen (PEUP.PA, Eu23.06, UNDERPERFORM [V], TP Eu21.00, MARKET WEIGHT) Renault (RENA.PA, Eu35.89, OUTPERFORM [V], TP Eu43.00, MARKET WEIGHT) Scania (SCVb.ST, SKr141.60, UNDERPERFORM [V], TP SKr96.00, MARKET WEIGHT) Sinotruk (Hong Kong) Limited (3808.HK, HK$7.20, UNDERPERFORM [V], TP HK$4.00) Superior Industries, Intl. (SUP, $15.90, NEUTRAL [V], TP $21.00) Tata Motors Ltd. (TAMO.BO, Rs1015.05, OUTPERFORM [V], TP Rs1145.90) Tenneco Inc. (TEN, $25.15, OUTPERFORM [V], TP $35.00) Toyota Motor Corp. (7203, ¥2,951) TRW Automotive Holdings Corp. (TRW, $34.96, OUTPERFORM [V], TP $54.00) Volkswagen (VOWG_p.F, Eu87.44, OUTPERFORM [V], TP Eu102.00, MARKET WEIGHT) Volvo (VOLVb.ST, SKr93.10, UNDERPERFORM [V], TP SKr84.00, MARKET WEIGHT)

Disclosure Appendix

Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names.

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3-Year Price, Target Price and Rating Change History Chart for 012330.KS 012330.KS Closing

Price Target

Price

Initiation/ Date (W) (W) Rating Assumption 30-Oct-07 90500 O 30-Apr-08 91900 107000 30-Jul-08 88800 99000 04-Nov-08 77900 86000 28-Apr-09 95200 119000 29-May-09 118000 138000 04-Sep-09 136500 164000 N 28-Oct-09 162500 166000 28-Apr-10 179500 206000 O 02-Aug-10 222000 237000

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Closing Price Target Price Initiation/Assumption Rating

W

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered


Price Target

Price

Initiation/ Date (W) (W) Rating Assumption 26-Oct-07 66200 72000 20-Mar-08 72700 74000 08-Jul-08 69000 71000 25-Jul-08 71400 72000 24-Oct-08 46700 49000 24-Apr-09 66700 62000 04-Sep-09 107500 80000 U 23-Oct-09 109500 82000 29-Jan-10 113000 84000 23-Apr-10 130000 88000 30-Jul-10 149000 110000

72000 74000 7100072000

49000

62000

8000082000 84000 88000

110000U

37100

57100

77100

97100

117100

137100

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Price Target

Price

Initiation/ Date (W) (W) Rating Assumption 04-Oct-07 11900 15000 29-Oct-07 10300 10600 N 20-Mar-08 11800 12800 14-Apr-08 12150 R 21-Apr-08 13800 N 27-Oct-08 8350 7800 04-Sep-09 16700 13600 U 26-Oct-09 18650 17000 N 01-Feb-10 20650 18000 26-Apr-10 26350 24000 02-Aug-10 32300 27000

15000

1060012800

7800

13600

17000 18000

24000

27000

NU

NR

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5850

10850

15850

20850

25850

30850

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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry

15 September 2010

Automotive 85

factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts’ perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts’ perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 46% (61% banking clients) Neutral/Hold* 40% (59% banking clients) Underperform/Sell* 12% (51% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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See the Companies Mentioned section for full company names. Price Target: (12 months) for (012330.KS) Method: Our target price of W237,000 for Hyundai Mobis is based on 2010E price to book (PB) ratio of 2.4x suggested by PB/ROE (return on equity) analysis assuming cost of equity of 8.6%. Risks: FX risks to our target price of W237,000 for Hyundai Mobis are twofold in our view: direct and indirect. Direct risks should be minimal given 20% direct export ratio and 5% import content. Indirect risks represent potential pricing pressure from customers when FX related margin pressures occur at HMC and KIA. Strategic risks include being a captive supplier to the HMC Group which is a structural phenomenon in the global automotive industry, and margin risks for Mobis's China subsidiaries. Price Target: (12 months) for (005380.KS) Method: Our TP of W110,000 on Hyundai Motor is based on our target P/B (price to book) multiple of 1.0x 2010E BVPS (book value per share), which is supported by our residual income analysis using an 9.1% COE (cost of equity). Risks: Risks to Hyundai Motor achieving our W110,000 target price include the following. For the next 12-18 months demand volatility in the global auto industry resulting from the completion of demand stimulus programs in key demand centers may result in lower than expected demand. Adverse market liquidity can cause the stock price to either overshoot or undershoot our TP under volatile market conditions. Price Target: (12 months) for (000270.KS) Method: Our TP of W27,000 on KIA Motors is based on our target PB (price to book) multiple of 1.1x against our 2010 BVPS (book value per share), supported by our residual income analysis assuming cost of equity of 9.5%. Risks: Key risks to our W27,000 target price for Kia include any sudden sharp fluctuations in currency movements, which could adversely impact Kia's profitability. In the short term, the W:US$ and W:Eu exchange rates are both depreciating against the Korean Won, contracting the company's Won denominated ASP. For the next 12-18 months industry demand risk is another key risk to consider, as there is considerable demand volatility currently in the global auto industry as effects of government stimulus programs come to an end. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names.

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The subject company (012330.KS, 005380.KS, 000270.KS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (012330.KS, 005380.KS, 000270.KS) within the past 12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (005380.KS) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (012330.KS, 005380.KS, 000270.KS) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (005380.KS) within the past 12 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (012330.KS, 005380.KS, 000270.KS) within the past 12 months.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: ALV.N, BMWG.F, CONG.DE, DAIGn.DE, FIA.MI, F, MANG.DE, MICP.PA, 7201, PSHG_p.F, PEUP.PA, RENA.PA, SCVb.ST, VOWG_p.F, VOLVb.ST.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Arndt Ellinghorst, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. • Govindarajan Chellappa, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited. • Henry Kwon, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited, Seoul Branch. • Seungwoo Hong, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited, Seoul Branch. • HungBin Toh, non-U.S. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited. • Adrian Chan, non-U.S. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

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Equity Research

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