Thematic ● Global
November 2020
Increasing software content
enabling autonomous driving
and robotaxis represent next
potential disruptions
Electrification/Software has
forced reallocation of capital
away from conventional auto
technologies…
… while also making
substantial parts of existing
workforce redundant
Autonomous/shared mobility
pose threat to traditional
revenue models for OEMs but
also open up new streams
Outside of electrification, software-defined vehicles, software architectures, high-performance
computing, sensors (camera, radar, LiDar), recurring revenues from service-based business
models and over-the-air updates/upgrades and synergetic capabilities to construct and integrate
full stacks across domains and clouds, have until recently represented a daunting buzzword
tsunami for the common automotive analyst. However, we have to increasingly embrace this
new world. Even if it is more relevant to (or only relevant to) future investment cases, and
complements traditional order intake rather than providing large revenue streams today, the
disruptive tech revolution has arrived in Autos. That’s not least courtesy of Tesla, pushing the
boundaries of regulation and (computer) science, and getting the (rather complacent) incumbent
OEMs on their toes, causing them to model themselves off the new Californian kid on the block
as a blueprint for Distribution Concepts, Complexity Reduction and proprietary Software.
“Impossible” has sometimes become “possible” in the space of a tweet and one CEO’s
relentless ambition has – in our view – resulted in Tesla’s market capitalisation outstripping that
of all the listed German Automotive industry combined.
1st Tier implications – i.e. with an immediate effect on OEMs and their employees – include:
 The re-allocation of CapEx and R&D resources into areas that are now deemed new core
competencies for OEMs, such as proprietary operating software systems in their cars and
electric motors and battery pack assembly. This then comes at the expense of conventional
engine and gearbox manufacturing, which fall victim to significant complexity reduction to
free up resources to finance the technological transition.
 Electric cars have fewer moving parts and are less complex to assemble with more scope for
automation. A larger share of the value-add falls onto the electric powertrain and the software,
which are seldom compatible with the existing manufacturing footprint and workforce
qualifications. Large scale headcount reductions are the inevitable consequence, as we are
very much witnessing in Germany currently (e.g. Daimler >15,000 jobs by 2022, MAN c9,500
jobs by 2023, Schaeffler 4,400 jobs by 2022, Continental c30,000 jobs by 2029).
 A disruptive risk in the longer term (2030s onwards) lies in an increasing adoption of
autonomous driving and shared mobility if it reduces the need/want for private car
ownership. This would disrupt the traditional business model for OEMs of selling new cars
with (often) very profitable specifications and later a profitable spare-parts business.
Instead, this may (at least for a share of their business) get reduced to selling the
“envelope” into a mobility operator such as Uber or Lyft. However, an increasing
technology/software content in the car also presents unexplored revenue streams for OEMs
through (over-the-air) updates, navigation and infotainment features etc. For example,
Mercedes targets to monetise software, upsell digital content and generate cEUR1bn in
EBIT from this revenue stream by 2025e (c10% of its 2019a adj. EBIT).
2nd Tier implications – i.e. with an indirect effect on suppliers and customers – include:
 Conventional suppliers are regularly geared to the complex combustion engine,
transmission and exhaust after-treatment technologies. As the market transitions to electric
mobility (faster), the structural change affects many incumbent suppliers and their
employees. At the same time, new competitors, such as Asian battery makers, take larger
shares of the EV value-add. Amongst the incumbent suppliers, there likely needs to be
consolidation in new categories such as e-motors, inverters, on-board chargers and battery
management systems, where we think 3-5 players will eventually control c75% market
share – as is typically the case in most automotive product categories to allow necessary
economies of scale.
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November 2020

Samsung SDI: Sum-of-the-parts (SOTP) valuation

2021e Target % of total
(KRWbn) EBITDA EV/EBITDA EV EV Note
Battery 32,048 81.1%
- Small battery 619 6.5x 4,024 10.2% Average multiple of Panasonic, Simplo, and
Dynapack in 2009-11
- Large battery (EV & ESS) 28,024 70.9% Based on DCF analysis applying a WACC of 7.0%
Electronic materials 619 5.8x 3,614 9.1% Average multiple of Nitto Denko in 2005-08
Operating value 35,662 90.2%
Non-marketable securities Note
Samsung Display (unlisted) 5,831 14.8% Lower-bound PB of LG Display (034220 KS,
KRW14,850, Hold) during 2005-18 (0.8x) applied to
2020e BVPS
Other non-marketable securities 130 0.3% Book value
Marketable securities Note (below all based on market prices)
Samsung Engineering 283 0.7% 11.7% ownership (028050 KS, KRW13,100, Hold)
Samsung Heavy 15 0.0% 0.4% ownership (010140 KS, KRW6,030, Buy)
S1 366 0.9% 11.0% ownership (012750 KS, KRW83,400, N/R)
Hotel Shilla 2 0.0% 0.1% ownership (008770 KS, KRW80,000, Buy)
Investment asset value 6,468 16.4% Reflects a holding company discount of 20%
Net debt (net cash) 2,607 2020e estimate
Equity value 39,523
No. of shares (‘000 shares) 65,433 Excluding treasury stocks
Target price (KRW) 600,000
Current price (KRW) 501,000 As of 18 November 2020
Difference to target price 19.8%
Note: All DCF inputs are unchanged. Priced as of 18 November 2020.
Source: HSBC estimates

Sum-of-the-parts breakdown for HMC

2021e Remarks
Operating value KRWbn 32,411
Core business KRWbn 33,576
EBITDA KRWbn 11,192
‘Fair’ multiple x 3.0 2021e global autos peer average
China JV KRWbn -1,166
China equity method KRWbn -177
‘Fair’ multiple x 6.6 2021e PE of BAIC
Asset value KRWbn 7,909
Kia Motors KRWbn 4,610 30% discount
Hyundai Wia KRWbn 203 30% discount
Hyundai Glovis KRWbn 229 30% discount
Hyundai E&C KRWbn 512 30% discount
Hyundai Steel KRWbn 203 30% discount
Others KRWbn 2,153 30% discount
Net debt KRWbn -10,000
‘Fair’ equity value KRWbn 50,320
Shares outstanding m 214
‘Fair’ value per share KRW 240,000
Source: HSBC estimates, Bloomberg, company data

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Valuation and risks

Valuation Risks
Current price: Methodology: 80:20 weighted average of sum-of-the-parts (SOTP) Downside risks include
Volkswagen
EUR154.54 over 2021e- 22e and Discounted cash flow (DCF) method. Macro risks: The environment of high geopolitical risk and
VOW3 GR
Target price: SOTP (EUR151.3 fair value per share) problems in emerging markets (such as Russia and Brazil) –
EUR170.00 VW PC brand: Valued at 12.5% EV/sales and 2.0x EV/EBIT further exacerbated by COVID-19 – may lead to larger-than-
expected declines in global car sales, worse pricing, and a
Buy Up/downside: Audi: Valued at 17.5% EV/sales and 3.7x EV/EBIT weaker product mix.
+10.0%
Skoda/Seat/VW CVs: Valued in line with VW brand (i.e. 12.5%
COVID-19: A prolonged outbreak, and therefore lower unit
EV/sales, 2.0x EV/EBIT) sales than our expectations as well as a larger hit to the
Bentley: Valued in line with Audi brand (i.e. 17.5% EV/sales and 3.7x global economy resulting in a slower recovery and therefore
EV/EBIT) a slowdown for the auto sector in 2021e and 2022e, also
Porsche: Valued at roughly the midpoint of Ferrari (RACE IM, poses downside risks to our estimates.
EUR161.30, Buy) and BMW target multiples, in order to reflect China risks: VW is the largest car maker in China. It sells
Porsche’s better volume resilience, better pricing and much higher c40% of its global volumes in China, of which a large
margins while not being Luxury like Ferrari (implied multiples: 85% proportion is from local JV production. Any downturn in the
EV/sales and 8.5x EV/EBIT) Chinese economy would have a negative impact on VW’s
Traton: Value 89% stake of VW in Traton SE (8TRA GR, EUR18.06, sales, earnings and cash flow forecasts as well as on the
Not Rated) in line with its current market capitalisation. valuation of the stock.
China JVs: Valued at 11.2x times 2021-22e JV earnings in line with the Legal risks related to Dieselgate and hardware retrofits of
PE of the FTSE China autos index, on which we apply a 20% holding diesel cars in Europe: Uncertainty regarding the total cost of
discount the emissions scandal has declined but still poses some
downside risk. The main downside risks remain damages
Financial Services: 0.60x times 2020-22e FS book value in line with
claims from VW shareholders, for which the company has
other OEMs in the sector, reflecting the increasing residual value risks
not yet set aside any provisions, as well as the risk of
from leased diesel cars
retrofits of catalytic converters in VW cars on the road in
Net cash, pensions: We value net Automotive cash at 2020e forecast Germany being required.
of EUR17.7bn. We value pension liabilities at EUR36.6bn in line with
Q1 2020 report. We additionally reduce cash flow of EUR3bn of Hybrid
bonds, as this is included in Net Automotive cash.
Contingent liabilities: EUR7.5bn (2019a reported was EUR8.5bn) but
we exclude EUR1bn post the German class action settlement in
February 2020.
DCF (EUR246.3 fair value per share)
Period: Explicit forecast for 2020-25e, semi-explicit for 2026-2031e and
terminal period thereafter.
Terminal period assumptions: -1.5% terminal revenue growth and
6% terminal margin
WACC: 2.5% risk free rate, 4.5% equity risk premium and beta of 1.5x
resulting in an 8.5% WACC
Using the 80-20 weighted average of SOTP and DCF we arrive at our
target price of EUR170 per share for VW Prefs, which implies 10.0%
upside from the current share price. We have a Buy rating on
Volkswagen Prefs due to the potential for earnings growth, favourable
positioning on EVs and very strong FCF and dividend yields.
Henning Cosman* | Henning.Cosman@hsbc.com | +44 20 7991 0369

115

Henning Cosman*
European Head of Automotive
Equity Research
HSBC Bank plc
henning.cosman@hsbc.com
+44 20 7991 0369
* Employed by a non-US affiliate of HSBC
Securities (USA) Inc, and is not registered/
qualified pursuant to FINRA regulations
First leg of disruption –
Electrification – is already
here…
…driven initially by regulation,
but by 2025e also due to
genuine consumer demand
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Thematic ● Global
November 2020
Automotive
 Autonomous and Connectivity are two of the “ACES” megatrends in
Autos – the other two are Electrification and Shared Mobility
 While “Level 3-5” autonomous driving and robo-taxis arguably will
come later than previously expected, connectivity is now a high
priority for (all) OEMs
 VW, Daimler, Hyundai exposed OEMs and Continental, Samsung SDI
exposed suppliers – disruption is challenge and opportunity alike
Disruptive impacts – 1st and 2nd tier implications
The biggest and “most trending” global impending disruption in Automotive is electrification, as
we have discussed in much detail in our recent suite of global reports on the EV value chain
including Global Autos: EVs back in focus – COVID-19 as a jump-start from 20 September.
Electrification is significantly accelerating because of regulation and incentives currently and in
the short term until 2021/22, but also beyond 2022 thanks to a much larger availability of more
attractive models (c350 launches until 2025) with longer ranges (>400km) and more competitive
costs vs ICE equivalents (upfront purchase price and total cost of ownership) thanks to
declining battery prices (while increasing compliance makes ICE cars more expensive).
For passenger cars, we forecast c15% electric vehicle penetration globally in 2025 and c50%
penetration in 2035 – with upside risk from stricter regulation (such as the newly proposed -50%
CO2 reduction target for the EU), and more environmentally focused policies/politics (such as
could be adopted in the US following the recent election of Joe Biden as President) but also
simply from a larger-than-expected genuine willingness on the part of consumers to buy electric
cars. If the energy to source the materials and manufacture the cars, charge the vehicles during
their useful life, and eventually recycle them can be sourced sustainably (e.g. from renewables
such as wind or solar) this can make a vital contribution to carbon reduction from the transport
sector. We have discussed this in our recent report Considering ESG across the whole EV
supply chain by Wai-Shin Chan from 20 September and The second frontier - Why the transport
sector is next in tackling climate change by Ashim Paun from January 2019.
In the heavy-duty transport segment, interest has focused on electrification based on hydrogen
fuel cell technologies. The argument for hydrogen is that higher energy density, rapid refuelling
and longer ranges tip the scales in favour of hydrogen trucks against their battery equivalents.
A number of truck OEMs will launch hydrogen truck trials over the next 1-3 years with mass
commercialisation most likely post 2030. Most notably Volvo and Daimler in April announced a
EUR1.2bn JV to commercialise fuel cell technologies for heavy duty transport, targeting first
trucks with a 1,000km range on the road by 2023. For more details see our May 2020 thematic
report Spotlight: The second frontier: Towards low carbon trucks.

Industry consolidation, data
security/privacy and ESG
issues related to material
sourcing are new threats
VW: best placed incumbent
OEM to challenge Tesla
Hyundai: Underdog in EV
game
Samsung SDI: Gaining from
market consolidation
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 As carmakers increase their commitment to electrification, the EV battery industry should
become more concentrated around the market leaders driven by: (i) pressure on battery
prices; (ii) stricter quality requirements; and (iii) lingering obstacles to battery upgrades. In
fact, the combined market share of the top five EV battery suppliers – Panasonic, LG
Chem, Samsung SDI, CATL, and BYD – was up to 82% in 1H20 from 80% in 2019 and
72% in 2018.
 Connected cars come with many benefits, but generation, ownership, storage and use of
personal data also raise questions about privacy and data security.
 When Autonomous cars eventually drive themselves – relying on artificial intelligence –
there are ethical concerns in situations where accidents are unavoidable and decisions
have to be made to weigh off different potential casualties.
 In the case of Autonomous cars/robo-taxis for mobility services, these new services also
replace conventional taxi operators as well as drivers of mobility services such as Uber and
Lyft. This allows a fast amortisation of the autonomous technology as well as cheaper fares,
which in turn reinforces and accelerates the competitiveness and adoption of autonomous
mobility services.
 State-of-the-art NMC Li-ion batteries use a cathode material that is a combination of nickel,
manganese and cobalt (NMC) often in the ratio 6:2:2. This chemistry requires scarce metals
and minerals, prominently cobalt which is mainly mined in Congo (sometimes under
conditions that are ethically questionable). Much larger quantities of electric vehicles and
the associated battery cells would also require more of these minerals, exacerbating the
impact on finite resources and local workers and communities.
Disruptive impacts – companies
Volkswagen
By 2025, VW targets 3m BEV sales, then likely significantly outselling current market leader
Tesla with a relatively much better value vs price proposition by leveraging its EV platform
strategy and significant economies of scale. For addressing the connected and autonomous
megatrend, VW has set up a dedicated business unit called the Car.Software Organisation with
the aim to develop a standard operating system “VW.OS” for all group cars, a standardized
infotainment platform, automated driving functions etc. VW targets investments of EUR7bn by
2025 in this area and expects to achieve sizeable economies of scale in the group with a
uniform software architecture. In addition, VW has collaborated with Ford and invested
cEUR2.6bn in Argo AI, a start-up focused on autonomous technology.
Hyundai Motor
HMC is engaged in all areas of “ACES” through investment, R&D, and JVs as shown in the
recent initiatives since 2019. We think HMC will continue to expand its investment, enabling the
company to be either leader or fast follower in the upcoming megatrends. We also view HMC as
an underdog that could change the game in EVs as we expect HMC’s new models to result in a
big change in consumer perception through (i) high performance and range, (ii) 800V charging
systems and (iii) competitive pricing (see Korea Autos – Underdog that can change the game in
EVs from 24 August 2020 by Paul Choi).
Samsung SDI
Samsung SDI is our preferred EV battery play as a key beneficiary of the market consolidation
given its advanced technology, expertise in optimizing production processes, and strong ties with
leading automakers. We expect SDI to gain market share on the back of aggressive and efficient
capacity expansion from 2021e after new product launches and production process optimisation.
 Thematic ● Global
November 2020

Volkswagen – sum-of-the-parts valuation approach, 2021e-22e

2021-22e 2021-22e EV avg. Value per
EURm revenues EV/Sales EV Clean EBIT EV/EBIT EV valuation share (EUR)
Volkswagen Passenger Cars (PC) 85,216 12.5% 10,652 3,857 2.0 7,714 9,183 18.3
Skoda 19,155 12.5% 2,394 1,232 2.0 2,465 2,429 4.8
Seat 10,073 12.5% 1,259 150 2.0 299 779 1.6
VW Commercial Vehicles 12,063 12.5% 1,508 487 2.0 974 1,241 2.5
Audi 57,852 17.5% 10,124 4,321 3.5 15,235 12,679 25.3
Bentley 2,262 17.5% 396 157 3.5 553 475 0.9
Porsche AG 30,042 85.0% 25,535 4,581 8.5 38,937 32,236 64.3
VW Cars 216,663 23.9% 51,869 14,784 4.5 66,176 59,022 117.7
Traton 7,716 7,716 7,716 15.4
MAN Power Engineering 3,872 55.0% 2,129 223 8.5 1,895 2,012 4.0
Others/reconciliation -33,129 23.9% -7,931 -1,864 4.5 -8,344 -8,137 -16.2
VW Industrial Operations 187,405 28.7% 53,783 13,143 5.1 67,443 60,613 120.9
VW Financial Services 20,509 20,509 20,509 40.9
SoP Operating Business (EV) 74,292 87,952 81,122 161.8
Financial Stakes: Stake Value Stake Value
China JVs: 50% in Shanghai-VW; 40% in FAW VW 52,122 52,122 52,122 104.0
Fair value associated companies 52,122 52,122 52,122 104.0
Holding discount on financial stakes; % -20.0% -10,424 -10,424 -10,424 -20.8
EV of the above 235,849 49.2% 115,990 15,278 8.5 129,650 122,820 245.0
Industrial net debt (-)/net cash (+) Q120a 17,729 17,729 17,729 35.4
Contingent liabilities from Dieselgate -7,500 -7,500 -7,500 -15.0
Pension provisions 36,666 36,666 36,666 73.1
Minorities 1,870 1,870 1,870 3.7
Hybrid Bonds 15,663 15,663 15,663 31.2
Total equity value 72,021 85,681 78,851
Total number of shares (Ord. + Pref.) 501,295,263 501,295,263 501,295,263
Implied value per VW pref. share (VOW3 GR) (EUR) 138.21 164.43 151.3
Source: Company data, HSBC estimates, Factset

Volkswagen - DCF valuation

DCF valuation EURm EUR/share Fair value Weight
Phase I (2020-22e) 23,242 VW Prefs
Phase II+III (2023-2031e) 80,644 SOTP fair value 151.3 80.0%
Terminal Value 36,561 DCF fair value 246.4 20.0%
Sum of the present values 140,448 Weighted avg. fair value 170.3
+ Book value of FS (@40% discount) 20,509 Target price 170.0
- Net debt 21,277
- Contingent liabilities -7,500
- Net pension liabilities -36,666
- Minorities -1,870
- Hybrid bonds -12,663
Equity value 123,535
Shares outstanding 501
Equity value per share (EUR) 246.4
Note: Share price as at 29 September 2020. Source: Company data, Factset, HSBC estimates

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Valuation Risks
Current price: We use a SOTP to value HMC as we think it more accurately Key downside risks: (1) Higher competition from Japanese
Hyundai Motor
KRW179,500 reflects: (1) its auto operation given net profit fluctuation at affiliates; automakers in major overseas markets; (2) failure to
005380 KS (2) distorted book value given its financing arm; and (3) its increase the popularity of the new SUV model, Tucson; (3) a
Target price:
KRW240,000 struggling China operation. We believe SOTP more fairly captures further slowdown in utilisation rates at plants in China; (4)
upside from any future potential restructuring should it happen. COVID-19 risk: additional shutdowns globally could result in
Buy Up/downside: We apply a 3.0x EV/EBITDA (global autos peer average) target further production losses along with weak demand.
+33.7% multiple to the core business 2021e EBITDA of KRW11.2trn and
apply a 6.6x target PE multiple to the China JV (6.6x PE is the 2021e
PE of JV partner BAIC, which gives an operating value of
KRW32.4trn. We then apply a 30% discount to the asset value, which
is the standard discount rate we apply to holding companies in Korea.
After considering net cash of KRW10trn, we arrive at our rounded fair
value per share of KRW240,000. This implies a 33.7% upside to
current share price and hence we have a Buy rating on Hyundai.
Paul Choi* | paulchoi@kr.hsbc.com | +82 2 3706 8758

Current price: We have a SOTP-based target price of KRW600,000. We use Key downside risks: 1) A delay in emission reduction
Samsung SDI
KRW501,000 EV/EBITDA-based sum-of-the-parts (SOTP) methodology to value targets to negatively affect demand for EV LIB; 2) Faster-
006400 KS Samsung SDI: (1) for the small-sized battery unit, we continue to than-anticipated technology upgrades at Chinese EV LIB
Target price:
apply a 6.5x target multiple to the 2021e EBITDA (the average makers to increase competition in the EV battery industry; 3)
KRW600,000
multiple of Panasonic, Simplo, and Dynapack in 2009-11, when EV A lithium and cobalt shortage over the near term to result in
Buy Up/downside: battery earnings were insignificant and expectations on EVs a surge in EV battery material prices; and 4) Weaker
+19.8% peaked); (2) for the EV battery unit, we use a DCF analysis demand for power tools to erode small battery growth and
(assuming a 2.5% risk-free rate based on 1-year average of the US profitability.
30-year Treasury bond yield, a 5.0% equity risk premium, 1.0 beta,
and a 7.0% WACC; (3) for the electronic materials unit, we apply a
5.8x 2020e/21e EV/EBITDA; the average multiple of Nitto Denko in
2005-08 when electronics materials margins improved on market
share gain); and (4) for the SDC stake value, we apply a 0.8x PB,
the historical lower-bound PB of LGD during 2005-18 with
corresponding ROE of 5-10%. Our target price implies 19.8%
upside from current levels; accordingly, we rate the stock Buy.
Will Cho* | will.cho@kr.hsbc.com | +82 3706 8765

Priced at 18 November 2020

* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
Source: HSBC estimates

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