nexteer (1316.hk, buy)pg.jrj.com.cn/acc/res/hk_res/stock/2017/3/27/824912ef... · 2017. 3. 29. ·...

March 27, 2017

The Asia Stock Collection

Nexteer (1316.HK, Buy)

Upside: 19% Equity Research

Steering autonomously

Upcoming technology shift unravels a significant set of opportunities

In the last technology shift, Nexteer earned its place as the No. 3 global steering supplier (up 2 places from 2012; out of 7

competitors) gaining significant market share (from 4.8% in 2012 to 12.4% in 2018E). We believe the next major

technology shift — largely driven by Advanced Driver Assistance System (ADAS)/Autonomous Vehicle (AV) — is likely

to be a game changer for Nexteer. We expect the company to capture market share based on enhanced tech capability

and competitive advantage vs. peers, and reach new highs in terms of product ASP/margin/share on increased value

creation (i.e., more software/sensor/control). We forecast 20% earnings CAGR over 2018E-2020E. Reiterate Buy.

Belt on: 2018’s the take-off year

Despite the US$25.6bn backlog (6.7X of FY16E revenue), we forecast

muted 2017E earnings growth (7% yoy) on flat US/China market growth

and low new product contribution. While 2017 sees a transition in terms

of earnings, we believe it lays a strong foundation for the next cycle and

expect the share price to perform as more clarity emerges on: 1) R&D

milestone of Nexteer-Continental joint venture on integrated wire-

based/motion control system in 2H2017E; 2) Engaging with OEMs at an

early stage of their tech model development which would further enhance

Nexteer’s product credentials and support its positioning in potential

backlog bidding; and 3) Strategic investments/partnerships which the

company plans to pursue to improve its product suite/competitiveness in

the ADAS/AV space.

We believe valuation is attractive. The stock is currently trading at 10.0X

2018E P/E vs global peer average of 12.2X and its historical 12-month

forward P/E median at 9.6X.

Technology/competitive landscape analysis in focus

It is generally quite challenging to grasp the core of a supplier’s

investment thesis due to the lack of product/volume/ASP clarity and

segment context. For a concentrated segment with relatively high entry

barriers such as steering, we believe the technology upcycle offers not

only ASP/margin expansion potential, but also the opportunity for well

positioned players such as Nexteer to gain market share.

In our view, Nexteer is an early mover in the upcoming ADAS/AV cycle

and scores well on all critical aspects to capture the opportunity on the

back of: 1) leading steering technology, 2) continuous R&D in

software/sensor/control, 3) braking-steering integration, 4) being

independent as a supplier.

Yuqian Ding +86(10)6627-3327 [email protected] Beijing Gao Hua Securities Company Limited

Price 12m Target Price

HK$11.78 HK$13.98

Market Cap 12m ADTV

US$3.7bn US$6mn

1.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

Curating analyst stock ideas around Asia with

a focus on differentiated views, liquidity and

drivers in 2017 addressing eight core issues:

1. Investment thesis

2. The path forward

3. Where we are different

4. Forecast drivers

5. Valuation

6. Cash flow & balance sheet

7. Risks & pushbacks

8. External share price factors

Check out the full series on GS360 portal.

https://360.gs.com/gs/portal/home/fdk/?st=1&n=/portal/announcement/research/ASC

March 27, 2017 China: Automobiles

Goldman Sachs Global Investment Research 2

The prices in the report are as of the market close of March 24, 2017, unless stated otherwise.

Nexteer Automotive Group: Summary financials

Profit model ($ mn) 12/16 12/17E 12/18E 12/19E Balance sheet ($ mn) 12/16 12/17E 12/18E 12/19E

Total revenue 3,842.2 4,141.8 4,746.9 5,508.8 Cash & equivalents 484.5 736.7 1,015.1 1,255.4

Cost of goods sold (3,018.0) (3,245.0) (3,719.0) (4,316.0) Accounts receivable 589.6 635.6 728.5 845.4

SG&A (253.2) (277.1) (317.6) (364.1) Inventory 261.7 281.4 322.6 374.3

R&D (110.8) (119.5) (136.9) (158.9) Other current assets 91.7 91.7 91.7 91.7

Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 1,427.6 1,745.4 2,157.8 2,566.9

EBITDA 571.1 619.7 710.3 828.7 Net PP&E 779.1 851.2 937.9 1,118.1

Depreciation & amortization (162.6) (176.5) (186.0) (205.6) Net intangibles 449.7 366.1 282.5 198.9

EBIT 408.5 443.2 524.3 623.1 Total investments 10.6 13.4 16.7 20.3

Interest income 1.4 1.8 3.0 4.7 Other long-term assets 26.4 26.4 26.4 26.4

Interest expense (31.6) (29.5) (29.5) (29.5) Total assets 2,693.4 3,002.5 3,421.3 3,930.6

Income/(loss) from uncons. subs. 0.0 0.4 0.8 1.2

Others 7.7 (1.2) (1.2) (1.2) Accounts payable 604.5 650.0 744.9 864.5

Pretax profits 386.0 414.6 497.3 598.1 Short-term debt 75.5 75.5 75.5 75.5

Income tax (84.1) (90.3) (108.2) (130.1) Other current liabilities 180.3 184.7 197.4 212.9

Minorities (7.1) (7.7) (8.9) (10.3) Total current liabilities 860.3 910.2 1,017.8 1,152.9

Long-term debt 488.7 488.7 488.7 488.7

Net income pre-preferred dividends 294.7 316.6 380.2 457.7 Other long-term liabilities 253.4 253.4 253.4 253.4

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 742.0 742.0 742.0 742.0

Net income (pre-exceptionals) 294.7 316.6 380.2 457.7 Total liabilities 1,602.3 1,652.2 1,759.9 1,894.9

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 294.7 316.6 380.2 457.7 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 1,059.0 1,312.3 1,616.5 1,982.6

EPS (basic, pre-except) ($) 0.12 0.13 0.15 0.18 Minority interest 32.0 38.0 45.0 53.0

EPS (basic, post-except) ($) 0.12 0.13 0.15 0.18

EPS (diluted, post-except) ($) 0.12 0.13 0.15 0.18 Total liabilities & equity 2,693.4 3,002.5 3,421.3 3,930.6

DPS ($) 0.02 0.03 0.03 0.04

Dividend payout ratio (%) 20.0 20.0 20.0 20.0 BVPS ($) 0.42 0.52 0.65 0.79

Free cash flow yield (%) 10.8 8.2 9.0 8.3

Growth & margins (%) 12/16 12/17E 12/18E 12/19E Ratios 12/16 12/17E 12/18E 12/19E

Sales growth 14.3 7.8 14.6 16.1 CROCI (%) 27.1 25.2 26.2 27.1

EBITDA growth 20.8 8.5 14.6 16.7 ROE (%) 31.2 26.7 26.0 25.4

EBIT growth 23.6 8.5 18.3 18.8 ROA (%) 11.4 11.1 11.8 12.5

Net income growth 43.5 7.4 20.1 20.4 ROACE (%) 28.9 29.5 34.3 38.2

EPS growth 43.4 7.2 20.1 20.4 Inventory days 31.2 30.5 29.6 29.5

Gross margin 21.5 21.7 21.7 21.7 Receivables days 55.1 54.0 52.4 52.1

EBITDA margin 14.9 15.0 15.0 15.0 Payable days 70.3 70.6 68.4 68.1

EBIT margin 10.6 10.7 11.0 11.3 Net debt/equity (%) 7.3 (12.8) (27.1) (34.0)

Interest cover - EBIT (X) 13.5 15.9 19.8 25.1

Cash flow statement ($ mn) 12/16 12/17E 12/18E 12/19E Valuation 12/16 12/17E 12/18E 12/19E

Net income pre-preferred dividends 294.7 316.6 380.2 457.7

D&A add-back 162.6 176.5 186.0 205.6 P/E (analyst) (X) 9.5 12.0 10.0 8.3

Minorities interests add-back 7.1 7.7 8.9 10.3 P/B (X) 2.6 2.9 2.3 1.9

Net (inc)/dec working capital 18.3 (20.2) (39.0) (49.1) EV/EBITDA (X) 5.1 5.9 4.8 3.8

Other operating cash flow 13.9 0.3 0.0 (0.4) EV/GCI (X) 1.5 1.7 1.4 1.2

Cash flow from operations 496.6 481.0 536.0 624.1 Dividend yield (%) 2.1 1.7 2.0 2.4

Capital expenditures (192.1) (165.7) (189.9) (303.0)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 0.0 0.0 0.0 0.0

Others (2.4) (2.4) (2.4) (2.4)

Cash flow from investments (194.6) (168.1) (192.3) (305.4)

Dividends paid (common & pref) (41.1) (58.9) (63.3) (76.0)

Inc/(dec) in debt 0.0 0.0 0.0 0.0

Common stock issuance (repurchase) 0.0 0.0 0.0 0.0

Other financing cash flows (193.4) (1.7) (1.9) (2.3)

Cash flow from financing (234.5) (60.6) (65.3) (78.3)

Total cash flow 67.6 252.2 278.4 240.3 Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Content upgrade/add-on and share gain to drive earnings

Given the high entry barriers and technology-driven nature of the segment, we expect well

positioned technology-parts suppliers such as Nexteer to enjoy triple leverage

(ASP/margin/market share) in the next technology cycle.

We expect Nexteer’s revenue opportunities over the medium term to be driven by:

Higher ASP on content upgrade (ADAS-featured EPS and SBW)

Market share gain at the expense of other global peers’/OEMs’ in-house capacity on

its favorable positioning and leading technological capability.

On profitability, we expect:

Higher margins on increasing software/sensor/motor content in the mix

We forecast 17% earnings CAGR during 2016-2020E, although we expect relatively muted

2017E earnings growth rate at 7% on a high FY16 base and relatively limited conversion

gain on close to saturated EPS penetration in the US. However, we expect earnings growth

to reaccelerate starting 2018E on increasing upgraded product contribution.

Exhibit 1: We see ASP/margin/market share expansion to fuel earnings growth during 2016E-2020E

Net earnings walk, in US$mn

Source: Gao Hua Securities Research.

Suppliers have the key to value creation

New automotive innovations are increasingly developed by suppliers rather than OEMs,

with increased focus on the design, integration, assembly and distribution of vehicles.

Consulting firm Oliver Wyman estimates that suppliers will account for 69% value creation

by 2025E from 61% in 2012 (for details, please refer to our report Upward mobility: The rise

of global autos: Competitive Positioning in a growing, evolving autos industry, dated May1,

2014). In our view, this trend is being driven by the rising pressure on car manufacturers to

build economies of scale and leverage technologies and investments on higher volumes.

295

550

57

46

56

96

-

100

200

300

400

500

600

2016 earnings Market growth ASP increase Margin expansion Market share gain 2020E earnings



We estimate that globally ADAS/AV together would represent a US$100bn parts market by

2025E driven by six enablers: hardware, software, V2V/V2I (Vehicle to Vehicle and Vehicle

to Infrastructure), a favorable regulatory framework, consumer acceptance, and cyber

security.

Exhibit 2: We forecast 42% CAGR in ADAS/AV related revenue over 2015-25E, making the

overall profit pool worth US$96bn for AV suppliers Global ADAS/AV content revenue pool by region and content per vehicle

Source: Conti, Delphi, TRW, Magna, Autoliv, Mobileye, Quanergy, Ibeo, Cohda, Cisco, TomTom, Argus, Security Innovation, Broadcom, Nvidia, GM, Goldman Sachs Global Investment Research.

As the automotive industry enters the ADAS/AV cycle (with steering playing a critical

actuation role in the vehicle infrastructure), we expect the content to increase in the

existing EPS (Electric Power Steering) system such as dual core processing, multiple

sensors, collaboration with braking system, and additional redundancy to enable ADAS

features.

Moving forward, when the auto industry moves to the semi and fully autonomous driving

stage, we expect further upgrade to Steering By Wire (SBW) system (steering by braking,

i.e., steering with braking redundancy). In autonomous driving architecture, steering

system needs close collaboration with braking system on increasing requirements of

motion control integration, system safety and redundancy, precision, and reliability. As a

result, ADAS-featured EPS and SBW are likely to drive higher ASP/margin opportunities for

major competitors. We estimate ADAS-featured EPS is likely to enjoy 30% ASP increase

from the standard EPS system, and SBW is likely to boost ASP above US$500 (Exhibit 3).

Over the past technology cycle from HPS (Hydraulic Power Steering) to EPS, we saw

average operating profit margin for the industry increasing to 8.8% in 2016 (from 4.7% in

2012).

ADAS/AV likely to create a US$100bn revenue opportunity by 2025E

In ADAS/AV, steering remains critical and is likely to see content add-up/upgrade



Exhibit 3: ASP increase along with technology evolutionSteering system by generation ASP, in US$

Exhibit 4: Margin increase on increasing software/controlOperating profit margin, in %

Source: Company data, Gao Hua Securities Research.


Nexteer is well positioned to leverage ADAS/AV content opportunity

We see Nexteer as having demonstrated strong capability in the ADAS-featured EPS and

SBW systems. As in Exhibit 5, Nexteer already has ADAS-featured EPS systems in

production. On Jan 9-10, 2017, at the North American International Auto Show, Nexteer

debuted two by-wire based technologies, which are capable of SAE (Society of Automotive

Engineers) level 3 to 5 automated driving (that is semi to fully autonomous driving).

Nexteer also announced an agreement to form a joint venture with Continental in motion

control systems. We see the launch of SBW tech and strategic partnership with Continental

as key milestones for commercialization from 2018. With early launch of the next-

generation steering solution, Nexteer would be able to engage with OEMs at an early

stage of their AV model development and validation, which may further enhance its

product credentials and support its positioning in potential backlog bidding, in our view.

Exhibit 5: Nexteer is well prepared to leverage the ADAS/AV cycle, with a strong suite of products

Nexteer’s ADAS/AV related technology progress


Nexteer already has a small batch of ADAS-featured EPS products in production; we expect

increasing revenue contribution with ADAS penetration. We think consumption upgrade

(increasing consumer preference for comfort, safety and smart features) would drive ADAS

content adoption over the medium term. Further, we note that the commercial success of

top-selling models in 2016 (such as Geely’s NL-3 and GAC’s GS8)’s could be partially

attributed to their high ADAS equipment level.

57

220282

360

468

>500

0

100

200

300

400

500

600

700

Manual HPS Midsolution

EPS EPS(ADAS)

SBW

ASP

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

OPM

Nexteer JTEKT (steering&bearing)NSK(steering&bearing) ZF‐TRW (Chassis Systems)Bosch (Auto parts) TK‐presta (Auto parts)

ADAS/AV features/technologies Development type Levels of Autonomy (NHTSA) Estimated launch time

Driver Assist In Production

Lane Keeping In‐house Level 1‐2 In production

Pull Compensation In‐house Level 1‐2 In production

Park Assist In‐house Level 1‐2 In production

Stability Control Enhancements In‐house Level 1‐2 In production

Smooth Road Shake In‐house Level 1‐2 In production

Variable Effort In‐house Level 1‐2 In production

Active Damping In‐house Level 1‐2 In production

Active return In‐house Level 1‐2 In production

Patented next gen steering technology

Nexteer Steering on DemandTM System In‐house Level 3‐4 2018

Nexteer Quiet WheelTM Steering In‐house Level 3‐4 2018

In development technology

Integrated motion control Joint venture with Continental Level 3‐4 2019



We expect more ADAS to be introduced in new model launches given intensified

competition. We expect the ADAS-featured EPS and SBW products’ revenue mix to

increase to 5% in 2018E (vs marginal exposure currently) and further expand to 15% in

2020E. We also forecast net profit margin to expand to 8.0% in 2018E and 8.5% in 2020E on

back of increasing new product mix.

Exhibit 6: How is Autonomous measured? Snapshot of the various levels of autonomy according to NHTSA (National Highway Traffic Safety Administration)

Source: NHTSA, Goldman Sachs Global Investment Research

Nexteer to boost market share in the upcoming technology cycle

For suppliers, especially in a rather concentrated segment, we see market share reshuffle

opportunities generally emerging during a technology changeover. As a reference,

Nexteer’s market share rose to 10.8% in 2016E (from 4.8% in 2012) during the steering

segment technology conversion from HPS to EPS. Since its listing in Oct 2013, Nexteer has

grown revenue/earnings by 17%/39% during 2013-2016. Its market cap grew from

US$0.8bn to US$3.7bn (as of Mar22, 2017, close).

Why could it happen again this time?

1. Steering is a technology-parts segment, hence highly attractive: Due to the critical

nature of the steering system and segment concentration, we view steering as a

technology-parts segment. Technology-parts suppliers are well positioned and

structurally the most attractive within the auto space. The key growth drivers are: (1)

rising ‘supplied’ content per vehicle; (2) market share gains for globalized suppliers;

and (3) a shift in value-add innovative content towards suppliers. In addition to strong

structural growth, suppliers enjoy relatively strong pricing power (for details, please

refer to our report Upward mobility: The rise of global autos: Competitive positioning

in a growing, evolving autos industry, dated May 1, 2014).

2. Steering parts have high entry barriers due to increasing tech content and R&D needs:

We note that the entry barriers have been increasing over time, and along with

upgrades in steering technology have resulted in only a few competitors in the

segment. For example, back in the time when HPS was the predominant solution for

steering systems, there were more competitors in the segment. During the life cycle of

a car model/platform, there used to be several suppliers sharing the steering sourcing.

However, when EPS emerged to become the major solution, fewer players had the

technological capability and this reduced competition while bidding.

Driver attentiveness/road

monitoringComment Example

Level 0 No‐AutomationDriver in complete and sole

control

Could contain driver support systems, but only

warnings; driver never cedes controlBlind Spot Warning

Level 1Function‐specific

Automation

Driver maintains overall control,

but can cede limited authority

One or more specific control functions that

operate independent from each otherAdaptive Cruise Control

Level 2Combined

Function

Automation

Driver responsible for monitoring

the roadway and available for

control at all times on short

notice

At least two primary control functions designed to

work in unison to relieve driver control

Adaptive Cruise Control with

Lane Centering

Level 3Limited Self‐

Driving

Automation

Driver enabled to cede full

control under certain traffic

conditions, but is available for

occasional control with a

comfortable transition time

Vehicle designed to ensure safe operation during

automated driving mode, but can determine

when the system is no longer able to support

automation, i.e., an oncoming construction area

Autonomous Driving

Supporting Multitasking with

Transition Time Back to Driver

When Necessary

Level 4Full Self‐Driving

Automation

Driver to provide navigation

input, but is not expected to be

available for control at any time

during the trip

Vehicle designed to perform all safety‐critical

driving functions and monitor roadway conditions

for an entire trip.

Full Autonomous Driving in

Any Situation

Autonomy level

ADAS

AutonomousDriving

Nexteer doubled its market share during the past tech upgrade



Also, a technology changeover requires substantial R&D and development investment

in production facilities. Consequently, OEMs now have only one steering supplier

during the life-cycle of a particular model/platform. The growing entry barriers have

driven higher ASP, and increased pricing power over the model lifecycle and a more

secure backlog. In addition, with the model cycle refresh/changeover going forward,

we believe existing EPS suppliers will be favorably positioned to continue to supply as

second-generation development costs are only less than 20% vs. first generation

(Exhibit 8).

Exhibit 7: Car product cycle is on average 5-7 years

BMW 5 series life cycle

Exhibit 8: EPS suppliers difficult to be switched

Initial development cost vs. 2nd generation, initial cost

indexed as 1X

Source: IHS.


3. Nexteer is the best positioned to win market share: It is difficult to gain share during

an existing EPS cycle, and therefore the next market share reshuffle window which

likely lies with the technology shift from EPS to ADAS-featured EPS and then to SWB,

will be critical. We outline the key criteria for steering suppliers to stay competitive in

the potential market share reshuffle during the next tech shift. From this analysis, we

derive our positive view on Nexteer’s market share gains (Exhibit 11).

Steering technology (ADAS-featured and SBW) capabilities are critical: The

technological capabilities to develop and produce commercially reliable ADAS

EPS/SBW systems are critical to assess a company’s market share potential.

Nexteer showcased the commercially viable by-wire technology in the US auto

show on Jan 17, 2017. And early launch of the next generation technology would

help Nexteer engage with OEM clients at an early stage, which could potentially

lead to further product improvement and backlog lock-up.

Continuous R&D investment needed in software/sensor/motor: In the ADAS/AV

age, the actuation parts such as steering would partly/fully be commanded by

computers rather than human, which increases the complexity both mechanically

and electronically. More software/sensor/motor and redundancy will be added,

and the system requires a series of validations to ensure safety. As shown in

Exhibit 10, Nexteer has been investing heavily in R&D vs. peers.

Braking and whole AV architecture know-how: In the AV architecture, steering,

braking and throttling may all be operated by wire. The actuation modules such as

steering and braking may be more integrated in order to provide smooth and

accurate motion control. Both ZF and Bosch have their in-house braking divisions.

Nexteer has a strategic partnership with Continental – their nearly mutually

exclusive parts coverage also creates strong synergy in developing integrated

5-Series (2003)

5-Series (2010)

5-Series (2016)

0.2%

0.3%

0.4%

0.5%

0.2%

0.3%

0.4%

0.5%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

5-Series market share

1X

0.16X

0.0X

0.2X

0.4X

0.6X

0.8X

1.0X

1.2X

Initial development cost Gen 2 development cost

Nexteer scores well on all critical aspects to capture market share: 1) steering technology, 2) R&D in software/sensor/ control, 3) braking-steering integration, 4) independence as a supplier



motion control systems. So far, with technology readiness yet to be validated and

regulations to be finalized, we do not see a fully autonomous vehicle in mass

production. Early engagement with AV projects would put their supplier partner in

a favorable position to develop and fine-tune their next generation product in a

dynamic way. In 2016, Nexteer became a steering partner for Waymo (i.e.

Google’s driverless car division). The project with Google may not be meaningful

for near-term revenue/earnings, yet is critical from a strategic perspective as early

engagement with a leading AV developer could help Nexteer understand the most

advanced requirements for steering systems and build a capable module geared

with full autonomous car architecture. Similar projects also include Chevy’s Bolt

EV (GM and Lyft’s driverless car project).

Independence as a supplier: Due to supply chain security concerns, OEMs

generally prefer independent suppliers, which do not belong or are affiliated to

any other OEMs. Nexteer is an independent supplier, thus favored by OEMs in

comparison with peers that are affiliated to OEMs.

Exhibit 9: Nexteer is a steering pure play Y axis: steering revenue in US$mn; X axis: steering as % of

total revenue, 2016E

Exhibit 10: R&D as % of sales also high among peers R&D as % of sales, 2015

Note: R&D is on group level


Source: Company data.

Exhibit 11: Our competitive landscape analysis suggests Nexteer is well positioned Global 7 steering suppliers’ summary


‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0% 20% 40% 60% 80% 100%

Steering revenue (in US$mn)

Steering as % of total revenue

JTEKT

Bosch

NexteerNSKZF

Thyssenkrupp PrestaShowa

8.4%

6.1%

4.4% 4.1%2.9%

1.1% 0.7%

0%

2%

4%

6%

8%

10%

Bosch

Nexteer

ZF

Showa

JTEKT

NSK

Thyssenkrupp

Presta

R&D as % of revenue

Ticker Company business portfolio Sector

Affliation

(vs. OEM) Braking parts exposure AV project engagement

Company

JTEKT 6473.T

‐ Auto components

‐ Bearings

‐ Machinery

Machinery/auto Toyota n.a In‐house R&D on steer‐by‐wire

systems

Bosch private

‐ Auto components

‐ Home application

‐ Sensor/technology/service

Industrial/auto n.a In‐house Uber/Volvo driverless car

Nexteer 1316.HK Auto components Auto n.a JV with Continental Google driverless car

NSK 6471.T

‐ Auto components

‐ Bearings

‐ Machinery

Machinery/auto n.a n.a n.a

ZF private

Auto components Auto n.a In‐house (via acquisition of TRW) ZF ProAI jointly developed with

NVIDIA

Thyssenkrupp Presta private

‐ Diversified industrial (Construction,

Mining, Chemicals, Energy, White goods,

F&B, Aerospace, Shipbuilding,

Mechanical engineering etc.)

‐ Auto component

Industrial Conglomerate n.a n.a Cooperation with AdasWork on

autonomous control system

Showa 7274.T‐ Auto components

‐ Motorcycle components

Auto/Motor n.a n.a n.a



Discount to global peers unjustified; our TP implies 19% upside

We value Nexteer based on P/B-ROE regression against global comparable peers, as we

believe this is the most appropriate method due to the following reasons:

For cyclical industries, where returns fluctuate with the cycle, book value provides a

more stable reference to company value;

There are limited comparable peers in the H-share supplier space. So we select a

portfolio of global/regional comparable peers with similar business, client base, and

technology credentials to value Nexteer;

The company is expanding faster than the industry with significant capex and assets

(such as new plants under construction and new products under development) sitting

on the balance sheet. We think the P/B-ROE method is appropriate to ascertain the

value of these assets, which are not operating now but are expected to generate profits

in the future.

Accordingly, we derive a 12-month target price of HK$13.98, implying 19% potential upside.

Our target price implies 2017E/2018E P/E multiples of 13.2X/11X.

Exhibit 12: Nexteer looks undervalued vs. global peers 2018E PB vs. avg 2018E-2019E ROE

Exhibit 13: Nexteer enjoys leading ROE among peers

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research.


Exhibit 14: Currently trading at 11.3X 12m fwd P/E vs.

median at 9.6X 12m fwd P/E

Exhibit 15: Currently trading at 2.7X 12m fwd P/B vs.

median at 2.5X 12m fwd P/B

Source: Datastream, Gao Hua Securities Research. Source: Datastream, Gao Hua Securities Research.

y = 7.575x + 0.6334R² = 0.6845

0.00

0.50

1.00

1.50

2.00

2.50

3.00

5% 10% 15% 20% 25% 30%

2018E PB

Avg. 2018E‐19E ROE

NSK

JTEKT

Conti

BorgWarner

Weifu A

Minth Nexteer

Valeo

Autoliv

ROE quartilingTicker Company name 2015 2016E 2017E 2018E 2019E

6471.T NSK 15.2% 14.9% 8.1% 13.4% 13.2%

6473.T JTEKT 9.8% 10.5% 7.2% 10.5% 10.5%

CONG.DE Continental 23.3% 20.7% 21.8% 20.0% 18.4%

BWA BorgWarner Inc. 19.1% 20.8% 21.4% 21.4% 21.5%

000581.SZ Weifu A 13.4% 13.3% 14.0% 14.8% 15.1%

0425.HK Minth 14.5% 16.4% 18.1% 20.1% 21.5%

1316.HK Nexteer 27.2% 31.2% 26.7% 26.0% 25.4%

VLOF.PA Valeo 25.0% 26.5% 21.2% 20.1% 19.6%

ALV Autoliv 13.3% 15.9% 15.3% 15.4% 15.7%

0.0X

2.0X

4.0X

6.0X

8.0X

10.0X

12.0X

14.0X

Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

12m Fwd P/E Median P/E

Median P/E = 9.6 X

0%

5%

10%

15%

20%

25%

30%

35%

0.0X

0.5X

1.0X

1.5X

2.0X

2.5X

3.0X

3.5X

4.0X

Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

12m Fwd P/B (LHS) Median P/B ROE (RHS)

Median P/B = 2.5 X



Nexteer is attractively valued vs. both global and local peers

Exhibit 16: Nexteer is attractively valued vs. global auto parts coverage 2017E PB vs. avg. 2017-19E ROE

Note: Red dots are GH covered supplier stocks; blue dots are GS covered global supplier peer stocks.

Source: Quantum, Gao Hua Securities Research.

Exhibit 17: Nexteer is attractively valued vs. global auto parts coverage 2017E PB vs. avg. 2017-18E ROE

Note: Red dots are GH covered supplier stocks, blue dots are non-covered A share supplier stocks (the forecasts for which are from WIND consensus).

Source: WIND, Gao Hua Securities Research,

Nexteer

Minth

Huayu

Weifu (A)

Hyundai Mobis

Autoliv

CNH Industrial

Continental

Faurecia

GKN

Hella KGaA Hueck

Michelin

Nokian Renkaat

Valeo

Aisin Seiki BridgestoneDenso

Sumitomo

Toyota Boshoku

Lear Corp.

Johnson Controls

MagnaBorgWarner Inc.

Goodyear

Nemak

Motherson Sumi

Cheng Shin Rubber

Amara Raja Batteries

Bosch Ltd.

Exide Industries

0

1

2

3

4

5

6

7

8

9

10

5% 10% 15% 20% 25% 30% 35%

2017E PB


NexteerMinth

Huayu

JoysonWeifu (A)

Wanxiang

Zongshen Huaxiang

Wanfeng

HongtuYinlun

Tianrun

AP M&EXingminLongji

Yuandong ZYNP

Songz

Jingu

TJ Dies

Haili

Vie

WKW

ShuanglinJS Forging

Yunyi

Fulin Precision

DF Electronic

Hejia

NBTMDongan

FAWAY

Tuopu

Xingyu

HMT

Broadocean

0

2

4

6

8

10

12

14

0% 5% 10% 15% 20% 25% 30%

2017E PB




Strong balance sheet and cash flows allow room for acquisitions

With the EPS conversion cycle nearly complete in developed markets such as US and EU

(see Exhibit 18), we forecast Nexteer’s capex cycle to be largely over for now, before

reaccelerating in 2019. ADAS-featured EPS does not require significant investment in the

production line and the increased content is more on the software/sensor side. Software is

developed by Nexteer’s own R&D/engineering team. So we do not see capex to expand

much during 2017-18E. However, the steering-by-wire product may require a rather

significant change in the production line; we forecast capex spending to accelerate from

2019E.

Exhibit 18: EPS conversion cycle is largely over in DM

EPS penetration in US/EU and China

Exhibit 19: EPS capex cycle is over

Capex in US$mn, Capex as % of revenue (RHS)



Balance sheet is strong as Nexteer’s avg. 2017-19E gearing ratio is -27% vs. global peers’

4% and its historical avg. (2012-2016) at 76%. Nexteer’s FCF is also strong among peers as

its avg. 2017E-19E FCF yield is 9% vs. global peers’ avg. at 5%.

We see the strong balance sheet/cash flows likely supporting the company’s technology

capability enhancement and potential global partnership/acquisition opportunities.

We see payout ratio less likely to increase as it’s critical for the company to continuously

drive its strategic innovation. Given the increasing technology requirements in the ADAS/AV

cycle, we think capital allocation to innovation and potential M&A would be key.

Exhibit 20: Gearing lower than peers Net debt/equity ratio, Nexteer and peers’ avg.

Exhibit 21: FCF yield is higher than peers FCF yield ratio, Nexteer and peers’ avg.



0%

20%

40%

60%

80%

100%

2007

2008

2009

2010

2011

2012

2013

2014

2015

E

2016

E

2017

E

2018

E

US EU China

-

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-

50

100

150

200

250

300

350

2014 2015 2016 2017E 2018E 2019E

Capex Capex as % of Revenue (RHS)

‐50%

0%

50%

100%

150%

200%

250%

300%

2012 2013 2014 2015 2016E 2017E 2018E 2019E

Nexteer Global peers' avg.

‐12%

‐8%

‐4%

0%

4%

8%

12%

2012 2013 2014 2015 2016E 2017E 2018E 2019E

Nexteer Global peers' avg.



Exhibit 22: We expect Nexteer’s payout less likely to

increase on continuous investment requirements Nexteer dividend payout ratio and dividend yield, 2012-2019E

Exhibit 23: Nexteer’s payout is relatively lower among

peers Dividend payout ratio, 2017E



0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0%

5%

10%

15%

20%

25%

2013 2014 2015 2016 2017E 2018E 2019E

Dividend payout ratio Dividend yield (RHS)

20%

27%

40%36% 36%

32% 31% 30% 29%

17%

0%

10%

20%

30%

40%

50%

Nexteer

China auto avg.

Minth

NSK

Autoliv

Valeo

JTEKT

Weifu A

Conti

BorgWarner

2017E dividend yield



Navigating Trump policy impact, growth and technology rollout

In this section, we address the key risks to our view and 12-m target price:

#1: Potential Trump taxes and trade impact analysis

The Trump administration has signaled a set of wide-ranging changes across taxes and

trade. While the details are still unclear, our economists believe the US tax reform draft this

year could include: 1) a destination-based tax with border adjustment (they see a 20%

probability), 2) a corporate tax cut (they assume 25% from 35%), 3) 100% capex write-off in

the first year, and 4) the repeal of net interest expense deduction (for details, refer to the

report What Would the Transition to Destination-Based Taxation Look Like? dated Dec 8,

2016). The process is likely to get into full swing in the US Congress late March or April.

Although we do not attempt to predict the outcome of the US tax reform, we see a high

likelihood of suppliers with businesses deeply rooted in the US (e.g., US production plants)

having an edge vs. those which have net export exposure to the US.

We note that Nexteer’s global revenue is generated from its localized production footprint

and has limited export-to-US exposure. With 65% revenue exposure to North America in

2016, Nexteer is one of the most resilient names within our China auto component

coverage.

Exhibit 24: Nexteer’s revenue is mainly from NA Revenue by region, FY2016

Exhibit 25: Nexteer’s earnings is also mainly from NA EBITDA margin by region, FY2016



Exports from the rest of the world to the US are subject to a 2.5% tariff in case of finished

vehicles (excluding certain kinds of trucks) and 2.5%-5.7% for auto parts. Since the rest of

the 6 global steering peers are non-US companies, in case of a tariff hike, we believe

Nexteer is relatively well positioned as its US revenues are largely generated through

products produced locally vs. peers’ higher dependence on imports.

65%

23%

11%

North America Asia Pacific Europe and South America

15.0% 15.8%

19.3%

3.7%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

24.0%

Group level North America Asia Pacific Europe and SouthAmerica

EBITDA Margin



Exhibit 26: North America production is 20% of global

Global light vehicle production volume, 2016E

Exhibit 27: US tariff on passenger cars is 2.5%

Tariffs for autos and auto parts (as of Feb 2017)

Source: Goldman Sachs Global Investment Research.

Source: World Tariff.

Before Trump came to power, Nexteer had planned a plant rotation to Mexico for cost

optimization purposes. Given the current Trump policy direction, we note that the mgmt

may adopt a wait and watch approach. We think potentially lower US tax and supportive

capex/interest burden treatment may drive cost optimization/plant rotation in the US. And

we also think the potential tariff impact could be partly offset by forex (see Exhibits 28-29).

Our analysis is for illustrative purposes only and we acknowledge that the final outcome

could vary depending on the actual legislation and companies’ tax strategies. In addition,

we do not take a view on government policy and we note that the final form of

implementation for any proposed changes is still widely uncertain.

Exhibit 28: Mexican Peso depreciated by 6% after the US

elections Forex trends

Exhibit 29: Illustration of how a tariff hike can be offset

by forex Destination tax after nominal forex rate

Source: Datastream.


20%

23%

28%

29%

North America Europe China Others

Product US Canada Product US CanadaAuto Bumper 2.5% 6.0%Passenger Car 2.5% 6.1% Seat belt 2.5% 6.0%Bus 2.0% 6.1% Brake 2.5% 6.0%Truck 25.0% 6.1% Gear Box 2.5% 6.0%Auto Parts Drive shaft 2.5% 6.0%rearview mirror 3.9% 6.0% Wheel 2.5% 6.0%Key 5.7% 6.0% Suspention 2.5% 6.0%Engine 2.5% 2.5%-6.0% Radiator 2.5% 6.0%Engine parts 2.5% 2.5%-6.0% Muffler 2.5% 6.0%Auto air conditioner 2.5% 6.0% Airbag 2.5% 6.0%Distributor 2.5% 6.0% Body 2.5%-4.0% 6.0%Ignition coil 2.5% 6.0% Steering 2.5% 6.0%Wiper 2.5% 6.0% Tire 3.4%-4.0% 7.0%Shield beam lamp 2.0% 6.0% EV Li Battery 3.4% 7.0%

16

17

18

19

20

21

22

23

Sep‐16 Oct‐16 Nov‐16 Dec‐16 Jan‐17 Feb‐17 Mar‐17

MXN/USD

US presidential election (Nov.8)Net importer Net exporter

High import share

Low import share

High profit margin

Low profit margin

Current law

FX (foreign currency per $) 1 1 1 1 1 1

Total sales (USD) 100 100 100 100 100 100

US sales (USD) 100 0 100 100 100 100

Foreign sales (foreign currency) 0 100 0 0 0 0

Total costs (USD) 90 90 90 90 50 98

US costs (USD) 45 45 0 90 25 49

Foreign costs (foreign currency) 45 45 90 0 25 49Tax burden at 20% 2 2 2 2 10 0.4After-tax profit 8 8 8 8 40 1.6

Destination-based taxation

FX (foreign currency per $) 1.25 1.25 1.25 1.25 1.25 1.25

Total sales (USD) 100 80 100 100 100 100

US sales (USD) 100 0 100 100 100 100

Foreign sales (foreign currency) 0 100 0 0 0 0

Total costs (USD) 81 81 72 90 45 88.2

US costs (USD) 45 45 0 90 25 49

Foreign costs (foreign currency) 45 45 90 0 25 49Tax burden (20%) 11 -9 20 2 15 10.2After-tax profit 8 8 8 8 40 1.6



Exhibit 30: Summary of tax reform proposals Tax reform proposals relative to current law

Source: Tax Policy Center, Goldman Sachs Global Investment Research.

#2: 2017 muted China and US market growth impact on Nexteer

In the US, HPS to EPS conversion cycle is largely over, and before the ADAS-featured EPS

kicks-in materially in 2018, we see Nexteer’s 2017E US growth to slow down from FY16.

However, we would highlight that Nexteer is more exposed to light truck (pick-up) and

SUV/CUV segments. Given the consumer preference on ride height and strong housing

project starts, we see SUV/CUV/pick-up segments to outgrow the overall light vehicle

market. During the Detroit auto show on Jan 13, 2017, both OEMs and suppliers saw a

continued mix shift towards light trucks even though oil/gasoline prices may rise.

Exhibit 31: We see growth of pick-up/SUV/CUV slightly

better than overall light vehicle in the US US light vehicle growth vs. pick-up +SUV/CUV segments

Exhibit 32: Light truck incentives are lower than cars Light truck incentives, % of ASP

Source: IHS, Gao Hua Securities Research.


In China, we see market growth to slow down on govt. subsidy cut and high base in 2017.

Nevertheless, the HPS to EPS conversion is only half way through. We still expect double-

digit sales growth from China Nexteer on its conversion gain and client base expansion.

Current Law House Republican Blueprint Trump Proposal

Domestic corporate rate 35% 20% 15%

Business expensing

Accelerated depreciation

with 50% bonus through

2017, 40% through 2018,

30% through 2018

100% expensed at time of

investment

Allow option of 100%

expensing

Net interest deductibility Unlimited Repeal deductibilityRepeal deductibility for

those who expense

Foreign income 35% (minus foreign tax

credits)0% (full territorial system)

15% (repeal deferral

but allow foreign tax

credits)

Repatriation 35% (minus foreign tax

credits)

8.75% on cash 3.5%

otherwise

10% on previously

untaxed earnings

Destination‐basis/border

adjustment N/A

Deny deduction of import

costs, exclude export related

income

N/A

‐30%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Overall US LV yoy growth Pick‐up + SUV/CUV yoy

9.4% 9.8%

14.1%

10.0%

0.0%

4.0%

8.0%

12.0%

16.0%

Light truck(current)

Light truck(historical

avg.)

Passenger car(current)

Passenger car(historical

avg.)



Exhibit 33: Nexteer is more exposed to SUV segments

China car growth vs. SUV segment

Exhibit 34: HPS to EPS conversion is not over yet

EPS penetration



#3: ADAS/AV commercialization execution/delivery risks

With solid momentum in the technology progress and being open to suitable M&A, we see

Nexteer as well positioned to face industry challenges. Nevertheless, along with the

increasing complexity of autonomous vehicle architecture and actuation systems

(including steering, braking and throttling), there may also be potential technology

bottlenecks or hurdles. We would keep a close watch/frequently evaluate according to the

upcoming milestones such as commercially viable integrated motion control technology

(to be delivered by Nexteer-Continental joint venture), ADAS-featured EPS and SBW

program, etc.

#4: Competition and peers’ strategy

Nexteer is a pure play in the steering segment while the rest of the 6 major global

competitors have other business departments as a diversification of their product line. In

an extreme case, there is a risk that peers could take a more aggressive pricing stance

during new product bidding as they have other business lines to stabilize the short-term

profitability fluctuations. However, we see peers less likely to change their strategy in the

steering segment significantly in the near term as we expect further tech upgrades to be

gradual.

#5: FX risks

In our view, Nexteer tends to keep its global business naturally hedged, that is, to increase

localization rate in each region of production. However, we see potential FX risks during

the period of ramping up, esp. during the strategic business expansion stage.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E

2017

E

2018

E

2019

E

China SUV growth yoy China car market growth yoy

0%

20%

40%

60%

80%

100%

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

US EU China



Backlog visibility and ADAS/AV milestones to drive share price

Backlog is a key factor to evaluate supplier’s future earnings quality

The core of OEM investments is their product cycle, whether the car manufacturers can

produce commercially successful cars. We can validate the momentum from high

frequency data point such as monthly sales.

For suppliers, it’s relatively difficult to track from high frequency data point perspective.

The revenue and earnings estimations are largely determined by backlog booking. Backlog

is the accumulated ‘booked yet to be delivered’ revenue over the coming periods. It

provides visibility to evaluate a supplier’s mid-to-long revenue potential.

A continuously growing backlog reflects future earnings visibility and quality. Nexteer

currently has US$25.6bn backlog (expanded by US$1.6bn from US$24bn in end-Sep 2016),

which is about 6.7X its FY16 revenue. We see further backlog expansion may drive Nexteer

share price as the market would get more visibility on future growth.

Exhibit 35: Nexteer’s backlog is 6.7X of its FY16 revenue

Backlog as of Dec 31, 2016


Technology and positioning likely to drive backlog expansion in tech changeover

We see ADAS upgrade and future technology changeover from EPS to SBW likely to drive

changes in steering segment’s competitive landscape, as we discussed in the above

section.

The competitor (such as Nexteer) which has strong technological capability and active

early engagement with OEMs on next generation product development, may enjoy higher

backlog expansion opportunities vs. peers, in our view.

We note that the market focuses a lot on backlog expansion/earnings delivery. And we see

the ADAS/AV technology shift starting to accelerate. Thus technology capability and

competitive positioning are critical to evaluate key competitors’ backlog expansion

opportunities over the coming 5-7 years.

US$24bn

US$3.8bn

US$25.6bn

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY16 Backlog (Sep16) Backlog (Dec16)

Driveline

CIS

HPS

EPS



Exhibit 36: We see strong backlog growth, earnings delivery and technology milestones to

drive stock price Nexteer market cap performance since listing, in US$mn

Source: Datastream, Gao Hua Securities Research.

We expect key tech milestones/sign of early commercialization to drive stock further

Given the solid ADAS/AV progress from OEMs/disruptor/supplier aggregator side, we see

more concrete milestones/pioneer project delivery to be critical. For Nexteer, we expect

technology milestones such as integrated motion control technology and signs of early

commercialization of SBW product to drive stock price further.

In our global automotive report Cars 2025: Vol. 3: Monetizing the rise of Autonomous

Vehicles, September 17, 2015, we projected gradual growth on the “consumer” side. Our

forecast that semi-autonomous (Level 3 AVs) will be available in the US around 2018 is

equivalent to about half a product cycle (meaning cars are already being developed with

this capability in mind), and our forecast for full autonomous (Level 4 AVs) in 2025 is about

two product cycles away. However, adoption of full autonomous driving could be achieved

earlier on the “fleet” side as cities like Amsterdam, Singapore, and Luxembourg are

looking to adopt AV much sooner (which could be commercially viable around 2020).

Exhibit 37: We see level 3 semi-autonomous driving to get set around 2020 and level 4 autonomous driving around 2025

Timeline of enablers for the implementation of autonomous driving (US market only)


0

5000

10000

15000

20000

25000

30000

0

500

1000

1500

2000

2500

3000

3500

4000

Oct‐13 Jan‐14 Apr‐14 Jul‐14 Oct‐14 Jan‐15 Apr‐15 Jul‐15 Oct‐15 Jan‐16 Apr‐16 Jul‐16 Oct‐16 Jan‐17

Market Cap (in US$mn) Hang Seng Index (RHS)

1H16 earnings beat

New gen tech debut and partnership with Conti

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Hardware

Software

Cyber security

Societal acceptance

Time frame until scale implementation

Level 1‐2 Level 3 Level 4



We note that the potential autonomous driving commercialization could set in earlier than

we expect. As summarized in Exhibit 38, on the “fleet” side, Uber is already operating the

driverless car service in Pittsburgh and Arizona. On the “consumer” side, Tesla has

announced to introduce a full self-driving car by 2018 and a few major OEMs have

expressed intent to launch full self-driving cars by 2020/2021.

Exhibit 38: OEMs/Suppliers/Disruptors are racing to develop autonomous vehicles Autonomous driving by company, summary


Company name Type Partnership Acquisition Investment Semi‐autonomous Full autonomous Summary

Tesla OEM/disruptor Autonomy on

highway already

available

2018 ‐ Tesla CEO Elon Musk announced in late October 2016 that cars currently in production —

which includes the Model S, Model X, and future Model 3 — will be built with new hardware

that will enable them to be fully driverless, pending regulatory approval and further software

validation.

‐ Musk has been committed to having a fully self‐driving car ready by 2018

BMW OEM Intel/Mobileye HERE (the former mapping

division of Nokia, together with

Mercedes and Audi)

2021 ‐ BMW will test 40 self‐driving cars on public roads in the second half of 2017.

‐ BMW is also planning to release self‐driving vehicles in China in 2021.

‐ BMW is committed to releasing an all‐electric car with the autonomous capabilities in late

2021 as part of its Project iNext. By 2025, the Project iNext car will be fully autonomous.

Daimler OEM HERE (the former mapping


BMW and Audi)

Autonomy on

highway already

available

2020 ‐ Daimler executives have said the system powering the autonomous truck, dubbed Highway

Pilot, may be ready for real‐world application by 2020.

Volvo OEM Uber 2017 2020 ‐ Volvo is aiming to make its cars “death proof” by 2020 by rolling out semi‐autonomous

features, eventually working up to fully driverless ones.

Toyota OEM 2027 ‐ Toyota is pursuing self‐driving cars, but is taking a more conservative approach than other

companies.

‐ Toyota is looking to introduce a Level 4 self‐driving car in 10 years as part of its Chauffeur

project.

Nissan OEM 2020 ‐ Nissan is committed to have a commercially viable autonomous car on the roads by 2020.

‐ Nissan will continue to add driverless capabilities to ProPILOT until it has a fully self‐driving

car in 2020.

Ford OEM Velodyne (Lidar

supplier)

2021 ‐ Ford will roll out a fleet of self‐driving cars as part of a ride‐sharing or ‐hailing service by

2021.

GM OEM Lyft Cruise Automation (self‐driving

car start‐up)

Lyft ‐ General Motors has partnered with Lyft to build electric, fully driverless cars that will be

available to just about anyone.

Audi OEM NVIDIA HERE (the former mapping


Mercedes and BMW)

2020 ‐ Audi has teamed up with Nvidia to bring fully self‐driving vehicles to the market in 2020.

Honda OEM 2020 ‐ Honda is aiming to produce cars that are completely driverless on highways by 2020.

Hyundai OEM 2020 2030 ‐ Hyundai is aiming to have highway driverless features in its cars by 2020, but won’t have a

fully autonomous car ready until 2030.

PSA OEM 2020 ‐ PSA is aiming to have fully driverless cars ready by 2020.

Bosch Supplier 2026 ‐ Bosch has been working on driverless technology for several years with the goal of releasing

fully driverless software within the decade.

‐ Bosch might not plan to build an actual self‐driving vehicle (Focusing on system and

sensors)

Waymo (Google) Disruptor FCA Increasing testing

fleet on road in

2017

‐Google spun out its self‐driving car unit into an independent company, called Waymo, in

December 2016. Waymo is now operating under Google’s parent company Alphabet.

‐Waymo has said it’s not interested in building a car, but in selling the tech to automakers.

Uber Disruptor Volvo Otto (self‐driving truck start‐

up)

Robot taxi service

available in

Pittsburgh and

Arizona (with

engineer on

board)

‐Uber is letting people take a ride in its self‐driving cars in both Pittsburgh and Arizona.

Baidu Disruptor Velodyne (Lidar

supplier)

2018 ‐ Baidu is aiming to have a commercial model of its driverless car ready by 2018.

Apple Disruptor ‐ Apple was originally aiming to ship its car in 2019, the Wall Street Journal originally

reported in September 2015.

‐ But Bloomberg reported in October 2016 that Apple is prioritizing working on the software

for a driverless car rather than building an actual autonomous car from scratch.

Didi Disruptor Uber China ‐ Didi founder and CEO Cheng Wei said in a Bloomberg article that he was hiring data

scientists in Silicon Valley to build a self‐driving car.

Launch schedule



We see solid regulatory progress and increasing consumer acceptance

In the Detroit auto show during Jan 8-22, 2017, Mark Rosekind, administrator of the NHTSA

–the governmental body in-charge of writing and enforcing traffic safety regulations – gave

a presentation on regulatory developments in autos. Key takeaways are as follows:

Proactive approach: The NHTSA has overhauled its regulatory approach in the most

significant way in 40 years. This new approach should allow the agency to implement

dynamic regulations in tandem with new technological advancements, with the goal of

innovation velocity and pedestrian protection. Further, it is working to help organically

drive the industry to adopt incremental safety features as standard – without the need

for a rulemaking process – through the New Car Assessment Program.

V2V proposal: The agency has proposed a rule about vehicle-to-vehicle

communication, which will help allow cars to “see around corners,” unlike current

sensor arrays. This technology is seen as necessary for connected and autonomous

vehicles – not just by NHTSA, but also by industry participants.

Federal AV policy: NHTSA also came out with a detailed policy in 2016 for autonomous

vehicles in an effort to set the stage for automotive companies and a regulatory

framework. On the former, there is a 15-point Safety Assessment to set clear

expectations for manufacturers developing and deploying automated vehicle

technologies. On the latter, there is a model state policy that delineates the Federal and

State roles in an effort to build a consistent national framework.

On the content adoption front, we see ADAS content (level 1 and 2 autonomous)

installation is gaining strong momentum. In 2016 China car market, where in general, the

ADAS installation rate is lagging global peers, we saw a clear trend of auto consumption

upgrade as consumers preferred more comfortable, smarter and safer functionalities. We

also attribute part of the commercial success of select top selling local brands’ models such

as Geely’s NL-3 and GAC’s GS8 to their heavy load of ADAS content. We believe this might

drive ADAS content adoption in 2017 given intensifying competition and a series of new

model launches.

Exhibit 39: Geely NL-3’s content is catching on Mercedes Comparison of select equipment between Geely NL-3 SUV and Mercedes Benz models

Source: Baidu Search Index.

Equipment Geely Boyue Mercedes GLC Mercedes C class

Electronic Parking Brake Systems √ √ √

Electronic Stability Program √ √ √

Lane Departure Warning Systems √ √ √

Adaptive Cruise Control √ √ √

Panoramic Camera √ √ √

GPS Navigator √ √ √

Park Assist Vision Systems × √ √

Blind Spot Monitoring Systems × √ √

Panoramic Sunroof √ √ √



Appendix: History, shareholders, case study

Nexteer is a global steering supplier based in the US, owned by China AVIC group (SOE)

and listed in Hong Kong.

Nexteer is a steering parts pure play, originated from GM/Delphi

Nexteer is a global tier 1 technology parts supplier specializing in steering parts. The

company’s history spans a century with relatively complicated acquisitions/corporate

restructuring events in the past decade.

The company was founded as Jackson, Church & Wilcox Co. in the US in 1906. It then

became the first automotive parts manufacturing division of General Motor (GM) in 1917.

GM created Delphi in 1998 and moved its steering operation to Delphi. Delphi was then

spun off by GM and became an independent, publicly held corporation in 1999. Delphi filed

for Chapter 11 (bankruptcy) to reorganize its US operations in 2005. GM acquired the

steering operations from Delphi and renamed it as Nexteer in 2009. Beijing E-Town

acquired Nexteer from GM and transferred the acquired interest to PCM in 2010. AVIC

acquired 51% of PCM and became Nexteer's controlling shareholder in 2011. The

management and technology team has remained stable after AVIC’s acquisition.

Exhibit 40: Nexteer’s top customer is GM… Top customers, 2015

Exhibit 41: …and is predominantly exposed to US and

China

Geographic revenue split, 2015

Source: Company data

Source: Company data

Controlling stakeholder AVIC is a strong supporter of China expansion

As we discussed in the industry section, the HPS to EPS shift is largely done in developed

markets, while we still see penetration opportunities in China.

We believe AVIC, the controlling stakeholder of Nexteer, would be of help to Nexteer to

penetrate in China. China local car makers have around 38% market share. Among China’s

local OEMs, 65% are currently affiliated brands of auto SOEs. We believe AVIC’s support

would help Nexteer penetrate SOE’s own brands.

For the joint ventures (62% of the China’s current car market mix) between China auto

SOEs and foreign car makers, we see increasing bargaining power from the joint ventures

in business decision-making such as sourcing given the China portion is increasingly

substantial in their foreign partner’s profit pool.

49.0%

13.0%

17.0%

5.0%

3.0%

2.5%10.5%

GM

Ford

FCA

PSA

BMW

SGM-Wuling

Others

66%

22%

China: 12%

2%

North America

China

European

RoW



Exhibit 42: China’s local brands have 37.6% market

share…

Exhibit 43: …of which, SOEs account for 65%

Source: ChinaAutoMarket. Source: ChinaAutoMarket.

Exhibit 44: China contribution is now a substantial portion of profit pool of global car makers 2016E, in thousand units


Exhibit 45: AVIC’s current group summary

Note: AVIC now owns 23% of Changan Auto’s parentco post 2009 restructuring with CSIG (China South Industries Group)


29.0% 28.8% 28.2% 25.9% 31.1% 31.8% 29.3% 29.5% 32.7% 33.4% 37.6%

23.1% 23.5% 27.9% 30.4% 25.1% 23.6%22.9% 19.7% 17.8% 16.7%

17.2%

11.1% 10.0% 6.8% 8.3% 10.4% 9.9%10.3%

10.5% 10.0% 9.9%8.4%

13.5% 14.2% 13.7% 12.0% 12.2% 13.0% 13.8% 14.3% 14.2% 13.8%12.9%

23.3% 23.5% 23.4% 23.4% 21.1% 21.8% 23.7% 26.0% 25.3% 26.3% 24.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Chinese Japanese Korean American European

60% 60% 57% 55% 61% 66% 65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013 2014 2015

SOE's affliated brand Private

2016E BMW Mercedes VW PSA Renault FCA Faurecia Hella Valeo Autoliv Continental

Net income

Group net income 6,342 9,214 8,684 1,714 3,409 2,046 512 377 874 572 2,954

Tax rate 33% 32% 25% 33% - - 31% 25% 18% 33% 28%

China consolidated net income 1,968 1,973 1,879 - - - 184 55 200 109 433China equity income 502 516 3,151 - - - 0 0 0 0 0China net income 2,471 2,489 5,030 557 200 86 184 55 200 109 433as % Group net income 39% 27% 58% 33% 6% 4% 36% 15% 23% 19% 15%

Military Aviation and

defense

Civil Aviation

Transportation

Power & Energy

Electronic Equipment

Electronics

General and special

equipment

Materials Environmental Protection

Architectural Engineering

Trade & Logistics

Capital

Media & Consultancy

IT & Software

IT & software

AVIC group(unlisted)

Bus Special Vehicle Automobile Equipment

Auto Parts Shipping Smart Transportation

Engine Air Intake System

Thermal Management

System

Electrical & Electric product

Security System

Vehicle Body & Structural Parts

Changan Auto’s parentco

NexteerOther parts subsidiaries ....



Case study: Positioning and strategy in technology cycle matters

Stanley case study: Technology changeover and peers’ strategy might reshuffle competitive landscape

Both Stanley and Koito are Japanese automotive lighting system suppliers. For the longest

time, the industry‘s mainstream solution for lighting systems has been halogen. Stanley is

the No. 5 global player but its margin was higher than global No. 1 Koito. However, the

industry gradually started adopting LED lighting systems. During the transition, Koito took

a more aggressive approach with its LED product vs. Stanley, including pricing discounts.

Koito subsequently boosted its market leadership in LED headlamps to 52% in 2013 vs.

26% share in headlamps in 2011. Eventually, Koito managed to boost margins on

volume/margin gains driven by product upgrades (i.e. LED). On the contrary, Stanley

moved relatively slow during the technology transition and eventually lost its edge in

growth momentum and margin.

Exhibit 46: Koito had highest share in headlamps… Headlamp global market share (2011)

Exhibit 47: …and also became dominant in LED-HL LED-HL global market share (2013)



Exhibit 48: Stanley lags Koito in terms of LED

installation ratio LED installation ratio trend at Stanley Electric and Koito

Exhibit 49: Our Japan auto team expects Stanley’s

margin to remain under pressure Operating margin trend at Stanley Electric (automotive

business) and Koito

Source: Company data, Goldman Sachs Global Investment Research.

Source: Company data, Goldman Sachs Global Investment Research.

Koito, 26%

Valeo -Ichikoh, 23%

Automotive Lighting, 20%

Hella, 17%

Stanley, 10%

Others, 4%

Koito, 52%

Hella, 24%

Magneti Marelli, 8%

Stanley, 6%

Other, 10%

0.5%

4%

7%

13%

22%

2%

6%

12%

17%

22%

25%

30%

0%

5%

10%

15%

20%

25%

30%

35%

2011/3 2012/3 2013/3 2014/3 2015/3 2016/3E 2017/3E

Stanley Koito

0%

2%

4%

6%

8%

10%

12%

14%

16%

Stanley Koito



Exhibit 50: Supplier valuation summary

*The stock is on regional Conviction List.

Source: Quantum, Goldman Sachs Global Investment Research, Gao Hua Securities Research.

Exhibit 51: Key events to watch


Valuation Summary - Global comparable peersTicker Company name Rating Current Price Market cap EPS%

USD'mn16-19E CAGR 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E

6471.T NSK Neutral 1,637.00 7,739 0% 24.1X 14.1X 13.1X 2.0X 1.8X 1.7X 8% 13% 13% 2% 2% 2% 5% 8% 8% 1% 5% 5%6473.T JTEKT Neutral 1,788.00 5,505 4% 18.5X 12.1X 11.2X 1.3X 1.2X 1.1X 7% 10% 10% 2% 2% 2% 6% 7% 7% 1% 5% 5%CONG.DE Continental Buy 199.65 43,148 11% 11.8X 10.9X 10.3X 2.4X 2.0X 1.8X 22% 20% 18% 2% 3% 3% 12% 12% 12% 5% 7% 8%BWA BorgWarner Inc. Neutral 41.28 8,906 10% 12.1X 10.8X 9.6X 2.5X 2.2X 2.0X 21% 21% 22% 1% 1% 2% 16% 16% 16% 6% 7% 8%000581.SZ Weifu A Buy 23.53 3,484 16% 12.4X 10.7X 9.3X 1.7X 1.5X 1.3X 14% 15% 15% 2% 3% 2% 16% 17% 17% 4% 1% 3%0425.HK Minth Neutral 32.25 3,963 23% 16.4X 13.2X 10.8X 2.8X 2.5X 2.2X 18% 20% 22% 2% 3% 4% 20% 22% 23% 3% 4% 4%1316.HK Nexteer Buy 11.78 3,788 16% 12.0X 10.0X 8.3X 2.9X 2.3X 1.9X 27% 26% 25% 2% 2% 2% 25% 26% 27% 8% 9% 8%VLOF.PA Valeo Sell 59.99 15,257 5% 15.2X 13.8X 12.3X 3.0X 2.6X 2.3X 21% 20% 20% 2% 2% 3% 11% 11% 11% 3% 4% 5%ALV Autoliv Neutral 101.68 8,968 8% 15.1X 13.8X 12.5X 2.2X 2.0X 1.9X 15% 15% 16% 2% 3% 3% 12% 12% 12% 3% 4% 5%

Global glass avg. 10% 15.3X 12.2X 10.8X 2.3X 2.0X 1.8X 17% 18% 18% 2% 2% 3% 14% 14% 15% 4% 5% 6%

Valuation Summary - Global suppliersTicker Company name Rating Current Price Market cap EPS%

USD'mn16-19E CAGR 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E

1316.HK Nexteer Buy 11.78 3,788 16% 12.0X 10.0X 8.3X 2.9X 2.3X 1.9X 27% 26% 25% 2% 2% 2% 25% 26% 27% 8% 9% 8%0425.HK Minth Neutral 32.25 3,963 23% 16.4X 13.2X 10.8X 2.8X 2.5X 2.2X 18% 20% 22% 2% 3% 4% 20% 22% 23% 3% 4% 4%600741.SS Huayu Neutral 17.44 6,540 5% 9.0X 8.4X 7.8X 1.3X 1.2X 1.1X 15% 15% 15% 6% 6% 7% 18% 17% 16% 4% 5% 7%000581.SZ Weifu (A) Buy 23.53 3,484 16% 12.4X 10.7X 9.3X 1.7X 1.5X 1.3X 14% 15% 15% 2% 3% 2% 16% 17% 17% 4% 1% 3%

China avg. 15% 12.5X 10.6X 9.1X 2.2X 1.9X 1.6X 18% 19% 19% 3% 4% 4% 20% 20% 21% 5% 5% 6%012330.KS Hyundai Mobis Neutral 247,500 20,849 2% 7.6X 7.5X 7.3X 0.8X 0.7X 0.6X 10% 10% 9% 1% 1% 1% 7% 7% 7% 2% 3% 4%161390.KS Hankook Tire Buy* 55,400 6,112 5% 7.7X 7.3X 6.9X 1.0X 0.9X 0.8X 14% 13% 12% 1% 1% 1% 12% 12% 12% 8% 11% 15%

Korea avg. 3% 7.6X 7.4X 7.1X 0.9X 0.8X 0.7X 12% 11% 11% 1% 1% 1% 10% 9% 10% 5% 7% 10%ALV Autoliv Neutral 101.68 8,968 8% 15.1X 13.8X 12.5X 2.2X 2.0X 1.9X 15% 15% 16% 2% 3% 3% 12% 12% 12% 3% 4% 5%CNHI CNH Industrial Buy* 9.69 13,217 52% 24.5X 15.7X 12.5X 2.7X 2.4X 2.1X 12% 16% 18% 2% 3% 3% 8% 9% 9% 4% 6% 7%CONG.DE Continental Buy 199.65 43,148 11% 11.8X 10.9X 10.3X 2.4X 2.0X 1.8X 22% 20% 18% 2% 3% 3% 12% 12% 12% 5% 7% 8%EPED.PA Faurecia Neutral 42.00 6,226 4% 9.4X 9.0X 9.1X 1.5X 1.4X 1.2X 18% 16% 14% 2% 2% 2% 11% 11% 10% 7% 8% 9%HLE.DE Hella KGaA Hueck Neutral 40.63 4,877 18% 13.3X 11.2X 10.4X 2.1X 1.9X 1.8X 17% 18% 18% 2% 3% 3% 10% 11% 11% 3% 4% 6%MICP.PA Michelin Buy 111.85 21,985 9% 11.7X 10.3X 9.4X 1.7X 1.6X 1.4X 16% 16% 16% 3% 4% 4% 9% 9% 9% 5% 8% 9%NRE1V.HE Nokian Renkaat Neutral 39.14 5,696 10% 19.9X 17.3X 15.9X 3.5X 3.4X 3.2X 18% 20% 21% 4% 4% 4% 18% 19% 19% 2% 4% 5%VLOF.PA Valeo Sell 59.99 15,257 5% 15.2X 13.8X 12.3X 3.0X 2.6X 2.3X 21% 20% 20% 2% 2% 3% 11% 11% 11% 3% 4% 5%

Europe avg. 15% 15.1X 12.8X 11.5X 2.4X 2.2X 2.0X 17% 18% 18% 3% 3% 3% 11% 12% 12% 4% 5% 7%6473.T JTEKT Neutral 1,788.00 5,505 4% 18.5X 12.1X 11.2X 1.3X 1.2X 1.1X 7% 10% 10% 2% 2% 2% 6% 7% 7% 1% 5% 5%6471.T NSK Neutral 1,637.00 7,739 0% 24.1X 14.1X 13.1X 2.0X 1.8X 1.7X 8% 13% 13% 2% 2% 2% 5% 8% 8% 1% 5% 5%7259.T Aisin Seiki Neutral 5,490.00 13,931 12% 14.6X 12.1X 11.5X 1.4X 1.2X 1.1X 9% 10% 10% 2% 3% 3% 9% 9% 9% 5% 8% 8%5108.T Bridgestone Neutral 4,543.00 32,018 15% 11.1X 10.2X 8.9X 1.3X 1.2X 1.1X 12% 12% 13% 3% 4% 4% 10% 9% 10% 6% 8% 9%6902.T Denso Neutral 5,095.00 36,975 4% 17.8X 16.0X 14.7X 1.1X 1.1X 1.0X 7% 7% 8% 2% 2% 3% 9% 9% 9% 5% 6% 7%5110.T Sumitomo Rubber Indu Sell 1,885.00 4,453 10% 14.5X 10.7X 8.9X 1.2X 1.1X 1.0X 8% 10% 11% 3% 3% 3% 7% 7% 7% 4% 7% 11%3116.T Toyota Boshoku Neutral 2,577.00 4,300 124% 11.3X 11.1X 10.9X 2.0X 1.8X 1.6X 20% 17% 15% 2% 2% 2% 12% 12% 11% 11% 9% 9%

Japan avg. 24% 16.0X 12.3X 11.3X 1.5X 1.3X 1.2X 10% 12% 12% 2% 3% 3% 8% 9% 9% 5% 7% 8%LEA Lear Corp. Sell 137.90 10,111 5% 8.9X 8.6X 8.4X 2.6X 2.2X 1.9X 32% 28% 24% 1% 2% 2% 31% 28% 26% 10% 10% 9%ADNT Adient Neutral 68.52 6,407 7% 7.7X 7.8X 6.6X 1.3X 1.1X 1.0X 18% 16% 16% 1% 2% 2% 0% 12% 13% 4% 10% 12%MGA Magna Neutral 42.66 16,339 9% 7.5X 6.7X 6.3X 1.8X 1.9X 1.6X 23% 27% 27% 3% 3% 3% 8% 8% 16% 6% 10% 10%BWA BorgWarner Inc. Neutral 41.28 8,906 10% 12.1X 10.8X 9.6X 2.5X 2.2X 2.0X 21% 21% 22% 1% 1% 2% 16% 16% 16% 6% 7% 8%DLPH Delphi Buy 78.90 21,533 8% 12.2X 10.9X 9.9X 7.5X 6.1X 5.0X 66% 61% 55% 2% 2% 2% 25% 24% 22% 6% 7% 8%GT Goodyear Buy 35.94 9,416 20% 8.8X 6.6X 5.2X 1.9X 1.6X 1.3X 22% 26% 26% 1% 1% 1% 13% 14% 14% 7% 13% 18%NEMAKA.MXNemak Neutral 20.74 3,389 9% 9.6X 9.6X 8.9X 1.7X 1.5X 1.3X 17% 16% 16% 3% 3% 3% 16% 14% 14% 6% 5% 5%

US avg. 10% 9.5X 8.7X 7.8X 2.8X 2.4X 2.0X 29% 28% 27% 2% 2% 2% 15% 17% 17% 6% 9% 10%

CROCI FCF yield

P/E P/B ROE Dividend yield CROCI FCF yield

P/E P/B ROE Dividend yield

Time Event

2017Potential technology break‐through of the integrated motion control

technology from joint venture with Continental

2017‐2018Potential announcement of backlog expansion of ADAS featured EPS

and SWB systems

2017‐2018 Potential value‐accretive M&A within ADAS/AV scope

2019‐2020 Potential commercialization of SWB system



Exhibit 52: Income statement (USD mn)


Exhibit 53: Balance Sheet (USD mn)


Income Statement 2014 2015 2016 2017E 2018E 2019E1H 2H 1H 2H 1H 2H

Total sales/revenues 2,978 3,361 3,842 4,142 4,747 5,509 1,642 1,718 1,924 1,918 2,029 2,112 yoy % 24.8% 12.8% 14.3% 8% 15% 16% 14% 11% 17% 12% 5% 10%

- COGS (ex-depreciation) (2,439) (2,673) (3,018) (3,245) (3,719) (4,316) (1,319) (1,354) (1,513) (1,505) (1,590) (1,655) Others - - - - - -

Total COGS (2,439) (2,673) (3,018) (3,245) (3,719) (4,316) (1,319) (1,354) (1,513) (1,505) (1,590) (1,655) -

Gross profit 539 687 824 897 1,028 1,193 323 364 411 413 439 457 yoy % 30% 28% 20% 9% 15% 16% 28% 27% 27% 14% 7% 11%

- SG&A (178) (214) (253) (277) (318) (364) (98) (116) (127) (127) (136) (141) Other operating income/(expense) - - - - - - - - - - - -

Total operating expense (178) (214) (253) (277) (318) (364) (98) (116) (127) (127) (136) (141) EBITDA 361 473 571 620 710 829 225 248 285 287 304 316

yoy % 44% 31% 21% 31% 31% 26% 16% 7% 10%-

Depreciation (80) (89) (94) (93) (102) (122) (43) (45) (45) (49) (46) (47) Amortization (39) (53) (69) (84) (84) (84) (25) (28) (32) (37) (41) (43)

EBIT (operating profit) 242 331 408 443 524 623 157 174 208 201 217 226 yoy % 37% 36% 24% 9% 18% 27% 45% 33% 15% 5% 13%

- Interest income 2 2 1 2 3 5 1 1 1 1 1 1 Interest expense (23) (33) (32) (30) (30) (30) (17) (17) (16) (15) (14) (15)

Net interest income/expense (22) (31) (30) (28) (27) (25) (15) (16) (16) (14) (14) (14) Profit/loss on disposal of assets (pre-tax) - - - - - - - - - - - - Foreign exchange gain/(loss) (0) (7) 8 - - - (3) (4) 9 (1) - - Net income from associates - - - 0 1 1 - - - - 0 0 Share of results in jointly controlled entities (1) 1 1 - - - 0 1 1 (1) - - Impairment loss of assets - - - - - - - - - Other non-operating income/expense (5) (11) (1) (1) (1) (1) (5) (6) (1) 0 (1) (1) Non-operating income/(loss) (28) (47) (22) (29) (27) (25) (22) (25) (7) (16) (14) (15) Pre-tax profit (income before tax) 215 283 386 415 497 598 134 149 201 185 203 211

yoy % 42% 32% 36% 7% 20% 20% 20% 45% 50% 24% 1% 14%- - -

Income taxes (51) (73) (84) (90) (108) (130) (35) (38) (48) (36) (44) (46) Minority interest (2) (5) (7) (8) (9) (10) (3) (2) (4) (3) (4) (4) Preferred dividends - - - - - - - - - - - - Extraordinary gain/(loss) - - - - - - - - - - - - Net income 161 205 295 317 380 458 97 109 149 146 155 161

yoy % 48% 27% 43% 7% 20% 20% 19% 35% 54% 34% 4% 11% - EPS - basic 0.06 0.08 0.12 0.13 0.15 0.18 0.04 0.04 0.06 0.06 0.06 0.06 EPS - fully diluted 0.06 0.08 0.12 0.13 0.15 0.18 0.04 0.04 0.06 0.06 0.06 0.06

201720162015

Balance Sheet 2014 2015 2016 2017E 2018E 2019E

Cash and equivalents 380 417 484 737 1,015 1,255 Net receivables 525 570 590 636 728 845 Inventory/stocks 226 254 262 281 323 374 Other current assets 94 95 92 92 92 92 Current assets 1,226 1,336 1,428 1,745 2,158 2,567 Gross PP&E/Fixed assets 844 992 1,180 1,345 1,534 1,836 Less accumulated depreciation (218) (307) (401) (494) (596) (718) Net PP&E/Fixed assets 626 685 779 851 938 1,118 Gross intangibles 405 522 633 633 633 633 Accumulated amortization (61) (114) (183) (267) (350) (434) Net intantigibles 344 408 450 366 283 199 Total investments 6 10 11 13 17 20 Other long-term assets 41 18 26 26 26 26 Total assets 2,242 2,457 2,693 3,003 3,421 3,931 Accounts payable 439 559 604 650 745 864 Short-term debt and current portion of long-term debt 97 81 75 75 75 75 Other current liabilities 146 167 180 185 197 213 Current liabilities 682 807 860 910 1,018 1,153 Long-term debt 634 561 489 489 489 489 Other long-term liabilities/creditors 218 235 253 253 253 253 Total long-term liabilities 852 795 742 742 742 742 Total liabilities 1,534 1,602 1,602 1,652 1,760 1,895 Preferred shares - - - - - - Common stock 350 288 224 224 224 224 Treasury stock - - - - - - Retained earnings 333 540 834 1,088 1,392 1,758 Other common equity - - - - - - Total common equity 684 827 1,059 1,312 1,616 1,983 Minority interest (balance sheet) 24 27 32 38 45 53 Total shareholders funds/equity 708 854 1,091 1,350 1,661 2,036 Total liabilities and equity 2,242 2,457 2,693 3,003 3,421 3,931



Exhibit 54: Cash flow statement (USD mn)


Related Research

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on suppliers; Buy Weifu dated November 11, 2016

Steering toward increase/upgrade in product content; initiate at Buy dated May18, 2016

Cars 2025: Vol. 3: Monetizing the rise of Autonomous Vehicle, dated September 17, 2015

Upward mobility: The rise of global autos; competitive positioning in a growing, evolving

auto industry (Mar 1, 2014)

Cash Flow Statement 2014 2015 2016 2017E 2018E 2019E

Income pre-preferred share dividends 161 205 295 317 380 458 Minority interest add-back 2 5 7 8 9 10 Depreciation and amortization add-back 119 142 163 176 186 206 Net income from associates and jointly controlled entities 1 (1) (1) (0) (1) (1) Net loss/(gain) on asset sales 5 6 1 1 1 1 (Increase)/decrease in working capital : (112) 36 18 (20) (39) (49)

Accounts receivable (197) (61) (20) (46) (93) (117) Inventory (49) (41) (8) (20) (41) (52) Accounts payable 134 138 46 45 95 120

Other operating cash flow items 78 75 14 - - - Cash flow from operations 254 468 497 481 536 624 Capital expenditure (279) (277) (192) (166) (190) (303) (Acquisitions)/divestitures 7 4 - - - - Investments (3) (2) (2) (2) (2) (2) Other investment cash flow items - - - - - - Cash flow from investing (276) (276) (195) (168) (192) (305)

Dividends paid (common and preferred) (22) (32) (41) (59) (63) (76) Share repurchase/issue (change In common stock) - - - - - - Share repurchase/issue (change In other common equity)Increase/(decrease) in short-term debt - - - - - - Increase/(decrease) in long-term debt 143 (91) - - - - Increase/(decrease) in preferred shares - - - - - - Change in minority interest - (1) (2) (2) (2) (2) Other financing cash flow items (31) (37) (192) - - - Cash flow from financing 91 (162) (234) (61) (65) (78) Effect of foreign exchange rate changes (3) 6 - - - -

Total cash flow 66 37 68 252 278 240



Disclosure Appendix

Reg AC

We, Yuqian Ding, Yipeng Yang and Longjin Li, hereby certify that all of the views expressed in this report accurately reflect our personal views about

the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,

related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

Investment Profile

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market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

of several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate

of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

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in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN

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includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and

superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate

performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Yuqian Ding: A-Share Autos, China Autos. Yipeng Yang: A-Share Autos, China Autos.

A-Share Autos: Anhui Jianghuai Automobile Co., Chongqing Changan Auto (A), FAW Car, Fuyao Glass Industry Group (A), Great Wall Motor Co.(A),

Huayu Automotive Systems, SAIC Motor, Weichai Power (A), Weifu High-Technology Group (A).

China Autos: Baoxin Auto Group, Brilliance China Automotive, BYD Co., China Harmony New Energy Auto, Dongfeng Motor, Fuyao Glass Industry

Group (H), Geely Automobile Holdings, Great Wall Motor Co. (H), Guangzhou Automobile Group, Minth Group, Nexteer Automotive Group, Sinotruk

(Hong Kong), Weichai Power (H), Zhengtong Auto Services Holdings, Zhongsheng Group.

Company-specific regulatory disclosures

The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies

covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Nexteer Automotive

Group (HK$11.42)

Goldman Sachs had a non-securities services client relationship during the past 12 months with: Nexteer Automotive Group (HK$11.42)

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 54% 14% 64% 60% 51%

As of January 1, 2017, Goldman Sachs Global Investment Research had investment ratings on 2,902 equity securities. Goldman Sachs assigns stocks

as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell

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Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has

provided investment banking services within the previous twelve months.



Price target and rating history chart(s)

Regulatory disclosures

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Investment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho

69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms

8.98

9.339.9

15,000

17,000

19,000

21,000

23,000

25,000

27,000

29,000

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

Nexteer Automotive Group (1316.HK)

Goldman Sachs rating and stock price target history

Stock Price Currency : Hong Kong Dollar

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2016.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

Rating

Price target

Price target at removal

Covered by Yuqian Ding,as of May 17, 2016

Not covered by current analyst

Hang Seng Index

Inde

xPr

ice

Sto

ckPr

ice

Nov 11, 2016 to N from B

May 17B

F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2014 2015 2016



Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific

disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese

Securities Finance Company.

Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy

or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as

a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a

global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage

group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment

recommendations focused on either the size of the potential return or the likelihood of the realization of the return.

Return potential represents the price differential between the current share price and the price target expected during the time horizon associated

with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each

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Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at

http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook

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the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an

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