EQUITY RESEARCH

8 December 2009

EUROPEAN AUTOS & AUTO PARTS: INITIATION OF COVERAGE
PREPARE FOR POST-SCRAPPAGE PRICE WARS

Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 177.

Barclays Capital | European Autos & Auto Parts

EUROPEAN AUTOS & AUTO PARTS – PREPARE FOR POST-SCRAPPAGE PRICE WARS
European Autos & Auto Parts Brian A. Johnson 1.212.526.5627 brian.johnson@barcap.com BCI, New York Kristina Church +44 (0)20 313 42199 kristina.church@barcap.com Barclays Capital, London

We see 2010 as a year of unintended consequences from the scrappage programmes of 2009 for the European Auto sector, and expect volumes to fall, excess capacity to be exposed and pricing to deteriorate. As a result we favour stocks that have unrecognized cost reduction potential. We are initiating coverage with three key 1-Overweight ideas: Renault, BMW and VW Prefs and two key 3-Underweights: Fiat and Daimler. Sector wise, we believe the sector is moderately expensive for what we see as a tougher than expected 2010 but reasonable in light of longer-term valuations. We are initiating with a 2-Neutral sector view and believe the time is right to refocus on stock selection. Specifically we believe that: The sector is no longer a near-term macro call with early cyclical recovery gains behind us; 2010 will be the year of unintended consequences from scrappage programme payback that will pressure not just on volumes but on pricing as the European consumer base becomes addicted to incentives; and Given the toughening environment, we prefer players who can exploit already established scale positions by driving further cost savings via further commonality and modularity over those still scrambling to establish scale. In terms of 1-Overweight, we are non-consensus on Renault. Among our 3-Underweight ratings, we are non-consensus on Daimler and Fiat. Stock selection: Prefer players who can extract cost savings from established scale Auto stocks have already priced in an economic bottom, with OEMs stocks outperforming YTD by 41% (on a raw basis vs. DJ STOXX, excluding VW ords). While investors are cautious toward sales declines in 2010, we believe they do not yet appreciate the degree to which pricing will be under pressure. This makes cost savings critical. To identify cost cutting potential, we believe investors should pay equal attention to the firm’s ability to increase modularity and commonality to exploit the scale – as well as the workforce flexibility to bring the productivity savings to the bottom line. 1-Overweights – We believe the market is underestimating Renault’s potential to take the Nissan alliance to the next level; BMW, where modularity and workforce demographics likely set up further cost reduction; and VW prefs are cheap even assuming dilution and merger risks. 2-Equal Weight – PSA as market appreciates product cadence and is already pricing in gains from a Mitsubishi alliance that will take years to extract; Porsche is primarily a vehicle to gather VW shares but with greater merger and dilution risk than the VW prefs. 3-Underweight – Daimler as workforce demographics inhibit further cost cutting; Fiat as the market overestimates Chrysler potential. Sector view: 2-Neutral We are initiating with a 2-Neutral view on the auto sector for three reasons: 1) At 27% EV/sales for 2010E, the sector valuation is in line relative to history (29%) and investors’ confidence in the sector may be shaken as pricing and volume deteriorates and scrappage programmes expire in early 2010, 2) But at 23% for 2011E EV/sales, the sector still offers upside for longer-term holders and 3) our analysis shows it is time to buy stocks based on company specifics, which points to in-line performance after this year’s rally.

8 December 2009

1

Barclays Capital | European Autos & Auto Parts

Summary of our Rating, Price Target and Earnings in this Report
Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)

Old New 04-Dec-09 Old European Autos & Auto Parts BMW (BMW GY / BMWG.DE) Daimler AG (DAI GY / DAIGn.DE) Fiat SpA (F IM / FIA.MI) Peugeot SA (UG FP / PEUP.PA) Porsche Automobil Holding SE (PAH3 GY / PSHG_p.DE) Renault SA (RNO FP / RENA.PA) Volkswagen AG (VOW GY / VOWG.DE) Volkswagen AG-PFD Preferred (VOW3 GY / VOWG_p.DE) N/A 2-Neu N/A 1-OW N/A 3-UW N/A 3-UW N/A 2-EW N/A 2-EW N/A 1-OW N/A 2-EW N/A 1-OW 32.75 35.91 10.56 24.18 47.51 35.59 80.39 63.50

New %Chg Old New %Chg Old New %Chg

N/A 41.00 N/A 32.00 N/A 8.00 N/A 26.00 N/A 55.00 N/A 42.00 N/A 100.00 N/A 85.00

-

N/A 0.24 N/A -2.02 N/A 0.03 N/A -6.28 N/A -14.29 N/A -10.30 N/A 4.18 N/A 4.17

-

N/A 1.64 N/A 0.61 N/A 0.05 N/A -1.90 N/A 1.47 N/A 0.53 N/A 5.31 5.29

-

Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency. FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital. Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative

8 December 2009

2

please see page 174 8 December 2009 3 .Barclays Capital | European Autos & Auto Parts CONTENTS EUROPEAN AUTOS – PREPARE FOR POST SCRAPPAGE PRICE WARS THE YEAR OF UNINTENDED CONSEQUENCES SCRAPPAGE HANGOVER LIKELY WORSE THAN CONSENSUS EXPECTATIONS EU PRODUCTION TO WEAKEN SEQUENTIALLY BUT GLOBAL GROWTH PICKS UP 1 5 9 15 DESPITE LONG-TERM DOWNSIZING. BUT UNDERWHELMED BY “NEW” STRATEGY – 2-EQUAL WEIGHT RATING PORSCHE – MERGER BENEFITS MAY NOT FLOW TO PREF HOLDERS –: 2-EQUAL WEIGHT 101 121 RENAULT – POTENTIAL FOR GREATER COMMONALITY DRIVES 1-OVERWEIGHT RATING 132 VOLKSWAGEN – SCALE TO WITHSTAND PRICE WARS 152 For Valuation Methodology and Risk section. MID-TERM GROWTH IS IN VOLUME C AND ABOVE SEGMENTS AS SCRAPPAGE DISTORTION FADES 17 SCRAPPAGE AND LOAN PROGRAMMES PRESERVED EXCESS CAPACITY SCRAPPAGE SCHEMES MAY HAVE HOOKED EUROPEAN CONSUMER ON INCENTIVES SETTING UP PRICING PRESSURE CURRENCY SHIFTS PRESSURE US AND UK IMPORTS WE FAVOUR THOSE WITH DOMINANT HOME MARKET C & D POSITIONS 19 23 29 30 SCALE AND COMMONALITY PROVIDES BUFFER AGAINST UNINTENDED CONSEQUENCES 33 SECTOR VALUATION – 2-NEUTRAL BMW – POTENTIAL FOR FURTHER COST CUTS DRIVES 1-OVERWEIGHT RATING DAIMLER – MARKET OVER OPTIMISTIC ON COST-CUTTING POTENTIAL 37 42 59 FIAT – EXCESS CAPACITY AND LOWER CHRYSLER TURNAROUND ENTHUSIASM DRIVE 3-UNDERWEIGHT RATING 78 PEUGEOT – STRONG MODEL CYCLE.

Barclays Capital | European Autos & Auto Parts

Current

Price Mkt Cap

Upside/ 2009

EPS 2010 2011 2009

EPS growth 2010 2011 2009

Sales 2010 2011 2009

Sales growth 2010 2011

Rating European OEMs BMW AG Daimler AG Fiat SpA Peugeot SA Porsche Renault SA 1-Overweight 3-Underweight

price

target downside

€ 32.75 € 21,395 € 41.00 € 35.91 € 36,765 € 32.00 € 8.00 € 26.00 € 55.00 € 42.00 € 5,486 € 8,314 € 9,132

25% -11% -24% 8% 16% 18% 24% 34%

€0.24 (€2.02) €0.18

€1.64 €0.61 €0.05

€3.14 €2.20 €0.42 €2.87 €4.74 €4.77 €8.67 €8.67

-53% -244% -88% NA -140% -563% -65% -65% -174% -88%

586% NA -71% NA NA NA 27% 27% 142% 27%

92% 259% 723% NA 222% 799% 63% 63% 317% 222%

€41,341 €42,316 €45,215 €65,785 €69,512 €76,660 €48,398 €44,852 €46,602 €45,393 €45,923 €49,115 €6,260 €7,094 €8,362 €30,230 €30,831 €33,089 €94,485 €94,299 €104,402 €94,485 €94,299 €104,402

-15% -24% -17% -14% -16% -15% -8% -8% -15% -15%

2% 6% -7% 1% 13% 2% 0% 0% 2% 2%

7% 10% 4% 7% 18% 7% 11% 11% 9% 9%

3- Underweight € 10.56 € 13,061 2-Equal Weight € 24.18 2-Equal Weight € 47.51 1-Overweight € 35.59

(€6.28) (€1.90) (€14.29) €1.47 (€10.30) €0.53 €4.18 €4.18 €5.30 €5.30

Volkswagen (Ords) 2-Equal Weight € 80.39 € 32,169 € 100.00 Volkswagen (Prefs) 1-Overweight Mean Median € 63.50 € 25,410 € 85.00

US OEMs Ford Motor Co. 2-Equal Weight $8.94 Rating
Current

$31,268

$9.00 52 week

1%

($0.38)

$0.60

$1.50

NA

NA P/E

148%

$103,508 $116,441 $133,130 EV/sales

-15%

12% EV/EBITDA

14%

Share price performance

price European OEMs BMW AG Daimler AG Fiat SpA Peugeot SA Porsche Renault SA 1-Overweight 3-Underweight € 32.75 € 35.91

High

Low

Dec 08 1 month 3 month

YTD

2009

2010

2011

2009

2010

2011

2009

2010

2011

€ 36.48 € 37.90 € 11.47 € 25.67 € 61.20 € 37.37 € 82.90

€ 17.22 € 17.20 € 3.32 € 11.30 € 27.12 € 10.17 € 29.55

€ 21.61 € 26.70 € 4.59 € 12.15 € 54.85 € 18.55 € 38.02

0% 10% -2% 4% -11% 11% -25% -7% -2% -1%

4% 7% 28% 14% 6% 8% -68% 9% 1% 8%

52% 34% 130% 99% -13% 92% -68% 67% 49% 59%

137.1x NA 59.7x NA NA NA 19.2x 15.2x 57.8x 39.5x

20.0x 58.6x 209.5x NA 32.3x 67.0x 15.2x 12.0x 59.2x 32.3x

10.4x 16.3x 25.4x 8.4x 10.0x 7.5x 9.3x 7.3x 11.8x 9.6x

20% 45% 34% 6% 187% 11% 67% 67% 55% 39%

18% 44% 35% 7% 40% 11% 27% 27% 26% 27%

18% 40% 32% 7% 27% 13% 20% 20% 22% 20%

2.2 x 11.7 x 4.5 x 1.1 x 9.2 x 1.7 x 6.6 x 6.6 x 5.4x 5.5x

1.5 x 5.4 x 4.9 x 1.1 x 1.9 x 1.2 x 2.2 x 2.2 x 2.6x 2.1x

1.1 x 3.7 x 4.1 x 0.9 x 1.3 x 1.1 x 1.7 x 1.7 x 1.9x 1.5x

3- Underweight € 10.56 2-Equal Weight € 24.18 2-Equal Weight € 47.51 1-Overweight € 35.59 € 63.50

Volkswagen (Ords) 2-Equal Weight € 80.39 € 313.00 € 78.10 € 250.00 Volkswagen (Prefs) 1-Overweight Mean Median

US OEMs Ford Motor Co. 2-Equal Weight $8.94 $9.14 $1.50 $2.29 20.0% 11.6% 290.4% NA 14.8x 6.0x 54% 48% 38% 16.1 x 7.3 x 4.3 x

8 December 2009

4

Barclays Capital | European Autos & Auto Parts

THE YEAR OF UNINTENDED CONSEQUENCES
Effects of government interventions & scrappage schemes likely to linger

Governments in Europe and the US intervened on an unprecedented scale in automotive marketplaces in 2009. Various forms of scrappage programmes boosted sales by 3mn units in Europe and 700,000 units in the US. Government financial support to automakers included loans in France and Germany (Opel), and bailouts of Chrysler and GM in the US. But we see 2010 as a year of unintended consequences when volume falls, excess capacity is re-exposed and pricing deteriorates. As a result, we favour stocks that have unrecognised cost reduction potential. The positive, intended consequences of government interventions accounted for much of the rally in European autos since their lows of January 2009. With the prominence of automobile sector to European employment (2.2mn jobs in 2007, or 7% of manufacturing employment in the EU27), governments stepped in to cushion the fall. Germany, with over 800,000 jobs at stake, took the lead, followed by other major manufacturing countries. As a result, sales in pan-Europe (ex-Russia and Turkey) are likely to have fallen by only 5% from 2008 to 2009, note that sales would have fallen by 20% without scrappage programmes. After a dip in 1Q09 production to 3.4mn units, production in the remainder of 2009 will have averaged 4.3mn units a quarter. This led to a “positive, albeit small” contribution to 1H09 GDP at a cost of less than 0.1% of GDP in the euro area (see European Central Bank, Monthly Bulletin, October 2009). In the US, the Chrysler and GM bailouts preserved up to 600,000 jobs at GM and Chrysler and their suppliers, and prevented significant disruption in the supply chain and cascading supplier bankruptcies. However, 2010 and beyond will see the negative unintended consequences of the government interventions play out in Europe -- only some of which we believe are fully understood by investors: First, sales in Western Europe are likely to fall 13.6% (that is, we believe 400bp worse than consensus) as scrappage programmes expire and underlying demand remains anaemic. Second, excess capacity and globally uncompetitive labour rates will persist. Third, and perhaps least well understood, the scrappage programmes likely hooked the European consumer on incentives, leading to very weak pricing over the next several years all the way up to the luxury segment -- in stark contrast to the strong pricing that otherwise concentrated local markets have allowed. Fourth, in another sector of government intervention, the two governments which have been most aggressive in propping up their banks and expanding their national debt -the US and UK -- have and are likely to continue to suffer from weak currencies that hurt exporters into those geographies.

W Europe sales to fall near 14% in 2010E, 400bp worse than consensus forecasts

We are cautious on the sector as a whole – 2010-11E likely weaker than market anticipates Excess capacity, pricing & currency pressures to weigh on sector – most acutely on luxury manufacturers
8 December 2009

So what are investors to do? First, we are cautious on the overall sector. We expect 2010 to be weaker for the industry than most believe, although at current market prices we still see value out to 2011 and beyond as demand recovers allowing capacity utilisation and pricing to improve. Second, we believe pricing and currency pressures are most acute in the luxury segment, we do not favour luxury over volume. Finally, given the pressures, we are looking to companies that have superior resilience (at least relative to market expectations) to the weak pricing, currency and demand environment due to their market and cost positions.

5

Barclays Capital | European Autos & Auto Parts

BMW (1 – Overweight, €41 price target) (see page 42)
BMWG.DE / BMW GY Stock Rating

1-OVERWEIGHT
Sector View

2-NEUTRAL
Price Target

€41.00
Price (04-Dec-2009)

€32.75
Potential Upside

We are initiating coverage of BMW with a 1-Overweight rating and €41 price target, based on a combination of EV/sales and PE metrics and historical and peer averages. Given the pricing, demand, and currency pressures we expect to continue in the premium market, we favour companies that can deliver and retain near and mid-term cost reductions ahead of market expectations. BMW is a well-understood story as regards its upcoming model launches; nevertheless, we believe the market is underestimating the company’s potential for deeper and further cost savings via Strategy #1, both as a result of the full roll-out of its modular strategy and as a consequence of increased flexibility regarding employee costs due to an ageing workforce and extensive use of temporary workers. Moreover, while not part of Strategy #1, BMW’s more extensive manufacturing presence in the UK and US provides more of a natural currency hedge offsetting the strength of the euro.

25%

Daimler (3- Underweight, €32 price target) (see page 59)
DAIGn.DE / DAI GY Stock Rating

3-UNDERWEIGHT
Sector View

2-NEUTRAL
Price Target

€32.00
Price (04-Dec-2009)

€35.91
Potential Downside

11%

We are initiating coverage of Daimler with a 3-Underweight rating and €32 price target due to our expectations that the market has run ahead of itself on its forecasts for Daimler’s cost saving potential. We expect pricing, demand, and currency pressures to continue in the premium market and therefore favour companies that can deliver and retain near and midterm cost reductions ahead of market expectations. Although management have committed to an additional €4bn cost savings for 2010E, we are concerned that the majority of these will be absorbed be negative factors (price, FX and raw material costs), whereas we believe market assumptions are overestimating the retention potential. We believe that DAI is also more exposed to pricing risks than BMW, having unfortunately launched its E-class into a falling luxury market and with less natural hedging is more exposed to FX risks than its peer. We also think that with Mercedes’ youthful workforce, its lack of modular-focused savings (relative to BMW and especially Audi/Porsche), and its belated efforts in the field of fuel economy provide less fat to trim. Even using consensus estimates for the truck sector (which we believe is risky given that the market seems to be underestimating the tepid recovery potential for the European truck market) our forecasts still remain 40% below market expectations for 2010E. Valuation metrics further point us to prefer BMW (currently 18% 10E EV/sales vs 44% at DAI, though admittedly DAI also incorporates high-rated trucks) and lead us to initiate coverage of Daimler with a 3-Underweight rating and a €32 price target.

Fiat (3- Underweight, €8 price target) (see page 78)
FIA.MI / F IM Stock Rating

3-UNDERWEIGHT
Sector View

2-NEUTRAL
Price Target

€8
Price (4-Dec-2009)

€10.56
Potential Downside

24%

We are initiating coverage of Fiat with a 3-Underweight rating and a €8 price target. While Fiat has rallied recently on hopes for Chrysler and press speculation of an FGA spin-out, we believe that while Chrysler is likely to survive through 2011, even a strong turnaround (albeit below management projections) would be worth only €1.50 per Fiat share by 2012. Moreover, by Fiat’s own admission, the prospects for a spin-out of Fiat Group Automotive, which would in our view unlock the value of CNH and Iveco, are remote in 2010. As a result, we believe investors will refocus on the core automotive business, which faces a difficult year as scrappage programmes fade away across Europe. As the programmes fade, we think Fiat, which benefited significantly from the shift to A and B vehicle segments, will be hit hard as volumes fall and price competition sharpens. The fall in volume will once again reveal the excess capacity in Italy, leading to negative headlines and difficult negotiations as Fiat navigates the delicate task of closing Italian capacity. We are therefore initiating coverage of Fiat with a 3-Underweight rating and we value the Fiat share based on an average of EV/sales and EV/EBTIDA at historical and peer average multiples, which lead us to our €8 price target.
6

8 December 2009

We base our price target for the Porsche’s preference shares using an average of EV/sales and EV/EBITDA metrics at historical and peer average multiples leading us to our €55 price target. senior status. €42 price target) (see page 132) RENA. While Porsche’s near-term prospects as a sports car manufacturer are strong in the face of a challenging market. As at Peugeot. 8% Porsche (2.PA / RNO FP Stock Rating 3-OVERWEIGHT Sector View 2-NEUTRAL Price Target €42. but with the defensive characteristics of downside protection.DE / PAH3 GY Stock Rating 2-EQUAL WEIGHT Sector View 2-NEUTRAL Price Target €55. we believe that this leaves plenty of upside to the current share price when recovery sets in. Though Peugeot’s superior product mix and the upside potential if a buyer were to be found for its Faurecia stake prevent us from taking an underweight stance. we base our valuation on a SotP methodology.Equal Weight. likewise.00 Price (04-Dec-2009) €35. an income advantage and strong takeover and dividend protection features our Barclays Capital convertibles analysts recommend Peugeot’s 2016 convertible. which in turn drives our 1-Overweight rating. the real value of Porsche’s pref shares lie in the current 51% holding of VW shares and their eventual conversion into VW NewCo shares (likely prefs). such as the Volvo stake. As with Renault. The unlocking of such synergies has long caused heated debate among analysts but we believe that RNO management are now whole-heartedly focused on both near-term cash management but also on turning their association with Nissan into something more obviously tangible.Barclays Capital | European Autos & Auto Parts Peugeot (2. While we maintain a positive stance toward VW prefs (with a 1-Overweight and €85 target).Overweight. which will include the sale of selected property assets and of any non-strategic investments.00 Price (04-Dec-2009) €47. Renault (1.PA / UG FP Stock Rating 2-EQUAL WEIGHT Sector View 2-NEUTRAL Price Target €26. the company is only likely to retain €2.Equal Weight. We believe that the market is already well versed in Peugeot’s strong upcoming model line-up and is already over-crediting the company’s revenue growth potential in 2010 and beyond.00 Price (04-Dec-2009) €24. For equity investors who are looking for exposure (delta) to the underlying equity. the company’s lack of scale and the market’s over-confidence in its future cost saving potential steer us away from an Overweight rating. which we confirm against peer average EV/EBITDA multiples in order to reach our price target of €26.59 Potential Upside 18% Our 1-Overweight rating on Renault is based on the thesis that the ‘glass is half full’ in relation to future potential synergies from the Nissan alliance. In the near term. offers better protection against the vagaries of offering dilution and exchange ratios than do the Porsche prefs. We are optimistic that 2010E will herald the beginning of an improved cash management strategy.18 Potential Upside Our 2-Equal Weight rating on Peugeot is based on our concern regarding the company’s lack of scale both geographically and on a platform-by-platform basis. Whilst we acknowledge that the company is currently in a far from secure position in balance sheet terms and is yet to show evidence of current profitability in its automotive business. €55 price target) (see page 121) PSHG_p. which we check against peer average EV/EBITDA multiples to reach a price target of €42. 7 8 December 2009 .3bn of gross cost savings. We also believe that of the targeted €3.1bn. we base our valuation on a SotP methodology. €26 price target) (see page 101) PEUP. We are initiating coverage of Peugeot with a 2-Equal Weight rating. Nissan’s exposure to the US and emerging markets will likely aid Renault’s earnings but where we feel that real additional value can be extracted from the Renault share is via the longer-term potential for increased use of commonality on platforms shared with its Asian associate. we believe that public shareholders in both firms face transactional risk around the future fundraising and eventual merger ratios.51 Potential Upside 16% We are initiating coverage of Porsche with a 2-Equal Weight rating and a €55 price target reflecting the uncertainties and risks in the next 16-18 months. against the near-term low valuation in light of Qatari share sales. With VW we believe that the ultimate earnings power.

we recognize that VW is seen as a consensus overweight – yet has been a stock that has repeatedly punished the consensus trade. we do not view the potential Porsche merger and attendant financial manoeuvring as posing significant downside risk to VW pref holders.Barclays Capital | European Autos & Auto Parts Volkswagen Prefs (1. We believe that VW is the most advanced of the European auto makers in capturing economies of scale – and is likely the world benchmark for modularity – which should give it the cost position to withstand the intense price competition we expect in 2010. which lead us to our €85 price target for prefs and €100 for ords. price target €85) and Volkswagen Ords (2. Moreover. and with a 2-Equal Weight and €100 price target for the ordinary shares.00 ords Price (04-Dec-2009) €63.00 prefs / €100.39 ords Potential Upside 34% prefs / 24% ords We are initiating coverage of Volkswagen with a 1-Overweight rating for the pref shares and a €85 price target. consider options as an alternative to the shares. in our view. These investors should.Overweight.50 prefs / €80.DE / VOW3 GY Stock Rating 1-OW prefs / 2-EW ords Sector View 2-NEUTRAL Price Target €85. Any potential ‘overpayment’ for Porsche assets is only at most in the range of €6-7 per VW pref share – small in light of the significant upside potential as VW returns to 4% EBIT margins by 2012 (which would be below our longer term projections of 6-7% in 2014-15). We value the VW shares based on an average of EV/sales and EV/EBITDA metrics at historical and peer average multiples.DE / VOW GY VOWG_p. Given the erratic movements of Volkswagen’s shares many investors are loath to enter into a position that could result in substantial losses. 8 December 2009 8 . as VW appears to have protected itself against an inordinate amount of net debt on Porsche’s balance sheet. with the benefit that the maximum loss to a long call or put position is the premium paid. At the same time.Equal Weight. price target €100) (see page 152) VOWG.

364 1. We believe that government interventions clearly distorted the European market in 2009.882 1.934 2010E* 2.700 2.377 2008 3.050 1. masking what would have been a steep 25% decline in total Europe.615 3.5% +11.347 978 13. had scrappage schemes not been initiated.746 1. JD Powers.162 2.162 15.109 807 2.000 938 17.708 1.966 13. France.9% +22.2% +10.132 2. which were adopted to varying degrees by the five major Western European markets as well as well as five of the smaller WE states and two of the new EU members.090 2.462 670 14. 870.300 1.404 2. This will be a difficult hole to climb out of given limited spillover of scrappage programmes into 2010.385 2011E 2.0% -15. The European auto downturn of 2008-09 came after nearly a decade of sales that fluctuated mildly in Western Europe (between 14.561 1.228 1.147 2.550 1.7% -12.1% YoY Chg (%) 2010E -32. we expect sales to reach 13.460 13.934 744 2.4% +5.071 1.7% -10.638 2009E +21.2mn in 2008.1mn sales in W EU in 2009E are likely to have been subsidized by scrappage programmes.543 1.4% (-14% total Europe) in 2009E but masking a -19% drop (-25% total Europe) had scrappage schemes not proliferated. Barclays Capital 8 December 2009 9 .7% -7.1mn in Western Europe.6% +7.117 14. However.5% -14.087 2.2mn units and 15.075 14.493 2.1% -3.054 19.960 2.725 12.384 2.4% -12.904 2. nearly 3mn of the 13.798 1.4% +4. likely effects of pull ahead of 2010E sales into 2009.0% +8.828 2012E 3.179 14.7% 2011E +13.100 870 14.320 932 12.740 2. UK & Spain.549 2009E 3.6% -43.101 18.9m in Russia.2% -5.1% -12. Turkey and former Soviet Union states – for a net decline of -3.7% +9. Source: ACEA. For the full year 2009.8% -9.7% +6.708 820 15.065 1.0% Note: * assumes low level of extension to scrappage schemes in Italy.6% +16.892 1.0% -51.5% +4.4% +7.150 880 2.4% -26.252 1.750 1.161 2.773 1.0% +8. Figure 1: European car registrations historical and forecast.579 11.2% -17.1mn) while growing healthily in Eastern Europe to 1.876 13.4% in W Europe and -14% in total Europe (or a cumulative decline since 2007 of -12% and -18% respectively).000 in Eastern Europe and 1. 2007A-2012E (units in 000’s) Registrations (units in 000’s) 2007 Germany UK Italy France Spain Rest of W Europe Total W Europe New EU States Pan-EU Russia Turkey & FSU Countries Total Europe 3.860 2.1% +5.1% +10.7% +9. 2009 W European sales would have declined 19% to 11mn units without government interventions W European sales to fall only -3.000 1. and expected weak euro area macroeconomic growth.932 2.8% -13.312 622 15.000 2.Barclays Capital | European Autos & Auto Parts SCRAPPAGE HANGOVER LIKELY WORSE THAN CONSENSUS EXPECTATIONS Consensus expectations for European sales in 2010E appear to be for a slight softening in the range of 8-10%.2% -4.9% -24.

> 13 years.000 cars €750–1.Barclays Capital | European Autos & Auto Parts Figure 2: European summary of current scrappage schemes F: €1000 + staggered tax staggered tax rebate up to €5000 > 10 years New car max 160 gCO2/km (staggered) €220mn 1 year 2008 – 2009 Proposal for extension 2010 L: €1500/1750 > 10 years New car max 150 gCO2/km 1 months 2009 UK: £2000 > 10 years £400mn 10 months 2009-10 NL: €750–1. or 250. 8 December 2009 10 .750 LCVs > 13 years (petrol) > 9 years (diesel) €65mn 2009-10 D: €2500 further tax rebate for Euro 5/6 cars > 9 years Min Euro 4. max 140gCO2/km 1. depending on the design of the programme.000 vehicles 11 months 2009 E: Plan 2000E: €2000 Plan VIVE: interest free loan (€10. we estimate that c50% were incremental sales and c50% a pull-forward of 2010E sales in 2009E. To estimate the base underling rate we assume that. We estimate that scrapping programmes in WE provided nearly 3mn units of sales. max 1 year €5 bn 1 year 2009 A: €1500 > 13 years New car min Euro 4 €45 mn 9 months 2009 P: €1000/1250 > 8 years. between 30% and 35% of the buyers would have found their way into showrooms with or without scrappage incentives.1 mn 9 months 2009 RO: €1000 > 10 years Max 60. Of the remaining scrappage sales. However. as critics of the programmes point out. at least some of these sales would have occurred anyway in 2009. and had a relatively minor positive affect in Eastern Europe. other countries showed significant boosts as well. New car max 140 gCO2/km 5 months 2009 SK: €2000 > 10 years €22.000 km car max 5 years.000 max) > 10 years.5 years 2008–2010 I: €1500 – 3000 cars €2500 – 6500 LCVs > 9 years New car max 130-140gCO2/km 11 months 2009 GR: new scheme announced: €1500 – 3200 cars €2000 – 3700 LCVs €7000 – 13000 HDVs 2009 – 2012 Campaigns underway Source: ACEA Discussions While scrappage provided the largest and most-discussed boost in Germany.

425 10.Barclays Capital | European Autos & Auto Parts Figure 3: Barclays Capital 2009E scrappage model % of scrappage % of scrappage sales that 'would sales pulled have occurred' in forward from 2009E pro forma ex scrappage 2009E 2010E 25% 35% 30% 30% 30% 30% 35% 30% 35% 35% 35% 35% 2.179 14.8mn in total Europe (incl. Figure 4: YoY change in monthly W European car sales 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Jul-07 Jul-08 Nov-07 Nov-08 Sep-07 Sep-08 Jul-09 Mar-07 Mar-08 May-07 May-08 Mar-09 May-09 Sep-09 11 Jan-07 Jan-08 EU(15) + EFTA(3) Source: ACEA.934 13. we believe that the true underlying rate is closer to 11mn in WE– a far deeper hole from which to climb out.934 15.0mn in 2009 in WE and 13.0mn scrappage sales that otherwise would not have occurred in 2009E (assuming c.934 -14.090 2.162 2. Note that while our 14% decline forecast for 2010E will bring sales down to 11.3% As opposed to the scrappage fuelled headline number of 13.740 3.600 285 400 390 200 50 2.829 1. and in line with the 25% declines seen in the US prior to cash for clunkers.550 1. far lower than the comfortable 14mn run rate of recent months in WE (sales even reached a SAAR of 15mn in Oct 09).966 13. Russia) – a YoY decline of 19% in WE and 26% overall.987 30% 30% 842 11.100 870 14.000 1.720 1.000 2.809 18. JD Powers and Barclays Capital 2009E 3.161 2.9mn scrappage sales would have occurred in the year even without scrappage).8% 2008A Germany UK Italy France Spain Rest of WE W Europe New EU States Pan-EU Turkey.150 880 2.860 2.050 1.561 1.965 3.763 -25.549 -4.1% Scrappage boost 1.965 2. Backing out the estimated 2.132 2.675 1. brings the underlying base rate of sales to 11.877 740 2.460 13.1m 09E. Russia & FSU Total Europe (inc Russia) YoY chg(total Europe) Source: ACEA.3mn. the -25% cumulative decline this will imply between 2008A and 2010E is on a par with levels at which the markets cleared prior to scrappage incentive interventions (as per Figure 4 below). Barclays Capital 8 December 2009 Jan-09 .30% of total 2.925 40 2.750 1.

Figure 5: Barclays Capital 2010E scrappage model 2009E Germany UK Italy France Spain Rest of WE W Europe New EU States Pan-EU Russia Total Europe (inc Russia) YoY chg total Europe Source: Barclays Capital 2010E 2.8mn from continuation of scrappage schemes but battling a headwind of 1. In France.000 vehicles and it is expected that the Spanish and Italian schemes will also be extended to some degree.2mn to 13mn in WE.000 units. attracted many customers who would not otherwise have bought a new car.320 932 12.0mn units in 2010E.Barclays Capital | European Autos & Auto Parts 2010 sales of 11. and underlying euro area growth of 1.750 1.543 1.3mn in WE and 14. we believe that VW likely as an order book of at least 500.773 1.579 11.934 744 2. 8 December 2009 12 . to bring total sales to 11.000 to EUR700mn on 1 January 2010 and to EUR500mn on 1 July 2010.759 1.252 2.132 change in base demand 6% 5% 5% 5% 2% 5% 5% 5% 3. In particular. at least a few countries still have budget or plans for scrappage in 2010.020 400 100 80 100 60 50 790 60 850 Pro forma ex scrappage 2.000 1.132 14.746 1.3mn likely in W Europe . a government draft budget document is set to reduce the incentive support from the current level of EUR1.12.000 are likely to be delivered in 2010 in the winter and early spring. optimistically. At the same time.806 1.860 2.547 11.7% Pay back from Continued 2009 scrappage scrappage boost -560 -85 -140 -137 -70 -18 -1. German automakers appear to be pressing for a subsidy programme (or changes in personal taxation of company-provided cars to reflect actual price vs. while we believe the scrappage programmes.1% 5% 850 14. but not assumed in our analysis. some sales were undoubtedly pulled forward from 2010E as consumers accelerated purchases. there is still expected to be some carryforward into 2010E as the scheme was based on orders placed rather than on deliveries.2mn units in 2009. of which 300.460 13.0mn sales that were pulled forward from 2010E into 2009. As a result.100 870 14. and there has been no suggestion that an extension can be expected.540 884 12. the German programme ran out of money in early September. offsetting some of the payback from pull-ahead sales.500 2.8mn units to 1.000 2. The UK recently extended its scheme by an additional 100.010 -12 -1.971 754 2. a segment in which sales fell from the ‘normal’ range of 1. the net impact of scrappage in 2010 will be negative – a likely boost of 0.3mn in total Europe – well below the consensus range which we estimate at c.6% could provide an additional boost of. In addition.934 15. 5% to auto sales. Although.limited scrappage boost and modest euro area economic growth We believe that extension of scrappage programmes could provide a further scrappage boost of 1. list price) focused on company fleets. particularly in Germany.150 880 2.934 -14.385 -9.556 A few scrappage schemes still to play out in 2010 but not likely to offset payback from sales pulled forward in 2009 While the bulk of scrappage programmes played out in 2009.703 1.

817 10.498 11. the average rebound was 3.034 YoY change % 1. Barclays Capital Macro boost of 4-5% is somewhat optimistic given history of rebounds We are somewhat optimistically assuming that underlying base sales (that is.938 12.160 8.416 13.7% 0.1% 13.5% -0.2% -13.7x the prior year’s downturn.252 11.4% or on average 0.9% 5.000 12.6%) estimate for Western Europe in 2010E (we believe consensus is expecting only an 8-10% decline).664 11.0% 9.000 8.004 10. Barclays Capital 8 December 2009 13 . 1970A-2015E W EU car market total ('000) 1973 1974 1975 1976 1979 1980 1981 1982 1983 1984 1985 1986 1990 1991 1992 1993 1994 1995 9. Figure 7: Western European historical & forecast car sales cycle.107 9.Barclays Capital | European Autos & Auto Parts Overall.6% -2.000 4. we expect a decline in Western Europe of 25% (with the aid of scrappage incentives). ACEA.000 2.517 13.000 10. The sharpest rebound was 6% in 1994.9% -5.3mn (-13.6% 6.yet we still remain significantly below consensus with our 11.684 13. JD Powers.000 6.416 9.636 10.3% 3.4% average of prior 2nd year rebounds 7.6% -16.431 8.460 10.5% 3.0% Source: JD Powers. 2009 stripped of scrappage distortions) will grow 5% .1% 0.9% 1. after a near-17% decline in 1993.0% -2.000 14.152 10. Figure 6: W European historical car sales.8% average of prior first year rebounds 3. In looking at prior cycles in Western Europe.532 10. only slightly worse than the 1992-93 downturn but significantly worse than other post 1970 downturns. 1970-2012E (units in 000’s) 16.000 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010E '73-74 -13% '79-81 -8% '92-93 -17% '00-03 -7% 08A-10E -25% W European Car Market Total ('000) Source: ACEA.6% 0.9% 4. across the 2008-10 cycle.

7 1.0 0.7 -7.0 0.0 -4.6 -0.7 -15.5 2.0 -0.2 2.4 0.8 -4. GDP alone provided the best (albeit.2 3. Source: ACEA. somewhat below consensus expectation of 2.0 6.9 5.4 0. 1995-2009 15% Registrations (yoy % c 10% 5% 0% -5% -10% -15% -6% R2 = 0.1 2. we are left to forecast just 2.3 -9.4 -2.9 3. However.4 -1.1 -4. this implies registration growth of 3.4 -4.2 1. with the strongest growth in base demand likely in Germany – which had the greatest scrappage distortion.2 -26.5 2.0 4Q09 3.7 -0. when we back out the likely scrappage payback in 2010E.4 2.1 1.6 -13.0 1Q10 1.0 2. Haver Analytics.2 2.6 1.4 -3.3 0.5 0.0 0.6 3.6 0.5 2Q09 -0. Hungary Poland Russia Source: Barclays Capital Real GDP % annual change 2Q10 2.4 -10.3 4.7mn units in Germany in 2010E.4 4.6% growth in WE GDP for 2010.7 -8.0 0. Figure 9: EU car registrations vs.8 2.3 2008 1.9 2.8 2.1 -0.0 2.3 1.8 1.7 -12.0 -2.8 1.2 -10.7 3.1 1.6 1.4 -6.0 0.1 1.8% change in auto registrations as per Figure 10 below).5 3Q10 2. SAAR 1Q09 Europe and Africa Euro area Germany France Italy Spain Netherlands United Kingdom Sweden EM Europe & Africa Czech Repub. automotive registrations will change about 1.9 2.2 -9.5 2.0 0.8x multiplier (where every 1% change in Real GDP correlates to 1.6 -4.3 -4. regression shows that for every 1% change in euro area GDP. Using the 1.3% in Spain to 2.5 4.3 -3.2 0.8 1.4 -2.5 -4.5 1.5 2010 1. There are still a few scrappage schemes to play out in 2010 but not likely to offset payback from sales pulled forward in 2009 (see scrappage section later in this report). a somewhat weak) fit.1 -2. Figure 8: Barclays Capital estimates for real GDP growth.2 -1.2 3.0 0.3 2.3 1.1 1.8 -2.6 2.23 1% change in Real GDP = 1.6 2009 -4.6 2. real GDP YoY Chg (%).4 0.2 -0.7 2.8 Overall.8%.2 7.6 -0. including income growth.3 -1.8 17.0 0.0 0.9 -7. 1995-2009 15% 10% 5% 0% -5% -10% Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 -15% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% Figure 10: Correlation of EU car registrations to real GDP (YoY Chg %).9 1.6% in Germany.5 0.7 2. our BarCap economics colleagues forecast 1.7 -19.6 2.1 0.5mn units.6 2.7 1.Barclays Capital | European Autos & Auto Parts Moreover.7 3.7 -6. with growth rates varying from -0. 2008-2010E Real GDP % over previous period.4 0.6 -3.4% (consistent with prior rebounds).7 -0.0 13.9 2.1 2. Barclays Capital Real GDP Real GDP (YoY % chg) Source: Haver Analytics.3 3.4 3.0 2.8 1.6 1. with 23% R-squared. unemployment and interest rates.8 7.3 3.0 1.8% change in registrations -4% -2% 0% 2% 4% 6% Car Registrat. Barclays Capital 8 December 2009 14 .2 3Q09 3.0 3.2 -4.8 -3.3 2.5 1.5 2.7 -5.4 3.2 1.1 1.4 -5.9 2. Note while we examined other macro factors.9 1.

down from an estimated 16. However.9 2.5 15.4mn units in 1Q09 to an estimated 4. Figure 11: Pan European production (including LCVs and Russia): 2007-2015E (and quarterly).2 4.2 8.6 3.0 3.9 17. Barclays Capital 8 December 2009 2015E 15 2015E .2 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2014E 4Q09E 1Q10E 2Q10E 3Q10E Source: CSM.4 4.6 16.6 11.2 15.5 2.0 3.7 2.1 19.1 12.Barclays Capital | European Autos & Auto Parts EU PRODUCTION TO WEAKEN SEQUENTIALLY BUT GLOBAL GROWTH PICKS UP Supported by the region’s scrappage programmes. units in mn 4Q10E 15. we expect North American production to increase from an estimated 8.4mn in 4Q09.9 4. we expect European production to decline in 2010 to 15.6mn units in 2009 to 11.0 5. North American production volumes in 2009 were depressed due to the industry’s need to correct for excess inventory.5 3. with most government incentives ending in 2009.3 20.7 22. European production in 2009 recovered somewhat from 3. with November SAAR reaching 10. US sales have improved modestly in 4Q09.0 14. Furthermore.7 1.2 4.4 14.5 3. which we do not expect to reoccur in 2010.8 21. Indeed.8 5. up from 10.0 2. the region is likely to experience some payback from pulled forward demand. in our view.9mn.4 4.6 13.8 4.1 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 2007 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E 2008 2009E 2010E 2011E 2012E 2013E Source: CSM.9mn units.5 12.8 2. Figure 12: North America light vehicle production – 2007-15E (and quarterly).4 2.2mn units in 2010.0 4.2mn units in 2009.6mn. units in mn 21.5 3.5mn in October and a 1H09 average of 9. As a result. Barclays Capital At the same time.5 18.7 1. as recent US sales performance suggests signs of a recovery.7 4.

0 4. Barclays Capital 8 December 2009 16 .2 12.2 14.1 15.0 11.1 12.8 5.1 11.5 2015E Source: CSM.6 3.0 2.5 13. Figure 13: Global light vehicle production – 2008-15E 77.6 10.3 2.5 16.7 1.3 South Asia South America Middle East/Africa Japan/Korea Greater China Pan Europe North America 21.0 13.9 4.4 18.7 10.7 14.1 14.6 1.8 15.2 13.6 2009E 55.1 14.5 20. fuelled by a rebound in North America and continued growth in BRIC countries.1 5.5 7.6 2.5 66.4 7.4 5.4 2014E 22.0 2013E 79.2 2010E 6.5 2011E 6.7 8. we expect light vehicle production to increase.6 65.0 3.3 3.3 14.6 2008 8.6 13.1 5.7 12.5 2012E 7.9 1.9 11.0 14.7 2.8 15.2 19.7 72.7 4.4 5.6 61.9 17.9 13.8 81.1 14.1 1.Barclays Capital | European Autos & Auto Parts On a global basis.

2% 0.Barclays Capital | European Autos & Auto Parts DESPITE LONG-TERM DOWNSIZING.4% and 2008.6% -0.0% 7.5% 0.8% 3.7% 0.5% Figure 14: Western Europe mass vehicle segment mix 2008 vs. the German programme alone contributed 4.0% -2. For example. MID-TERM GROWTH IS IN VOLUME C AND ABOVE SEGMENTS AS SCRAPPAGE DISTORTION FADES In addition to boosting volumes well above their base run rate. Going forward.0% 1.2% -0. 2008.0% A B 2008 2009 C D Source: JD Powers. eg.2% 13.1% 0. Ford Focus) and C/D and D segments (midsize. Barclays Capital The shift in segment share across Europe can more than be accounted for by the scrappage programmes in the top five countries – for example.7% 10.7% 33. shifted mix dramatically downward.1% 0.5% 8.7% 0.5% -1. while was actually flat in the ten year period 1998-2008. Ford Mondeo). we believe the fastest growing segments through 2012 will actually be volume C segments (compact.4% 10. Barclays Capital B segment 29.3% 3.4% -0. the A segment only grew by 350bp between its 2003 low of 6. in the volume market. 2009E vs 2008A A segment 2008 segment market share YoY Chg by Country: France Germany Italy Spain UK Other Memo: total change 2009 segment market share Source: JD Powers. in the mid-term we expect mix to somewhat renormalize in a recovering market. Figure 15: A-C volume segment market share and YoY chg by country. VW Polo. eg. the European scrappage programmes. In 2009. VW Passat.5% 4. eg.6% The 320bp one-year increase in A share and 370bp change in B share is well ahead of the longer term trendline shift to smaller vehicles. 2009E 33. the B segment 360bp while C segment lost 180bp and 29.8% 29. eg.2% -0. The B segment grew by 400bp over the same ten-year period.1% 31.8% -1. Ford Fiesta) vehicles.4% 29.4% -0. the A segment gained 270 points of segment share over 2008. 8 December 2009 17 .2 share points in 2009 to the overall European increase in volume B segment share vs. As a result.5% C segment 31. by design.9% 1.3% 0. Fiat Panda) and B class (subcompact.6% 13.2% -0. even acknowledging the longer-term shift to A (city car. VW Golf. however.

Small -540 A . the A and B segments are likely to shrink by almost 1mn units.1% 81.4% 9.7% 38.6% 7.8% 6.Barclays Capital | European Autos & Auto Parts Figure 16: Western Europe overall segment share 1994-2008 40.0% 15.6% 6.Executive D .9% 8.4% 2012 12.2% 38.0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 A Source: JD Power.Lower Medium B .Upper Medium C .8% 29. Figure 18: Change in volume by segment 2009 to 2012E F .4% 2008 10.0% 31.Basic B .6% 83.0% 32.0% 79.5% 29.5% 32.3% 31.0% 10.9% 38.4% 31.8% 32.3% 78.4% 42.6% 41.0% 0.1% 82.4% 2009 13.1% 31.5% 40.1% 46.1% 31.D Source: Barclays Capital 2007 8.8% 44.0% 30.5% 79.0% 6. Barclays Capital B C D E Going forward.Basic -600 -413 -500 -400 -300 -200 -100 -45 -4 38 89 0 100 200 Change in units 2009-12E (000) Source: Barclays Capital 8 December 2009 18 .Lower Medium D . we expect some renormalisation of mix.1% 2011 11.0% 5.0% 36.1% 37.3% 82.2% 29.0% 25.7% 33.7% 39.8% 31.0% 39.0% 35.4% 29. while the D segment should grow slightly and the C segment remain flat.9% 8.Luxury E .Small Memo: A + B C .4% 40.1% As a result.4% 8.4% 2010 11.0% 20.Upper Medium Memo: C + D Memo: A . Figure 17: A to D volume market segment share 2006-12E 2006 A .8% 44.

2001-2015E vs 6yr historical average 95% 90% 85% 80% 75% 70% 2001 2003 2005 2007 2009E 2011E 2013E 2015E European Capacity Utilisation Source: CSM.0% 2008 2010E 2012E 2014E European capacity 80.0 16. Barclays Capital European Production (mil) European Production (LHS) Source: CSM.0% 2006 2007 2008 2009E 2010E European Capacity (mil) Source: CSM. Note that the downturn has only resulted in 3.0% 14. and is likely to close 2010 at 18.2mn units.0% 90.Barclays Capital | European Autos & Auto Parts SCRAPPAGE AND LOAN PROGRAMMES PRESERVED EXCESS CAPACITY With well-known restrictive labour relations in most Western European countries. the European market has been plagued by excess capacity.0 70. Barclays Capital 8 December 2009 19 .0 16.0 13.0 18.0 22. Figure 19: European capacity utilisation rates. Barclays Capital Historical average Government interventions during the downturn of 2009 forestalled the capacity reduction that might normally accompany a sharp cyclical downturn.8mn units in 2005. European capacity (excluding Russia and Turkey) stood at 20.0 85.0 14. whereas production has fallen by 4.0 12.9mn units of capacity reduction in the overall European market.0 15.0 20. with capacity utilisation averaging only 84% from 2001 to 2007.0 18.3mn units during the same period.0 75.0% 17. Figure 20: European total production & capacity 2005A2010E (mn) 24. causing utilisation rates for the industry as a whole to stall at below 80% until 2011E and below the 6-year historical average for the overall market of 84% until at least 2012E.0 2005 Figure 21: European overall market production vs capacity utilisation 2005-2015E 19.

8 December 2009 20 . they will be overtaken by their Asian peers in 2011E and will still linger below the 85% level until 2014.0% European Volume Production (LHS) EU volume capacity utilisation % (RHS) Source: CSM. Barclays Capital *European volume comprises Fiat. will actually surprise the market by its ability to significantly increase the scale-effects with Nissan (see RNO section later in this report). RNO. €6bn loaned by govt to PSA and RNO dependent on no plant closures in France. PSA. capacity utilisation for the volume market is not likely to surpass 80% until 2012 and will not reach 90% levels until 2015. helped partly by rationalisation schemes at Aulnay and Rennes and also by upcoming model launches in C-segment.0% 10. we believe that PSA’s cost-cutting efforts are well understood by the market and that by contrast. eg. Figure 23: European volume capacity utilisation by company type 2008-2015E 95% 90% 85% 80% 75% 70% 65% 2008 2009E 2010E 2011E 2012E 2013E Asian 2014E 2015E European Volume* US based Volume avg Source: CSM. Mercedes.0 Millions 85. Government intervention to hinder major capacity reduction plans.0 80. Figure 22: European volume* production vs capacity utilisation 2008-2015E 14.0% 13. even trumping premium peers.0% 11. However.0 90. Renault & Volkswagen ex-Audi PSA is likely to achieve the highest utilisation rates in the market in the next three years – peaking at 95% in 2012E.0% 12. when production volumes are expected to attain near pre-crisis levels. Porsche Audi & JLR/Tata Although EU volume manufacturers will maintain utilisation above market average from 2010E onwards.0 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 70.0 75. Barclays Capital *total market ex-BMW.Barclays Capital | European Autos & Auto Parts Volume capacity particularly hampered by government interventions Having averaged 83% from 2001 to 2007. which has the greater amount of savings to achieve since it has one of the lowest capacity utilisation rates in the market.

Audi.0 4. 90. albeit not to the same extent as its volume peers.0 85. In terms of units. Mercedes. nor was capacity artificially preserved by explicit government intervention.0 0. Barclays Capital 8 December 2009 21 . Figure 25: European volume OEM excess capacity by company 2010e Volkswagen Ford Renault PSA Fiat General Motors Toyota Nissan Honda Hyundai 0 Source: CSM. Capacity utilisation fell to 77% in 2009 (from a six-year historical average of 91%). while Mercedes and Tata (Jaguar/Land Rover) will stall at 74% and 77% respectively. Barclays Capital Figure 26: European volume OEM capacity utilisation by company 2008-2015E 95% 90% 85% 80% 75% 70% 65% 60% 55% 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 885 401 354 287 268 239 126 125 96 74 200 400 600 800 1. compared to 80.000 units of excess capacity.0% Millions Figure 24: European premium* production vs capacity utilisation 2008-2015E 5. 3. spurred by rebound in export demand and modest expansion of European demand.0% that of the volume market.0 95.0% EU Premium Production EU premium capacity utilisation % (RHS) Source: CSM.0 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 80. Daimler likely will have about 370. Porsche & JLR/Tata The premium market excess capacity is not evenly distributed -. Barclays Capital *BMW.0 1.000 for BMW and 135k for Audi.Barclays Capital | European Autos & Auto Parts Premium manufacturers suffer from lack of demand but more room to manoeuvre The premium market suffers from overcapacity.0% 2. 85% and 84%.0% 75. Although average historical utilisation at 91% far exceeds excess capacity will linger for premium OEMs in 2010 with only 81% utilisation. but could reach 88% by 2012E and 95% by 2015.BMW. Audi and Porsche are likely to maintain capacity utilisation in 2010 of 93%.000 Fiat PSA Renault VW ex-Audi Source: CSM.

Barclays Capital Mercedes Tata/JLR Premium avg 8 December 2009 22 .Barclays Capital | European Autos & Auto Parts Figure 27: European premium excess capacity by company 2008-2015E 400 350 Thousands 300 250 200 150 100 50 0 BMW Daimler Audi Tata Porsche 78 17 133 112 369 Figure 28: European OEM capacity utilisation by company 2010E 100% 95% 90% 85% 80% 75% 70% 65% 60% 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E BMW Audi Porsche Source: CSM. Barclays Capital Excess production capacity Source: CSM.

3%. But the various scrappage 1 European Commission “Car Price Report at 1. Even excluding the effects of scrappage incentives across the EU. manufacturers are facing particularly price-sensitive consumers.8% rise in overall prices. Prior to the scrappage programmes. the more concentrated major markets. inflationadjusted) car prices declined in 23 out of 27 Member States between January 2008 and January 2009. manufacturer rebates had been minimal and sporadic in most countries. against a 1.1%.878 € 10. including VAT and registration taxes) decreased by 1.498 € 10. consumer are even more price-sensitive as lower incomes have historically led a high share of consumers to opt for second-hand cars.548 € 10.870 € 10. induced by both government scrappage schemes and companies’ own attempts to drive down overstockage via pricing promotions.747 € 10.2009”. France and Germany.613 According to a recent report published by the European Commission1.454 € 10. tend to have higher list prices than less concentrated markets such as Spain and the UK without indigenous manufacturers. Figure 29: European list prices for volume segments A-D.462 € 9.286 € 9. In new Member States. However. also mean that manufacturers are not now in a position to significantly raise prices in countries affected by currency devaluations. real (ie. and rarely widely advertised.799 € 10. the weak capacity utilisation in Western Europe has been counterbalanced by relatively robust pricing in the volume car market. this data only assesses manufacturer list prices and does not take account of the recent surge in incentive discounts which differ from country to country and have a significant impact on manufacturer profitability. In particular.9%). translating into a fall in real car prices of 3. deal seeking consumer as has developed in the US.681 € 10. Jan 2009 IE PT BE D LU FR ES AT IT NL FI CY EL M UK Source: European Commission € 10. which have local companies with high volume share.272 List price (Euros) € 7. As a result.703 € 9. real car prices fell 3% in 2008 and are likely to have fallen even more sharply in 2009E A combination of a dramatic fall in consumer demand and a sea change in consumer pricing expectations. leading to more transparent pricing and a price shopping. Historically. real prices in EE countries decreased on average (-6.1. The EU price index for cars (reflecting nominal prices paid by consumers.Barclays Capital | European Autos & Auto Parts SCRAPPAGE SCHEMES MAY HAVE HOOKED EUROPEAN CONSUMER ON INCENTIVES SETTING UP PRICING PRESSURE Perhaps the most insidious unintended consequence of the scrappage programmes may be a potential breakdown in pricing discipline in key European markets.993 € 9.810 € 9. published June 2009 8 December 2009 23 .

500 € 1.500 2.500 4.550 2.990 Fiat Grande Punto 11. weniger ist genial [Less is more. Figure 30: Scrappage incentive levels per vehicle by country (EUR) € 2.860 6.220 2.720 Nissan Note 16. less is better.' which ranged from €1.500 4.500 4. less is genius] Vehicle Base price Govt rebates OEM rebates TOTAL Rebates Net price Advertising pitch Nissan Micra 11.500 € prämien sichern [Save up to €6.000 € 1. weniger ist besser.950 2.000 6.700 4.500 13.500 € 2.190 2. with even additional rebates in some countries for the most environmentally friendly cars.200 4.secure your rebate now] Source: Company data.990 Weniger ist mehr.360 4.Barclays Capital | European Autos & Auto Parts programmes led to intense media coverage around the level of government 'cash on the bonnet.960 9.000 to €2.690 2.000 6. Figure 31: Examples of incentivised cars in Germany (prices in €) Vehicle Base price Govt rebates OEM rebates TOTAL rebates Net price Advertising pitch Fiat Panda 9.500 .500 10. trade press 8 December 2009 24 .690 Fiat Bravo 15.790 2.120 France UK Italy Spain Germany Source: ACEA & Country statistics In addition.500 4.690 Jetzt bis zu 6. some manufacturers would offer up to double the government cash in heavily advertised offers.500 3.500 per vehicle.290 Nissan Qashquai 20.460 5.500 2.000 6.000 € 1.

insurance and servicing provides savings of as much as €1. showroom traffic slowed dramatically.528 11.500 Thousands Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 US monthly car sales Source: Autodata Avg monthly incentive per car (US$) However. To restart its own sales (and arguably to reboot a key part of the US economy).000 $3. The German government’s “Umweltprämie” or €5bn scrappage incentive programme ran out of money in September. leading to three years of rising incentives but stalled sales. led to a marked rebound in sales.000 $2.1mn units in September 2001 to a peak of 21. prompting carmakers to step up discounts yet further: for instance Ford is currently offering zero-percent financing and a €2. a somewhat analogous anti-recession incentive programme (albeit only company funded) led to a marked deterioration in pricing that persisted for years.000 rebate for the Focus.5/car in early 2001 to $2. 8 December 2009 Jul-07 25 .485 11. at least for GM to 'run the business for cash' to cover fixed costs). threatening US automotive production further in the midst of the post techboom recession. Barclays Capital Oct 2009 2. leading to a relatively profit-less recovery.292 10. which rose from a SAAR of 16.3mn in the following month -.5% more than the average for the 16 eurodenominated countries.7k in October and to over $3k/car in late 2002.7% Dec 2008 €2. sales fell in late 2001 due to payback.6% Sep 2009 2.500 $3. GM launched its 'Keep America Rolling' programme. Rather than accepting the decline.500 $2. Figure 33: US monthly sales (000’s) and monthly incentives per car (US$) 400 350 300 250 200 150 $4. which allows greater flexibility for manufacturer/dealer incentive packages.330 on most VW models.8% In the US market. After the events of September 11.000 $1. quickly matched by both domestic and transplant manufacturers. The programme. US auto makers boosted incentives to restart sales (and.500 $4. offering zero-percent financing. Fiesta and Ka compacts in Germany and a package of cheap loans.Barclays Capital | European Autos & Auto Parts In Germany list prices are currently about 5. Figure 32: Government scrappage schemes have led automakers to heavily boost their own incentives in 2009 Avg OEM incentives in Germany Avg incentive/car (€) Incentive as % of list price (%) Source: KBA.as average incentives rose steadily from US$1.

500 $2.500 $4. a softer new vehicle pricing environment will also likely have a knock on negative effect on second-hand pricing which will impact both consumers and leasing-exposed manufacturers alike. when manufacturers finally resisted the urge to cut prices in the face of falling demand in the US market. Already in 2009. 8 December 2009 Jan-07 Jul-07 . pricing appears to have deteriorated by 3. Figure 35: Real new car CPI -.000 $3. as incentive programmes wind down. pricing stands on the cusp of following the profitless American-style path.000 $2. the real price of new cars and trucks fell steadily until this past year.500 $3. With residual value depreciation comprising c47% of the total cost of vehicle ownership.Barclays Capital | European Autos & Auto Parts Figure 34: US monthly sales (000’s) and monthly incentives per car (US$).000 $1.500 Thousands Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 US monthly car sales Source: Autodata Avg monthly incentive per car (US$) While manufacturers attempted to the boost list price to offset some of the incentives. 2002-07A 400 350 300 250 200 150 $4. YoY chg % 6% 4% 2% 0% -2% -4% -6% -8% -10% Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 26 Real CPI YoY Chg % New car Source: US Bureau of Labor Statistics New truck In Europe.US market 1996-09A.1% on a real basis.

while corporate programme buyers show less price sensitivity. Volume manufacturers point to manufacturer incentives being frequently added on top of government incentives. with intense competition during many programmes.Barclays Capital | European Autos & Auto Parts Figure 36: Total cost of ownership for average vehicle in Europe Taxes Tyres 5% 5% Maintenance 8% Interest 8% Residual value depreciation 47% Admin 1% Insurance 12% Fuel 14% Source: EurotaxGlass Our recent conversations with OEMs. To date. Three points stood out: Luxury makers reported that pricing in key markets was coming under pressure as consumers and dealers demanded rebates to match those offered under scrappage programmes to volume makers. Figure 37: Euro area new and second-hand car prices. this pressure has been only partially buffered by new model roll outs. albeit with falling order volumes – leading to risks of future price cuts. manufacturer incentives are remaining constant. Most manufacturers believe pricing pressure is more acute in the retail market. YoY chg % 4% 2% 0% -2% -4% -6% -8% Figure 38: Selected European country new car nominal CPI 4% 3% 2% 1% 0% -1% -2% Nov-08 Jan-08 Mar-08 Jan-09 May-08 Mar-09 May-09 Jul-08 Sep-08 Jul-09 Sep-09 -3% Mar-08 May-08 Mar-09 May-09 Jul-08 Nov-08 Jan-08 Sep-08 Jan-09 Jul-09 NL France Spain Source: Eurostat Germany Euro zone Italy UK Source: Eurostat Germany France 8 December 2009 Sep-09 27 . as well as the 3Q09 result discussions. revealed pricing concerns across the spectrum. With the conclusion of scrappage program in Germany.

000 $500 $0 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 15% 10% 5% 0% -5% -10% -15% Aug-07 Aug-08 May-07 May-08 May-09 Aug-09 Nov-06 Nov-07 Nov-08 Feb-07 Feb-08 Feb-09 European Car Average US incentive Source: Manheim Consulting Source: Autodata 8 December 2009 Jan-09 28 . YoY chg % Figure 40: Average European OEM monthly incentive spending per car in US market.500 $3.500 $1.Barclays Capital | European Autos & Auto Parts Figure 39: Manheim index of residual values.000 $1.500 $2.000 $3.000 $2. Jan 01 to date (US$) $4.500 $4.

00 Jan-05 Figure 42: EURUSD forward rates remain close to US$1. Over the last year. Daimler has the biggest FX exposure – being exposed both to the US and to the UK and with very little natural hedging in either region. Ryton plant.492 1. while Nissan is partially hedged. Although of the European OEMs BMW has one of the highest proportions of sales in the UK and US markets (22% of sales in the US market and 11% in UK).10 1.480 1. especially after PSA chose to close its UK.5 1. but with a significant manufacturing presence in the UK and the US.70 0.488 1.00 0. PSA and VW’s low proportion of sales in the US (and VW’s plant in Mexico and future plant Tennessee.474 1 day Jan-06 Jan-07 Jan-08 Jan-09 1 month 3 month 9 month 2 year EURUSD Source: Datastream Source: Datastream EURUSD forward rates Figure 43: Current EURGBP spot rates painful to importers 1.910 0.476 1.490 1.40 1. US) leave them less exposed to the US dollar weakness.484 1.50 1.900 0. the aggressive fiscal and monetary stimulus taken by the UK and US governments have led to a weakening of their currencies.890 0.915 0. BMW is also one of the most insulated in our coverage to both the US and UK.478 1. Fiat.90 0.60 0.70 1.895 0.50 Jan-05 Figure 44: Forward rates do not imply GBP burden will ease 0.80 0. the pound has fallen 15% relative to the euro while the US dollar has slipped 12%.482 1.30 1. All other manufacturers have meaningful pound sterling exposure.20 1. Of all OEMs.60 1. creating further pressures (perhaps unintended) on importers into those markets.885 1 day Jan-06 Jan-07 Jan-08 Jan-09 1 month 3 month 9 month 2 year EURGBP Source: Datastream Source: Datastream EURGBP forward rates 8 December 2009 29 .486 1.905 0.Barclays Capital | European Autos & Auto Parts CURRENCY SHIFTS PRESSURE US AND UK IMPORTS Arguably. Figure 41: Current EURUSD spot rates painful to importers 1.

Ford still seen as UK local firm with 25% of C market). no player over 25% share) Figure 45: Overall Western European market shares Group 2006 2009E Share change Porsche-VW Group PSA Group Renault-Nissan Group Ford Group Fiat Group GM/Opel Daimler Group Toyota Group BMW Group Hyundai Group Honda Group Other 18.0% Concentration index (HHI) Top 3 share Source: JD Powers. no player over 25% share).5% 6.9% 1.7% 5. many volume segment/country markets (eg.3% -0. 8 December 2009 30 .3% 9. home country preferences in volume market remain strong (eg.2% -1.despite years of EU directives aimed at harmonization.4% 5. WE appears fragmented on an overall basis (HHI under 1500. French have 40% share in France.8% 10.4% 1.8% 11.7% 14.7% 5.1% 10.500.6% 1.2% 1.4% 9.1% 11.3% Segment/country concentration favours home country incumbents -.3% 20.2% 0.6% -0.7% 3. VW 30% share in Germany. but home country hegemony offers profit pockets in Western Europe The threat of a pricing war could upset what has been a historically attractive pricing environment in Europe driven by local market concentration. B car in Italy) are highly concentrated.3% 0.5% 8.5% 3.9% 13. While WE appears fragmented on an overall basis (HHI under 1. Fiat 45% share in Italy A/B car.6% 4.1% -1.8% 5.3% -0.8% 0. offering competitors pricing power. Barclays Capital 1039 44.Barclays Capital | European Autos & Auto Parts WE FAVOUR THOSE WITH DOMINANT HOME MARKET C & D POSITIONS Overall the WE volume market is highly fragmented.1% 4.3% 1.8% 0.2% -0.8% 5.6% 1101 45.1% 8.

An HHI of 10. Fiat in Italy) As a result. Barclays Capital (ie. over 1800 is considered concentrated.RNO & PSA combined share in France. Note we measure concentration using the Hehrfindal-Hirschman index (HHI). Barclays Capital 8 December 2009 31 .000 would be a one-layer market (10000 = 100*100 ).800 is considered concentrated. A market over 1. and other competitors follow suit. which is the sum of the squares of the market shares of the participants. Smart & VW in Germany. while a market over 3.000 is considered highly concentrated.Barclays Capital | European Autos & Auto Parts Figure 46: “Home company” share by country/segment – volume market* 69% 70% 59% 44% 28% 47% 51% 42% 67% 24% 13% 1% France A Germany B C D Italy Source: JD Powers. market share of domestic manufacturers -. while a two-player market with each player at 50% share would have an HHI of 5000 (= 50*50 + 50*50). over 3000 highly concentrated Source: JD Powers. offering pricing power if the lead competitor chooses to set a price umbrella. several pockets of concentration remain. Figure 47: Concentration ratios & degree of concentration by country/segment – volume OEMs HHI Ratios: A B C D E G sports MPV Pickup SUV Van France Germany Italy Spain UK Degree of concentration:: 2945 1343 3050 2090 1715 2429 1359 2199 1497 1280 2112 2483 1260 1523 1483 3184 2655 2643 1740 1614 4311 3528 9450 3431 4444 3133 4263 3688 3853 3293 2715 2211 1885 1442 2256 2821 3176 2855 2783 2938 2753 3021 2627 2104 2267 2745 2152 2020 2019 1705 France Germany Italy Spain UK MEDIUM LOW HIGH MEDIUM LOW MEDIUM LOW MEDIUM LOW LOW MEDIUM MEDIUM LOW LOW LOW HIGH MEDIUM MEDIUM LOW LOW HIGH HIGH HIGH HIGH HIGH HIGH HIGH HIGH HIGH HIGH MEDIUM MEDIUM MEDIUM LOW MEDIUM MEDIUM HIGH MEDIUM MEDIUM MEDIUM MEDIUM HIGH MEDIUM MEDIUM MEDIUM MEDIUM MEDIUM MEDIUM MEDIUM LOW Note: Concentration ratio is sum of squares of market shares.

655 2.643 1.0% 0.0% 7.005 39.5% 35.523 2.679 30.945 1.Basic B .7% 3. Figure 49: Concentration ratios by country: A and B volume segments UK Spain Italy Germany France 1.8 0.740 1.939 12.5% 22.5% 37.4% 33.0% 0.1% 36.000 30.5 0.9% 17.5% 0.429 2.1% 1. Barclays Capital Concentration index A Source: JD Powers.9% 0.483 3.3 0.0% 1.184 2.5% 33.0% 0.200 8.1% 1.0% 0.0 0.954 3.2 0.0% 132 10.3% 0.3% 2.0% 17 6.828 33.2% 1.0% 5.0% 0.5% 0.2% 263 3.210 26.0% 0.5% 0.0% 0.4 0.0% 237 2.0% 0.Barclays Capital | European Autos & Auto Parts Figure 48: Key Western European markets: estimated volume by segment 2011E (units) 1.0% 536 3.050 Figure 50: Concentration ratios by country: C and D volume segments UK Spain Italy Germany France 1.1% 1.7% 29.0% 0.0% 0. The risk going forward is the three-party concentration can quickly pivot from price discipline to a price war as each of the three vie for share in a flat market.9% 0.1 0.Upper Medium Spain UK Van Millions France Source: JD Powers.347 35.7 0.112 Source: JD Powers.2% 1.6 0.5% 0.4% 37.0% 0. Barclays Capital B D Figure 51: Western European premium market shares by segment/manufacturer.0% 30. Barclays Capital 8 December 2009 32 .0% 29 3.7% 35.0% 5. Barclays Capital The luxury market remains highly concentrated -.0 A .8% 0.which has in the past supported strong pricing.715 1.497 2.0% 0.9 0.614 1.5% 0.3% 0.8% 0.4% 80.260 2.343 2.2% 44.199 3.6% 1.280 1.5% 0.359 1.Small C .2% 24.4% 6.0% 44.112 Concentration index C Source: JD Powers.9% 0.0% 196 3. 2009E B C D E F G MPV SUV Total BMW Group Daimler Group Porsche-VW Group Renault-Nissan Group Tata Group Toyota Group Other 2009 units (000) HHI 100.0% 0.483 1.Lower Medium Germany Italy D .1% 0.0% 541 3.090 2.

Japanese OEMs such as Honda. as well as more easily move production across different plants in different geographies. alliance. platform commonality. with their export driven approach. This approach was first launched in the early 1990s at GM and then VW (brought over by Jose Ignacio Lopez de Arriortua. In this approach. especially BRIC countries In our view. OEMS can gain further benefit from leveraging lower cost production sites and by supporting smaller-run variants to address niche segments. whom VW hired away from GM). Overall savings can range from 5-10%. The global element was not focused around engineering commonality. OEMs threatened to pull business from suppliers unless demands for price cuts were met.at first. Most OEMs are still pursuing varying degrees of phase 2. the strategic lever most impactful to differentiating performance over the midterm is likely to be the quest for global scale and commonality – especially as OEMs face the unintended consequences of scrappage programmes in the form of potential pricing pressures and sticky labour costs and capacity. scale-driven procurement. Virtually every OEM articulates four common strategic themes: 1. For the OEM. who can similarly leverage their engineering and tooling costs across larger runs. the OEM would punish the supplier by taking away business in another region. Rather then offering any 'win win' solutions. If extended globally. implying the real differentiation will be in starting point and execution (especially versus market expectations). the procurement approach helped OEM profits . merger. Global OEMs are evolving through three distinct phases in their search for scale and commonality of cost savings In phase 1. but simply a brute threat that if supplier fails to cut price in one region. Drive fuel efficiency/carbon reduction via both ICE incremental improvements and varying degrees of hybridization 4. OEMs sought bulk purchasing price discounts from suppliers. although virtually all OEMs are at some stage of phase 2. were early leaders. variants within a region and then in vehicles across regions. the competitive edge is likely to evolve from simply posting 1mn unit scale in key volume platforms. GM). Reengineer operational and administrative costs short term 2. Seek/leverage global scale and parts commonality (that is. internal cooperation to lower engineering and product costs 3. with annual price downs of 1 to 2 percent. Pursue growth in emerging markets.Barclays Capital | European Autos & Auto Parts SCALE AND COMMONALITY PROVIDES BUFFER AGAINST UNINTENDED CONSEQUENCES OEM strategies are starkly similar. depending on scale and commonality. Moreover. Platform commonality can be win-win for suppliers. up to 60 percent on the common vehicles depending on how far out the scale curve. platform commonality unlocks engineering savings. reach 1mn units per platform) via market share gains (especially around product cadence). Moreover. the procurement approach failed to address internal OEM costs such as engineering. While saving up to 20% on purchased parts. to exploiting the scale through common engineering and parts specifications (not just purchasing volumes). 8 December 2009 33 . regardless of the degree of commonality across platforms and geographies. The sheer brute force of Phase 1 favoured the manufacturers with the largest global production volumes (eg. OEMs seek to commonise parts across vehicles within a platform -.although at the expense of supplier profits and arguably innovation.

Nissan-Renault have the largest scale in the B segment.Barclays Capital | European Autos & Auto Parts Figure 52: Estimated impact of increasing commonality Cost components Impact on Product Cost view Est. Barclays Capital 8 December 2009 34 .460 1. with 1. Despite its strength in the B segment in Europe. is likely the leader when volume and commonality are considered together.5% 70% 60% 66% 385 180 565 Source: Company reports. scale by platform is the starting point. somewhat surprisingly. Fiats lack of an Asian or integrated North America presence has it trailing most competitors (except for GM) in the B segment. although Ford will only get to a truly common platform in C car with the Focus relaunch in 2010/11. Hyundai has.215 796 596 378 1. with over 2mn units in 2011.112 926 745 Fiat TYPE 169 (500) Ford B2e (Fiesta) GM Global Gamma (Aveo) Europe Asia Honda GSP (Fit) Hyundai PB PSA PF1 (207) (Accent) RenaultNissan B (Versa) Toyota NBC-2 VW (Yaris) PQ24/PQ25 (Polo) Middle East/Africa North America South America Source: CSM. with close to 2mn units in 2011. VW. VW and Ford are second and third. albeit with we believe little commonality across vehicles. cost Potential Pro forma margin improvement impact (bp) Comment/lever EBIT Labour Materials and engineering of which: Vehicle-specific Powertrain Additional common components Modular architectures Product potential 5% 5% 90% 25% 25% 11% 29% 5% 10% 7% 15% 20% 100 Capacity utilisation 124 248 79 439 889 Design/procurement Engineering/mfg Design/procurement Engineering/mfg Impact on Capex/ER&D view Capex and R&D/sales Engineering Total ER&D 5. the largest scale in the C segment. Figure 53: Global production of major B segment platforms by OEM (000’s units) – 2011E 2. Barclays Capital In phase 2.103 1.0% 8.5% 3.5mn units.

Barclays Capital Asia Middle East/Africa North America South America When intra.301 Fiat TYPE 199 (Punto) Ford C1 (Focus) GM Global Delta (Cruze) Honda C5 (Civic) Hyundai HD PSA PF2 (308) (Elantra) RenaultNissan C (Sentra) Toyota MC-C (Corolla) VW PQ35/PQ36 (Golf) Europe Source: CSM. with over 3.6mn units on the Camry platform.221 994 233 842 Fiat C-Evo (Milano) Ford CD4 GM Global (Fusion/Mondeo) Epsilon (Malibu) Honda D-5 (Accord) Hyundai NF/CM PSA PF3 (408) Renault-Nissan D Toyota MC-M (Sonata) (Altima) (Camry) VW MLB (A4) Europe Source: CSM.132 1. Phase 3 involves modular architectures .Barclays Capital | European Autos & Auto Parts Toyota’s strength lies in the D segment. with plans to compress to two sets of modules (MQB for traverse. VW is acknowledged by competitors as the global benchmark for modularity. generally premium) Figure 54: Global production of major C segment platforms by OEM (000’s units) – 2011E 1. but across platforms (and across geography).685 315 934 1.372 1. capture the greatest scale economies. highlighting an opportunity to drive the alliance to the next level Both PSA and Fiat fall short on sheet scale. 8 December 2009 35 . followed at a distinct second and third by Hyundai and Honda.and cross-platform commonality is considered in. we believe that VW.426 1. and Hyundai. the C segment. Barclays Capital Asia Middle East/Africa North America South America Figure 55: Global production of major D segment platforms by OEM (000’s units) – 2011E 3. with its scale of the common Elantra platform.that is.as well as lowering the overall complexity of the organisation and supporting manufacturing flexibility (multiple platforms on the same assembly lines).352 1. generally volume) and MLB for longitudinal.208 1. By further driving down the scale curve additional efficiencies result .369 1.946 1. for example. with its modular approach.048 1.814 1. While Renault/Nissan has scale. it appears to have not driven true platform cost sharing. parts commonality not just within a platform.788 1. although both are likely to have a moderate level of commonality.

Barclays Capital 8 December 2009 36 .Barclays Capital | European Autos & Auto Parts Figure 56: Manufacturer’s scale vs estimated commonality – key C platforms Degree of commonality HIGH Toyota Fiat MED PSA GM Honda VW Hyundai Ford Renault-Nissan LOW 0 1.units 000 2.000 Scale .000 Source: CSM.

while production will likely slip below 16mn units. The drop in production will highlight the endemic overcapacity that the scrappage programmes and loan programmes preserved. Figure 57: 2010E EV/sales 44% 40% 35% 27% 18% 11% 7% 27% 27% 48% Fiat SpA Peugeot SA Renault SA Porsche Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital 8 December 2009 Daimler AG Ford Motor Co. In terms of EV/sales. To make matters worse. We believe 2010 will be a disappointing year for European automakers as the unintended consequences of scrappage programmes play out across Western Europe. 37 BMW AG . valuations for 2010 appear fairly valued. Against this difficult 2010 backdrop.Barclays Capital | European Autos & Auto Parts SECTOR VALUATION – 2-NEUTRAL Our 2-Neutral rating for the sector is based on our below-consensus view for the 2010 sales and pricing environment offset by the attractive valuations when pivoting to 2011 revenue and earnings power. Sales will likely decline by 13. is only just below the 2002-08 historical average of 28% (excluding Porsche).6% -.far greater than market expectations which we believe are looking for an 8-10% decline -. pricing will come under pressures as discount-addicted customers and dealers demand and receive automaker-funded rebates. although with a broad range across our coverage. the 2010 EU sector average of 27% (range from 7% to 44%).

9x 1.3x.4x 4. BMW AG .2x 2.6x Fiat SpA Peugeot SA Renault SA Porsche Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital 8 December 2009 Daimler AG Ford Motor Co.Barclays Capital | European Autos & Auto Parts Figure 58: 2002-08 historical average EV/sales (sector avg excl Porsche) 124% 41% 35% 38% 28% 13% 11% Renault SA Porsche 38% 28% 27% Peugeot SA Fiat SpA Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital Daimler AG In terms of industrial EV/industrial EBITDA.2x 2.6x (range from 1. the 2010 EU sector average of 2.1x to 5.1x 1.2x 2.4x) is somewhat more below the 2002-08 historical average of 3.9x 1.5x 1.3x 5. 38 BMW AG Ford Motor Co. Figure 59: 2010E EV/EBITDA 7.

7x 14.3x 5.5x 58.6x 1. for P/E the 2010 EU sector average of 30.6x 20. Figure 61: 2010E PE multiples 209.2x Renault SA Porsche Volkswagen (Ords) 12.1x 5. 39 Source: Barclays Capital 8 December 2009 Daimler AG BMW AG Ford Motor Co.7x 2.3x 3.8x.4x 3.Barclays Capital | European Autos & Auto Parts Figure 60: 2002-08 historical average EV/EBITDA 10.4x 3.0x Fiat SpA Peugeot SA 67. PSA. BMW AG .8x 2.8x Ford Motor Co.3x Fiat SpA Peugeot SA Renault SA Porsche Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital Daimler AG Given depressed 2010 earnings. RNO) (range from 12x to 59x) is well above the 2002-08 historical average of 12.9x 1.3x 15.0x 32.0x 0.0x Volkswagen (Prefs) EU sector average 30.7x (excluding Fiat.

3x 13.3x 12.9x 16.3x 8. the 2011 sector average of 22% (range from 7% to 40%) is below the 2002-08 historical average of 28% (excluding Porsche).4x 17.1x) is well below the 2002-08 historical average of 3.7x 8. the 2011 sector average of 2. driving earnings recovery.Barclays Capital | European Autos & Auto Parts Figure 62: 2002-08 average PE multiples 22. In terms of EV/sales. BMW AG . 40 BMW AG Ford Motor Co. 8 December 2009 Ford Motor Co. as cost reductions mount and sales recover in 2011.0x (range from 0.3x. in terms of industrial EV/Industrial EBITDA.8x Peugeot SA Renault SA Fiat SpA Porsche Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital Daimler AG While fairly valued on 2010.8x 5.9x to 4.8x 13. 2011 valuations are more enticing. Figure 63: 2011E EV/sales multiples 40% 32% 27% 18% 13% 7% 20% 20% 22% 38% Fiat SpA Peugeot SA Renault SA Porsche Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital Daimler AG Similarly.

7x 1.3x to 25.4x 7.4x) is also below the 200208 historical average of 12.3x 1. BMW AG .1x 4.3x 10.5x 12.3x 7.3x 3.0x 9.0x Fiat SpA Peugeot SA Renault SA Porsche Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital 8 December 2009 Daimler AG Ford Motor Co. 41 BMW AG Ford Motor Co.7x 1.0x Fiat SpA Peugeot SA Renault SA Porsche Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital Daimler AG For P/E the 2011 sector average of 12.1x 1.4x 16.2x 10.3x 6.1x 0.4x 8.8x.2x (range from 7.Barclays Capital | European Autos & Auto Parts Figure 64: 2011E EV/EBITDA multiples 4. Figure 65: 2011E PE multiples 25.7x 2.9x 1.

€41 price target We are initiating coverage with a 1-Overweight rating. BMW is a well-understood story as regards its upcoming model cadence sweetpoint (with a raft of model launches in train. We believe this more cautious approach has led the market to dismiss the full potential of “Strategy #1” and hence undervalue the BMW share.and mid-term cost reductions ahead of market expectations. Nevertheless. demand.75 Potential Upside 25% Given the pricing. both as a result of the full roll-out of its modular strategy and as a consequence of increased flexibility regarding employee costs due to an ageing workforce and extensive use of temporary workers. BMW’s more extensive manufacturing presence in the UK and US provides more of a natural currency hedge offsetting the strength of the euro. implying 25% potential upside from current levels. beginning with the 5series in 2Q10E and building up to 1. We are initiating coverage with a 1-Overweight rating and a €41 price target. We value the BMW share based on an average of EV/sales and PE metrics at historical and peer average multiples. While Daimler’s “in excess of €4bn” savings target for 2009E has been widely touted. while not part of Strategy #1. and currency pressures we expect to continue in the premium market.DE / BMW GY Stock Rating 1-OVERWEIGHT Sector View 2-NEUTRAL Price Target €41. which lead us to our €41 price target (please see the valuation section for further details). we believe the market is underestimating the company’s potential for deeper and further cost savings.and 3-series in 2011-12E). A strong core balance sheet and superior cash generative ability should further support share price accretion. Moreover.Barclays Capital | European Autos & Auto Parts BMW – POTENTIAL FOR FURTHER COST CUTS DRIVES 1-OVERWEIGHT RATING BMWG. Key share price drivers: Positives: Cost-saving potential enhanced by advanced age of workforce & modular strategy Above-average capacity utilisation rates & planned global capacity enhancements Product cadence brings youthful models in 2010E & further boosts CO2 credentials Price/mix strength from new models to mitigate pricing pressures in overall market US exposure and low exposure to scrappage incentives to drive above market volume growth Balance sheet strength .00 Price (04-Dec-2009) €32. we favour companies that can deliver and retain near. 8 December 2009 42 . due to the company’s potential for cost savings via its modular strategy and increased workforce flexibility which will combine with a youthful product mix to drive above consensus EBIT growth. BMW’s management has kept more tight-lipped about its cost-saving potential of late.cash generation potential aided by strong model mix Risks to our 1-Overweight view: Failure to deliver expected cost savings Increased negative earning impact if USD/GBP were to weaken further Lingering effects of low value leasing contracts 1-Overweight.

197 921 1.84 Sales Reported EBIT EBIT margin (%) BC EPS € Consensus EPS € EV/sales (%) EV/EBITDA P/E ratio (%) -20% 1.88 16% 0. 2009E (€mn) 1000 505 941 3.61 18% 1.51 2009E 48.8% 1. BMW will. With investors now increasingly looking beyond 2009E to the prospects for 2010 and 2011.829 3.01 18% 1.530 3. we believe that BMW has positioned itself for a faster than expected recovery in its automotive EBIT.30 20% 2.14 2012E 52.1x 10. especially as the new 5. BMW can better capture productivity savings as it has a substantially longer-tenured workforce that provides greater potential for further headcount reductions.4bn in both 2010 and 2011 even in the face of these external burdens: BMW will benefit from its push for modularity.371 395 0. Costs should also benefit from stronger capacity utilisation.Barclays Capital | European Autos & Auto Parts Figure 66: BMW – headline data and valuation multiples.4x 2.595 3. BMWs expanding global manufacturing footprint not only supports growth but also provides better natural hedging relative to Daimler.0x 3.64 2011E 50.2x 0.5x 20. with the savings flowing in lower materials costs.1x 60.4% 3.24 2010E 47. Figure 67: BMW Auto EBIT walkdown.7% 0.450 196 801 387 452 1. Barclays Capital *FactSet consensus data BMW has unappreciated cost reduction opportunities While we agree that pricing pressures for the market as a whole and the likely 2010E effects of weak sterling and US dollar exchange rates for euro-denominated exports have not been fully understood by the investment community.232 6.080 690 500 0 -500 -1000 -1500 -2000 690 -738 911 -1.9x 8.and 7-series (which share a platform) are rolled out. 2008-2012E (€mn) 2008A 53.5x Source: Company data. 2008A (€mn) 4000 3500 3000 2500 2000 1500 1000 500 0 Volume Price/Mix Productivity Personnel etc 2008A 07A FX Other RMs Figure 68: BMW forecast Auto EBIT walkdown. we feel that BMW is better placed than its premium rivals to overcome these burdens.8% 0.882 7.4% 3. in our view.2x 137.0x 1. pursue four interrelated cost levers that should drive EBIT improvement of €1.903 1.300 400 -300 100 620 -307 -2500 Volume Price/Mix 08A Productivity RMs FX Other Personnel etc 2009E 43 Source: Company data (other incl €911m risk provision for residual values) Source: Barclays Capital (other incl ‘08 €911m risk provision for residual values) 8 December 2009 .

BMW product launches start in earnest in 4Q09 with 5-series GT and X1 coming on line. Although BMW has not been grabbing the headlines so recently with announcements on headcount reductions like its close peer Mercedes. Daimler) for greater modularity and commonality across vehicles. Although the current BMW workforce is comprised of only a tiny percent of temporary workers. rather than on a standalone model basis. Temporary workers are paid a similar hourly rate to their permanent counterparts but (according to Jens Koehler. As the new modular strategy is rolled out across new products. we expect to see the back-end loaded savings from this modular strategy starting to ramp up from 2010E. BMW has historically relied much more heavily on temporary workers (hence the ability to reduce the workforce by 10. the company has much more flexibility to manoeuvre its workforce. €2bn of which are to come from fixed costs/R&D. chief workers' representative at the Leipzig plant and an official with IG Metall) receive about two-thirds of the total monthly compensation due to receiving fewer benefits than regular staff. the naturally older age of its workforce should enable BMW to quietly achieve the majority of its targeted personnel savings over the next three years via natural attrition alone. BMW is likely to be the fastest improver in the sector in terms of average product age. of which 60% were temporary workers) which provides additional flexibility to react speedily to changes in production. We expect this to boost market share but also to enable the full effects of the €4bn in material cost savings targeted under Strategy #1. sharply followed by new 5-series in 2Q10 and X3 in 4Q10.000 workers in 2008. With c20% of all workers aged >50 years (vs. the scope to rehire on a temporary basis when production begins to recover. We believe that these savings are not yet widely credited by consensus forecasts.Barclays Capital | European Autos & Auto Parts Modularity to lower costs as product line refreshed While important for the top-line growth and as a buffer against pricing (which we discuss later). With the company emphasising the potential for up to 80% commonality between products on the two main platforms (1-/3-series /X1/X3 produced on the ‘small car’ platform and 5-/6-/7-series working off the ‘large car’ platform). 8 December 2009 44 . to a lesser extent. also demonstrate the cost savings associated with BMW’s push (as at VW and. trade press. in our view. will position the company well from a fixed cost perspective. BMWs strong product cadence will. As a result. 2009-2012E BMW Group 2009E 2010E 2011E 2012E BMW Mini Rolls-Royce 2Q: Z4 4Q: X1 & 5 GT 2Q: Cabrio Coupe 2Q: 5-series 4Q: X3 Countryman 4 RR Ghost 1-series 3 GT & 6-series Coupe 3-Series Roadster Source: JD Power. company data and Barclays Capital Ageing workforce to boost productivity Strategy #1 targets a reduction of €6bn in costs by 2012E. material costs & R&D should increasingly become shared across all model series on a platform. 2% at Mercedes). Additionally. Figure 69: BMW forecast new model introduction schedule.

Barclays Capital 8 December 2009 45 .8 0.2 0. Sector leading capacity utilisation BMW is already working at above average (for premium peers) capacity utilisation in 2009E but is set to achieve the best in sector utilisation rate of 93% in 2010E (vs premium sector average of 81% and volume average of 79%). 2010E (000s) Thousands 400 350 300 250 200 150 100 50 0 BMW 78 369 133 112 17 Daimler Audi Tata Porsche Source: CSM.0% 85. This further encourages us to favour the share over its closest luxury rival.0% Figure 72: European premium excess capacity. BMW is closing the gap on competitors not only with its increased commonality of components. However.4 40.2 1.8 41. but also in the scale-stakes via well-targeted alliances: such as its small engine cooperation with PSA and its cooperation with DAI on purchasing & hybrid development. combined with moves to draw down dealer inventory. with the lowest level of excess capacity units of all peers.0 2008 2010E 2012E 2014E BMW Production BMW capacity utilisation % (RHS) Premium average capacity utilisation % 80.Barclays Capital | European Autos & Auto Parts Figure 70: BMW average worker age vs. This production build. 2008A-15E 1. BMW is no longer using Kurztarbeit (short-time work) as it ramps up production (auto production exceeded sales by almost 10k units in 3Q09) in preparation for a raft of model launches beginning in Q409.0% 75.6 42. Figure 71: BMW production (mn) & capacity utilisation (%) vs average for premium market.4 1.0% 90. Barclays Capital Source: CSM.0% 100. Daimler (years) Average age (yrs) Percent over 50 yrs (%) BMW hourly BMW salaried Daimler hourly Daimler salaried Source: Company data 39.6 0. in an effort to improve BMW’s longer-term pricing power.0 0.6 17 25 2 2 Unlike Daimler.0% 95. explains the larger-than-expected Q3 loss in the Auto division.4 0. we note that Q4 results will likely be flattered by the sales momentum from 5-series GT and X1 launches thus matching sales outturn more closely to production levels and cost absorption should be boosted further by full 5-series model launch in 2010E.

indexed to 1997 190 180 170 160 150 140 130 120 110 100 90 CY1997 CY1998 CY1999 CY2000 CY2001 CY2002 CY2003 CY2004 CY2005 CY2006 CY2007 BMW Source: CSM. after recording 25% growth YTD in 2009. Barclays Capital Mercedes Global scope to aid competitiveness and help shield against FX burdens Although Germany remains BMW’s biggest single market (accounting for 21% of unit sales YTD 09 see Figure 74).000 units.000 pa. despite European sales likely flat. Production at the second plant is due to commence early 2012E and to increase total Chinese capacity to 100. 19% of unit sales are US-based and the Chinese market is now BMW’s fourth-largest market. Figure 74: BMW geographical breadth (YTD 09 unit sales) ROW 25% Germany 21% Japan 3% China 7% USA 19% Source: Company data Rest of WE 25% Last month BMW announced plans to build a second plant in China with JV partner Brilliance (the existing plant has produced BMW 3-series and 5-series vehicles since 2003 with current production capacity of 41.000 extra vehicles in 2010E.Barclays Capital | European Autos & Auto Parts Figure 73: BMW & Mercedes production units. combined with its good model mix will provide an expected 5% growth in units in 2010E – we forecast a positive impact on EBIT of €500mn (see Figure 78 below). We therefore credit the company with the ability to sell 46. A recovery in the US market and exposure to more resilient emerging markets. 8 December 2009 46 . thus giving the company a stronger foothold in this fast-growing market and providing a natural hedge to exchange rate fluctuations.

we believe that BMW’s efforts to expand.100 8. provides shelter from the vagaries of the USD.300.082 2.000 75.397.000 75.100 51.300 135. Munich.000 4. only 40% and 0% respectively for Mercedes) lead us to forecast a €450mn negative EBIT impact from FX in 2010E .000 244.000 217. Barclays Capital 123.085 133.090 35% 1.000 143.000 143.500 270.400 350. With the US market likely to rebound ahead of the scrappage-restrained European market in 2010E. *** S Africa and JV with Magna Steyr in Austria While our thesis still stands that the market is underestimating the likely negative EBIT impact in 2010E from USD and GBP FX rates. BMW’s 21% revenue share should also set it apart from some of its volume peers.000 920. 2010E (000s) Region Production 2010E Capacity 2010E Capacity utilisation % Germany* UK US (Spartanburg) China (Shenyang)** Other*** BMW Total (ex-JVs) 870. despite only an estimated 30-40% sourcing of components locally. Mini brand’s Oxford and Rolls Royce Goodwood plants in the UK (providing 245.000 100% 133. % of local sourcing Implied UK production sourced in UK£ Net vehicle imports/(exports) UK engine production Net currency position UK£ Natural hedging percentage Source: Company data. ** JV with Brilliance. with 70% locally sourcing.000 130. BMW’s Spartanburg plant (which will ramp up to 270.500 206. based on 44% natural hedging in the US and 45% in UK (vs.000 pa capacity in 2010 in preparation for the next generation X3 launch).085 133.000 14.Barclays Capital | European Autos & Auto Parts Figure 75: BMW estimated plant capacity.050 1. Barclays Capital *Regensburg.500 8.000 1.000 95% 89% 50% 100% 91% 93% Source: CSM. or at the very least maintain.100 100% 8. Dingolfing.000 35% 72. Likewise.000 1.700 500 9. its capacity reach in UK and US markets will shelter it to some degree from the worst of the FX effect. Figure 76: BMW estimated naturally hedging protection for USD and GBP. 8 December 2009 47 .enough to more than wipe out the effects of non-personnel based productivity savings but still €450mn below our estimates for Mercedes’ FX exposure due to its lower natural hedging buffer.889 55% Our calculations of exposure to the GBP and USD.200 44% Net vehicle imports/(exports) N Am engines imported Net currency position US$ Natural hedging percentage Units Value in UK£ mil UK sales UK production est. Company data.939 1.000 units of British capacity in 2010E) and the Hams Hall engine plant. Leipzig.021 3. provide natural hedging from negative GBP currency effects. 2010E Units Sale Value in US$ mil N Am sales N Am production 276.

3bn improvement.90 0.90 0.558 1. market assumptions for BMW estimate only a €1.100 55 2.104) (307) 540 69.49 (30) 153.000 48 7. Our own forecasts incorporate €1bn of improvement in BMW’s Automobile segment (€1. Barclays Capital 2009E 2010E 2011E 2012E 690 (1.49 1.958 4.428) (183.49 1.42 (370) 123. €750mn of additional FX and raw material costs still allow an EBIT margin improvement of 240bp YoY.890 90% 0.390 0% 0. 2008-2012E (units as stated) 2008 2009E 2010E 2011E 2012E North American volume (units) Natural hedging volume in USD (%) Net currency position.000 54 1.€mn Prior year Auto EBIT Volume Memo: additional volume (units) Fixed costs: Price/Mix Raw materials & other input costs Productivity/efficiency Currency Personnel.49 1.7 728 1.90 0.350 90% 0.300) 100 400 (300) 620 911 431 (997) 345 (270) 500 (480) 400 495 1.1 8 December 2009 48 .84 (150) (480) 289.5bn at group level) – of which €900mn relates to cost efficiencies. neither do we think they have fully credited the likely modular savings resulting from new model roll outs at BMW.035 300 500 (370) 200 630 1. on our estimates.000 20% 1. R&D Other (incl risk provisions in 2008) Total change in fixed costs Operating margin delta Current year Auto EBIT EBIT margin (%) Source: Company data.300 20% 0.7 1.205 728 600 76. N Am (US$ mn) Financial hedging volume (%) Spot rate Estimated effective rate US$ impact on EBIT (€mn) UK volume (units) Natural hedging volume in UK£ (%) Net currency position.3 2.48 (220) 136.800 95% 1.873 6. Barclays Capital 303.36 (210) 154.90 (30) (60) Market forecasts underestimate BMW’s potential Whilst consensus numbers are currently expecting a €4bn YoY EBIT delta for Daimler in 2010E (admittedly aided by an estimated €2bn of improvement in trucks).80 0.90 0.958 425 54.70 (120) (330) 238.900 52 8.000 53 2.085 44 9.and 7-series.Barclays Capital | European Autos & Auto Parts Figure 77: BMW estimated GBP and USD exposure. (UK£ mn) Financial hedged volume (%) Spot rate Effective rate UK£ impact on EBIT (€mn) TOTAL XR impact on EBIT (€mn) Source: Company data.89 (150) (370) 300.492 (1.400 0% 1.200 60% 1.500 55 2. despite the company’s superior model mix.190 45 8. SG&A. Figure 78: We forecast an EBIT delta of €1bn at BMW Autos in 2010E BMW Auto cost walkdown (Delta) . €540mn to volume improvement and €345mn to the price/mix effects of new 5.47 1.230 550 (60) 490 915 (307) -0.500 90% 1.180 60% 0.40 1. Although we believe the market as a whole has not taken full account of the likely FX and raw material negatives for the autos sector in 2010E.79 (310) (300) 276.35 40 130.000 52 8.500 55 2.

with consumer expectations skewed by a year of discounts from both governments and manufacturers alike.000/vehicle incremental EBIT margin (our breakdown of the price/mix impact on 2010E’s EBIT is given at Figure 79 and Figure 81 below).000 450 30.000 EBIT contribution/vehicle for incremental 5-series sales and €15.000) (500) (500) 245 345 600 200 45 Source: Barclays Capital. Likewise.000 5. The company’s Q309 results call was characterised by cautious commentary on price – management blamed luxury peers for pricing new models over-competitively in a grab for market share. the launch of the all-new 5-series range in 2010E should form some degree of buffer from pricing negatives. we also credit the company with the ability to price both its 5-series and 7-series models ahead of its predecessors. We agree that pricing across the board will come under pressure in 2010E and therefore assume that BMW’s existing models will suffer €1k/vehicle pricing erosion – a €500mn negative effect. Although ill-discipline in pricing has spread to even the luxury end of the market. Figure 79: Positive mix and pricing effects of new models should more than compensate for negative pricing on other models 5-series 7-series Other models Total BMW Additional vehicles of new model (units) Additional price/vehicle (€) EBIT impact (€mn) Negative price/vehicle (€) EBIT impact (€mn) Est. mix effect* Total BMW EBIT delta (€mn) 150. Our forecasts do not assume any benefit from an improvement in mix to corporate buyers.000 3. should provide a further €245mn boost to EBIT. *assuming €5.Barclays Capital | European Autos & Auto Parts 5-series launch will buffer against pricing trends Whilst we remain convinced that the full effects of pricing weakness have also yet to be factored in to market numbers for 2010E. However.000 for 7-series 8 December 2009 49 .000 150 (1. based on a €5. though we expect these to return to the market in greater numbers in 2010E. thus providing a likely €600m positive contribution to EBIT. the mix impact from these new models launching in what we view as the fastest growing segments in Europe (small car segments are likely to flounder post-scrappage). However. bringing greater commonality across model ranges. with the 5-series launch also heralding the beginning of a more modular strategy. and more than compensating for the price erosions on other models. we believe that BMW’s youthful product cycle and its substantial destocking of dealers should stand the group in good stead from a pricing perspective. we are convinced that EBIT/vehicle is set to improve significantly at BMW even in a weak demand and pricing environment.

it is a well-argued thesis that the luxury market will be better protected from any scrappage pull-back effects felt in 2010E. Figure 80: BMW Auto EBIT walkdown 2010E (€mn) 1000 800 600 400 200 0 -200 -400 Volume Price/Mix Productivity RMs FX Peronnel.3bn price/mix effect and -€1. preferring instead to caution investors on the likely external burdens to 2010E earnings.000 were permanent workers). we agree that BMW is positioned to outperform the overall market from 2010E onwards. Whilst. we believe that this issue has already been factored in to current share price. SG&A. so investors have much less visibility over cost-savings achieved already in YTD 09A. to help the Autos business return to above 4% margins (though still some way from historical peak and Strategy #1 target of 8-10%). BMW does not give useful quarterly walkdowns of its Auto EBIT margin.000 employee departures in 2008 (of which 4. This should provide some buffer against the -€1. should yet provide further upside to the share.4bn volume negative in 2009. In 2010 and 2011. we expect savings from increased modularity and improved productivity to combine with the effects of natural attrition in the workforce and a more positive volume and mix environment. unlike Daimler.Barclays Capital | European Autos & Auto Parts History of cash generation to further support valuation Since scrappage did not boost the luxury market significantly in 2009E. as with product cadence. such that it still remains at least 12 months ahead of competitors in the R&D spending stakes. If the volume effects are already well understood. €400mn relates to internal productivity measures and €620mn to personnel savings – the likely full-year effects of 10. Although productivity improvements of €80mn were more than offset by volume and price/mix negatives at BMW in 2008 and we expect a similar story in 2009E (as scrappage incentives pushed consumers to lower mix cars. R&D EBIT 2009E EBIT 2010E Figure 81: BMW price/mix walkdown 2010E (€mn) 700 600 500 345 -270 -480 400 728 500 400 300 540 -307 200 100 0 5-series price 7-series price -€1k avg price/vehicle 5-series mix 7-series mix 2010E price/mix impact 50 150 500 450 45 345 200 Source: Barclays Capital Source: Barclays Capital 8 December 2009 . we do forecast a further €1bn gross cost savings in 2009E (as per Figure 78 above). Cost savings to ramp up from 2010E onwards One of the reasons why we believe that investors are not crediting enough future cost savings at BMW is because. the cost benefits of the company’s strong positioning in environmentally friendly products (via its Efficient Dynamics range). leaving volumes at the premium end of the market muted). Neither has BMW been flaunting its cost-saving potential as widely in the press as its German peer. as discussed above. Of these.

the debt has an A.000 6. Figure 82: Solid cash generation drives steady rise in net cash.000 16. giving it easy access to credit to support the funding of its financial services business. although it dipped to 20% during the credit crisis of 2008 and at current market price is only trading at 18% 2010E EV/sales on our estimates. especially since we remain below consensus on our top-line forecasts for BMW in 2010E. Despite an overly aggressive strategy in its leasing business which led to €2bn of lease book writedowns in 2008A and likely three years of low value leases coming through the system.000 12. 8 December 2009 51 . BMW has typically been a share favoured by leverage-averse investors. Barclays Capital Industrial FCF (op cash-capex) Rating We are initiating coverage with a 1-Overweight rating.000 0 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 3000 2500 2000 1500 1000 500 0 Industrial Net Cash Source: Company data.rating from S&P.7bn per annum and average net industrial debt of €6bn during the same period (€7. Although downgraded one notch by rating agencies.000 8.Barclays Capital | European Autos & Auto Parts Putting it together – EBIT and cash flow With a five-year historical average FCF in the industrial business of €1.000 10. the highest in the auto sector. A strong core balance sheet and superior cash generative ability should further support share price accretion. We believe that the current BMW share price significantly undervalues the share based on this valuation metric.000 2. By comparison luxury peer DAI’s historical average is 42% and on our estimates is currently trading at 44% 2010 EV/sales. believing that BMW’s potential for cost savings via its modular strategy and increased workforce flexibility will combine with a youthful product mix to drive above consensus EBIT growth. we believe BMW remains an attractive stock due to its superior balance sheet.8bn at 3Q09). Valuation methodology We value the BMW share based on an average of EV/sales and PE metrics at historical and peer average multiples: EV/sales BMW has historically traded at a five-year average of 39% EV/sales.000 14.000 4. €mn 18.

Barclays Capital Daimler’s exposure to the higher-rated truck sector should imply a higher multiple to BMW but we note that in reality the market has tended to discount this truck exposure. Looking out to 2011E. when we expect autos markets to have normalised to a greater degree. Figure 84: At current price BMW is undervalued on EV/sales 50% 45% 40% 35% 30% 25% 20% 15% 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E EV/Sales at current price 5 year historical avg Source: Company data.3% Source: FactSet consensus. We believe that the company should trade at its historical level of 11x.57 -5.64 50.8x for the sector as a whole). from which we derive a price of €35. viewing both companies at similar multiples.903 1. Barclays Capital Figure 85: BMW cheap in comparison to DAI 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2002 2004 2006 2008 2010E 2012E DAI EV/Sales Source: Company data.6% 4.734 1. Using its own historical average of 39% implies BMW should trade at €50/share. 8 December 2009 52 . Barclays Capital BMW EV/Sales P/E Historically BMW has traded at an average of 11x P/E (vs 13x at Daimler and 9. our above consensus EBIT estimates put BMW at only 10x at the current share price.Barclays Capital | European Autos & Auto Parts Figure 83: Below consensus revenue estimates but expecting higher margins 2010E Barclays Consensus Variance Revenue (€mn) EPS (€mn) 47.

0x 1. Barclays Capital A weighted average of both these valuation metrics leads us to set a €41 price target for the share.24x 0.1x 22.0 20 1.5 40 1.8x 6.1x 3.8x 60.7x 9.0x 26.9 20 2.5 18 1.4x 8.1x 3.4x 26.1 54 1.7 40 2. BMW has historically traded at 11x PE 20 15 10 5 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 8 year historical avg PE at current price Source: Company data.2x 0.8x 60.1 54 1.44x 1.4x 27.4x 23.4x 21.1 17 1.1 44 1.2 46 1.4x 2.32x 2.1x 27.Barclays Capital | European Autos & Auto Parts Figure 86: Other than during the recent downturn.0x 6.5x 29.0x 9.4x 146.6 38 1.3x 3.7 39 3.45x 2.2x 10.0 16 0.7 41 1.1x 2.7x 5.3x 21.0x 29.6x 133.4 20 1.5x 25.1 19 1.6 38 1.9 52 1.4x 1.0x 6.4 39 3.2x 33.1x 3. implying 25% upside from current market price.1 44 1.2x 2.8x 11.1 46 1.5x 5.8x 9.0x 9.9 52 1.2x 137.0x 1.0 20 2.9 18 1.4x 26.0 Industrial EV/sales (%) Industrial EV/clean EBITDA Industrial EV/clean EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Source: Company data.3x 1.4x 2.4x 20.2x 114. Figure 87: BMW key valuation metrics 2006 Valuation multiples at current price 2007 2008 2009E 2010E 2011E 2012E Industrial EV/sales (%) Industrial EV/clean EBITDA Industrial EV/clean EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Valuation multiples at €41 price target 40 2.3x 21.7x 5.6 42 1.4x 1.4 18 1.9x 2.8 43 1. Barclays Capital 8 December 2009 53 .7x 9.4x 2.2x 33.

Risks to leasing book – we believe that the worst is now behind the company in relation to writedowns on its financial services leasing book but were second hand prices to fall significantly and cause further writedowns to residual values. could make our forecasts difficult to achieve. Credit perspective Barclays Capital credit analysts. potential for further cost reductions. Rob Perry and Darren Hook. 8 December 2009 54 . BMW could remain low A through next year. also rate BMW Overweight believing that while there are risks to BMW's ratings.Barclays Capital | European Autos & Auto Parts Risks to price target Risks to our price target are as follows: External risk – macroeconomic factors outside the control of the company. with Moody's particularly at risk of downgrading to high BBB. and belief that current provisioning in Financial Services is adequate. BMW’s larger than average financial services penetration would result in a greater downside risk than for peers. leading to an even weaker demand and pricing environment than we currently assume. given their expectations for moderate revenue growth.

329) (2.722 (739) 19% 3.6% 4.64 6 2046 4.5% 5.958 64 762 447 3232 2.050 8.8% (39.3% 6.018 2008 53.0% 6.8% 0 3.7% 4.832) (2.230 15.395) 6.972) 227 4.134 3.51 6 150 0.507 Attributable to MI Net profit attributable to shareholders Net margin % EPS 6 2868 5.526) 7.4% Financial result Profit before tax Memo: PBT margin % 74 4.552 (11.196 15.825) 6.579 15.903 2011E 50.5% 2.124 8.232 6.8% (300) 3582 6. 2006A-2012E Year-end December (€mn) Revenues 2006 48.5% 3.06 653 0.018 48.70 Automobiles Motorcycles Financial services Miscellaneous/consolidations Group revenues Segmental reported EBIT: 47.818 1.0% 3.0% 7.323) (2.079 (11.8% Taxes Tax rate (ex RRExch.052 (1.134 (21) 6% 330 2.3% 0.341 1.5% 5.999 2007 56.9% (40.873 6.070 1.7% -0.874 2.595 Cost of sales R&D Gross profit Memo: gross margin (% of sales) (37.4% 8 December 2009 55 .371 2010E 47.829 3.39 8 3126 5.070 (880) 30% 2.548) 200 3.415 16.630) 8.631) (2.5% (44.4% 6.903 45.423) 4.4% (40.369) 241 921 (5.050 (5.873 72 778 159 3882 Automobiles EBIT margin Motorcycles EBIT margin Financial services EBIT margin Group EBIT % Source: Company data.232 (4.411 (9.14 6 2501 4.424) (2.8% 1.052 2.1% 0. tax-free gains) Net profit Memo net profit ex-non recurring (1.4% 6.0% 3.551) 200 1. 000s) DPS (Euros) Segmental Revenue: 654 0.829 (4.3% 0 395 0.266 16.0% Sales and administrative costs Other operating income & expenses Reported profit before financial result (EBIT) Non-recurring income and (expenses) Clean profit before financial results (EBIT) Memo: clean EBIT margin (%) (4.544) 8.6% 0.30 653 0.139 14.0% (41.948 (10.8% 4.212 (5.530 47.882 7.4% 5.049 11.8% 3.344 6.507 2.595 Automobiles EBIT Motorcycles EBIT Financial services EBIT Reconciliations Profit before financial result (EBIT) Segmental reported EBIT margins: 3055 75 689 231 4050 3450 80 717 -35 4212 690 60 -216 387 921 (307) 50 324 328 395 728 57 448 596 1829 1.530 2012E 52.247 (11.Barclays Capital | European Autos & Auto Parts Figure 88: BMW Group income statement.882 (2.968) 56.550) (2.254) 200 4.079) 250 395 (4.50 653 0.215 1.500) 48.8% 0 1.734) 200 3.70 653 0.9% -1.3% 5.608 (39) 20% 156 156 (459) 30% 1.1% 6.2% 1.515) 5.2% (300) 2932 5.1% 7.540) 53.84 No of shares (average.197 2009E 48.80 6 324 0.4% 1.4% 0 3.371 42.446 1.224 10.660) (2.4% (300) 1529 3.70 654 1.212 7.9% 6.2% 8.940 (12.265 11.0% 5.3% 4. Barclays Capital 6.250) 34% 2.782 1.920) 9.9% (570) 351 0.228 13.4% (339) 3.9% 4.180 12.9% (43.316 1.119 15.795 17.7% 5.112) 48.168 15.1% 3.074) 30% 2.5% 1.30 653 0.100) 50.725 (12.600) 52.197 41.7% (200) 195 0.24 6 1064 2.767 1.500) 47.999 53.4% 4.

300 13.147 5.758 Industrial non-current liabilities Industrial current liabilities Industrial total liabilities 11.900) 7.796 2.583 4.339 99. plant and equipment Leased products Investments Financial assets & other assets Industrial fixed assets 5.775 3.767 27.086 52.377 7.126 21.429 99.700 2.394 5.749 (3.385 12% 7.725 64.880 5.983) 402 (4.249 28.743 47.861 21.880 13% 11.240 1.585 65.702 12.995 12.470 50.778 6.061 Industrial total assets Financial services total assets GROUP TOTAL ASSETS 37. Barclays Capital 35% 33% 40% 54% 64% 61% 58% 8 December 2009 56 .919 5.994 51.920 28.265 11.994 51.260 254 448 2.214 5.428 10.073 29.927 55.565 Inventories Trade receivables Financial & other receivables Marketable securities Cash and cash equivalents Industrial current assets 6.493 Gearing (pre-pension) Source: Company data.184 1.134 33.900 2.915 70.248 5.744 8 20.302 (3.797 10.831 13.484 Industrial equity Financial services equity BMW shareholders’ equity 15.740 1.374 34.728 23.915 70.581 5.729 28.965 19.656 88.775 3.393 Unfunded pension 'debt' Industrial net debt (cash) post pensions (4.407 5.629 70.733 22.348 1.900) 6.728 23.339 99.758 Financial services total liabilities & equity TOTAL GRP LIABILITIES & S'HOLDERS EQUITY Balance sheet analysis & drivers: Net industrial working capital 5.743 47.203 84.728 23.297) 5.841 30.128 19.795 8 17.419 69.018 1.567 5.235 12.626 71.005 2.045 33.470 50.240 1.403 11.598 268 2.906 12.870 254 6.401 5.183 69.266 101.508 7.750 15.836 103.070 15.481 3.253 66.266 101.235 18.178 2.272 268 2.365 11.900) 5.631 22.100 11.419 69.752 20.139 21.877 16.276 11.074 268 2.792 101.265 18.760 59.900) 6.200 2.249 5.429 99.488 11.266 Minority interests Group shareholders' equity (incl MI) 4 19.489 84.626 71.787 17.200 11.861 20.183 69.200 2.775 3.458 8 15.938 5.602) 2.680 83.273 8 18.861 21.813 65.199 65.183 51.340 (3.274 Industrial total liabilities & equity 37.306 268 2.040 80.337 7.529 17.737 84.885 8 15.052 15% 9.656 88.728 22.845 30.747 Financial services total liabilities GROUP TOTAL LIABILITIES 42.513 4.710 6.426 Working capital/sales Industrial net cash (debt) 12% 5.728 23.986 19.240 1.130 11 21.450 17.Barclays Capital | European Autos & Auto Parts Figure 89: BMW Group balance sheet.414 5.135 15.935 7.980 (3.401 6.212 10.346 18.086 52.861 21.401 5.792 101.725 79.240 13% 10.734 1.775 3.300 11.046 14% 9.775 3.057 52.401 5.333 10. 2006A-2012E As at end-December (€mn) Industrial/Auto Assets: 2006 2007 2008 2009E 2010E 2011E 2012E Intangible assets Property.036 2.414 59.366 5.997 53.401 5.517 67.450 (3.836 103.170 6.438 14.414 59.861 16.629 70.212 268 2.267 7.506 24.315 4.725 79.202 12% 10.997 53.183 51.886 33.407 30.057 52.784 2.048 6.

0% 5.891) Capital Increase Dividends Paid Change in Debt Industrial cash flow from financing (253) (419) (525) (1.476 3. **Industrial Cash from operations + Net Capex 8 December 2009 57 .2% 114.064 7.891) 0 0 0 (3.0% 6.685) (5.500) (5.177 4.668 10.471 (422) 3.0% 80.0% 12.502 Industrial Capex (incl capitalised R&D) Net financial investments Net proceeds from leased products Net change in marketable securities Industrial cash flow from investing (4.323 (137) 8.787 4.197) 0 (458) (1.0% 131.417) (3.7 8.259) (3.607 9.000 9.552) (3.711) 0 0 0 (3.024) (1.185) 0 0 (2.000 9.000) 804 834 0 (196) 822 0 (327) 1.4% 87.000) (9.568 (78) (663) 371 85 (207) 6.715 285 3.916 12.9% 80.833) (131) (5) (130) (4.2% 7.891) FS cash flow from investing Group cash flow from investing (9.575 1.685) (3.621 0 500 200 (330) 370 4.824 (2.198) (17.111 2.413 (81) 534 (1.340 6.890 12.8% 7.667 8.147 2.649 3.000 10.980 5.8% 8.4% 90.537 0 (457) 1.652) (4.000 9.872 6.711) (6.6% 7.8 7. Barclays Capital * Industrial Cash from operations + Industrial cash from investing.711) (3.6% 14.146 4.567 (499) 9 597 571 1.9% 6.Barclays Capital | European Autos & Auto Parts Figure 90: BMW cash flow statement Year-end December (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Industrial net income Industrial Depreciation & amortisation Other Change in inventories Change in receivables Change in liabilities 2.259) 0 0 0 (3.5% 12.0% 6.075 5.449 3.945 0 (196) 3.937) (317) (20) (278) (4.963 3.218) (18.5% 12.241) 52 (28) (200) (4.520 3.9% 7.970) 530 1.603 10.0% 13.168 650 9.061 0 334 0 1.665 (308) (703) (98) 368 (433) 5.183 5.248) (14.9% 13.002 Total movement in WC Industrial Cash inflow from operating activities FS cash flow from operating activities Group cash flow from operating activities 4.0% 12.000) (8.264 5.000) (9.7 8.110 12.6% 5.864 1.660 (1.804 0 (196) 0 (196) 0 (327) 0 (327) 0 (457) 0 (457) FS cash flow from financing Group cash flow from financing Industrial change in cash (debt) 4.018 1.322 0 (963) 0 154 Industrial FCF (company definition*) Industrial FCF (Barclays Capital definition**) 956 1.259) (6.253) (13.218 9.638 0 (200) (100) 90 (210) 5.730 8.864 2.4% 7.311 9.132 2.373 2.904 3.864 0 (300) (100) (249) (649) 6.1 7.000) (9.5 7.000 2.215 6.0% 8.111 Group FCF FCF per share Group capex/Sales Industrial capex/sales Group capex + R&D/Sales Group capex/D&A 5.099) (3.018 1.9% 8.533 1.2 7.8% 115.654 FS change in net cash (debt) Group Change in net cash (debt) Cash flow Statement analysis & drivers: (148) (285) 241 1.0% Source: Company data.277 1.000) (195) 138 1.246 226 3.777 4.057 1.482) (10) (694) 4.670) (13.8 7.

YTD 09A 6 Series 1% X6 4% 7 Series 4% Figure 94: BMW EU sales mix 09E vs industry average (%) 35% 1 Series 21% 30% 25% 20% 15% 10% 5% 0% EExecutive A .Small Industry avg Figure 95: BMW EBIT mix by division.Basic C .Upper Medium B . 2000A-2015E 80000 Financial Services 27% 70000 60000 50000 40000 Moto 2% Autos 71% 30000 20000 10000 0 2000 2002 2004 2006 2008 2010E 2012E 2014E Automobiles Motorcycles Financial Services Source: Barclays Capital Source: Company data. Barclays Capital Figure 93: BMW unit sales by model.Barclays Capital | European Autos & Auto Parts Figure 91: BMW revenue mix by division 2009E Figure 92: BMW revenue mix by division. Barclays Capital D . Barclays Capital 8 December 2009 Other 58 . 2010E Figure 96: BMW EBIT margin by division.Lower Medium SUV Van 2014E X5 8% 5 Series 16% Z3/Z4 2% X3 5% 3 Series 39% BMW Source: Company data Source: CSM. 2004A-2015E 10% Financial Services EBIT 36% 8% 6% 4% 2% Auto EBIT 59% Moto EBIT 5% 0% -2% 2004 2006 Auto EBIT % FS EBIT % 2008 2010E 2012E Motorcycle EBIT % Group EBIT % Source: Barclays Capital Source: Company data.

its lack of modular-focused savings (relative to BMW and especially Audi/Porsche).and 7-series Lower capacity utilisation rates and levels of modularity provide less potential for savings than at peer BMW 8 December 2009 59 . this provides only €2bn additional EBIT (and risky. which leads us to initiate coverage of Daimler with a 3-Underweight rating. Based on our FX forecasts for USD and GBP exposure we believe that Mercedes faces significant currency exposure in 2010E. though admittedly DAI also incorporates high-rated trucks) and using a SotP methodology (for further detail see the valuation section).Barclays Capital | European Autos & Auto Parts DAIMLER – MARKET OVER OPTIMISTIC ON COST-CUTTING POTENTIAL DAIGn. demand.DE / DAI GY Stock Rating 3-UNDERWEIGHT Sector View 2-NEUTRAL Price Target €32. Key share price drivers: Negatives: Market over-confident of company’s potential for retaining further gross cost savings Youthful workforce makes achievement of gross savings less likely Daimler remains the OEM facing the greatest pressures from USD and GBP weakness Pricing pressures to affect luxury end of the market and Mercedes worst affected because of ageing model line up in comparison to BMW’s new 5. Of course. Whilst market estimates for German peer BMW look for only €1.00 Price (04-Dec-2009) €35. whereas we believe market assumptions are overestimating the retention potential.5bn achieved YTD and the company announcing that it is on track to exceed its €4bn target for the full year. as consensus on trucks may be too optimistic given the tepid recovery potential.and 7-series models. superior fuel efficiency credentials and higher level of modularity). we favour companies that can deliver and retain near. at best. due to its lower degree of natural hedging than BMW. and its belated efforts in the field of fuel economy provide less fat to trim in the next 12-18 months. Given the pricing. Daimler’s Truck division (historically 25% of group EBIT in ‘normal’ market conditions) is believed to be at rock bottom in 09E but even with our Daimler Truck division estimates in-line with consensus expectations for truck market peers. we are concerned that the majority of these will likewise be absorbed be negative factors (price. market estimates for Daimler are expecting a much more aggressive €4bn EBIT delta.and mid-term cost reductions ahead of market expectations. we reach a €32 price target. FX and raw material costs). for the European truck market). and currency pressures we expect to continue in the premium market. Yet it is difficult to reconcile these €3. Our 3-Underweight rating is driven by our concern that the market has run ahead of itself on its expectations for the company’s cost-cutting potential. having unfortunately launched its E-class six months too early into a falling luxury market. Valuation metrics further point us to prefer BMW (currently 18% 2010 EV/sales vs 44% at DAI. Although management has committed to an additional €4bn of savings for 2010E.5bn gross savings with the disclosures of net impact on EBIT. Daimler management has been vociferous on the company’s achievements regarding cost cutting in 2009. with gross savings of €3. We also think that Mercedes’ youthful workforce (hence less scope to cut labour costs).91 Potential Downside 11% We are initiating coverage of Daimler with a 3-Underweight rating and €32 price target.4bn of YoY EBIT improvement in 2010E (despite new 5. We believe that DAI is more exposed to pricing risks than BMW.

Barclays Capital | European Autos & Auto Parts

Risks to our 3-Underweight rating:
A stronger-than-expected recovery in the truck sector Exposure to faster growing market, such as China but also the early-recovering US market could provide additional upside to the share Figure 97: Daimler – headline data and valuation multiples (at current share price), 2008-11E
(€mn) 2008A 2009E 2010E 2011E 2012E

Sales EBIT EBIT margin (%) BC EPS € Consensus EPS € Industrial EV/sales (%) Industrial EV/EBITDA P/E ratio (%)

95,873 2,730 2.8 1.41 1.41 44% 4.1x 29.8x

77,507 (1,619) -2.1 (2.02) (1.79) 45% 11.7x (16.6)

80,883 1,453 1.8 0.61 1.40 44% 5.4x 54.7x

88,258 3,690 4.2 2.20 2.87 40% 3.7x 15.2x

91,782 4,502 4.9 2.75 3.22 38% 3.5x 12.2x

Source: Company data, Barclays Capital *FactSet consensus data

Management urges caution as market runs ahead of itself
With the market currently, we believe, looking out to 2010E earnings and beyond, management’s forecasts for “positive earnings from ongoing business” and “positive FCF” for 2009 have become less relevant. Instead, we feel the market is currently focused on Daimler’s cost-cutting potential. Big headlines flaunting the over-achievement of 2009’s €4bn cost-cutting target and aims to make 2009’s savings permanent and also to exceed those savings incrementally in 2010E have, we believe, driven Daimler’s relative price outperformance versus BMW in recent months (DAI +22% relative to DJ Euro STOXX -6 months, vs BMW +15%). And yet management has neither reconciled the gross savings achieved already with Daimler’s YoY EBIT delta, nor have they provided any specific detail on how a further €4bn in savings will be achieved in 2010E. Indeed, recent company statements have led us to believe that even management themselves believe that current analysts’ forecasts have run ahead of company guidance. Figure 98: DAI has outperformed BMW by 12% since July 09
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 7/1/2009

8/1/2009

9/1/2009

10/1/2009

11/1/2009

DAI share price relative to BMW
Source: Datastream

8 December 2009

60

Barclays Capital | European Autos & Auto Parts

New E-class launched six months too early
Unfortunately for Mercedes, 2009’s big model launch, the all new E-class, could not have come at a worse point in global auto markets. Whilst scrappage incentives at least boosted the lower end of the market, the higher-mix C and above segments were hit hard by the global recession. Though at 10M09 E-class sales were up 24,000 units YoY and to date in 2H09 comprised 22% of MBC group sales, (vs 25% in its last peak model year), the executive segment as a whole was down 50bp in Europe in 2009 and was likewise hit hard in the US. By contrast, we expect the segment share to recover again in 2010-11E just as the E-class laps its model launch anniversary and to top it off, its closest rival launches its all new 5-series. Figure 99: C and above segments to experience most growth 2010-11E

F - Luxury E - Executive D - Upper Medium C - Lower Medium B - Small -540 A - Basic -600 -413 -500 -400 -300 -200 -100 -45

-4 38 89

0

100

200

Change in units 2009-11E (000)
Source: JD Powers, Barclays Capital

After the launch of the E-class in 2009 (with the E-class SW in Q409 the final model in the range), DAI has passed its peak model cycle and will have to wait until C-class replacement in 2014 before it gets another high volume, strong mix launch. We therefore expect the new E-class will help boost Mercedes margins in 2H09E and into 1H10E but we expect the benefits to be short-lived as its rival BMW, with its new 5 and 7-series models and better fuel efficiency credentials, takes the prize for most youthful product line-up. Whilst exposure to the high-growth Chinese market should buffer weaker demand in Triad markets, we still believe that top-line market estimates for MBC are overly optimistic. Figure 100: New E-class likely to aid 2H09 earnings but company losses model age battle with BMW by 2010E
Brand 2008 2009 2010 2011 2012

Mercedes

CLC Q1 SL Q2 GLK SUV Q4

E-class Q1 E-Coupe Q2 E-class SW Q4

E-coupe cab Q1 SLS Q2 CLS Q3

A-class Q1 B-class Q3 SLK

M-class B-class SUV Sub A-class ForFour?

Smart
Source: JD Powers, trade press and Barclays Capital

8 December 2009

61

Barclays Capital | European Autos & Auto Parts

Figure 101: Mercedes’ mix skewed to higher segments

Figure 102: E-class historically 25% of sales (but closer to 40% of MBC profits)
1,400 1,200 1,000 800 600 smart M/R/G S-Class E-Class

35% 30% 25% 20% 15% 10% 5% 0%
EExecutive A - Basic SUV Van C - Lower Medium D - Upper Medium Other B - Small

400 200 0 1996

C-Class

A/B-Class 1998 2000 2002 2004 2006 2008 2010

DAI
Source: JD Powers, Barclays Capital

Industry avg

Source: Company data, Barclays Capital

Pricing pressures to hurt Mercedes as E-class ages
One of our biggest concerns for the European market in 2010E, and for Mercedes cars in particular, relates to pricing. Perhaps the most insidious unintended consequence of the scrappage programmes will be a potential breakdown in pricing discipline in key European markets, leading to more transparent pricing and a price-shopping consumer. We believe that European manufacturers will follow the US pattern of over-incentivising end-prices in an attempt to boost volumes. While scrappage programmes were aimed at the volume small car market, the programmes appear to have shifted price expectations amongst luxury buyers. In the most recent set of results presentations, as well as in our discussions with management, luxury makers reported that pricing in key markets was coming under pressure as consumers and dealers demanded rebates to match those offered under scrappage programmes to volume makers. In Germany list prices are currently about 5.5% more than the average for the 16 euro denominated countries, which allows greater flexibility for manufacturer/dealer incentive packages – the flip side of which being greater opportunity for margin erosion. The German government’s €5bn scrappage incentive programme ran out of money in September, prompting carmakers to step up discounts yet further. Figure 103: Government scrappage schemes have led automakers to heavily boost their own incentives in 2009
Avg OEM incentives in Germany Oct 2009 Sep 2009 Dec 2008

Avg incentive/car (€) Incentive as % of list price (%)
Source: KBA, Barclays Capital

2,485 11.6%

2,292 10.7%

€2,528 11.8%

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Less potential to trim costs than BMW Over-achievement of cost savings in prior periods hampers 2010 delta Though we credit Mercedes with €600mn of further production & procurement savings in 2010E.000 additional price/unit (a generous assumption since Eclass renewal began in Q109 but allowing for easy YoY comparisons due to the effect of launching in a weak pricing year). we also believe the market is over-playing the future benefits of other cost saving efforts.000 EBIT contribution/vehicle for incremental E-class sales Another knock-on effect of such pricing ill-discipline is likely to be that manufacturers are no longer in a position to significantly raise prices in countries affected by currency devaluations. However.000 new E-class sales in 2010 at an estimated €2.Barclays Capital | European Autos & Auto Parts Despite the positive price and mix effects of E-class and S-class renewals on 2010 EBIT. its hugely successful CORE restructuring programme which ended in 2007. For mix. Mercedes faces higher R&D costs in the years ahead as it lags behind its Munich-based peer in fuel efficient technologies. leaving them less room for flexibility when markets recover. and of which so far there has been little evidence of achievement at the net level in 2009. we estimate. Whilst we believe that this risk is already fully understood by the market. we believe that its potential for deeper and more permanent savings is much less than at BMW. we expect that a vast majority of these have already been achieved via 2007’s C-class roll-out and this year’s E-class. We expect the full availability of new E-class to boost price and mix by €770mn in 2H09E (versus an estimated €2. 8 December 2009 63 . Additionally. both in Mercedes’ domestic market but also in the rest of Europe. This will have the greatest impact for Mercedes as it has the greatest exposure to sterling and US dollar denominated sales (see FX discussion below). Rather unfairly. EBIT mix effect (€mn)* Total Mercedes EBIT delta (€mn) 200. by the overall negative pricing environment which we expect to affect pricing on all other European and US vehicles by a negative €1. saw a great deal of costs taken out of the production system before we even entered the market downturn. *assuming €5.000 400 (1.000 2.000 incremental contribution per unit for the model.000/vehicle.7bn negative impact in 1H09 when Mercedes like all other OEMs was attempting to drive down overstockage via pricing promotions). Although there are still incremental savings to be made via increased commonality between models. the details of which have yet to be disclosed. leaving it more potential in future to improve productivity. both of which have been produced based on the modular concept. but our estimates for 2010E assume a €300m negative EBIT impact from price and mix. this is due to the fact that BMW has come later to the modularity game. negative pricing for the overall market will drive an expected €100mn price/mix headwind in the year To date. This forecast is based on 200. this combined €575mn positive impact from new E-class is more than negated.000) (880) 175 (880) 175 (300) 400 Source: Barclays Capital. negative pricing drives an overall €100mn negative price/mix impact for Mercedes E-Class Other models Total MBC Additional vehicles (units) Additional price/vehicle (€) EBIT price impact (€mn) Negative price/vehicle (€) EBIT price impact (€mn) Est. has been buffered only partially by new model roll outs. Unfortunately for Mercedes. Figure 104: Despite positive mix effects of new E-class. we believe this pressure. we assume a €5.

peer BMW (years) Percent over 50 yrs (%) Average age (yrs) Daimler hourly Daimler salaried BMW hourly BMW salaried Source: Company data 2 2 17 25 40. we believe that there is less flexibility in the workforce than at BMW due to its more youthful age. this provided greater flexibility to use schemes such as kurstarbeit (or short-time work) in Germany.000 workers who left the company in 2009. Daimler still has the greatest excess capacity among its premium peers in Europe – with the likely ability to manufacture 369. 20% at BMWs). longer term.3bn in savings from personnel/SG&A in 2010E as kurtzarbeit continues until June 10E and we should see the full-year effects of the 6. over-capacity will. natural attrition will not be such an easy lever for Mercedes going forward. In 2009E. as well as the further redundancies the company has discussed.8 41. Figure 107: DAI average worker age vs. in order to cut labour costs to deal with the dramatic fall in production levels in the year but it has also left a great deal of under-absorption of fixed costs. However. we believe.Barclays Capital | European Autos & Auto Parts Figure 105: DAI has greatest excess capacity of premium peers 400 350 300 Thousands 250 200 150 100 50 0 BMW Daimler Audi Tata Porsche 78 17 133 112 369 Figure 106: Below average capacity utilisation at Mercedes 100% 95% 90% 85% 80% 75% 70% 65% 60% 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E BMW Mercedes Premium avg Excess production capacity Source: CSM. With c2% of all workers aged >50 years (vs.6 39.6 42. Our 2010E EBIT walkdown (see Figure 78) gives the company the benefit of €1. Youthful workforce does not aid further productivity savings Mercedes has been grabbing the headlines recently with announcements on the potential for further headcount reductions.000 more vehicles in 2010E than the market will demand. Barclays Capital Source: CSM.4 8 December 2009 64 . With no major new models due to come to market in the next 12 months. Barclays Capital Despite the efforts of the CORE restructuring programme. be a drag on earnings in 2010E.

700 N Am engines imported Gross currency position US$ Est. Over the last year. US$ Natural hedging percentage GBP exposure – Mercedes & Smart cars 262.400 17.000 vehicles.100 3. GBP Natural hedging percentage Source: Company data. of group revenues in North America in 2008. plus a further 260. 250.000 vehicles (Mclass.000 MBC vehicles were sold in North America but only 153. Daimler has one of the largest US dollar exposures of all European OEMs.103 6. creating further pressures (perhaps unintended) on importers into those markets. emerging market sourcing in US$ Net currency position.100 18. As we argued in the front section of this report. Despite the company’s recent announcement that it will be shifting 20% of its C-class production to its US factory in Alabama starting in 2014 to help compensate for a weak dollar. leaving the company with net imports of 100. we do not expect the benefits of this to be seen for at least another 4-5 years. GL-class and R-class) were produced. or 40% natural hedging. The main transactional currency risk lies in the MBC car division. 40% natural hedging from USD leaves MBC with a likely $14bn net currency position (pre-financial hedges) in 2010E Natural hedging provides shelter from USD but zero natural protection from GBP In 2008. Although sourcing in USD in Mexico and also to a large degree in China helps to balance the gross currency exposure. or €18bn. Barclays Capital 79.000 vehicles imported from euro-denominated countries.800 4.100 0 79.100 240 3. as US sales collapsed. Although this figure fell significantly in 2009.883 24. we believe that the market is currently underestimating the full impact of this weakening in foreign exchange rates relative to the euro for the autos sector in 2010E.Barclays Capital | European Autos & Auto Parts Size of impact from USD and GBP weakness likely to surprise the market The aggressive fiscal and monetary stimulus taken by the UK and US governments have led to a weakening of their currencies. we expect the total US SAAR to recover back to 12mn vehicles in 2010E.010 UK engine imports Net currency position.800 161.683 100.500 14.250 0% 8 December 2009 65 .010 0 3. the pound has fallen 15% relative to the euro while the US dollar has slipped 12%. 2010E Units Sale value in US$mn N Am sales N Am production Net vehicle imports 262. Figure 108: Mercedes estimated natural hedging protection for USD and GBP.000 engines.683 1. thus leaving MBC with 162. we still expect a US$14bn net currency position in FY10E. although Daimler trucks (and to a much lesser extent Van & Buses) also has a small degree of FX exposure.300 40% Units Sales value in GBPmn UK sales UK production Net vehicle imports 79. With 20%.

500 60% 1. Despite selling fewer cars than BMW in both the UK and US.400 40% 14.91 0.9bn in FY10E Mercedes’ 2010E EBIT impact from FX forecast to be €0. (GBP mn) 0% 2.35 150 92.84 (360) (900) 20% 0. Zero percent natural hedging therefore leaves the company with £3bn net exposure to sterling FX rates in 2010E. MBC has a £3bn net currency position (pre-financial hedging) from UK sterling Unlike BMW.80 0. Despite financial hedging DAI’s EBIT FX impact likely €0.enough to wipe out 70% of the expected effects of personnel and SG&A based productivity savings in the year. an additional €40mn and every 1p weakening in GBP rates a further €20mn impact Although at least 60% of 2010’s net currency position has already been financially hedged by the company.89 (210) (650) 0% 0.45 1. our calculations of Daimler’s EBIT exposure to the GBP and USD lead us to forecast a €900mn total FX headwind for Daimler in 2010E -.400 44% 13.89 0. Therefore our natural hedging assumptions for Mercedes -40% in the US and 0% in UK compare with a much greater 44% and 45% at BMW.Barclays Capital | European Autos & Auto Parts With no production in the UK but an expected 79. Figure 109: DAI estimated USD and GBP exposure.000 vehicle sales in the region in 2010E. due to Daimler’s lower degree of natural hedging in the regions. Mercedes’ UK exposure is not mitigated by any production facilities in the region. N Am (USD mn) 282.9bn-every further 1cent weakening in USD rates.200 Financial hedging volume (%) Spot rate Estimated effective rate USD Impact on EBIT (€mn) 90% 1.49 1.300 41% 16.79 (200) (50) 60% 0. Any further 1cent weakness in the US rate would provide a further €40mn headwind for Daimler in 2010E and likewise a 1p weakening in the GBP rate would impact profits by €20mn.420 2010E 262.49 (110) 77.890 0% 3.850 North American volume (units) Natural hedging volume in USD (%) Net currency position. 8 December 2009 66 .100 20% 1.250 0% 2.000 40% 14.820 2012E 286.75 (270) (950) 95% 0.42 (540) 79. 2008-12E (units as stated) 2008 2009E 228.91 0.37 (680) 108. Barclays Capital 95% 0.91 (70) (180) Note that our FX forecasts assume that spot rates remain at current spot levels (despite forward FX markets implying the probability of further weakening from both the USD and GBP).48 (440) 69.91 0.680 2011E 275.680 0% 3. due to BMW’s higher level of production in both the US and UK.480 0% 3.900 UK volume (units) Natural hedging volume in GBP (%) Net currency position. Mercedes’ negative EBIT delta from FX is -€450mn higher than our estimate for BMW’s FX exposure in FY10E.500 90% 1.49 1.100 41% 29.200 Financial hedged volume (%) Spot rate Effective rate GBP impact on EBIT (€mn) TOTAL XR impact on EBIT (€mn) Source: Company data.39 1.800 0% 1.49 1.

492 1.484 1.900 0.910 0.905 0.848) (100) (220) 600 (900) 1. Whilst other manufacturers have significant exposure to either the USD or GBP.000) 200 (50) (50) 732 (1.8 309 0.3% to 6.486 1.9 1.474 1 day Figure 111: Forward rates imply GBP burden will intensify 0.168) (2. Daimler remains the most exposed to movements in FX rates due to its relatively low level of natural hedging versus the high proportion of sales in the US.119 2.488 1.45 1.680) (731) 410 309 510 849 470 Volume Price/Mix Raw Materials & other input costs Production & procurement Currency Personnel/SG&A.Barclays Capital | European Autos & Auto Parts Figure 110: EURUSD forward rates remain close above $1. Figure 112: We forecast an EBIT delta of €1. North American and Asian truck markets 2010-12E.5%).0bn for MBC in 2010E.4 Trucks at rock bottom but speed of recovery likely to lag cars With truck peers not currently rated by Barclays Capital.480 1.8bn cost savings MBC cost walkdown (Delta) .5% by 2012E (just ahead of pre-crisis level averages for 2005-07 but behind 2007’s peak of 7. Barclays Capital (731) -1. Even presuming truck margins recover from 2009’s low of -5.915 0.040 430 300 (700) 0 30 540 290 (200) (200) 270 Current year EBIT EBIT margin (%) Source: Company data.€mn Prior year EBIT 2009E 2010E 2011E 2012E 2117 (1.490 1. in particular. R&D Other* Total change in fixed costs Operating margin delta (2. only provides an extra €2bn EBIT to the group. 8 December 2009 67 .885 1 day 1 month 3 month 9 month 2 year 1 month 3 month 9 month 2 year EURUSD forward rates Source: Datastream Source: Datastream EURGBP forward rates We believe that consensus numbers are currently not factoring in the severity of 2010’s FX headwinds for the auto industry as a whole. we base our Daimler truck forecasts on what we believe to be consensus estimates for the European.250 630 1.895 0. with €1.7 849 1.476 1.482 1.890 0.478 1.

4 5.5 283.8 1.000 10 70 9. Whilst GDP growth in 2010 in the NAFTA region should trigger higher transportation volumes.1 9. there are currently a large proportion of parked trucks which will be utilised ahead of new purchases. weaker pricing and restructuring costs.4 1.5 9. new EPA 10 regulations are likely to dampen the chances of a Vshaped recovery and although the average age of the fleet is much older than in Europe.2% of sales in the W EU market.0 1. Figure 114: LCV segment market share 2006-12E LCV Segment 2006 2007 2008 2009 2010 2011 2012 LCV units sales (mn) Van share of EU market (%) DAI share of Van market (%) Source: JD Powers.000 16 70 15.000 6 70 6.5yrs old. according to KBA data).38 10.7 -5.Barclays Capital | European Autos & Auto Parts We note that using market estimates is risky.9 6. Figure 113: Giving company benefit of doubt by assuming consensus truck estimates Trucks 2008A 2009E 2010E 2011E 2012E Unit Sales (units) Unit sales growth (%) Implied Rev/unit (€000s) Revenue growth (%) EBIT margin (%) Incremental margin (%) Source: Company data. for the European truck market. Daimler management have also urged caution against over-optimism on the truck outlook.6 -485 256.0 9. we expect it to benefit from the recovery in the overall market and to return to 6-7% margins by 2012E.5 328. Barclays Capital 472.074 1 61 0.8 9.2 8.35 9.71 11. with Q409E and early 2010E likely characterised by deterioration in regional mix.1 6.5 9.925 -46 75 -36. A youthful European truck fleet (German >16t trucks are just 3. raises concerns about the speed of the cyclical recovery in the region and make it likely that the recovery will take much longer than for car markets.73 10.60 10. albeit at a slow pace We expect the European LCV market to grow 130bp in share by 2012E from 2009’s low level when the segment accounted for just 9.3 Other businesses to recover. Although Daimler is not a market leader in this segment.5 2.5 14.82 10. Barclays Capital 1. at best.7 1.7 348.9 1.9 88.53 11.2 1.3 9.4 8 December 2009 68 .3 24.0 25. as consensus on trucks may be overly optimistic given the tepid recovery potential.

6 153.000 125 14.7 6.000 34 6. thought still behind 2008’s level of 8.0% Opel Other 3% Daimler 6% 9% PSA 25% 11. Figure 117: Vans & Buses segment expected to return to close to pre-crisis levels by 2012E 2008A Vans 2009E 2010E 2011E 2012E Unit sales (units) Implied Rev/unit (€ 000) Revenue growth (%) EBIT margin (%) Buses 287. the credit crisis and resultant liquidity squeeze and US leasing issues have drastically reduced the returns from this business.000 125 2.000 34 1.5 Financial Services returns muted Although Daimler’s financial services business provided a stable profit-stream historically.600 125 1.000 34 7.0% 2006 2008 2010 2012 2014 5.2 5.591 118 10.0% 10. we expect ongoing strong city bus development to boost revenues and help EBIT margins recover to 6.4 32.4 -1.0% Van share of WE Market DAI vans share of WE van market Source: CSM and Barclays Capital Likewise.5 8.0% Ford 11% 8.0 208.5 8.9 6.5 34. Although liquidity has now returned to the market and lower interest rates will aid the spread on new customer contracts. we believe that higher cost of risk levels will continue for at least the next 12 months and combine with the lower profit contracts (struck during the crisis) which will take three years to come through the system.Barclays Capital | European Autos & Auto Parts Figure 115: LCV market share in Europe 2010E Figure 116: LCV market set to recover 180bp from 2009’s low 12. 8 December 2009 69 .5% by 2012E.0% Fiat 14% VW Group 15% Source: CSM and Barclays Capital RenaultNissan 17% 6.1 2.0 Unit sales (units) Implied Rev/unit (€ 000) Revenue growth (%) EBIT margin (%) Source: Company data.0% 15. Barclays Capital 40.0% 10.0 206.0% 7.4%.000 40 -35.0 39.198 33 1.5 6. thus hurting RoE for some time to come.500 128 -13.0 39.0% 9.5 4.0 7.6 191.

1bn in Dec 08).80% 0.50% 0.3bn of FCF in 9M09 and thus increasing its net liquidity to €6.0 0.0 -4. have a neutral CDS view and Marketweight cash rating for Daimler and believe that current debt ratings (A3 Neg/BBB+/BBB+ Neg) are probably the lows for the foreseeable future with expected earnings improvement likely to reduce the risk of a downgrade to mid BBB.0 -3. Note that our autos credit analysts.0 -2.0 0.70% 0. Barclays Capital DAI's RoA (%) Source: Company data.0 -6.0 -1.0 2.0 12.0 4. Darren Hook and Rob Perry. Much of this increase was aided by a reduction in inventories (which boosted working capital in the cash flow by €3.60% 0.0 8. Barclays Capital DAI Industrial FCF (€bn) RHS 8 December 2009 70 . Figure 120: Solid balance sheet and cash generation potential 14.90% 0. whilst we think that rising production rates will provide a drag on cash flow in coming months as both inventory and supplier payable levels build again – we estimate a €1bn outflow from industrial FCF in 2010E – we are confident that Daimler’s strong history of cash management and above average credit rating.7bn (versus €3.30% DAI's FS managed portfolio (€bn) Penetration rates (%) Source: Company data.0 10.Barclays Capital | European Autos & Auto Parts Figure 118: DAI’s FS portfolio to grow as credit supply returns 66 64 62 60 58 56 54 52 50 FY05A FY07 FY09E FY11E FY13E FY15E 25% 30% 35% 40% Figure 119: Cost of risk to peak in 09.0 "DAI Net Industrial Cash (€bn)" Source: Company data. will help maintain a relatively stable level of cash on the balance sheet.0 2.0 6.0 -5.0 -7.0 3.0 2005 2006 2007 2008 2009E 2010E 2011E 2012E 4. Barclays Capital Cost of Risk (%) RHS Balance sheet remains attractive From a balance sheet perspective Daimler remains an attractive asset after generating €2.40% 0. ROA to slowly recover 20% 16% 12% 8% 4% 0% FY05A FY07 FY09E FY11E 0.0 1.5bn at 9M09).

Barclays Capital SotP Using a sum-of-the-parts valuation we arrive at a €33 price for Daimler.0 4. peer EV/sales and EV/EBIT multiples for Daimler Trucks and bring in Finance companies and Vans & Buses divisions at historical average multiples. demand.0 1.684 2.5 4.40 Feb-09 -2. 10-11E EPS estimates have recently been rising but are too high 10.Barclays Capital | European Autos & Auto Parts Rating We believe the market is overly optimistic on DAI’s potential to deliver and retain future cost savings We are initiating coverage of Daimler with a 3-Underweight rating and €32 price target due to our expectations that the market has run ahead of itself on its forecasts for Daimler’s cost saving potential. We expect pricing. We base our calculation on a blended average of peer EV/sales and PE multiples for the core Autos business.00 Figure 122: Analyst recommendations have recently been growing more positive on DAI – we believe its too early 5.00 4.0 Sell Buy Dec-08 Aug-09 Dec-09 71 Apr-09 Jun-09 DAI FY09E cons EPS est DAI FY11E cons EPS est Source: Datastream DAI FY10E cons EPS est DAI Cons Recommendation Source: Datastream Figure 123: Over-optimistic consensus estimates 2010E Barclays Consensus Variance Revenue (€mn) EBIT (€mn) EPS (€) 80.00 2.2% -44. We also apply a 5% discount to the SotP valuation to take account of the historical holding discount for the trucks business.00 -2.5 2.453 0. implying 7% downside to its current market price. Figure 121: After months of downgrades. 8 December 2009 Oct-09 .0 3. In reality we have seen that Daimler has tended to trade much closer to BMW multiples.638 1.00 8.00 Nov-08 Nov-07 May-08 Mar-08 May-09 Mar-09 Nov-09 Sep-08 Sep-09 Jan-08 Jan-09 Jul-08 Jul-09 -4. and currency pressures to continue in the premium market and therefore favour companies that can deliver and retain near. despite its supposedly higherrated truck division historically comprising 25% of earnings.00 0.5 3.883 1.0 2.and midterm cost reductions ahead of market expectations.00 6.5 Aug-08 Dec-07 Apr-08 Jun-08 Oct-08 Feb-08 1.9% -56.2% Source: FactSet consensus. Valuation methodology We value Daimler using a SotP methodology but we acknowledge that this assumes the market gives full credit to each constituent part of the company. We therefore cross-check our valuation against historical and peer average EV/sales multiples and use a weighted average of the both methodologies to derive our price target.61 82.

Applying Daimler’s own historical average multiple would imply a price of €31. ex Chrysler €m € per share REMARKS Mercedes-Benz Cars Daimler Trucks Van & Bus Chrysler EADS SotP Industrial business 11.450 (3.5% equity interest. incl 7. Barclays Capital Historical average DAI EV/Sales Source: Company data.508) 33.715 12 12 5 0 2 31 Average of: 39% 2010E EV/MBC Sales / 11x 2011E PE (in-line with BMW) Average of: 60% 11E EV/sales / 8x 11E EBIT (in line with truck peer multiples) Average of: 30% 11E EV/sales.8x equity value FY10E Net Industrial Cash Under-funded pension status.800 11.075 4 35 Industrial net cash/(debt) Group pension Healthcare liabilities Minorities Total EV EV with holding discount Source: Company data.632 6 (4) (1) (2) 35 33 5% discount EV/sales Daimler has traded at a five-year historical median of 42% industrial EV/sales although during that period has ranged from a low of 13% in 2003 (incl Chrysler) to a high of 57% in 2007. 11x 11E PE has 22. Barclays Capital BMW EV/Sales 8 December 2009 72 .400 4.360 33.5% options (to convert on or after 1 July 2010) at 0. Barclays Capital 5.115 29. 2010E (assuming 30% tax shield) Healthcare in North America (assuming 30% tax shield) Financial Services EV Operating business 3.Barclays Capital | European Autos & Auto Parts Figure 124: Daimler SotP implies downside to current share price Sum-of-parts valuation. On the same time frame. BMW has traded at a median average EV/sales of 39% and has ranged from 20% to 59%. Figure 125: At current price DAI is overvalued on EV/sales 60% 50% 40% 30% 20% 10% 0% 2000 Figure 126: DAI currently trades more richly than BMW 80% 70% 60% 50% 40% 30% 20% 10% 2002 2004 2006 2008 2010E 2012E 0% 2000 2002 2004 2006 2008 2010E 2012E DAI EV/Sales Source: Company data.297 31.570) (594) (1.400 0 2.

leading to an even stronger demand and pricing environment than we currently assume. rate Daimler Market Weight.6) 8.5x 16.4 45 11.4x 29.1x 0.6 40 1. with Daimler returning to revenue growth.0 45 1. Barclays Capital Risks to price target Risks to our price target are as follows: External risk – macroeconomic factors outside the control of the company.7x 14. supported by the new E-class as well as further cost cutting progress.7x -3.8x 7.5 57 4.2 35 3.7x 3. Figure 127: Daimler key valuation metrics 2006 Valuation multiples at current price 2007 2008 2009E 2010E 2011E 2012E Industrial EV/sales (%) Industrial EV/EBITDA Industrial EV/EBIT P/E FCF Yield (%) Price/Sales (%) Price/Book Dividend yield (%) Valuation multiples at €32 price target 41 2.1x 0. Credit Perspective Barclays Capital credit analysts. Rob Perry and Darren Hook.3 43 1.2x 1.6x 15.Barclays Capital | European Autos & Auto Parts A weighted average of both these valuation metrics leads us to set a €32 price target for the share. 8 December 2009 73 .1 48 1.7x 12. however.4x 9.8x -6.6x 54.0 49 1.0x 4.1x 4.2x 8.6x (25.1x 2. The believe that the recovery in trucks.5 Industrial EV/sales (%) Industrial EV/EBITDA Industrial EV/EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Source: Company data.8 46 1.0x 2.3) 8.1x 18.4 44 4.8x -6.9 38 3.8 46 1.2x 1.2x 0.7x 3.3x 3.7x 10.0 44 5.3x 16.3x 7.3 72 1.4x 29.9 48 1.7 37 3.4x 29.8x 7.2x 3.1x 0. They view Daimler as a high BBB credit given their expectations for credit metric recovery through 2010.1x 18. could mean that the company exceeds our forecasts Were truck markets to improve faster than consensus (and our) estimates.2x 0.0 41 1.1x 50.2x 3.6x -3.7) (15.2 52 1.5 41 2.3x 16.2 57 4.8 40 3.3x 7.2x 3.3 72 1.1x 0.1x 11.5x 16.8x 29.5x 8.7x (28.2 46 1. this would ease the FX burden for Mercedes’ earnings forecasts. this would provide upside to the current share price Currency risk – if USD or GBP rates were to improve significantly against the euro.0x 27.2 44 4.8x 29.0x 11.1x 11. is likely to lag that of premium autos and management is likely to take a cautious approach to increasing inventory levels.7 40 5.0 41 10.2) (16.1 48 1.

8% 8.1% 6.660 1.5% 4. Barclays Capital 10.272) 31% (66) 2.252 (1.0% 6.023.736) 35% (39) 3.502 4.958 19.280 65.751) (3. Bus.476) (1.328) (3.531 (64.099 2498 1811 1410 -1390 5.638 415 17% (66) (2.4% Financial Services EBIT % Total Group EBIT % Source: Company data.782) 20.419) (450) 1.979) (3.5% 0.8% 0 3.7% 4.092) (1.873 2009E 77.410 31.598) (470) 4.690 984 4.8 44.089) (3.2% 6.2% 0 1.023.1% 3.0% 3.9% Non-recurring income and (expenses) Memo: clean EBIT Memo: clean EBIT margin (% of sales) (1.41 0.151 91.744 69.Barclays Capital | European Autos & Auto Parts Figure 128: Daimler Group income statement.8% (13.9% -8.040) 309 566 342 0 1.6% 0.6% 8.711 99.5% 5. share of associates & financial income Reported operating income Memo: reported EBIT margin (% of sales) (13.5% 6.123 90.518 Financial Services Total Group clean EBIT Daimler Segmental Reported EBIT Margin % 807 6.3% 2.430 (69.018) 594 4.399 9.370 80.75 1. Other (from 05) Chrysler Group Industrial Clean EBIT 3231 2133 313 -468 5.2% 1.729 7.348 1.948 1037.0% 6.960 11.975) 13.057 630 7.0% 5.785 1.912 1019 1574 817 0 3.688 957.50 (870) 3.152 Income tax Memo: tax rate Minorities/associates Net profit from continuing ops (1.250 4835 1957 801 -377 7.507 2010E 80.258 11.6% 8.992 5.8 41.953 MBC Cars Trucks (CVs before 05) Van & Bus (excl Chrysler & EADS post-2007) Industrial revenues Financial Services Total Group revenues Daimler segmental clean EBIT: 8.8% 9.360 12.164 SG&A Research & development Other op costs.25 0 2.849 (1.7 47.00 0 627 0.830 91.6% 13.070) (309) 31% (66) 627 (1.5% 2.1% 7.02) 0.158) 852 8.20 0.417 18.512 1.453 1.0% 6.036 949 1375 713 0 2.307) (1.821 22.282 95.8% 0.446) 2.619) -2.8% -5.022) 31% (66) 2.810 10.0% 3.106 100.024) (3.8% 7.873 11.8% (10.559 (63.404) 23.4% 5.055) (2.7% 1.90 0 2.814 2.782 Cost of sales Gross profit (78.2% 8.023.466 14.211 81 (959) 417 1.83 2.8% 4.772 28.3% 4. 2006A-2012E December year end (€mn) Net revenues 2006 99.591 1.61 0.9% Financial income/expense & other Pre-tax income (90) 4.8% (11.502 4.879 76.1% (10.087 10.399 2008 95.118) 19.5% (660) (959) -1.314) 21.970 86.0% 5.710 8.572 14.2% 8.502 MBC EBIT % Trucks EBIT % Mercedes-Benz Vans Daimler Buses 3.795 (800) (2.139 (71.0% (12.023.453) 16.782 MBC Cars Trucks (CVs before 05) Van.507 11.3% -1.222 2007 99.744 3.979 3.66 1.4% -1.127 (4.534 -731 -599 89 0 (1.41 No shares (average) Daimler Segmental Revenue: 1022.070) (2.8 52.690 4.598 88.8 40.730 2.1 51.789 13.7% 2.8% 2.091) 39% (66) 1.040) 1.022 79.6% 4.252 2.453 1.9% 2.326) 47% (6) 4.003 (350) 3.680) (681) 3.00 (290) 1.9% 8 December 2009 74 .4% VBO EBIT % Industrial EBIT % 10.5% 7.1% 4.2% 0 4.619) 20.462) (3.9% -2.440 (75.8% 6.057 6.430 28.883 11.basic DPS 617 3.729 677 6.453 778 3.814 Net income from discontinued ops Group Interest EPS .571 24.065) 6.2% (11.883 2011E 88.1% 981 7.211 6.8% (3.8 46.3% 2.690 4.258 2012E 91.902 471 9.0% 7.340 (350) 4.181 65 2.7% -2.481) 6.995 (74.60 0 (2.054 8.722 77.594) (3.0% 6.

618 67.830 35.758 2998 39.468 24.864 63.700 49.470 19% 5.468 24.044 7.964 16.427 26.230 1.326 13.602 41.508 31.106 18% 6.992 0 26.535 15.934) (848) (2.645 76.900 50. Barclays Capital -35% -39% -12% -28% -22% -20% -21% 8 December 2009 75 .100) (848) (748) (5.900 131.700 76.262 7.009 16.652 31.724 1.194 1.612 15.985 7.618 Current Assets Financial Services Total Group Current Assets Total Industrial Assets 48.133 6.490 66.383 4.468 Non-current Liabilities Financial Services Total Group Non-Current Liabilities Total Industrial Current Liabilities 57.022 7.346 1.894 (1.249 24.676) (5.094 67.512 38.102) (6.099 34.412 Current Liabilities Financial Services Total Group Current Liabilities Total Industrial Liabilities 51.200 4.258 2758 2998 41.686 24.612 96.400 75.866 39.101 65.793 4.099 25.450 18% 5.974 37.513 7.102) 33.880 Total Financial Services Liabilities TOTAL GROUP LIABILITIES 109.s Other non current financial assets/securities Deferred Tax & Other Total Industrial Fixed Assets 7.200 17% 5.793 Balance Sheet analysis & drivers: Net Working Capital 11.486 4.649 39.486 32.704 13.046 8.390 13.400 50.950 13.700 134. Plant and Equipment Operating Leases Investments in Associates/non-consolidated co.100 131.164 63.500 56.602 24.244 6.200 55.881 6.596 7.100) (848) 522 (5.594 3.723 5.699 7. 2006A-2012E As at end-December (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Intangibles Property.288 57.258 2.104 8.767 62.842 23.299 20.580 52.802 24.025 0 26.258 2758 2998 40.918 7.100) (848) (498) (5.873 7.708 132.966 (4.375) 25.612 19% 3.431 99.845 3.389 64.383 67.565 13.155 Fixed Assets Financial Services Total Group Fixed Assets 69.901 13.667 61.664 (2.718 26.185 6.468 24.300 74.913 48.998 14.120 73.511 29.800 51.270 35.639 5.135 14.480 137.390 36.927 26.000 75.736 7.967 13.925 32.681 13.900 28.207 217.200 100.998 39.252 36.493 6.680 Industrial Equity Financial Services Equity DAI Shareholders' Equity 28.Barclays Capital | European Autos & Auto Parts Figure 129: Daimler Industrial and Group balance sheet.902 33.000 57.100 56.065 66.258 2758 2998 39.313 15.824 5.002 1.285 Minority Interests Group Shareholders' Equity (incl MI) 421 37.567 37.604 6.328 4.386 180.452 37.218 35.076 99.668 15.577 3.477 26.011 12.758 2.335 73.900 29.200 4.599 39.723 Working capital / Sales Net Industrial Cash (Debt) 13% 9.317 61.128 14.632 31.002 135.494 25.392 90.100) (848) (518) Gearing (pre-pension) Source: Company data.369 5.769 12.912) (734) 9.928 1.423 6.262 35.699 47.956 15.861 14% 12.200 27.495 60.430 Funded/(Unfunded) pension obligations Healthcare obligations/other post-employment benefits Industrial Net Cash (Debt) after Pensions (2.763 0 26.473 Total Industrial Non-current Liabilities 33.107 15.752 66.531) (1.182 36.985 1.508 29.821 36.800 102.200 49.700 101.092 30.200 4.368 15.185 4.746 5.219 64.668 15.060 485 31.600 53.584 4.508 30.970 59.994 89.773 Total Financial Services Assets TOTAL GROUP ASSETS 118.819 30.500 51.817 25.063 55.186 4.216 23.203 35.836 70.500 129.496 47.009 0 25.508 32.523 7.600 99.508 30.855 Inventories Accounts receivable Cash Other current assets Total Industrial Current Assets 17.419 35.900 30.290) (14.603 10.385 3.319 65.200 4.717 36.168 15.012 39.060 24.600 8.493 5.634 62.727 80.264 29.952 38.531 16.258 2.200 48.

Barclays Capital | European Autos & Auto Parts Figure 130: Daimler Industrial and Group cash flow statement Year-end December (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Net Income Depreciation and amortisation Deferred tax (Gains) losses on disposals Chg in inventories Chg in trade receivables Change in trade payables Other chg in WC Change in Working Capital Share in equity co's (net of dividends) INDUSTRIAL OPERATING CASH FLOW 2.621) 198 246 (175) (1.834 (135) (10.222 5.623) 4.8% 2.500) (1.0% 8 December 2009 76 .162) 8.016) 0 0 0 0 (246) 0 0 0 229 DAI cash flow analysis & drivers Industrial FCF Group FCF Industrial Capex / Sales.528 23.016) (246) 229 Operating cash from Finance Co's Investing cash from Finance Co's Financing cash from Finance Co's Other/FX from Finance Co's NET CHANGE IN GROUP CASH 7.529) 0 0 0 0 (4.230) 3.466 (1.129 4.8% 6.395) 43 (5.3% 90.162) (1.361 0 0 0 0 (1.813 (71) (8.1% 70.502) (2.6% 80.200 0 0 0 0 0 0 (257) 0 0 (257) 0 (900) 0 0 (900) Other / FX NET CHANGE IN INDUSTRIAL CASH (432) (869) (1.500 (8.599) Debt issued/(redeemed) Dividends paid Equity issued/(redeemed) Shares repurchased INDUSTRIAL CASH FLOW FROM FINANCING (1.173 0 0 124 (476) (587) 234 0 3.234) (2.719) 0 0 0 0 3.597) (3.6% 1.361 (1. Barclays Capital (6) 12.447) -150 0 (3.016) 4.5% 75.070 (7.558 4.660) (21.758 410 4.440 (3.5% 2.643 1.0% (1.457 2.600 0 0 (377) (358) (282) (453) 0 5.735) (340) (37) 7.218 4.327) 3.2% 9.813 29.523) (513) 3.215) (722) 306 (29) (1.113) (1.0% 1.377 2.747 261 4.173 (464) (545) 224 (118) 122 (344) (116) (2.2% 9.2% 1. % Industrial additions to intangibles/ Sales % Capex + R&D as %age of Sales Industrial Capex/Depreciation & Amortisation Source: Company data.056 (98) 346 7.129 1.301) 1.734) 2.306) (1.344) 6.751 1.4% 8.811 3.5% 1.595) (2.615) (1.659) (3.500) 0 (7.864) (647) (1.220 3.5% 72.644 112 (1.7% 69.115 1.861) (2) (4.800 0 4.865) (2.301) 3.510) (24.272 (2.318 10.123 653 (712) (2.8% 2.793 4.680) (1.179) 1.632 3.130) (1.728 Capital expenditure. net Additions to intangible assets Acquisitions less disposals of businesses Changes in wholesale & retail receivables Investment in shares Other INDUSTRIAL CASH FLOW FROM INVESTING (5.016) (1.880 (10.367) (3.000 (600) 1.7% 2.611 4.125) 3.687) 0 0 0 0 (5.588 957 3.0% 1.207) (1.840) (1.753 7.9% 72.218) (6.0% 10 10 4.728) 3.267 0 0 253 (253) 243 (243) 0 6.628) (517) (644) (984) (4.706) 5.811 2.758 0 6.2% 8.8% 2.015) (1.773) (1.472 653 0 2.943) (1.7% (5.842 5.121 (1.352) (1.5% 6.759) 0 0 0 0 (5.644 1.2% 9.

0% 2004 Figure 136: DAI Industrial Net Cash and Industrial FCF (€mn) 14.0% -10. Barclays Capital Financial Services Figure 135: Daimler EBIT Margin by division. Bus.000 60. Barclays Capital 2006 2008 Trucks 2010E 2012E MBC Cars Mercedes-Benz Vans Financial Services Source: Company data.000 2.000 100. Barclays Capital 8 December 2009 77 .000 2.000 4.000) 14. 04A-12E (€mn) 120. YTD 09 Other Markets 19% A/B-Class 20% Germany 23% S-Class 7% Asia 14% Other W EU Markets 25% E-Class 14% C-Class 35% USA 19% Source: Company data Source: Company data Figure 133: Daimler revenues by division.0% 0.000) (6. Other (from 05) Chrysler Source: Company data.000 6.000 8.Barclays Capital | European Autos & Auto Parts Figure 131: Mercedes units by model.000 80.000) 2004 MBC Cars Van.0% 5.000 20.000 (2. 04-12E %) 15. YTD 09 smart 11% M/R/G 13% Figure 132: Daimler revenue by geography. Barclays Capital Source: Company data.000 40.000 6.000) 2005 2007 2009E 2011E Industrial FCF 2006 2008 2010E 2012E VBO EBIT % MBC EBIT % Trucks EBIT % Net Industrial Cash (Debt) Source: Company data.0% 10.000 0 2004 2006 2008 Trucks Daimler Buses 2010E 2012E Figure 134: Daimler Clean EBIT by division.000 10.000) (6.000 2.000 (2.0% -5.000 6. 04-12E (€mn) 10.000 10.000 0 (2.

As a result. We are therefore initiating coverage of Fiat with a 3Underweight rating and a €8 price target. leading to negative headlines and difficult negotiations as Fiat navigates the delicate task of closing Italian capacity. 2010 and 2011 are likely to be marked by survival albeit through heavy incentives and fleet sales Risks to our 3-Underweight view: Extension and/or expansion of Italian scrappage schemes More rapid rebound in truck and/or agricultural equipment More rapid turnaround at Chrysler 8 December 2009 78 . While Fiat has rallied recently on hopes for Chrysler and press speculation of an Fiat Group Automotive (FGA) spin-off. The fall in volume will once again reveal the excess capacity in Italy.Barclays Capital | European Autos & Auto Parts FIAT – EXCESS CAPACITY AND LOWER CHRYSLER TURNAROUND ENTHUSIASM DRIVE 3-UNDERWEIGHT RATING FIA. Key share price drivers: Negatives: Heavy reliance on A and B sectors leaves Fiat exposed to a decline in post-scrappage volume and price wars in 2011 While offering potential longer-term potential. which faces a difficult year as scrappage programmes fade away across Europe.50 per Fiat share by 2012. investors will likely refocus on the core automotive business.56 Potential Downside 24% We are initiating coverage of Fiat with a 3-Underweight rating and a €8 price target.MI / F IM Stock Rating 3-UNDERWEIGHT Sector View 2-NEUTRAL Price Target €8 Price (4-Dec-2009) €10. will be hit hard as volumes fall and price competition sharpens. CNH and Iveco offer only a modest offset in 2010 and 2011 Chrysler turnaround enthusiasm is getting ahead of potential turnaround progress. by Fiat’s own admission. which lead us to our €8 price target (please see the valuation section for further details). Moreover. even a strong turnaround (albeit below management projections) would be worth only €1. We value the Fiat share based on an average of EV/sales and EV/EBTIDA at historical and peer average multiples. we believe that while Chrysler is likely to survive through 2011. Fiat. which would in our view unlock the value of CNH and Iveco. are remote in 2010. As the programmes fade. the prospects for a spin-off of FGA. implying 24% potential downside from current levels. which benefited significantly from the shift to A and B vehicle segments.

which is historically a smaller car market. capacity and pricing. industry decline of 3. While Fiat may indeed have the right long-term strategy with downsized vehicles and small. the German programme alone contributed 4.309 3.Small Other Van Fiat Group Source: JD Powers.0 0. Figure 138: Fiat’s current European sales mix significantly skewed to A&B segments 40% 35% 30% 25% 20% 15% 10% 5% 0% EExecutive SUV C . The various scrappage programmes.924 3. Fiat’s overall share of WE increased 60bp to 8.0x Source: Company data.Basic B .4%.0x 205.26 25 3. In Italy.09 -0.82 33 4.0x 54.6x 46.Upper Medium A . from 57% share to 63%.3x 8. Barclays Capital Industry avg Volume down as boost to A and B segment fades In 2009.1 0.16 36 4.Lower Medium D .755 477 1.8 1. it nevertheless will likely be hit in 2010 by the fallout from the end of the scrappage programmes in terms of volume.8x 46. Barclays Capital *FactSet consensus data Unintended consequences of scrappage wind-down to hit Fiat hard Fiat’s mix – even before the scrappage boost of 2009 – had been tilted toward A and B segment vehicles.29 -31 3.2mn in Western Europe. As a result.9%.019 2. Fiat is likely to have maintained sales volumes of 1. sales fell even less.0x 10. The shift in segment share across Europe can more than be accounted for by the scrappage programmes in the top five countries – for example. with YTD Fiat selling 602k units in 2009 vs. a YoY increase of only 4% vs.36 0.242 1.565 1. In Italy.3x 29. further boosted Fiat’s A and B reliance.793 896 1. 8 December 2009 79 .04 1.6x 48.7x 109. fuel efficient powertrains.2 share points in 2009 to the overall European increase in volume B segment share vs. 604k in 2008.362 5.05 0. A and B segments increased by 600bp. 2008.9 0. 2008-2011E (€mn) 2008A 2009E 2010E 2011E 2012E Industrial Sales Industrial EBIT Ind EBIT margin (%) BC EPS € Consensus EPS € Adj Ind EV/sales (%) Adj Ind EV/EBITDA P/E ratio (%) 58. However.5 1. in particular the Italian programme. much of this relative success appears due to the artificial mix shift engendered by scrappage programmes.Barclays Capital | European Autos & Auto Parts Figure 137: Fiat – headline data and valuation multiples (at current share price).35 35 5.

777 Total C/D/E segment chg YoY Segment share Fiat share in segment -50.2% -0. with an additional €1.5% C segment 31. The Italian scheme thus covered all of the Fiat 500s. Barclays Capital -38.1% 0.2% 13. was boosted by sales from the scrappage schemes.500 car incentive to those new vehicles that met Euro 4 + emission standards and emitted a maximum 130 g/km (diesel) or 140 g/km (other fuels) of CO2. while at the same time excluding many variants of.7% 33. with a €1.8% -1.3% 3. Barclays Capital B segment 29. As a result.4% 10.9% in 2009. offset by some loss of Fiat share in these segments: Figure 140: Fiat volume segment in Western Europe source of change 2008 vs.3% 0.892 149.5% -1.593 11. (By contrast the German programme simply required compliance with Euro 4 emissions while France provides rebates for new vehicles for up to 160 g/km.980 Total Van and other segment chg YoY Segment share Fiat share in segment Fiat 2009 sales (volume market) Source: JD Powers Forecasting.2% 0. Overall.6% -0.8% 29. and most models of Fiat Bravo.6% Fiat was one of the key beneficiaries of the scrappage boost.1% 0. In Italy.3% in 2008 to 8. In the other countries.7% 0.000 units were from the overall increase of those segments in the European market.4% -0.504 -25.2% -0.8% 3.5% 0.275. 2009 Fiat’s 2008 sales (volume market) Sources of chg: 1.559 -49.7% 0.034 1. Fiat’s share of the Western European market. although its share of those segments slipped somewhat as other automakers rushed to fill demand.289.Barclays Capital | European Autos & Auto Parts Figure 139: Scrappage programmes account largely for mix shift to A&B segments in 2009E A segment 2008 segment market share YoY chg by country: France Germany Italy Spain UK Other Memo: total change 2009 segment market share Source: JD Powers. the scrappage programme was distinctly aimed at Fiat’s sweet spot in A and B segments. of which 150.0% 1.331 8 December 2009 80 .9% 1.5% 4.4% -0. the VW Polo and Golf.669 -74. Fiat gained about 74k units of volume in the A and B segments. for example. which rose from 8. enough to accommodate many versions of the Mégane).500 – 3000 for CNG or other alternative fuels (a Fiat sub-specialty).2% -0.482 Total A/B segment chg YoY Segment share Fiat share in segment 74. Italy restricted its trade-ins of ten-year-old and older cars.0% -2. Fiat benefitted from the general tendency of scrappage buyers to choose A and B segment vehicles.484 -24.

000 vehicles for the manufacturer. even with some trailing scrappage programme extensions. we expect the distortion of the A and B segment share to fall.Barclays Capital | European Autos & Auto Parts In 2010. although we would expect Fiat to revert closer to its 2008 share in the A&B segment this would still cause a drop of 190. meaning that total sales in the volume market would fall by 1. In this context. 8 December 2009 81 . with only modest economic growth.6mn. Likewise.from 47% in FY09 to 43% in 2010E. with combined share of the volume the W European market falling 400bp .1mn cars in Western Europe. we do not expect a significant rebound in the LCV market. which we see growing at 3% across Europe in 2010E. to a total of 4.

Overall in Europe. April and May due to production volumes for Grande Punto (especially the LPG and CNG versions that received extra incentives).400.000. Idea (again. April and May Cassino had some boost from LPG version of Bravo With the fall in sales. Fiat noted that the several plants had been boosted by scrappage incentives: The Melfi plant (site of a bitter labour action in 2004) did not need to use temporary layoffs in March. In mid-year. Barclays Capital Poland Turkey 8 December 2009 .200. Fiat will still suffer excess capacity in Italy of about 200. joining the current underutilised factories that make larger cars.6mn units in 2H09 to 8. Poland ran at 108% to meet Fiat 500 demand. with reduced recourse to temporary layoffs (from April.000 600. the incentivised CNG and LPG versions) and Alfa Mito.000 in 2011.000 0 2001 2003 2005 2007 2009 2011 Figure 142: Fiat European capacity utilisation by country % 140% 120% 100% 80% 60% 40% 20% 2005 2011 2013 Serbia 2007 2001 2003 2009 2015 82 0% Italy Spain Source: CSM.000 400. straight time capacity was trimmed to 970.000 1. January) and limited weekend overtime. capacity utilisation is strong in Brazil. largely by stepping down straight-time capacity in Serbia.000 units in 2009. perhaps converting to support agricultural equipment.Barclays Capital | European Autos & Auto Parts Exposing excess capacity and weak fixed cost absorption The scrappage programmes in Italy and beyond have helped to support utilisation at key Fiat factories in Italy.000 units in 2009.000 1. several Fiat factories that had enjoyed strong utilisation due to A and B segment build will see weaker capacity utilisation. more than halved vs. Musa. Figure 141: Fiat European capacity by country (units) 1. we expect Western Europe production to decline from the pace of 8. Fiat has recently underscored in its annual meeting with its ‘social partners’ its plans to discontinue automobile production at the Termini Imerese plant in Sicily in 2011.2mn units in 2008. Outside of Italy. or about the equivalent of 1 to 2 plants. Excess capacity is likely to continue in Italy for the foreseeable future. and scheduled weekend overtime. (in particular LPG version) with reduced recourse to temporary layoffs in March.000 units of excess capacity – at the same time.000 800. down from 1. In Italy.000 200. Even the slated-to-close Termini Imerese plant enjoyed decent volume in the Ypsilon. Barclays Capital Poland Turkey Serbia Italy Spain Source: CSM. The Mirafiori plant had good volumes for the Punto Classic. allowing for ‘only’ 280. As a result. but was able to reduce to 280. albeit weaker in Poland and Serbia where Fiat is adding capacity.0mn units in 1H10E.000 units of excess capacity in 2008. Fiat had almost 500.

the benefits from Chrysler are likely only post2012 as Chrysler reengineers its product lines (and as Fiat relooks at its own platforms) and may be more limited than management foresees should Chrysler not be able to grow car and unibody CUV share in the US (that is. Longer term. Barclays Capital 2. and a sales increase of up to 3%. we remain cautious near-term.485 11.7% 2. And manufacturers have become accustomed to the lift to capacity utilisation provided by scrappage programmes. we do not see significant ability for these programmes to offset the pricing and capacity issues over the next few years for three reasons. Fiat has guided to a trading profit of €1. and likely has seen benefits already reflected in its 2008 and 2009 earnings.6 improvement in working capital in 4Q09). driven by a €0. 8 December 2009 83 . First. often with matching manufacturer incentives on top. Fiat (unlike Renault) is already well advanced in its move to modularity.5bn.500/vehicle incentive with their own generous discounts: Figure 143: Government scrappage schemes have led automakers to heavily boost their own incentives in 2009 Avg OEM incentives in Germany Oct 2009 Sep 2009 Dec 2008 Avg OEM incentive/car (€) Incentive as % of list price (%) Source: KBA.5bn. Already in Germany.8% Progress in modularity unlikely to provide offset in near-term While Fiat has been a strong champion of modular architectures.500-2. OEMs have significantly added to the government’s €2.6% 2. we would expect management to begin to highlight the capacity issues and need for an industrial solution – a slow and difficult challenge in the context of Italian labour relations. may lead management to take a more cautious tone around the prospects for the core European business. TRUCKS & AG EQUIPMENT WILL NOT OFFSET AUTO DECLINE NEAR TERM Fiat’s has guided to a group trading profit of more than €1bn in 2009 (which we see little risk to as we are at €1.500 of government incentives. the new plan will likely be a positive assuming it addresses some of the core overcapacity issues. Consumers for A and B cars – even acknowledging that some were first-time new car buyers – have become accustomed to €1. Third.292 10.090bn) and a net industrial debt of less than €5bn for 2009 (we are at €4.528 11.Barclays Capital | European Autos & Auto Parts As CEO Marchionne turns his attention to a revised plan for Fiat Europe in 1Q10. Fiat is particularly vulnerable to a post-scrappage price cutting pandemic. Thus. Fiat lacks the global scale in its key platforms – especially C and D – relative to other auto makers and across platforms. Second. the country with the most aggressive scrappage scheme in 2009. we forecast trading profits of €660mn. In 2010. which we view as unlikely. platforms with more potential commonality with Fiat than the body-on-frame Jeeps and Rams). A further hit from likely weak A and B pricing in 2010 With its disproportionate focus on A and B segments. depending on scrappage programme extensions in Italy and elsewhere. especially as in the process of making the case for capacity reductions or increased flexibility. Without an extension.

9% 8 December 2009 84 .Barclays Capital | European Autos & Auto Parts FGA earnings likely to fall by over €350mn Assuming no extension of scrappage schemes in Italy.6% 47 0.2% 276 1.1% 30 -5 5 15 30 0 75 423 4. as well as the spread of pricing pressures in post-scrappage Europe. we expect FGA income to fall by €370mn further in 2010.4% 46 0 0 0 0 0 46 469 4.6% in 2009. while we expect a bottoming and modest rebound in CNH and Iveco in 2010. to a margin of 0.2% CNH and Iveco not likely to provide meaningful offset until 2011 At the same time.2% vs. Figure 144: Trading profit delta of €370mn likely at FGA in 2010E €mn FGA trading profit Prior year trading profit 2009 714 2010E 414 2011E 47 Volume Price/mix Purchasing net Production cost absorption R&D SG&A Other Yoy change in trading profit -24 -599 197 -200 75 440 0 -300 -303 -200 200 -283 20 200 0 -367 56 75 50 64 10 -25 0 230 Current year trading profit Trading profit margin Note: trading profit margin = trading profit/revenue Source: Barclays Capital 414 1. the increase of €75mn and €80mn respectively does not offset the headwinds in FGA: Figure 145: €75mn delta at CNH in 2010E not enough to offset FGA decline… €mn CNH trading profit Prior year trading profit 2009 1100 2010E 347 2011E 423 Volume/mix Price Purchasing net Production cost absorption R&D/SG&A Other Yoy change in trading profit Current year trading profit Trading profit margin Note: trading profit margin = trading profit/revenue Source: Barclays Capital -694 197 -5 -151 137 -192 -708 392 4. 1.

7% market share). we see potential for Chrysler to earn an operating income of US$2. Given what we view as achievable.84/share to Fiat value at a 12x P/E multiple./used R&D SG&A Other Yoy change in trading profit Current year trading profit Trading profit margin Source: Barclays Capital -1015 -44 17 41 2 49 161 -20 -809 30 1. we believe that Chrysler likely can survive until the new “Fiat’ inspired product arrives.43 on management’s more optimistic projections) At its recent five-year plan presentation.2mn assuming 10.5mn units. using the higher variable contribution of $5. What’s achievable: Survive through 2010 via fixed cost reduction.4% Chrysler likely to survive but contribution modest Chrysler to add only €1.300-$5. Using $8bn of fixed costs and the lower per vehicle contribution implies a breakeven production of 2mn units (or roughly a SAAR (seasonally adjusted annual selling rate) of 12.Barclays Capital | European Autos & Auto Parts Figure 146: … nor is €80mn Iveco delta in 2010E €mn Iveco trading profit Prior year trading profit 2009 839 2010E 30 2011E 110 Volume/mix Price Purchasing net Production cost absorption BB. the plans were well-founded and ahead of the direst predictions in the market.971/unit but rising to about $5.5bn in 2013. unlock Jeep export markets Aggressive fixed cost reduction likely lowers EBIT breakeven to about 11mn SAAR Given the large reductions to date in Chrysler’s fixed cost base.1% 161 -30 10 30 0 10 15 0 196 306 5.45 to Fiat EPS and €5. Jeep and Ram share. contributing €0.4mn units or a SAAR of 8. When the prior management team at Chrysler filed its “Viability Plan” in February 2008. at this point.600 per vehicle would imply EBIT breakeven at 1. to justify the recent run up in valuation. However.43 per share to Fiat value (at 12x P/E) some 4 years hence. in our view.15 to Fiat EPS and €1. insufficient.600 in the plan period. Chrysler indicated its fixed costs were US$8-$10bn and variable contribution was $3. as opposed to more aspirational and longer term stretch targets.84/share to Fiat value in 2013 on our assumptions (and still only €5. Chrysler management and CEO Marchionne outlined an aggressive set of plans to turn around Chrysler. 8 December 2009 85 .6% 40 -50 10 10 0 30 40 0 80 110 4. defend/expand Minivan. as well as the likely closing 2009 cash balance of US$6bn. Chrysler would contribute only €0. In many respects. Note even if Chrysler hits management’s more optimistic projections. we prefer to value Chrysler’s potential contribution to Fiat around what we believe to be achievable in the next few years.

the implied variable profit per unit is $3.Barclays Capital | European Autos & Auto Parts In the November 2009 plan.6X 3.636.6X High contrib. about in line with the February plan level of $3.5 9.5 10. implied in Nov 09 plan 10. Figure 148: Chrysler fixed costs: Feb 2009 plan vs.0 2. Chrysler indicated it could be at breakeven at annual production of 1.438 8.636 6.000 10. fixed costs appear to be in the range of -US$4-$6bn over the plan period.0 1.65mn units.7% 1.1 1.0 2.8 10. contribution per unit Source: Company data.1 5. Variable contribution per vehicle (US$) Fixed costs (US$bn) Units for breakeven (000) Implied US SAAR (000) US market share NA Production/US SAAR 3.2mn.7 4.) 2011E Source: Company data.7% 1. Barclays Capital 8 December 2009 86 .5% 1. and could earn an operating profit of US$2bn at production of 2. With a change in operating profits of $2bn due to a production increase of 550.2 8.634 8.3 5.636) per management’s Nov 09 plan Assuming that (as the plan guidance indicates) variable contribution is roughly constant over the life of the contract. Assuming Chrysler's planned level of Canadian. Barclays Capital 0.650 11.1 2.971 for 2008.586 10.636 Chrysler can breakeven at 11m US SAAR (implying contribution/vehicle of $3.2 2008 2009E Feb 09 plan 2010E Nov 09 plan (est. although below that plan’s rather too optimistic later year per vehicle contributions.0 550 $3.181 10.000 units.971 8.040 12.4X Nov 09 plan Memo: Nov 09 plan variable contribution analysis EBIT (US$bn) at: 1. 5.65 mn units 2.20 mn units Change in EBIT (US$bn) divided by: Change in units (000) = Var. Figure 147: Chrysler to breakeven at 11mn US SAAR based on new Nov 09 plan Chrysler implied breakeven analysis Feb 09 plan Low contrib. Mexican and export sales relative to US sales (which we believe Fiat may be able to increase) implies Chrysler can breakeven at an 11mn US SAAR.

While Jeep has suffered from some cloned vehicles that stretched the brand.6% by 2011 and 14% longer-term targets) However. and has been successful in the past at eking out share gains.000 units) and non-recurrence of inventory destocking (400.8% for Chrysler (vs. we see deliveries reaching 1.000 units or 27% in the November plan – thus limiting to some extent synergies with Fiat’s car platforms.6% in 2011 and eventually reaching close to 14% US share as aggressive. At the same time. turbocharged ICEs with dual clutch transmissions). 4. management’s more ambitious 12. developing new vehicles based on shared platforms with Fiat. unless the midcycle product refreshes are extremely successful. 11mn in the Fiat plans). we note that it is explainable due to increased fleet deliveries (about 150. and prefer to value Chrysler based on the US share we see as achievable given Chrysler/Dodge/Jeep brand positioning. and note that the smaller Fiat-inspired vehicles are likely to be received well in those markets. we assume share of 1. While the swing from 2009 to 2010 of 80% (that is.000 units. In particular. in line with management delivery assumptions. which underneath reflects an assumed continued decline in retail share offset by increased fleet deliveries. versus 429. and growing export markets.0% respectively to reflect the more recent weakness in their performance. On our assumptions.9% in 2009 to 3.000 units).000 units) and overall market growth (130. nevertheless Fiat should be able to defend most of the Jeep share.1% in 2011. introducing more fuel efficient powertrains (downsized. we are more sceptical of management’s aspirations for the Chrysler and Dodge brands. but leading to overall fleet mix of 31% (off our lower market share) vs. Chrysler’s product plan is directionally sound. Jeep enjoys a strong brand image. especially for the iconic Jeep. The new Ram brand organization appears to have identified growth opportunities to better segment and penetrate commercial markets. The key elements include refreshing vehicles mid cycle/near term. we believe that pickup trucks are likely to remain about 11% of US sales. making relaunch of the vehicles – even if well designed with Fiat input – more difficult. by continuing heavy reliance on incentives and fleet sales. 25% in management’s plans (which assumed higher retail sales in Dodge and Chrysler).4%) – roughly in line with the shares achieved in 2009. plan of 2.2% and 3.3% in 2011 -. 760. with most of the improvement coming from a resumption of fleet deliveries that were stymied in 2009 when Chrysler plants were shuttered. we see assumptions for Canada and Mexico as reasonable. exports (100.000 units).000 units) appears large. We think management’s estimates for Ram and Jeep market share are realistic but their expectations for Chrysler and Dodge brands are overly aggressive At the same time. 8 December 2009 87 .Barclays Capital | European Autos & Auto Parts Defensible share in core products Overall. we believe Fiat’s plans to greatly expand international sales – especially of Jeep – are eminently sensible given the strong Jeep brand image. we believe Chrysler will be continuing to impair brand equity. given their long history of market share losses.as fairly realistic. Similarly. We see Chrysler’s estimates for Ram and Jeep market share -. Our forecasts assume 10.2. Finally. especially around the iconic Jeep Wrangler. As a result.7mn units in 2010 and nearly 2mn units in 2011 (note we are using a higher SAAR assumption – 12mn in 2010 vs. The Ram pickup enjoys a loyal base. As a result. or 330. we see fleet share increasing from 1. Finally. car build in 2011 would be only 20% of the mix. product portfolio and export opportunities – which in our view would yield 2011 share of 10. defending and expanding the Jeep and Ram truck franchises. we view Chrysler’s goal of boosting share from 9% in 2009 to 12. although we somewhat haircut the shares to 2. Overall.3% market share for Chrysler in US in 2011 (vs.4% and 3.2%) and 3% for Dodge (vs.3%.

9% 0.3% 10.0% 0.5% 0.2% Dodge Dodge Dodge Dodge Car Minivan Other light truck Total 2.7% 3.9% 2.Barclays Capital | European Autos & Auto Parts Figure 149: Chrysler truck share likely to increase 180bp 09 vs 11E making car synergies with Fiat less obvious Chrysler US Share by Brand/Segment Brand Segment 2000 Market Share 2005 2008 2009 2011 estimates Chrysler BarCap Chrysler Chrysler Chrysler Chrysler Car Minivan Other light truck Total 1.3% 3.8% 1.9% 0.8% 0.3% 2.3% 1. even with a higher SAAR assumption we remain below management’s unit volume projections.8% 0. beyond 2011.4% 1.2% Nevertheless.8% 0.4% 0.7% 3.2% 1.6% 2.1% 12.3% 1.0% 4.1% 1.0% Jeep Plymouth Fiat GRAND TOTAL 2.6% 0.0% 0.0% 2.1% 406 1.6% 0.8% 1.7% 3.3% 0.5% 2.8% 3.6% 1.2% 4.5% 2.9% 2.9% 0.8% 0.5% 0.9% 0.2% 1.8% 1.4% 3.308 20.6% 11.7% 0.9% 579 1.1% 1.726 25.5% 0.2% 3.1% 1.8% 0.8% 1.0% 2.9% 187 594 24.845 26.9% 0.161 27.2% 0.6% 0.0% 0. Barclays Capital 678 1.3% 14.6% 1.5% 13.3% 0.8% 3.8% 1. 8 December 2009 88 .0% 3.0% 439 1.4% 330 1.8% Ram Ram Ram Large pickup Other pickup/comm'l van Total 2.3% Cars (000 units) Trucks (000 units) memo: % cars Source: Company data.7% 2.047 27.6% 2.0% 0.4% 1.6% 0.3% 2.0% 9.4% 1.1% 1.

494 300 20% 300 2.0 10.391 300 22% 300 1.120 2.991 1. 2013E 2014E 8 December 2009 89 .800 2.5 10.600 2.42x 949 10.3% 14.712 1.3% 15.348 1.094 1.8% 1.5x Figure 151: Chrysler unit sales at 1.600 14.) 2012E BarCap est.8% 1.065 2000 1500 1000 500 0 2008 2009E 2010E Feb 09 plan Source: Company data.345 12.3% 1.0% 1.0% 945 300 32% 100 1.958 10.348 2.5% 2.712 1.650 11.0 13.586 300 19% 500 2.085 1.0x 1.38x 1.175 2.386 949 949 2011E Nov 09 plan (est.00x 1.712 2.65mn in 2010 per Company’s Nov 09 plan Chrysler assumption per November 09 plan 2008 2009 2010 2011 2012 2013 2014 Chrysler Units US SAAR US Market share Production/US Sales Source: Company data 2.33x 1.348 1.5 10.386 Exports (000 units) Total Chrsyler N Am Sales Inventory build (destocking) Production units Memo: Production/US Sales Source: Company data.200 2.458 300 21% 200 1.200 12.6501.4 10.991 1. Barclays Capital estimates remain below management’s projections due to lower assumed market share 3000 2500 2.7mn units in 2010 based on Barclays Capital US SAAR estimates Chrysler Sales and Production by area (BC est.618 1.5 9.0 10.40x Figure 152: Despite higher SAAR assumption.4x 2.3% 16.5 10.4x -396 949 1.991 1.8% 1.1% 13.648 300 18% 400 2.Barclays Capital | European Autos & Auto Parts Figure 150: Chrysler deliveries to reach 1.386 1.5 13.400 2.227 2.065 1.4x 1. Barclays Capital 2.4x 2.065 13.0% 2.) 2008 2009 2010 2011 2012 2013 2014 US SAAR (mn units) Chrysler’s US Market share US Sales (000 units) Canada/Mexico sales (000 units) Memo: Canada/Mexico as % of US sales 13.800 14.5 10.400 13.775 1.6% 2.212 300 25% 200 1.37x 1. Barclays Capital 107 2.094 2.094 1.4x 2.8 13.6% 2.5 9.43x 1.7 12.0 10.

3 -2.3 4.2 -42.1 3.2 -2.0 -2.6% -5.7% Depreciation & Amortization (D&A) EBITDA EBITDA margin 2.5 -2.4 2014 57. we see only €0.3 -0.5 -2.5 0.4 -1.0 2.0 -6.42 in 2012.8 Memo -EPS per Fiat share (€) Value per Fiat share at 12x Source: Company data.4 8.84 at a 12x multiple.0 -1.3bn only somewhat below management projections of $4.5 -2.5 7.53 € 6. Net Income/(Loss) -2.6% -5.9 -1.4 -3.84 € 0.9 8.2 0.05 € 0.6 -3.2 1. Figure 153: Chrysler income statement . etc.8% -4.1 -0.8 8.3 Depreciation & Amortization (D&A) Interest.8 -3.0 7.0 -2.9 -1.0 -44.3 2.8% -5.0 1.3 -3.5 3. etc. taxes. we see 2011 EBITDA at US$4. but enough of a difference that we would envision no net income and hence no contribution to Fiat’s equity income.2 -13.5 -36.42 € 5.7 0.8 1.6 2009 16.2 3.2% -5.45 € 5.5 1.5 -57.5 3.0 2.1 0.0 7. Net Income/(Loss) -2.10 € 1.7 -8.1 -0. Even using management’s assumptions.5 -1.5 3.0 2.5 2011 52.0 3.3 10. or €5/share at 12x – we view this as ‘risky’ three years out (discounting back at 20% a year would lead to a value of €2.3 -4.1 2011 47.5 -37.2 0.1 -2.9 6.0 3.1% -6.5bn.6 -47.9 4.5 8.2 Fixed Cost Operating Profit Operating margin -10.9 0.5 -48.00 € 0.09 € 0.0% -5.8 -1.7 -53.17 Figure 154: Chrysler income statement per Nov 09 plan Year-end December (€mn) Net Revenue 2008 47.7 0.Barclays Capital | European Autos & Auto Parts Given these assumptions.5% -6.5 2012 50.11 € 0.8 4.0 -1.65 € 0.2 -13.8 -1.3% -5.6 3.5 Variable Cost Variable Profit -39.Barclays Capital estimates Year-end December (€mn) Net Revenue 2008 47.0 2.0 -2.0 -3.45 € 0.0 -48.0 3.1 0.2% -6.9 -2.8 2.5 Variable Cost Variable Profit -39.6 2.5 2014 67.5 6.9 -5.3 7.1 -5.6 2009 16.5 0.0 -1.6 -1.2 5.7 2. taxes.2 2013 56.12 € 1.5 -1.2 5.3 6.0 9.2 1.5 2012 57.0 -1. Even in 2013.3 8.2 2.3 2.4 8.5 Memo -EPS per Fiat share (€) Value per Fiat share at 12x Source: Company data.1 6.5 -2.4% Depreciation & Amortization (D&A) EBITDA EBITDA margin 2.0 2.5 2010 42.43 € 0.5 2010 44.16 € 0.5 2. Chrysler would contribute only €0.9 6. Barclays Capital -€ 0.5 3.1 -5.34 8 December 2009 90 .5 3.3 2.15 EPS per Fiat share – implying about €1.8 4.0 Depreciation & Amortization (D&A) Interest.0 5.8% -4.5 4.8 8.7 Fixed Cost Operating Profit Operating margin -10.7 -8.3 -4. Barclays Capital -€ 0.0 0.6 -1.3% -6.5 2013 62.7 4.1 -2.15 € 1.3 -2.2 -40.50.02 € 0.

8 December 2009 91 . believing that investors are underestimating the headwinds faced in 2010 while overvaluing short term the longer-term Chrysler option and contribution to Fiat core earnings. Second.150 16.725 0 -754 11. As PSA demonstrates. this does not appear to be the case currently.550 4 4 3 2 1 13 Average of: 25% EV/FGA Sales. an Asian partner adds access to faster growth markets. the need to address capacity issues in Italy and the slow pace of profit development at Chrysler (as ‘new’ models will not arrive until 2012).500 2. Fiat Group has traded at a discount to the “pure plays” of each of its components (volume car makers. cost sharing across traditional vehicle platforms. (For press reports. by Giancarlo Perini. see Marchionne to Turn Attention to Fiat. While there had been press speculation around a PSA tie up (perhaps put to rest with PSA’s approach to Mitsubishi). in our view). Peugeot Mulls Letting it Ride on Mitsubishi.600 1.com. realistic upside potential from a spin-off of FGA from other industrial operations for three reasons: First. without Opel.Barclays Capital | European Autos & Auto Parts Spin-off could unlock significant value but not likely until capacity rationalized and/or new alliance partner added At this point. premium car. 5x 11E EBIT Average of 60% EV/sales. Fiat is still well short of its 5mn unit ‘global player’ scale goal. 8x EV/EBIT 11E EBIT 25% EV/sales 2013 value at 12X P/E discounted to 2011 Industrial Net Cash/Debt (2010E) Pension/other Minorities Total EV Source: Company data. given the depressed earnings and multiples across the truck and agricultural equipment sectors. WardsAuto.700 4. 19 Nov 2009. we do not see significant. Current CNH market cap Average of: 60% EV/sales. as well as the need for geographic diversification. not a significant premium to our €8 target. given also the difficulty in addressing European capacity. Our sum-of-the-parts calculation.600 3.071 ( 4) 0 ( 1) 9 FY10E Net Industrial Cash Rating We are initiating coverage with a 3-Underweight rating. Fiat may follow the lead of PSA-Mitsubishi and begin the task of looking for alliance partners in Asia. 8X EV/EBIT. 3 Dec 2009) Figure 155: Fiat SotP (ex Chrysler) at peer multiples implies share is overvalued at current share price Unit EUR (m) € per share Remarks Fiat Group Auto CNH Iveco Components Chrysler SotP EV Operating Business 4. using current multiples of peer companies is €9 per share. while historically. with the likely pressures in FGA Europe (leading to a sequential decline in trading profit. Wall Street Journal. Third. Fiat is unlikely to generate sufficient progress in automotive to generate investor enthusiasm around a spin-out of FGA. and pooling of scarce R&DS around electric vehicles. we believe that. Barclays Capital -4. truck and agricultural equipment).

0x 2011 EBITDA. However. Historically. EV/sales Fiat has historically traded at a six-year historical average of 28% EV/sales. 3x for the European sector as a whole). from which we derive a €8 price target.324 0. highlighting our belief that the share is significantly overvalued at present. exactly in line with its historical average. Looking out to 2011E our below consensus EBITDA estimates put Fiat at 4. and our target is based on 4. The OEM sector average range is 27%.38 -2. But at current market price is trading at 35% 2010E EV/sales on our estimates.Barclays Capital | European Autos & Auto Parts Valuation methodology We value the Fiat share based EV/sales and EV/EBITDA metrics against Fiat’s historical trading range.3x EV/EBITDA (vs. Barclays Capital 6-yr historical avg EV/EBITDA Our EV/EBITDA looks at adjusted industrial EV (backing out financial services) over industrial EBITDA. Fiat would trade at 28% EV/sales. 8 December 2009 92 . with a reference to the SotP methodology (see Figure 155 above) based on peer multiples for the various divisions to confirm our valuation. Barclays Capital Figure 157: Fiat current share price looks overvalued in near-term based on historical avg EV/sales metrics 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Adjusted EV/Sales Source: Company data. Figure 156: Below consensus estimates Fiat 2010E Barclays Consensus Variance (%) Revenue (€mn) EPS (€) 48. given the 2010 headwinds we believe this discount is justified.036 0.1x at current share price. Fiat has traded at a 6-year average of 4.7% -660 Source: FactSet consensus.05 49. At our €8 price target.

0x 8.Barclays Capital | European Autos & Auto Parts Figure 158: Fiat historical and forecast PE and current share price 14.0x 2. Barclays Capital 6 year historical avg An average of both these valuation metrics leads us to set a €8 price target for the share.0x 12.0x 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Adjusted EV/EBITDA Source: Company data.0x 4.0x 0.0x 6. 8 December 2009 93 .0x 10.

com Barclays Capital. Figure 161: Max profits reached when Fiat trades back to September levels 14 22-Jan-10 27-Mar-10 23-Apr-10 22-Jul-10 17-Sep-10 Q4 09 results AGM Q1 10 results Q2 10 results Sep10 expiry Source: Barclays Capital Figure 160: Peer group 12 Blg 9m IV 3m RV Fiat rose 18% in three days after forecasting Chrysler operating profit within two years First put strike RNO FP PAH3 GR VOW GR F IM DAI GR BMW GR 46% 45% 44% 40% 37% 37% 44% 40% 44% 44% 38% 36% 10 8 6 4 2 Second put strike (peak profits will occur here) Aug-09 Source: Barclays Capital Source: Barclays Capital Colin Bennett +44 (0)20 777 38332 colin. especially given the difficulty of repositioning Chrysler’s current incentive driven line-up.com Barclays Capital.gupta@barcap. London Arnaud Joubert +44 (0)20 777 48344 arnaud. we are more conservative than management’s optimistic market share and earnings projections.50/share by 2012. London Fiat particularly exposed to end of cash for clunkers Fiat’s offering is heavily reliant on cheaper cars. In October 2009. However. As Chrysler was attributed little if any value before this date.2%).bennett@barcap. The future downside due to the higher Italian cost base would cap any upside should cash for clunkers be extended (in our view.45%) We believe that Chrysler’s turnaround plan is viable.75 (7. and as this €2 rise is above our estimated Chrysler total value of €1. 8 December 2009 May-09 Nov-08 Nov-09 Feb-09 94 . Fiat is therefore likely to be hit harder than other auto firms as volumes fall.com Barclays Capital. ref €10. London Anshul Gupta +44 (0)20 313 48112 anshul. the government is likely to insist Fiat moves production from other cheaper countries towards Italy.deb@barcap. Fiat soared €2 leading up to the forecast that Chrysler would make a profit inside two years.42-46%. 3m RV c.45.Barclays Capital | European Autos & Auto Parts Figure 159: Potential catalysts Date Event Fiat Sep-10 €10(96%)-€8(77%) put spread Pay: €0. which caused results to be substantially flattered by various cash for clunkers schemes. even if extended the scheme is unlikely to be impactful). London Abhinandan Deb +44 (0)20 777 32481 abhinandan. Should Italy extend its cash for clunkers scheme. delta 18% (IV c. current valuations have significant downside potential.com Barclays Capital. price competition increases and government support schemes expire.joubert@barcap. which is due to expire at the end of December 2009.

Nevertheless they note that credit metrics remain below requirements and while they expect material improvement through next year.Barclays Capital | European Autos & Auto Parts Credit Perspective Barclays Capital credit analysts. in their view. They believe Fiat has significantly improved its liquidity position in recent months following the issuance of 3 benchmark bonds and this will have gone some way to stabilise Fiat's current high BB rating. 8 December 2009 95 . rate Fiat’s debt Overweight. Rob Perry and Darren Hook. credit ratios are likely to remain at levels more consistent with a mid BB rating.

8x 12.3x 12.3x 6.5x 12.8% 43% 2.7x 12.2x 8.0% 40% 4.4x 10.3% 24% 1.7% 26% 1.4x 1. Barclays Capital Risks to price target Upside risks to our price target are as follows: External risk – macroeconomic factors outside the control of the company.9x 0.0% 20% 2.0% 36% 4.9x 22.6x 84.2x 205.9x 8.5% 25% 3.9x 1.0% 27% 1.9x 158.0% 31% 3.1x 7.4% 24% 1.2x 0.2x 1.4x 1.5% 0% 0.2x 0.0x 9.Barclays Capital | European Autos & Auto Parts Figure 162: Fiat key valuation metrics 2006 Valuation multiples at current price 2007 2008 2009E 2010E 2011E 2012E Industrial EV/sales Industrial EV/EBITDA Industrial EV/Clean EBIT P/E FCF Yield Price/sales Price/book Dividend yield Valuation multiples at €8 price target 28% 3.8x 15.6% EV/sales EV/clean EBITDA EV/clean EBIT P/E FCF yield Price/sales Price/book Dividend yield Source: Company data.0x 2. leading to a stronger demand and pricing environment than we currently assume.8x 8. Risks to our commonality assumptions if there were to be a more rapid turnaround at Chrysler than we currently forecast More rapid rebound in truck and/or agricultural equipment than we assume in our forecasts could provide further upside to the share 8 December 2009 96 .2% 1% 0.3x 18.6x 0.4% 40% 4.9x 109.8% 43% 2.2x 2.1x 0.3x 5.0x 12.0% 27% 1.4x 3.9x 2.2x 2.0x 8.2% 27% 3.8x -33.1x 0.4x 8.4% 28% 3.7x 10.8x -33.6x 9.6% 33% 4.1% 30% 3.1% 35% 5.0% 31% 3.0x 39.9x 0.5x 12.4% 27% 1.1x 27.2% 27% 1.9x 8.6x 0.3x 5. could make our forecasts difficult to achieve.7% 0% 0.2x 2.6x 7.2% 0% 0.3x 7.1x 7.3x 8.7x 21.4% 24% 1.5% 28% 4.3x 29.8x 8.

00 49.525 (45.178) 5.629) 7.388 8.571 (86) 1.8% 5.53 € 0.240 € 1.5% 6.187 (466) -21% 1.271 € 1.944 15.152 190 (105) (166) 3.05 € 0.087 8.586 8.adjusted Dividend Source: Company data.85 € 1.902 1.42 € 0.529 (50.233 190 (105) (166) 3.401 2.391 (17) 1.317 10.888) 7.70 € 0.6% 1.1% 1.12 53.985 (41.575 (42.9% 1.00 46.124 8.701) 6.7% 105 1.7% 42 676 0 0 0 676 (740) 16 (48) 127 265% 79 (17) 62 62 1.172 (675) 241 1.133 (40.5% 1.11 € 1.600 2.060 2 (165) (111) 786 (699) 0 7 95 (28) -30% 66 (27) 39 219 1.152 (719) -23% 2.362 20 (165) (245) 2.50 € 0.6% 1.321 -2.172 0 0 0 2.7% 4.29 € 1.1% 4.332 1.237 € 0.9% 4.374 1.374 1.697 9.165 -2.04 47.17 € 0.03 € 0.423) 9.241 0 0 0 1.560 13.832 (43.23 8 December 2009 97 .4% (29) 1.380 (49.9% 1.16 58.5% (23) 3.237 € 0.738 (347) 20% 1.951 607 (450) (47) 2.237 € 1.237 € 0.7% (104) 1.061 (490) -24% 1.301 -2.957 16.612 1.9% 4.721 (109) 1. Barclays Capital 51.7% 50 3.426) 6.889 1.241 (700) 19 561 (31) 5% 530 (17) 513 513 1.061 607 (450) (47) 2.3% 4.8% 1.18 € 0.Barclays Capital | European Autos & Auto Parts Figure 163: Fiat Group income statement.485 887 1.433 (101) 2.11 € 0. 2006A-2012E Year-end December (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Net Revenues Cost of Sales Gross Profit Memo: Gross Margin (% of sales) SG&A Memo: SG&A (% of sales) Research & Development Memo: R&D (% of sales) Other income/(expense) Trading profit/(loss) Investment Income/(Expense) Restructuring Costs (gains) Other unusual income/(expense) EBIT Financial Income (expense) Other Financial Income/expense Result from Investments Pre-Tax Income Income tax Memo: Tax rate Net before Minority Interest Minority Interest Profit/loss for the period Adjusted Group Net . ex special items No Shares (average) EPS EPS .972 (947) 162 2.42 € 0.4% (29) 2.05 € 0.900 13.497 2.438) 8.233 -2.075 8.40 59.955 12.874 13.087 15.262 € 1.

107 6.447 (91) 10.723 10.150 8.102 Fiat Group Automotive Maserati Ferrari Agri and Const Equipment (CNH) Trucks and Comm. Vehicles (Iveco) 23.906 420 1.122 838 414 9 239 392 47 15 239 423 110 276 20 307 469 306 734 25 342 549 462 30 4 48 (1) (22) (24) FPT Powertrain Technologies Components (Magneti Marelli) Metallurgical Products (Teksid) Prod Systems (Comau) Other business and eliminations Trading profit Source: Company data. Barclays Capital 168 190 56 (66) 271 214 47 (23) 166 174 41 21 (75) (23) (9) (34) (15) 676 (61) (10) (7) (31) (27) 1.392 (6.388 2006 2007 2008 2009E 2010E 2011E 2012E Fiat Group Automotive Maserati Ferrari Eliminations Agri and Const Equipment (CNH) Trucks and Comm.784 662 300 603 1.921 (303) 12.719 (136) 10.405 3. 2006A-2012E Year-end December (€mn) Segment revenue Automobiles 25.947) 50.145 4.046 24.530 Components/Prod Systems (FPT MM Teksid Comau): FPT Powertrain Technologies Components (Magneti Marelli) Metallurgical Products (Teksid) Prod Systems (Comau) Component eliminations Other business 6.762 4.946 (141) 10.811 437 1.666 568 736 (432) 1.Barclays Capital | European Autos & Auto Parts Figure 164: Fiat group divisional revenue & trading profit.072 3.089 8 December 2009 98 .808 22.506) 53.075 5.812 694 1.515 455 1.310 6.721 (152) 10.497 26.837 573 763 (447) 1.581 (6.114 Eliminations Group Revenues Segment trading profit Automobiles 441 1.071 4.447 837 1.967 25.093 1.064 (160) 11.665 4.160 67.683 28.092 5.174 29.850 473 2.383 4.455 979 1.190 66. Vehicles (Iveco) Components/Prod Systems (FTP MM Teksid Comau) 291 (33) 183 737 546 803 24 266 990 813 691 72 339 1.102 58.192 4.089 7.668 29.000 5.702 519 1.459) 46.050 4.192 510 661 (388) 1.000 783 1.227 (6.720) 48.619 7.843 11.136 26.279 521 675 (396) 1.123 5.196 26.241 32 73 19 (18) (48) 2.668 (159) 11.244 (7.172 2.937 825 1.768 25.527 9.863 23.464 1.280 7.916 29.

522 1.052 224 11.4 104.750 4.713 1.259 5.789 6.203 2.007 5.637 11.676 39.945 1.912 1.101 754 10.537 3.910 Debt: Other financial liabilities Trade payables Other liabilities Deferred tax liabilities Industrial Total Liabilities Total equity and liabilities Balance sheet measures: Inventory days Receivable days Payable days Capex percent of sales Source: Company data.600 4.713 1.036 673 10.929 4.443 761 26 134 748 11.746 3.482 30 54.637 5.311 4.302 38 164 672 9.103 7.509 3.150 7.531 3.604 28.7% 69.311 4.910 Cash and cash equivalents Current assets 7.5% 98.403 3.945 1.4 30.078 13.2 103.990 1.788 10.482 3.132 20 60.646 2.115 3.444 4.434 59.0 5.796 55.501 49.614 3.064 1.756 2.301 7.619 18.772 20 53.Barclays Capital | European Autos & Auto Parts Figure 165: Fiat industrial balance sheet.581 4.758 536 14.301 6.1 120.5 27.0 30.159 686 48.302 38 164 672 10.448 2.758 536 8.121 30.239 4.052 445 43.706 153 14.032 0 0 12.312 754 10.508 25.486 6.302 38 164 672 8.420 2.024 2.3 36.068 2.0 5.2 6.806 226 9.508 25.279 751 10.118 11.341 4.491 5.159 686 41.0 103.4 5.351 4.203 52.619 18.713 1.251 3.798 2.623 20 59.269 3.4% 79.032 0 0 12.745 20 55.311 4.3 6.250 3.558 11.721 22.635 3.0 100.0 30.325 2.365 6.4% 80.756 3.719 6.737 23.302 54.234 41.391 28.638 14.032 0 0 12.528 3.0 103.0 95.250 10.366 5.806 Assets held for sale Total assets 332 49.758 536 7.872 754 12.523 33.569 10.606 11. 2006A-2012 As at end-December (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Intangible assets Goodwill Other intangible fixed assets PPE Investment and other financial assets Deferred tax assets Total Non-current assets 6.945 1.032 0 0 12.350 11.311 4.159 686 42.362 10.606 3.357 1. Barclays Capital 69.508 25.950 2.458 7.619 18.785 11.0 5.360 6.237 26.548 27.301 3.858 53.259 5.0% 85.498 2.746 7.146 Inventories Trade receivables Receivables from financing activities Other receivables Accrued income and prepaid expenses Current financial assets: Current equity investments Current securities Other financial assets 8.307 35.0 30.508 26.758 536 14.713 1.302 38 164 672 7.751 5.696 5.727 6.429 60.364 2.094 3.753 6.361 13.216 6.721 11.537 83 52.555 98 12.891 2.619 18.945 1.5 8.567 7.403 Minority interests Equity Industrial stockholders' equity Provisions: Employee benefits Other provisions 674 9.159 686 48.295 5.4% 75.4% 8 December 2009 99 .391 754 11.350 12.225 25.6 35.

548 8.070 4.422) (2.944) 31 4.995 0 0 (49) (49) (148) (148) (102) 1.523 8.322 (3.756 1.604) 156 (317) 2.995 2.980) (152) 204 10 24 -1194 (2.675 5.180 7237 7.163) (82) (2.773 Investments in PPE Equity investments and unconsolidated.639 (921) 180 255 12 679 3.194 11 (1.045 79 2.767 300 0 301 3.237 6391 6. interest D&A (net of vehicles sold under buy-back commitments) (Gains)/losses and other non monetary items Dividends received Change in provisions and other Change in deferred income tax Change in working capital Industrial Cash flows from operating activities Industrial Cash Flow from Investments: 1.100) (3.088) (2.307 10.805) (6.523 7.854) (1.805 (119) 115 (149) (532) (3.391 2.744 (138) 186 (165) (289) 1.307 9.121 (1.633) 1.056 3.691 133 0 (30) 3. subs Proceeds from the sales of non current assets Net change in receivables from financing activities Change in current securities Other changes Industrial cash flows from investment activities Industrial Cash Flow from Financing: (2.257) (425) (390) (310) (1.447 530 2.548 9.109 7.256) 22 (23) (2.325 1.889) (46) 71 46 (32) 698 (2.Barclays Capital | European Autos & Auto Parts Figure 166: Fiat industrial cash flow.125) 3.773) 355 (5.450) (4.666) (136) 680 41 (2.015 12 0 (32) 3. 2006-2012E Year-end December (€mn) Industrial Cash Flow from Operations: 2006 2007 2008 2009E 2010E 2011E 2012E Industrial Net result before minority.446) 8 December 2009 100 .667 (704) 203 (13) (126) 1. Barclays Capital 6.721 2.949) (5.391 2.724) (4.840 14 -238 (546) 3.810) (442) (5.810) Net change in financial payables and other financial assets/liabilities Increase in capital stock (Purchase)/Disposal of treasury stock Dividends paid Cash flows from investing activities Translation exchange differences Industrial change in cash and cash equivalents (2.422) (2.517) (2.517) (2.574 149 2.653 161 0 (432) 3.919 1.152) (2.025 759 815 Cash and cash equivalents at beginning of period Cash and cash equivalent at end of period Net industrial cash (debt) Source: Company data.725) (4.604 7.151 2.054 2.

using a combination of a SotP methodology and peer EV/EBITDA multiples. we are concerned that too much of the current strategy relies on top-line growth. following the EMCON announcement. we think once excitement of this potential deal fades. has also brought the possibility of a disposal of Peugeot’s current 70. an income advantage and strong takeover and dividend protection features we recommend Peugeot’s 2016 convertible (for further detail please see convertible section). Another key bull argument for the stock has revolved around press speculation of future M&A activity. whilst we can in theory see the rationale for a potential tie-up with Fiat (as per numerous press articles for over 12 months). Whilst we can see the long-term strategic rationale behind Peugeot’s announcement last week of a closer partnership with Mitsubishi. which not only has far greater scale but also has the benefit of a whole decade of experience in running an alliance. energised management team. Whilst we struggle to underweight a stock with so many opportunities for improvement in the next 12 months and where there is potential for upside surprise from a balance sheet perspective were a buyer to be found for Faurecia. we think that a Mitsubishi tie-up would make its less likely for PSA to look at a European partner anytime soon. particularly at the Citroen brand. we remain more cautious than the market on the demand side of the equation. BUT UNDERWHELMED BY “NEW” STRATEGY – 2-EQUAL WEIGHT RATING PEUP. the right mix of fuel efficient vehicles and the new. we derive a €26 price target.18 Potential Upside 8% We are initiating coverage of Peugeot with a 2-Equal Weight rating and €26 price target because despite the company’s strong product cadence. We also believe that too much credit has already been given for the achievement of CEO Philippe Varin’s new strategy. Moreover. We agree that there is significant potential for turnaround at loss-making Faurecia.8% stake (to be diluted to 57% following the EMCON deal and to 51% on exercise of the OCEANE convertible bond) back to the forefront. but we believe that this is already a wellunderstood theme. Additionally. we believe that in reality political agendas would make it near impossible to reap significant synergies from such a deal. at the same time we are concerned that market estimates for Peugeot’s ability to retain cost cuts in 2010E are overly optimistic and we think that the share is already crediting M&A upside potential.00 Price (04-Dec-2009) €24. senior status. Likewise. but with the defensive characteristics of downside protection. Renault is also at least six months further ahead in its strategy of taking the alliance to a new level and eking out further commonality/modular synergies. We are therefore initiating coverage with a 2-Equal Weight rating and. the share will likely be pressured by concerns over dilution or an increase in gearing.PA / UG FP Stock Rating 2-EQUAL WEIGHT Sector View 2-NEUTRAL Price Target €26. For equity investors who are looking for exposure (delta) to the underlying equity. will be well received by the market. Recent acquisition activity at Faurecia. particularly amongst the French investment community. we believe that until investors are given better visibility regarding the likely financing for Peugeot’s proposed tie-up with Mitsubishi.Barclays Capital | European Autos & Auto Parts PEUGEOT – STRONG MODEL CYCLE. Whilst we believe that product renewal during this period. investors will be better in the mid-term to play the global-scale/alliance angle through Renault-Nissan. 8 December 2009 101 .

Barclays Capital | European Autos & Auto Parts Figure 167: PSA – headline data and valuation multiples (at current share price).9x) 51. The plan revolves around a targeted €3. Indeed.0x 7.0 2.5x) 47. responsible for strategy and performance objectives.356 550 1.044 3. differs very little from CAP 2010 and is likely to disappoint on a net basis Pay back from scrappage incentives likely to be higher than market anticipates Lack of geographical scope means top-line targets are much harder to achieve Lack of near-term operating earnings keeps attention on debt and makes investment grade credit rating tough to achieve Strategy presentation disappoints High hopes were entertained in the market following the appointment of ex-Corus CEO Philippe Varin.8x (3.8 4.51) 13 1.03) 10 1. Therefore there was a great deal of expectation surrounding November’s Investor Day when Varin first presented to analysts his new strategy objectives for Peugeot.3x Source: Company data.33) 13 2.28) (5. who arrived with a prior record of turning around the ex-British Steel company. via deep cost cutting and a solid refinancing plan.6x 4.523 3. 2008-11E (€mn) 2008A 2009E 2010E 2011E 2012E Sales EBIT EBIT margin (%) BC EPS € Consensus EPS € Industrial EV/sales (%) Industrial EV/EBITDA P/E ratio (%) 54.313 (681) -1.135 1.88 6 0.90) (0. at least in the near term. via a linear progression of savings in three key areas: 8 December 2009 102 .9x (18.88 4. which could further capitalise upon via a strategic alliance with Mitsubishi Reinvigorated (new) management focusing on long-term strategy Widest range of fuel efficient vehicles in the sector Faurecia turnaround could drive disposal opportunities (although we believe that this is well anticipated. Barclays Capital *FactSet consensus data Key share price drivers: Positives: Success in product cadence helps drive sector-leading capacity utilisation.1x (10.87 3.115 2.3bn improvement in Automobile EBIT 2010-12.4 (6.4 (1.903 193 0.29 8 1.0 (1. one of his first actions on taking the helm at Peugeot in June 2009 was to streamline the existing management team into just eight members.3x) 47. at least by French analysts) Risks: Too much expectation placed on new strategy which.2x 53.

Barclays Capital Strategy overly dependent on top-line growth We believe that management is targeting 140bp of market share gain by 2012E. Whilst not a wholly unrealistic strategy. We were rather disappointed that so little new was offered to investors at Peugeot’s investor day 12 November 2009. all of whom are targeting market share gain. development. we are concerned that the market is giving too much credit to likely achievement of Peugeot’s topline strategy.100 1. We credit only 40bp of additional share and just €670m of the targeted €1.3 Increased from 81% to 105% hrs/vehicle -20% -€400m Source: Company data. capacity utilisation and quality.Barclays Capital | European Autos & Auto Parts 1. increased capacity utilisation via improvements in commonality and geographical expansion.1bn per annum gross EBIT savings Lever % €mn/annum €bn 2010-12 Drivers/targets Sales & Marketing 30 330 1.4 3.based both on growth in the business-to-business segment and new model launches.5 China Lat Am.8 0. perhaps unsurprisingly given current market conditions. productivity and SG&A Figure 168: Peugeot targets €1. the remaining bulk (55%) of savings are to be cost-driven . we struggle to find much to differentiate it from any of its peers in the sector. 8 December 2009 103 .based on improvements in capacity utilisation. Russia and Latin America 3.8 0. Russia 55 25 18 12 100 600 270 200 130 1. 15% improvement is expected in high-growth or emerging markets – China (nonconsolidated). Management did not give their internal targets for market share growth. The “new” 2010-12 strategy seemed rather a revamp of predecessor Streiff’s CAP 2012 strategy. we are concerned that too much of the current strategy relies on top-line growth. will be well received by the market.0 Market share momentum Brand management Services High-growth markets Production. The plan. does not lay out any specific margin targets. nor did they share with investors their assumptions for global demand over the targeted period. SG&A Of which: Capacity utilisation Productivity SG&A Total 15 165 0. productivity. particularly at Citroen brand. Since we believe our own assumptions for 2010 auto demand in Europe to be significantly below consensus.5bn savings (from sales & marketing and high growth countries). 30% of savings are to come from sales and marketing: driven by market share momentum in Europe . improved brand management and expansion of service offerings 2.6 0. Whilst we believe that product renewal during this period. which likewise targeted product strategy.

6% 12.1 22. or 55% behind the company’s €1.1 37.one of PSA’s most profitable markets and the segment in which it has the top spot with market share peaking at 27% in 2009 recovering from its low of 2009.6 1. We expect this growth to provide an extra 45.6 7. with Peugeot’s core A & B segments likely down 200bp in share.6 83.1 8.0 39.252 -12. we do believe PSA’s product launch offensive in the next three years will set it apart from its closest peers (see detail below on product cadence).6 6.0 36.53 11.D Total Europe (units mn) 15. whereas based on our detailed scrappage model (see front section of report for further detail) we forecast European (EU 27 +EFTA 3) sales down -12.€230mn. Where we also have concerns about the success of the plan is the lack of detail regarding market demand assumptions over the three-year period. is currently at least 350bp too high (ranging from 8-10% fall in sales) for European demand in 2010E.Barclays Capital | European Autos & Auto Parts Though all European OEMs target market share gain.Lower Medium D .7 39.4 13.4 1.000 vehicles) cumulatively from year-end 2009 to 2012E.740 -7.Upper Medium Memo: C + D Memo: A .0 25.4 40.1 31.7 38.1 81. We are concerned that PSA’s demand assumptions may also be over optimistic. of course not all of them can be successful in achieving it.4 29.1 31.819 YoY chg in sales Source: Barclays Capital +3.000 units.35 9.300 +8.3 31.8 6.9 14. Figure 169: A to D volume market segment share 2006-12E Segment (%) 2006 2007 2008 2009 2010 2011 2012 A .000/vehicle.38 10.5 32.9% 10.1 12.4 42.3 21. However.8 31.1 46.000 -5.4 15.0 1.3 78. Consensus. We expect the LCV market to grow 130bp from 2009’s level when the segment accounted for just 9. our estimated positive total volume impact on EBIT for the company in the next three years is only €670mn.0 32.4 31.5% 11.8 21.4 14. we expect some renormalisation of mix.4 9.6% 13.4 14.5% C .2 27.Basic B .5 24.6 41.9 8. We therefore base our current forecasts on 40bp of market share gain by 2012 (despite 2010’s scrappage pull back).73 10.60 10.0 8 December 2009 104 .82 10.0 31.5 29.8 32.5 79.3 82. using an overall contribution margin of €3.5 1.2 38.71 11.5 40.0 79.4 8.5bn plan.7% By contrast.0% 11.000 vehicles for PSA based on our 2012 market assumption. Barclays Capital 1.5 26. boosting Peugeot’s margin performance by c.0 6.960 +0.8 44. or 700.Small Memo: A + B 8.2% of sales in the overall W EU market. we see the European LCV market .8 44.2 29. Figure 170: LCV segment market share 2006-12E LCV Segment 2006 2007 2008 2009 2010 2011 2012 LCV units sales (mn) Van share of EU market (%) PSA share of Van market (%) Source: JD Powers. However.1 1.5% in 2010E. We expect the European market to grow by only 5% (or 700.8 29.9 38. whereas we believe management may be targeting a much more aggressive 140bp increase.700 +10. Going forward.3 1.1 82.7 33. we believe.

Barclays Capital | European Autos & Auto Parts

Realistic targets for productivity and SG&A savings
Like many of its competitors, PSA targets a reduction in vehicle diversity (or stage 2 ‘commonality’ on the road to a full modular production process). This, along with optimisation of plant occupation and the rollout of the PSA excellence system across the group it believes will improve its production hours per vehicle by 20%. Likewise, commonality in repeat components and streamlining of suppliers it believes will increase development productivity by 20%. When combined with €400m of SG&A savings over the next three years, management expect a margin delta of €1.1bn. In this area we give the company full credit for the achievement of its targets. Figure 171: We credit PSA with €2.2bn cost savings by 2012E
Lever Barclays Capital estimates (€mn) 2010E 2011E 2012E 2010-12E 320 350 410 600 400 2,080 (390) 1,690 PSA plan 2010-12E 990 495 800 615 400 3,300 Variance (%)

Sales & Marketing High-growth markets Capacity utilisation Productivity SG&A
Total savings Other tailwinds/ (headwinds)* Total EBIT change YoY Automobile EBIT

(330) 200 240 150 200
460 (40) 420 (375)

500 40 (90) 200 150
800 150 950 575

150 110 260 250 50
820 (500) 320 895

-68 -29 -49 -2 0 -37

Source: Company data, Barclays Capital *incl FX, raw materials, price/mix and warranty

Lack of geographical scale remains a concern despite strengthening Mitsubishi co-operation
With only 21% of unit sales in non-European countries and a much lower percentage of revenues, PSA’s targeted €0.5bn savings from high-growth countries seems overly optimistic
China 6% Mercosur 9% Russia 2% C&E Europe (exRussia) 7% ROW 6% France 26%

We had expected more detail at the strategy presentation on how the company plans to gain market share in its key growth regions – China, Russia and Latin America – given that this is an area of historical weakness for the group, both in terms of volumes and profitability. Figure 172: 79% sales in Europe leaves Peugeot under-exposed to highest growth markets

Rest of WE 44%
Source: Company data

8 December 2009

105

Barclays Capital | European Autos & Auto Parts

Management did not lay out any plans to expand into new high growth markets, preferring instead to focus on how to improve those regions (China, Russia and Brazil) already covered. And yet PSA currently lags far behind its European peers (notably its key French competitor, RNO) in terms of geographical breadth, and even in those high growth markets that it does service, the company’s market share remains far below that of its volume competitors. Figure 173: PSA lags European peers in BRIC market exposure, even with Mitsubishi
Share Group Brazil China India Russia Total BRIC Brazil China Rank India Russia

Porsche-VW Group Renault-Nissan Group Fiat Group
PSA/Mitsubishi PSA Mitsubishi

20.6% 5.8% 24.9%
0.0% 6.1% 1.5%

11.0% 3.8% 0.5%
0.0% 2.3% 1.1%

1.4% 2.0% 0.4%
0.0% 0.0% 0.2%

4.5% 28.9% 2.6%
0.0% 2.8% 4.4%

10.6% 8.0% 5.1%
0.0%

2 6 1
5

2 12 24
13

10 9 12
14

8 1 10
5

2.8% 1.6% 0.5% 0.4%

5
10

15
20

13

10
8

BMW Group Daimler Group
Source: JD Powers, Barclays Capital

0.1% 0.4%

0.6% 0.4%

0.1% 0.2%

0.7% 0.6%

14 11

23 25

16 15

16 21

A strategic alliance with Mitsubishi Motors, as Peugeot announced on 3 December is currently being discussed would give Peugeot better geographical spread, since 55% of Mitsubishi’s sales are in Asia, along with a very small presence in North America (though only a 0.5% market share). However, Mitsubishi adds relatively little in BRIC countries, only significantly improving pro forma share in Russia (pro forma 5th rank vs. 10th and 8th for each company) and with Mitsubishi having only a 1.4% share of the overall global car market, or 1mn units per annum, this would not put the alliance any where near on the scale of the Nissan-Renault partnership. Indeed, Mitsubishi does not have more than 5% market share in any countries other than the Philippines and Taiwan where it has 13% and 15% respectively. Figure 174: Mitsubishi’s sales would provide only marginally greater geographical breadth for PSA

Western Europe 11% South America 7% North America 12%

Asia 55%

Eastern Europe 15%

Source: CSM, Barclays Capital

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Peugeot standalone should grow by 140,000 vehicles in high growth countries by 2012E
On the back of planned new models, we do credit 17% sales growth for Peugeot in its ‘rest of world’ (ie, non-European) markets by 2012E, but this only equates to an extra 140,000 vehicles. We expect PSA’s four new model launches and new powertrain plant in Latin America to aid fixed cost absorption in the region and with the Kaluga plant coming online from 1Q10, losses in Russia should start to reduce. However, we still expect the incremental contribution to be significantly lower in these regions than in Europe, and thus forecast only 52% (€350mn) of the €670m EBIT volume effect over the next three years to come from high-growth regions, as opposed to management’s €500m target. Figure 175: Our PSA estimates incorporate 40bp of European market share growth which equates to a cumulative €670mn additional EBIT 2010-12E
Unit sales data: 2008 2009E 2010E 2011E 2012E

Unit sales W Europe (000s) Unit sales Rest of Europe (000s) Unit sales ROW - ex-China (000s)
Group consolidated unit sales (ex-China) Memo: Unit sales growth W Europe (%) Memo: Unit sales growth Rest of Europe (%) Memo: Unit sales growth ROW (%) Memo: Total Unit sales growth (yoy)

2,079 204 798
3,081

1,871 163 774
2,809

1,778 168 821
2,766

1,902 175 870
2,947

1,940 181 913
3,034

-10.5 -6.2 17.6
-4.3

-10.0 -20.0 -3.0
-8.8

-5.0 3.0 6.0
-1.5

7.0 4.0 6.0
6.5

2.0 3.5 5.0
3.0

Estimated incremental contribution per unit (€) Volume EBIT Delta (€mn) Of which Europe Of which ROW
Source: Company data, Barclays Capital

3,000 (1,707) (860) (850)

3,000 (820) (730) (90)

3,000 (130) (330) 200

3,000 540 500 40

3,000 260 150 110

Capacity utilisation to aid recovery
We target €410mn of savings as a result of capacity utilisation (at 94% utilisation rates) – some way behind management targets of €800mn EBIT delta (at 105% utilisation)

We do credit PSA with superior capacity utilisation, following recent action at Aulnay and Rennes which reduced French capacity by 250k units in 2008-09. We expect the group to reach close to 95% utilisation rates by 2012E (a significant improvement from 2008’s 72% level and 78% in 2009E). However, based on our own sub-consensus view of the European market going forward, we struggle to credit management’s own more aggressive targets of 105% capacity utilisation by 2012E.

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Figure 176: New models to drive above average EU capacity utilisation rates from 2010E
95% 90% 85% 80% 75% 70% 65% 60% 55% 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

PSA capacity utilisation %
Source: CSM, Barclays Capital

With management guiding to 30bp improvement in EBIT for every 1pp improvement in utilisation, a 94% utilisation rate would imply an EBIT delta of €510mn by 2012E (whereas the company targets a more optimistic utilisation rate of 105% or €800mn EBIT delta). However, we are slightly more conservative than management on their ability to retain the full €30m per percentage point on a gross level and therefore forecast just €410mn of capacity savings over the next three years. Figure 177: We credit PSA with only €400mn of its targeted €800mn of savings from increased capacity utilisation rates
BC estimates Lever PSA Targets BC estimates PSA Targets Variance %

2012E utilisation (%)

10-12E EBIT delta (€mn) 410 800

Capacity utilisation
Source: Company data, Barclays Capital

94%

105%

-49

Lack of scale mitigates capacity strength
Whilst PSA’s superior capacity utilisation will aid marginal contribution per vehicle, the company’s lack of scale on its key platforms is a notable negative. When compared with its closest peer Renault (which has the benefit of cross-platform sharing with its alliance partner Nissan), PSA’s scale credentials are distinctly lacking. Indeed, with many in the industry forecasting that 1mn units per platform is a necessary level for future profitability, Peugeot falls short in particular on its PF3 but also on its PF1 platforms. Whilst any closer partnership with Mitsubishi would aid this lack of capacity, it would not provide enough scale to put Peugeot on a par with the Renault-Nissan alliance. Speculation in the press has previously focused more on the likelihood of a PSA-Fiat tie-up as this would provide the necessary scale across platforms. However, we question the chance of such an alliance reaping significant synergies in reality, due to the political sensitivity of reducing capacity. We also note the Peugeot’s management are focused in the short term on internal restructuring before turning to any major external actions. PSA is therefore likely to continue to fall short of competitors (other than Fiat) in terms of sheet scale, although is likely to have a moderate level of commonality, in our view.

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372 1. Barclays Capital Superior product cadence and strength in LCVs to boost margin A second key area of strength for PSA lies in its upcoming product portfolio.132 1372 745 994 233 PSA PF1 (207) Renault-Nissan B (Clio) Europe PSA PF2 (308) Renault-Nissan C (Megane) South America PSA PF3 (408) RNO-Nissan D (Laguna) Asia Middle East/Africa Source: CSM. in the industry in the next three years.Barclays Capital | European Autos & Auto Parts Figure 178: Manufacturer’s scale vs estimated commonality – key C platforms Degree of commonality HIGH Toyota Fiat MED PSA GM Honda VW Hyundai Ford Renault-Nissan LOW 0 1. We concur with the argument that it is not only the frequency of new products coming to market but also the diversity and success in design that is likely to drive earnings upside for the company and which makes us credit PSA with a strong increase in market share. if not the strongest.000 Source: CSM. Barclays Capital Figure 179: PSA lacks scale on its global production platforms compared to rival RNO-Nissan group (000’s units) – 2011E 1. will help the company capitalise on our belief that these will be the fastest growing segments in the next three years.units 000 2.000 Scale . 8 December 2009 109 . We also think the mix of new model launches. It is a well argued bull case among analysts that Peugeot’s product renewal schedule is likely to be one of the strongest. with a focus on C&D segments.

Upper Medium B .25 0. particularly for the Citroen brand.Lower Medium D .Barclays Capital | European Autos & Auto Parts Figure 180: PSA’s current mix in C & D segments is likely to be boosted by new model launches from Citroen brand in particular 40% 35% 30% 25% 20% 15% 10% 5% 0% EExecutive A . This is of course a highly profitable segment for the group and.3 0. product renewals. We believe this range will prove highly successful and will not only accord with current customer sentiment but provide an opportunity to boost incremental margin by providing a higher pricing point for the Citroen brand. 3008 and 5008 – are all new additions to the company’s existing range and from 2010 the new ‘Distinctive’ Citroen range is launched. In the front section of this report we argued that the C&D segments are the segments likely to grow the fastest in the next few years (we expect 150bp of share gain 2009-11E).2 0. Three of 2009’s new products – C3 Picasso.Basic SUV Van C .Small Other 2012 0. we believe that despite a gradual erosion of market share from 2009’s peak. Barclays Capital 8 December 2009 110 . A raft of new LCV’s in 2008 helped Peugeot grow its market share even in 2009’s falling market. are set to come thick and fast in the C&D segments. beginning with the DS3 and then extended to the C&D segments with the DS4 and DS5. Figure 181: Peugeot to have one of the youngest and most diverse product portfolios in the sector Segment 2008 2009 2010 2011 A&B C D 308 Q2 4007 Q3 C5 Q1 Nemo/Bipper LCV Berlingo 2Q Partner Q2 C3 Picasso Q1 C3 Q4 3008 Q1 5008 Q4 208 DS3 Q1 RCZ coupe Q1 408 Q2 C4 Q1 DS4 Q3 408 Coupe DS5 Q4 C1 C4 Picasso C5 Jumpy Source: Company data.35 0. Trade press.15 0.1 0. The extension to the breadth of the company’s model range should help shelter from the worst of the post-scrappage declines in the small car segments.05 0 PSA Group Source: JD Powers and Barclays Capital Industry avg Whilst the scrappage pull back in 2010E is likely to see a 390bp YoY decline in the A&B segment (traditionally the company’s key segments). JD Power. as we argued above. growth in the segment as a whole will provide an EBIT boost of €230mn to Peugeot over the next three years.

0% Ford 11% 8.Barclays Capital | European Autos & Auto Parts Strength in fuel efficient engine technologies As well as expanding its model range. JCI. There is still much to be done in the short term and we only forecast a 1% EBIT margin from Faurecia in 2010E but our longer-term expectations are based on our belief that the supplier can achieve margins much closer to competitor averages in each of its divisions. numerous others TEN. Faurecia – a turnaround story but well understood by investors Faurecia’s performance has long been a drag on its parent company. An alliance with BMW on engines further highlights the company’s lead in this area. Barclays Capital Figure 183: PSA no. MGA JCI. company data and Barclays Capital RenaultNissan 17% 6.0% 25.0% 9. the i-Miev. solid growth opportunities as emissions control requirements for passenger and commercial vehicles become more stringent Highly fragmented Source: Company data. Figure 182: Potential for strong recovery at Faurecia based on competitive margin benchmarking Business segment Benchmark EBIT margins (%) 2010 Midterm Global competitors Comment Seating Interiors Exhaust 5-6 1-2 4-5 6-7 4-5 6-7 LEA.0% 20.0% Van share of WE Market PSA share of WE van market Source: CSM and Barclays Capital 8 December 2009 111 . 1 position in LCV market 10E to boost EBIT Opel Other 3% Daimler 6% 9% Figure 184: LCV market set to recover 180bp from 2009’s low 12. coming first on the Peugeot 3008 HYbrid4 and then the Citroen DS5 HYbrid4. we still expect the long-term trend towards CO2 friendly vehicles to continue and thus Peugeot’s superiority in this area should set it in good stead. the company’s management are highly focused on restructuring and efforts in North America in particular have already begun to pay off. However. The company’s first EV is to be a version of an existing Mitsubishi product. Peguform and numerous others Concentrated oligopoly Fragmented business historically. Eberspracher Front-end modules 2-3 5-6 Magna/Decoma. Faurecia has been loss-making since 2006 and was hit hard by the severe OEM production cuts in 1H09.0% 2006 2008 2010 2012 2014 15. becoming somewhat more concentrated as suppliers exit Becoming more concentrated with Faurecia acquisition of EMCON. Longer term. Plastal.0% 30. with a Plug-In HYbrid4 diesel to follow in 2012.0% 10. its hybrid diesel technology is expected to launch in 2011. and is due in 2010. Currently 71% owned by PSA.0% 7.0% Fiat 14% VW Group 15% Source: CSM.0% PSA 25% 11. Peugeot is also devoting a great deal of attention to the development of fuel efficient technologies such as diesel hybrids and EVs. Despite our concerns for share erosion in the A&B segments in 2010E due to scrappage pull-back.

0 2. Figure 185: Consensus earnings estimates have moved into the black for 2011E 6.0 3. with the execution of the OCEANE convertible bond taking the holding down to 51%.5 3. the PSA share has historically rebounded strongly on any news regarding an eventual disposal. However.5 1. The recent EMCON acquisition should further boost the company in the fast-growing exhaust systems segment.00 -2.at the top end of management’s 4.5% margin by 2011E (no 2012E consensus data is yet available).00 -6. we believe that the French investment community already credit a great deal of longer-term restructuring success to the company.0 4.5bn of debt (and thus aid Peugeot in regaining its investment grade debt rating).00 2. There has been much speculation in the press and the investment community for a long while surrounding the likelihood of a Faurecia disposal.5-5% target but just behind midterm peer benchmark margin.0 1. hence we are wary of underweighting the share whilst M&A speculation abounds.00 Jul-09 Sep-08 May-09 Mar-09 Sep-09 Jul-08 Jan-09 May-08 Mar-08 Nov-07 Nov-08 Nov-09 Jan-08 Figure 186: Brokers have grown significantly more optimistic on the Faurecia share in 2H09 5.00 4.00 0.5 2. and therefore see less upside for the PSA shareholder. this still will not be low enough to allow PSA to deconsolidate Faurecia’s €1. thus boosting its parent company EBIT by an estimated €850mn. Change of ownership covenants currently prohibit PSA’s ownership from falling below 40% and it seems unlikely that a buyer will be found for Faurecia until the company’s turnaround is closer to completion.0 May-08 Mar-08 Nov-07 Jul-08 Jan-08 Sell Buy May-09 Nov-08 Mar-09 Jul-09 Nov-09 112 Sep-08 Jan-09 Faurecia FY09E cons EPS est Faurecia FY10E cons EPS est Faurecia FY11E cons EPS est Source: Datastream Faurecia Cons Recommendation Source: Datastream 8 December 2009 Sep-09 .Barclays Capital | European Autos & Auto Parts We therefore forecast that the company can reach a 5% group margin by 2012E .00 -4.5 4. Although the recently announced EMCON deal will see Peugeot’s stake in the parts supplier diluted from 71% to 57%.00 -8. Although the market is currently looking for only a 2.

London Angus Allison +44 (0)20 7773 5379 angus. but with the defensive characteristics of downside protection (delta is higher on the upside than on the downside). its defensive profile compared to cash equity.33 €24. CFA +44 (0)20 7773 5859 heather.00% 3.olsen@barcap.62% Convertible delta Current Target Target bond share price share price price €25. rebounding sharply from its late-2008 trauma. particularly in Europe. although the €575mn bond has traded actively since launch in June 2009.com Barclays Capital. The convertible is generally less liquid than the stock.00 €32.cridge@barcap. Adding the 3.6% pa income advantage.64% delta to the stock price and a c.62% 64% Note: As of 4 December 2009. the investment rationale is not based on cheapness or richness per se. Resurgent new issuance.10 €24. Source: Barclays Capital Credit perspective Barclays Capital credit analysts currently rate Peugeot Market Weight. London Heather Beattie. an income advantage and strong takeover and dividend protection features. We also believe that the market is already well versed in Peugeot’s upcoming product line-up and is already over-crediting the company’s 113 8 December 2009 .Barclays Capital | European Autos & Auto Parts Luke Olsen +44 (0)20 7773 8310 luke. We believe that switching into the Peugeot convertible makes sense for relatively defensive investors who wish to step up in the capital structure and reap a significant income pick-up over the stock. but rather.6% income pick-up over the stock (Figure 187).60% Income advantage 3. we estimate that the convertible’s valuation would rise 3. however. Equity rating We believe the market is overly optimistic on PSA’s potential for top-line growth and for retention of future cost savings We are initiating coverage of Peugeot with a 2-Equal Weight rating.5% rise in the stock.8% from its current level (target bond price versus current bond price). London Peugeot’s 2016 convertible: Recommended for investors seeking defensive exposure The convertible asset class has attracted substantial interest this year. We estimate that Peugeot’s 2016 convertible currently has a c. Lastly.53 0.com Barclays Capital.beattie@barcap. many convertibles offer exposure (delta) to the underlying equity.com Barclays Capital.18 €26. We are concerned that the company’s lack of scale both on a global basis but also on a platform-by-platform basis exposes the company to significant risks. As such. including Peugeot and Faurecia. they believe Peugeot has significantly improved its liquidity position.com Barclays Capital. has seen many companies raise convertible funds.18 575 Dividend yield 0. While they expect credit metrics to improve through 2010.45% 2016 convertible bond details Bond ISIN Bond currency Current bond price Parity Amount out (mn) Yield to maturity Running yield FR0010773226 Conversion price EUR €31. For equity investors.3. Figure 187: Peugeot 4. we view the convertible’s valuation as fair relative to the equity derivative (options) market and relative to other comparable convertibles. This is below the 7. they believe Peugeot is at risk of a downgrade to mid BB by S&P and view Peugeot more at risk of material cash burn than Renault in 2010. following significant bond issuance this year and government funding.allison@barcap. London Stella Cridge +44 (0)20 3134 9618 stella. At our fundamental equity analysts’ stock price target. Despite our confidence in Peugeot’s product strategy. together with its income advantage and seniority. senior status. makes the convertible’s return more competitive. However. we remain more cautious than the market on the demand side of the equation for the overall European market in 2010E.

Barclays Capital | European Autos & Auto Parts revenue growth potential by 2012E. Barclays Capital -19 -4 -1 30 28 5% discount Group EV/EBITDA Historically PSA has traded at an 8-year average of 2.888 5. We credit the company with only €2.304 30 25 28 15% 2011E Industrial EV/sales (in line with Renault) 2. we think that the Faurecia recovery story.078 12.706 6. We believe that the company should trade closer to its historical level of 2.252 3.8x equity) Gefco @ EV/sales multiple Faurecia @ EV/sales multiple Group EV 14 3 9 53 Net debt Pension underfunding Minorities SOTP (base assumption) TP applying holding discount Source: Company data. We apply a 5% discount to the NAV in line with the average discount that the market has historically applied when using the SotP methodology.8x book value 20% 2011E EV/sales 15% 2011E EV/sales FY10E BS date FY10E BS date FY10E BS date Banque PSA Finance (0.4x. implying 12% upside potential to its current market price. Our slightly below consensus EBITDA estimates put PSA at 2.121 -4. Likewise. GEFCO and Faurecia at historical average multiples. just ahead of its historical average.4x EV/EBITDA at a group level (vs 6x at RNO and 2.3bn in cost savings by 2012E.1bn of its targeted €3. We base our calculation on a blended average of peer EV/sales and EV/EBITDA multiples for the core Autos business and bring in Finance companies. which would imply a share price of €23. We are therefore initiating coverage with 2-Equal Weight rating and a €26 price target. 8 December 2009 114 . Valuation methodology We value the PSA share using a SotP methodology but also use historical and peer average EV/EBITDA multiples and take a blended average of the two methodologies: SotP Using a sum-of-the-parts valuation we arrive at a value of €28/share for Peugeot. We hesitate to underweight Peugeot due to its superior product and when any further news on a potential Faurecia disposal would provide upside potential for PSA but the company’s lack of scale and the market’s over-confidence in estimates steer us away from an overweight rating. Figure 188: Peugeot SotP implies just 12% upside to the current share price.141 650 2. PSA €mn € per share Remarks 1) PSA Auto @ EV/sales multiple 2) PSA Auto @ EV/EBITDA multiple Peugeot Auto average 6.5x at current share price in 2010E. though significant.616 6.267 -819 -329 6.7x for the sector as a whole). driving our 2-Equal Weight rating NAV. is already well understood by the market.0x 2011E Industrial EV/EBITDA (in line with Renault) 0.

Barclays Capital | European Autos & Auto Parts Figure 189: PSA historical EV/EBITDA implies a 2.5x 1.5x 0. Barclays Capital Adjusted EV/EBITDA 8 December 2009 115 .4x multiple is realistic to value the group 3.0x 0.0x 1.0x 2.5x 2.0x 2000 2001 2002 2003 2004 2005 2006 2007 2008 Historical average Source: Company data.5x 3.

Barclays Capital | European Autos & Auto Parts A blended average of both these valuation metrics leads us to set a €26 price target for the share.9x 9.6x) -40.5x 0.3x) (13.9x 2. Barclays Capital Risks to price target Downside risks to our price target are as follows: Macroeconomic risks . especially were the Peugeot to finance any future alliance with Mitsubishi Motors with debt M&A risk – if PSA were to embark on any further strategic alliances or seek to restructure its holding in Faurecia.5x 3.7 13 2.0x 23.8 17 2.4 20 0.4x 0.0x (5.6x) (4.3x 23. leading to an even weaker demand and pricing environment than we currently assume.6x 17.8x) -3.0 11 3.3x 25.1 11 0.9x 25. Liquidity risk – current high gearing levels and lack of investment grade credit rating expose the share to balance sheet risk.8x 2.4x 4.4 20 0.9x 2.4x 4.0 10 1. this could provide further upside to the share and cause it to exceed our current price target.8x 2.5x 0.8x 2.2x 4.3 13 0.1x) (3.8 Industrial EV/sales (%) Industrial EV/EBITDA Industrial EV/EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Source: Company data. Figure 190: PSA key valuation metrics 2006 Valuation multiples at current price 2007 2008 2009E 2010E 2011E 2012E Industrial EV/sales (%) Industrial EV/EBITDA Industrial EV/EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Valuation multiples at €26 price target 17 2.1 12 0.4 12 0. could make our forecasts difficult to achieve.3 12 0.9x 2.7x 17.3x 1.0 16 2.5x (37.6x) (12.6x 17.2x 14.5x 0.3x 4.1x) -3.5x 5.3 11 0.2x 17.8 7 0.8x 59.2 8 0. 8 December 2009 116 .0 15 2.7 17 2.6x na (18.4 12 0.5x) -49.8x 59.3x (5.2x 4.3x 8.2 23 0.2x 14.6 12 0.5 13 0.9x na (18.2 11 1.0x 8.2 23 0.macroeconomic factors outside the control of the company.8 17 2.5x 0.4x 8.5x) -49.7x) -37.8 12 0.5x (40.5x 0.0 13 1.0 12 2.3x 1.4x 3.

376 11.7% 1.9% 26.661 3.Barclays Capital | European Autos & Auto Parts Figure 191: PSA Group income statement.0% (7.694 Income tax Memo: tax rate Companies at equity Net before minority interest (156) 76% 20 69 (302) 28% 48 826 96 15% 57 (500) 415 23% 40 (1.3 3.001) (375) 105 93 (177) 575 404 114 1.033 (350) 1.093 895 592 117 1.4% 21.348 51.752 2.861) (681) -1.0% 1.370 17.433) (1.745) 193 0.87 226.781) (450) (407) (350) 1.8% 3.523 440 2.866) 1.00 41.920) 9.903 (39.613 16.4% 3.4% 1.045) 550 1.3% 2.9% (6.88 DPS PSA segmental revenue: 1.208 Minority Interest Group interest (114) 183 (59) 885 (157) (343) (100) (1.9 4.8% Non-recurring income and (expenses) Reported operating income (809) 310 (632) 1.0% 21.2% -1.940) 2.2% 2.613 (48.120 (917) (367) (700) (1.649 3.6 (1.7% -1.752 557 550 320 (681) 370 193 430 1.119 2.819 9.920 47.135 (40.594 1.383 0 2.4% 47.044 Automobile EBIT % Faurecia EBIT % GEFCO EBIT % Industrial EBIT % 0.28) 226.432) (1.0% (8.9 2.4% 18.8% SG&A Research & development Clean EBIT Memo: clean EBIT margin (% of sales) (7.9% 1.831 3.613 2.5% 3.00 38.115 (42.0% 3.088 54.1% 47.381) (150) 43 (140) 1.356 1.062) (1.0% -0.251 49.980 47.119 608 1.90) 226.519 12.700) 7.084 10.554 57.841) (2.0% 30.132 0.536 52.0% -0.9% 53.245 53.643 12.594 (45. Barclays Capital 34.7% 0.7% 1.88 227.566 11.5% -2.0% 3.542 3.999 60.044 Financial income/expense & other Pre-tax income (105) 205 (40) 1.576) (2.115 Automobile EBIT Faurecia EBIT GEFCO EBIT Industrial EBIT 267 69 151 515 858 121 155 1.2% -3.5% 2.115 1.35 44.1% 54.903 2.803) (1.9% 60.80 228.313 1.060 53.426) (100) (432) (100) 652 (100) 1.108 No of shares (average) EPS 228.5% 51.6% 4.0% 1.0% 2.00 40.0% -2.493 3.369 3.00 36.942) 10.789 1.534) 8.9 (6.712 18.9 (1.354) (2.4% 2.326) 35 9% 40 (332) (321) 31% 40 752 (526) 31% 40 1.144 (225) 91 127 (7) (795) (281) 75 (1.435) 12.2% 5.705 0.00 36. 2006-2012E December year-end (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Net revenues Cost of sales Gross profit Memo: gross margin (% of sales) 56.011 3.3% 3.882) 10.006 45.0% 16.4% 2.080 (286) (653) (400) (1.044 3.0% 4.020 51.604 Banque PSA Finance EBIT Total Group EBIT PSA segmental EBIT margin % 604 1.0% (6.135 2.017) 1.393 0.046 20.6% 0.50 45.761 56.523 3.51) 226.6% 0.055 Automobile revenues Faurecia revenues GEFCO revenues Industrial revenues Banque PSA Finance revenues Total Group revenues PSA segmental EBIT: 1.822 11.313 (39.8% 8 December 2009 117 .4% (6.069) 11.436 17.5% 3.923 1.178 20.072) 1.1% Banque PSA Finance EBIT % Total Group EBIT % Source: Company data.4% (6.5% 3.192 19.7 0.096 45.5% 0.356 (44.

plant and equipment Other non current financial assets Deferred tax & other Investments in associates/non-consolidated co.094 28.623 17.555 68.330 3% (2.269 42.024 Total Finance Co liabilities Group shareholders' equity Minority interests Shareholders' funds TOTAL GROUP LIABILITIES & S'HOLDERS EQUITY 24.418 (612) -1% 116 18.826 3.538 25.539 13.106 69.885 14.913 2.051 16.270 848 620 820 21.472 1.099 1.488 Inventories Accounts receivable Tax & Other receivables/assets Marketable securities Cash Total Industrial current assets Total Industrial assets 6.381 61.026 2.975 23.221 1.718 388 14.897 1.652 1.219 62.592 6.750 12.289 39.001 2.051 16.971 25.339 19.249 17. 2006-2012E December year-end (€mn) Industrial assets: 2006 2007 2008 2009E 2010E 2011E 2012E Goodwill Other intangibles Property.500 63.951 1.547 3.975 26.249 82 0% (1.245 310 14.984 429 12.237 4.483 5.237 4.451 30.502 14.538 2.990 229 12.651 14.043 1.477 (317) -1% (2.857 1.442 26.893) 20.990 848 620 940 20.359 12.481 16.121 21.312 1.391 2086 515 5.581 6.009 11.000 62.404 20.009 6.277 61.114 2.768 68.836 2.670 14.321 595 681 23.191 69.267) 20.780 38.126 Total Industrial LT liabilities Total Industrial current liabilities Total industrial liabilities 10.399 36.978 19.861 7.610 1.185 18.906) 19.Barclays Capital | European Autos & Auto Parts Figure 192: PSA Industrial and Group balance sheet.864 529 13.442 21.971 21.646) Gearing Source: Company data.224 17.462 13.929 1.870 19.776 Total Finance Co assets TOTAL GROUP ASSETS 27.077 38.757 2.237 4.488 3.121 554 772 22.619 30.965 39.947 15.237 4.086 515 7.720 24.061 14.132 6.300 62.398 57 0% (2.006 31.812 1.652 12.051 16.170 25.023 2% (4.720 20.389 40.064 848 620 780 21.188 6.051 16.355 1.126 Balance sheet analysis & drivers: Capital employed Net working capital Working capital / Sales Net Industrial cash (debt) 19.973 31.018 2086 515 6.000 65.040 14.719 2.175 30.560 13.853 11.559 329 11.222 29.098 2086 515 7.894 848 620 860 21.127 9.237 4.413 63.074 11.094 25.111 1.457 848 620 900 20.226 14.321 6.292) 21.200 9.888 62.086 515 2.s Total Industrial fixed assets 1.393 65.874 14. Barclays Capital -1% -10% 22% 19% 36% 23% 12% 8 December 2009 118 .538 21.143 134 13.840 (830) -1% 1.899 11.

924) (789) 156 (7) 11 (280) (2.114 1. Barclays Capital 424 (23) 153 6.215) (2.707) (3.301 590 (22) (167) (5) (2.833) (2.722 2.5% 4.374 6.664 (105) (455) 124 (37) 26 2.184 140 (1.360 6.247 Operating cash from Finance Co's Investing cash from Finance Co's Finance Co minority dividends FX & eliminations NET CHANGE IN GROUP CASH 210 (34) (193) (60) (58) 512 (20) (157) 131 1.115) 0 0 (140) 0 1.2% 3.081 (Increase)/decrease in inventories (Increase)/decrease in receivables Increase/(decrease) in payables Movement in provisions/other INDUSTRIAL OPERATING CASH FLOW 63 54 241 66 3.924) (3.5% 93 1.174 Capital expenditure Capitalisation of R&D Proceeds from disposals Investment in companies Investment in shares Other INDUSTRIAL CASH FLOW FROM INVESTING (2.214 6.362) (2.699) Group dividend Minority dividend Equity issued/(redeemed) ST Debt issued/(redeemed) LT Debt issued/(redeemed) Other INDUSTRIAL CASH FLOW FROM FINANCING NET CHANGE IN INDUSTRIAL CASH (309) 155 (39) 205 (309) 146 (23) (559) (342) 151 (43) 929 0 138 0 140 0 (227) 140 0 0 (227) 0 0 0 4570 273 0 12 19 (745) 835 695 (3.952) (1.985 0 (455) 0 0 0 1.981 5.177) (1.076) 804 (2.Barclays Capital | European Autos & Auto Parts Figure 193: PSA Industrial and Group cash flow.899 103 (197) 7.374 (227) 1.0% 3.741 0 0 (140) 0 (2.405 0 (455) 0 0 0 1.954 918 3.520) (937) 160 (19) (1) (155) (3. 2006-2012E December year-end €mn 2006 2007 2008 2009E 2010E 2011E 2012E Industrial cash flow: Net Income Depreciation and amortisation Non-current provisions Deferred tax (Gains) losses on disposals Share in equity co's (net of dividends) Revaluation adjustments (IFRS) Gross cash flow (329) 3. % Source: Company data.360 1.9% 4.068 (181) (80) 236 118 4.080) (1.7% 920 1.0% 3.703) (300) 0 (143) 0 4.608) (1.787) (1.837) (964) 100 0 0 0 (2.536) 3.435 (1.247 PSA cash flow analysis & drivers: Total movement in WC Industrial FCF Group FCF Industrial depn & amort / sales.434 (87) 186 119 702 4.069) 78 (2) (25) (79) (3.234 0 0 0 0 1.559 (227) (114) (94) (46) 32 3.4% (2.686 (148) (139) (54) (17) 11 3.414 (582) 2.719) (989) 100 0 0 0 (2.139) 7.313 (810) (276) (254) (22) 586 298 372 296 148 4.9% 1.5% 8 December 2009 119 .374 1.110) (1.015) (637) (558) 1.0% 1.947 0 (455) 0 0 0 2.701) (1.975) (87) 1.366 (1.3% (1.258) 100 0 0 0 (3.063 0 0 0 100 0 4.215) 6.0% 3.5% 4.515 (851) 3.012) 100 0 0 0 (2.099) 4.731 (113) 29 252 3. % Industrial capex / sales.010 405 3.472) (1.948 462 2.

Barclays Capital | European Autos & Auto Parts Figure 194: PSA revenue mix by division YTD 09 GEFCO 6% Banque Finance 4% Figure 195: PSA geographical revenue mix. Pluriel) 17% C3 Picasso 6% C4 / Xsara 29% ZX 6% 106 / 107 7% LCV + Other Berlingo 6% 13% C-Crosser 1% C5 / Xantia 8% 206 / 207 42% Source Company data. YTD09A Expert 1% 406+ 407 2% 405 (kit) 16% 3008 2% 307 / 308 19% Boxer & Bipper Other Partner 1% 3% 7% Figure 197: Citroen WE unit sales by model.0% 0. 2011E Banque PSA Finance EBIT 28% Figure 199: PSA EBIT margin %.0% Automobile EBIT 38% 3. 2002A-2012E 6. Barclays Capital -2. YTD09A C1 10% C2 / Saxo 4% C3 (incl.0% 4.0% 5.0% 1. Barclays Capital PSA Group EBIT Margin % 8 December 2009 120 .0% 2000 2002 2004 2006 2008 2010E 2012E Autos EBIT Margin % Source Company data. Barclays Capital Source Company data. Barclays Capital Figure 196: Peugeot WE unit sales by model. Barclays Capital Figure 198: PSA EBIT mix by division.0% 2. YTD 09 ROW Lat Am 9% 7% C&E Europe 8% Faurecia 20% Autos 70% W Europe 76% Source Company data.0% -3. Barclays Capital Source Company data.0% GEFCO EBIT 7% Faurecia EBIT 27% Source Company data.0% -1.

While Porsche’s near-term prospects as a sports car manufacturer are strong in the face of a challenging market.DE / PAH3 GY Stock Rating 2-EQUAL WEIGHT Sector View 2-NEUTRAL Price Target €55.370 15.8x (53. we see several transactional risks to Porsche pref holders from future fund raising and merger valuations that lead us to prefer VW pref shares as our vehicle for capturing the future value of VW.094 760 10. We base our price target for the Porsche’s preference shares using an average of EV/sales and EV/EBITDA metrics at historical and peer average multiples (for further details please see the valuation section).00 Price (04-Dec-2009) €47.74 2012E 8.7 4. €55 price target We are initiating coverage of Porsche with a 2-Equal Weight rating and a €55 price target.8x -14. against the near-term low valuation in light of Qatari share sales. While we maintain a positive stance toward VW prefs (with a 1Overweight and €85 target).51 Potential Upside We are initiating coverage of Porsche with a 2-Equal Weight rating and a €55 price target.4) 6.95 2009E 6. Overall. Key share price drivers: Positives: Strong underlying operating performance in difficult year Modular strategy to drive additional cost savings while enhancing product differentiation Continued dominance of German market provides buffer against weak post-scrappage pricing environment Porsche merger valuation mechanics not as impactful on pref value as market believes 8 December 2009 121 .3 35. the real value of Porsche’s pref shares lie in the current 51% holding of VW shares and their eventual conversion into VW NewCo shares (likely prefs). reflecting the uncertainties and risks in the next 16-18 months.3x Source: Company data.Barclays Capital | European Autos & Auto Parts PORSCHE – MERGER BENEFITS MAY NOT FLOW TO PREF HOLDERS: 2-EQUAL WEIGHT PSHG_p.8x 263. Figure 200: Porsche – headline data & valuation multiples (at current share price).5x (6.81 27 2.362 977 11.466 876 11.912 1. and we are positive on VW prefs. Barclays Capital *FactSet consensus data 2-Equal Weight.76 23 1.73 40 3. while most of the value of Porsche is in its VW stake.95 209 10.61 16% Sales Adjusted/clean EBIT EBIT margin (%) BC EPS € Consensus EPS € Industrial EV/sales (%) Industrial EV/EBITDA P/E ratio (%) 35. 2008-11E (€mn) 2008A 7.47 2011E 8.7 1.29 2010E 7. we believe that public shareholders in both firms face transactional risk around the future fundraising and eventual merger ratios.2) 7.8x 2. offers better protection against the vagaries of offering dilution and exchange ratios than do the Porsche prefs.5x (84.6) 2.4 7.3 -14. With VW we believe that the ultimate earnings power.260 676 10.45 187 10.

478 0 98.4% 71% € 52.172 7.134 0 96.517 101.379 90.7% 17% € 12.568 7.000 8.070 34.412 1.500 23.337 1.3% core operating margin for 2008/2009.420 116.739 69. Figure 201: Porsche key operating metrics €mn Unit sales (units): 2004/05 2005/06 2006/07 2007/08 2008/09E 2009/10E 2010/11E 2011/12E Boxster/Cayman 911 Cayenne Panamera Total unit sales Total production 18.058 18.000 8.560 760 10.000 90.723 6.Barclays Capital | European Autos & Auto Parts Risks: Continued selling pressure as Qatar liquidates remaining pref shares Rights issue in 2010 creates additional supply and selling pressure Clarity on Porsche merger pricing not likely until 2011 European pricing war undermines profit recovery and stalls margin recovery Earnings power of the sports car company remains strong While transparency into Porsche results ex Volkswagen and option losses is limited (and likely to become more limited as Porsche SE moves to equity income for both VW AG and Porsche AG).204 27.370 15.889 13.326 1.260 7.423 45.415 33.204 19.386 34.238 76.778 676 10.539 26.800 68. Adjusted EBIT Adj.000 7. Barclays Capital 8 December 2009 122 .000 32.911 6.844 63.296 1.000 22.747 31. The strong performance was likely driven by a richening mix.000 30.000 89. Porsche disclosed a 10.906 34. with the relative strength of the 911 (up from 32% to 36% of sales) and the Cayenne (steady at 46% of sales) offsetting the volume decline in the lower margin Boxster/Cayman.265 763 75.733 21. revenue fell by a likely €1.826 41.000 26. While about €200mn below the €876mn earned in 2008. underlying results of the sports car company within the financial speculation company appear strong.368 7.140 27.362 7.000 17.123 6.571 21.115 18.000 109.943 0 97.094 6.3% -274% -€ 237.146 37. indicating roughly €675mn of “clean” operating earnings for its sports car operations.0% 77% € 7.602 62.530 876 11.930 Average selling price (€) Revenue Total operating perf.912 8.2% -173% -€ 587.800 68.2bn – indicating incremental margins of 17%.7% 10% € 6.146 15.100 114.652 105.200 68.3% 17% € 8.954 59. EBIT margin Incremental margin Incremental EBIT per unit Source: Company data.162 63.5% 42% € 43.794 102.294 977 11.900 33.000 107.541 16.724 7.920 38.884 0 88.466 7.000 35.009 27.256 6.

it is not clear how much of that margin expansion would be shared with Porsche pref holders. Porsche disclosed that its liquidity situation was “critical” as of June 2009. Barclays Capital 1% 35% 46% 46% 38% 32% 36% 27% 22% 2007/08 911 Cayenne 17% 2008/09E Panamera Going forward. if options. In addition. In this quarter.4bn of net debt. and €13bn total (with pensions and hybrids) Porsche can (by design) work off most of its net debt if the planned series of transactions consummate.000. the transaction structure has been designed to alleviate Porsche’s debt burden.9%. and.4bn of cash pledged as collateral for its derivatives on VW shares. page 243) VW fundraising and Porsche transaction timeline However.7%. With €11. when margins could expand to 15%. we are looking for 14. we expect VW to finalize its purchase of 49% of Porsche AG for €3. although it is not clear whether Qatar holds actual shares or options shares. (Source: Porsche Annual Report 2008/09. If not. with margins reaching 10. the market will be asked to absorb up to roughly 90mn additional VW pref shares – up to 25mn from Qatar Holding LLC (whose lock-up period expires on 31 December 2009. driven largely by the Panamera. Net debt to be worked off by set of transactions but risk remains While the sports car operating side of Porsche handled the curves of 2009 ably.9bn. closer to the 2001-07 average of 16. as underscored by the accountant’s letter If the steps involved in the merger of Porsche Automobil Holding SE and Volkswagen AG and thus the debt relief of Porsche Automobil Holding SE do not take place as planned. if deliverable in physical delivery of shares) and about 65mn from a 8 December 2009 123 . As this margin expansion (incremental margins of over 70%) is based on VW contributions.Barclays Capital | European Autos & Auto Parts Figure 202: Stronger mix likely to drive higher earnings in 08/09E 100% 80% 60% 40% 20% 0% 2006/07 Boxster/Cayman Source: Company data. this could once again lead Porsche Automobil Holding SE into a critical liquidity situation by the end of 2009 which could put the ability of the company and group to continue as a going concern at risk. and with incremental margins of 17% EBIT of €977mn. units could advance by another 18. the financial side of the story was less heartening. as the annual report warns. driven by broader economic recovery. In 2010/11 (the likely time period for starting the IDS valuation). alleviated somewhat when it was able to recapture use of €1.000 unit growth in 2009/10. by mid 2010. The benefits of the VW modularity would likely not begin until 2012.

likely timed after Porsche/Piech family members receive the proceeds from the Salzburg sale. the transaction structure has been designed to alleviate Porsche’s debt burden. Transaction sequence aimed at stepping down net debt However. beginning with the initial purchase of 49% of Porsche SE. Porsche SE (which at that times owns half of Porsche AG and its VW ord shares but has largely paid down its debt). Barclays Capital We expect the VW pref issue at some point following the 2009 results announcement on 11 March 2010. in our view.Barclays Capital | European Autos & Auto Parts VW pref issue in 1H10 (assuming €4bn raised at €60/share). net debt at time of merger (inc. Figure 203: Merger timeline Date 2009 Event 3 December 2009 3 December 2009 18 December 2009 31 December 2009 by 31 December 2009 2010 Announcement of DAX official ranking as of 30 Nov VW EGM gave authorisation for VW pref share issuance Qatar option expiry on VW ords Expiry of Qatar lock-up period on VW prefs Purchase of 49% of Porsche AG by VW for €3. paid to family shareholders of the auto dealer).8 -3. The net result is to almost double the ‘publically held’ pref share count from the 55mn outstanding prior to Qatar’s initial sale to about 170mn – leading to. After the capital increase. 2009 Sale of Porsche SE (4Q09) Porsche capital increase (1H11) Est.55bn.8 -1.9bn.5 -1.55 EV Porsche SE capital increase (est. much of the recent weakness in VW prefs. with Porsche ord shareholders largely receiving VW ords and Porsche prefs would get VW prefs (although merger details could vary). €5bn) Porsche SE merges into VW AG Source: Company data. paid to Porsche AG) and Porsche Holdings Salzburg (for €3. merges into VW AG. operating cash flow 09/10 and 1H11 Est. window likely 11 Mar-15 May) sometime in 1H11 sometime in 1H11 sometime in 2011 VW purchases Porsche Holding Salzburg for €3.9 5.4 3. Porsche would also pursue a capital increase of about €5bn.5 -2.9bn 11 March 2010 sometime in 1H10 2011 VW FY09 results Potential VW pref issue (est €4bn. VW is to purchase two assets – 49% of Porsche SE (for €3.8 -7. Before the merger.0 0. Barclays Capital -11. hybrids and pensions) Source: Company data.5 8 December 2009 124 . Figure 204: Porsche merger dynamics to reduce net debt €mn Transaction impact Running total Porsche net debt as of Nov.

5x) for the industrial business.840 1. Step 1: Value of stand-alone operating firms Adjusting for VW's cash balance.647 10. As we review these steps. while the Porsche pref holders face greater downside risk around terms of the Porsche fund raising and merger valuations. even at a 6x multiple for the SE earnings.0x for a gross operating enterprise value of €10bn (note that this is somewhat below the €12. again.469 2. we become convinced that VW pref holders face relatively little risk from the future share offerings and mergers.5x 1.765 6.400 1. we start with the value the core operating businesses of both VW and Porsche (as this will likely form the basis for the future IDW S-1 valuation). valuation of Porsche must be in context of a future merger with VW. before giving effect to VW’s purchases of Porsche-related assets.5 x vs historical average of 3. we have chosen a low adjusted EV/EBITDA multiple for VW (2.086 € 108 € 119 € 95 -431 -1.671 9.396 35. While Porsche operating business is strong. we have chosen to be conservative as this would imply that VW ‘overpaid’ for Porsche SE). and add in ‘external’ affiliates (ie.905 11.828 Net debt (cash) Minorities Hybrid liabilities Pension (after tax) Net value of firm before intracompany ownership per share per ord per pref -18.590 239 10.4bn VW pegged the value of Porsche SE at.372 -2. For purposes of this exercise.495 44. MAN) and subtract net debt. and including the value of financial services and MAN leads to an enterprise value of €44bn for VW. or €95 per pref share (at a 20% discount).020 8. Figure 205: Value of VW & Porsche operating businesses €mn Starting point – operating businesses and 'external' affiliates 2011 EBTIDA EV/EBITDA multiple 11. Porsche would have negative value (but for the VW shares). In terms of risks to valuation from these transactions. For Porsche. Barclays Capital 20 8 December 2009 125 .161 -€ 7 at discount of Source: Company data.Barclays Capital | European Autos & Auto Parts Porsche valuation driven by merger exchange formula As Porsche is basically a holding shell for Volkswagen shares.0x VW Porsche Core auto operations Financial services "External" associates Gross value of operating firm and external affiliates less debt 28. we assume 6.

agreed to overpay for the initial stake in Porsche SE (which provides cash to pay down Porsche net debt) and for control of Porsche Holding Salzburg (which will provide cash to the families to use to subscribe to Porsche fund raising).900 2. Even assuming VW overpaid for Porsche SE by €1. near our target of €100 for the VW ords).0x) and by Salzburg by 1.027 € 86 20 8 December 2009 126 .038 -3. Also note that at this point. Porsche as an operating company has negative value.4bn paid for a 49% equity stake would imply a EV/EBITDA of 7.724 € 102 € 112 € 90 -298 Value of Porsche AG stake in VW Net value of firms before fund raise per share per ord per pref at discount of Source: Company data.5bn (with no public financials we have arbitrarily assumed an overpayment). With the VW shares included (assuming a €102 per share.500 -1.325 15. Porsche would have an indicative value of €86 per share at this point.086 € 108 Porsche -1.Barclays Capital | European Autos & Auto Parts Step 2: Giving effect to VW purchase of Porsche related assets One investor concern is that VW.724 41. in an attempt to gain Porsche family buy-in to the merger.000 -3. Barclays Capital 15. with more than 100% of the value of Porsche shares attributable to its holdings in VW. pref value per share would still be €89.25bn (as the €12.900 -3.6x vs our assumption of 6. Figure 206: VW purchase of Porsche assets €mn Net value of firm before intracompany ownership per share Plus intra-group transactions VW minority in Porsche AG: Value of equity business interest Cash received/(paid) Debt (assumed)/shed Memo: value creation (dilution) VW purchase of Porsche Salzburg Value of business interest Cash received/(paid) Memo: value creation (dilution) Value after sales to VW (ex cross-holdings) -862 862 VW 44.038 3.161 -€ 7 3.500 41.

702 Shares issued Price per share New share count Value of firms after fund raise (ex cross-holdings) Value of Porsche AG stake in VW Net value of firms after fund raise 14. which is near our price target of €55. even before adding a discount for transaction risk. Figure 207: Effects of fund raising €mn Value after sales to VW (ex cross-holdings) Fund raising VW 41.000 80 € 50 488 45. Were €5bn of shares offered at €40.041 18.724 Porsche -298 4.724 45.743 € 62 per share per ord per pref at discount of Source: Company data. on the other hand. Barclays Capital 20 8 December 2009 127 . Moreover. given the debt walk down. pref shareholders run some risk of ill treatment.000 125 € 40 300 4. the shares would be diluted down from €76 to €62. Porsche. our VW price target of €85 can withstand dilution. as the offer is likely to be tilted toward the family and other strategic ord purchasers. the need to raise that amount). with the stated intention of raising about €5bn (and. is more vulnerable to dilution.724 € 94 € 103 € 82 5.Barclays Capital | European Autos & Auto Parts Step 3: Giving effect to potential dilution from fund raising While we believe an offering below the current share price would be dilutive to both firms.

would create only about €76 of value per Porsche share – making the upside of a merger that tilts towards Porsche not worth the risks were prefs diluted more in either the fundraising or the merger process. However.683 18. Barclays Capital 20 Even assuming. however. Porsche shareholders would get 37% of the economic value of the merged entity and VW shareholders 63% (roughly in line with ingoing ownership). we understand that a merger of a company with ords and prefs into another company with ords and prefs is relatively unchartered territory in German corporate law. At our base case valuations.743 % of newco Per share per ord per pref 63% € 94 € 103 € 82 37% € 62 at discount of What if "unfair" 20% 27. Figure 208: Merger allocation options VW Who brought what to the table: Porsche VW shareholders ex Porsche Porsche shareholders Core business VW stake Total 31. reflecting the uncertainties and risks in the next 16-18 months. and that VW is arbitrarily undervalued.702 14. 8 December 2009 128 .734 10.041 31. while investors are concerned that VW pref shareholders will wind up with less of the merged company than what they could consider their fair share. merger synergies allocated more to VW. even at that point pref holders could face some risk around the division on merger value between Porsche ords and prefs – based on discussions with the companies. Rating We are initiating coverage of Porsche with a 2-Equal Weight rating and a €55 price target.734 22.683 4. and Porsche SE is overvalued by a factor of 3x.291 27. that Porsche shareholders get 45% of the combined firm.400 12. for example.692 VW shareholders ex Porsche Porsche shareholders Core business VW stake Total % of newco Per share per ord per pref 55% € 82 € 90 € 72 45% € 76 at discount of Source: Company data.Barclays Capital | European Autos & Auto Parts Step 4: Potential risk from relative IDW S1 relative valuations and pref/ord exchange ratios Finally. Porsche investors may have similar valuation risk were.

3x. Looking out to 2011E.6x EV to EBITDA during 2001-07 (before the extensive distortion of its options earnings) – vs 3. we conservatively believe that the company should trade at 3.73 -3.47 7. 8 December 2009 129 . when we expect the merger to finalize.Barclays Capital | European Autos & Auto Parts Valuation methodology We value the Porsche preference share based on an average of EV/sales and EV/EBITDA metrics at historical and peer average multiples: EV/sales Porsche prefs have historically traded at an eight-year average of 100% EV/sales. An average of both these valuation metrics leads us to set a €55 price target. Recognizing some of the risks inherent in the merger and future dilution.2% Source: FactSet consensus. and implying a value of €60/share.1x. at the current market price the share is trading at only 1.2% -46. Figure 210: Porsche EV/sales metrics 250% 200% 150% 100% 50% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EV/Sales Source: Company data. At current market price the shares are only trading at 27% 2010E EV/sales on our estimates. Barclays Capital EV/EBITDA Historically Porsche has traded at an average of 4.332 2. from which we derive a price of €50/share. although rose to 200% as sales dipped in 2009. closer to the peer historical average of 43%.094 1. Barclays Capital We believe given the fundraising and merger risks that Porsche should trade at 50% EV/sales. Figure 209: Slightly above consensus revenue & earnings estimates 2010E Barclays Capital Consensus Variance Revenue (€mn) EPS (€) 7.4x for the sector as a whole).

0x 4. Barclays Capital Figure 212: Porsche key valuation metrics 2006 Valuation multiples at current price 2007 2008 2009E 2010E 2011E 2012E Industrial EV/sales (%) Industrial EV/ EBITDA Industrial EV/ EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Valuation multiples at €55 price target 152 5.8x -24.9x 4.1 169 2.5 246 1.7 -14 (0.3 137 8.2x 77 3.0x 0. leading to a stronger demand and pricing environment than we currently assume.6x 3.2 154 9.1 252 3.8x (99.8x 2.4x 1.0x 1.1) 1.1 98 5.8) -34.0x 2.8 147 1.6x 1.5x 263.9x 1.2x 2.1x 0.0x 8.7x 10.6x 2.3x 5.1x 4.6 39 1.8x (0.9 122 1.7) (0.3x 13. The pricing and terms for the equity issuance and future merger are not known at this point.2x (2.2 152 5.0x 10.9) -0.3x (84.7 192 1.9x 8.9 44 2.8x 3. Risks from financial transactions – Porsche plans to issue future equity and complete a merger of Porsche AG into VW AG.9 115 6.4) -0.8 141 0.2) 28.9x 6.1x 1.6x (52.0x 2.9 108 4.8x 1.0x 5.4x 1.5x (2.5x 310.7x (53.5x 2.1x 0.9x 209 10.1 238 1.3 136 7.7) 0. Barclays Capital Risks to price target Risks to our price target are as follows: External risk – macroeconomic factors outside the control of the company.2x 2. and may be set in a way that prejudices owners of Porsche pref shares 8 December 2009 130 .6) -14.Barclays Capital | European Autos & Auto Parts Figure 211: Porsche EV/EBITDA 12.9 39 1.3x 4.6x 5.7x 3.8 355 21.9x 3.6x Industrial EV/sales (%) Industrial EV/ EBITDA Industrial EV/ EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Source: Company data.1x 3.1x 40 3.1x 3.3) 23.0x 5.3x 23 1.4) (6.9x 27 2.6 92 3.6x 3.0x 6.3x 3.9x 1.6x 187 10.7x -40.0x 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Adjusted EV/EBITDA Source: Company data.

100 2.300 VW Other operating items VW EBIT VW financial result VW pre-tax -300 3.100 3.000 8039 450 729 9.912 8.760 -1.3% -359 35.929 9.000 -4.190 122.500 15.960 2.613 -800 -790 1.565 9.400 -103.9% 6.7% -1.000 8647 478 804 9.466 7.177 28.960 -1.290 100 -3.84 10.7% -500 1.19 -19.560 € 68.Barclays Capital | European Autos & Auto Parts Figure 213: Porsche income statement Year-end July (€mn) Porsche standalone Units 98.6% 3.3% 876 11.569 6.0% 650 10.268 € 68.216 122.27 8.094 7.897 4.8% -304 35.600 123.501 -14.9% 2.7% 4.501 7. VW net income -1.400 -700 1.8% 1.74 6.41 8 December 2009 131 .558 -4.75 EPS core op'ns Source: Company data.000 7276 424 662 8.700 103.316 137.370 15.0% 667 Adjustments/minority interests Net profit Porsche AG 101 6.1% 7.0% 565 10.865 8.500 5.7% -500 477 -4.0% 3.95 -900 -2.100 100 7.3% 751 110.900 -109.28 0.8% -2.5% -350 35.3% 497 -4.4% -82 34.74 11.47 4.290 35.000 6052 412 630 7.29 -14.170 -1.000 107.100 25.456 15.500 -300 1.218 9.778 € 69.0% 310 9.94 35.900 5.4% Consolidated Porsche SE income statement (includes VW from 5 Jan 09) 113.215 -3.29 2.960 2.500 5.270 5.420 118.900 100 3.200 -1.300 VW minority at 62.621 9.392 -70.505 -788 -710 977 11.43 -1.8% -500 956 -4.000 4.7% -520 240 -4.36 0.4% Consolidated PBT Net income EPS ord shares EPS pref shares 8.370 15.322 -600 -60.47 1.140 257 1.61 7.526 15.270 5.762 4.331 7.456 -1.773 -4.466 7.900 VW tax etc.200 -1.12 0.85 8.500 15.900 -1.783 -1.918 7.738 -901 -850 1.000 -100.097 -1.526 15.700 -103.4% 1.709 103.0% -3. Barclays Capital 30.615 € 68.000 114.7% 1.564 115.100 2.056 11.826 6.800 107.470 -704 -600 760 10.094 2.156 1.7% 977 11.600 100 5.73 4.709 103.070 1.000 107.800 2.477 3.1% 2.000 6.674 -838 -820 1.260 6.7% -167 35.100 4.477 3.7% 1.294 € 68.50?) Consolidated revenues Consolidated EBIT Consolidated EBIT Margin 1.077 829 4.652 75.900 3.926 2.400 350 -192 417 -107 544 21 572 49 587 64 595 72 VW contribution to Group Units (000s) Revenue 5.587 127.000 6.400 -3.097 -1.3% 1.812 6.200 4.172 6232 516 718 7.609 -1.61 0.412 € 68.0% 676 10.911 5260 400 600 6.200 100 7.6% (vs -1.300 -116.569 60.60 7.300 7.066 132.962 € 68.0% 158 5.744 7.500 -1.628 127.826 6.100 1.4% 1.900 3.4% -500 1.800 4.0% 8.000 113.7% 760 10.898 10.100 4.238 89.4% -335 35.700 5.000 8336 464 766 9.4% -500 870 -4.156 5.586 -790 -760 1.26 9.0% Consolidated adjusted EBIT Consolidated adjusted EBIT margin 876 11.529 8.800 127.300 3.432 -1.500 -1.0% 622 10.700 -113.400 118.156 5.3% 859 8.000 5.6% 8.600 -120.0% 2.026 PBT margin Income taxes Tax rate (on pre-associate income) Net income 114.800 6.979 Other operating income Cost of materials Personnel expenses Depreciation and amortisation Other operating expenses EBIT EBIT margin Adjusted/clean core EBIT Adjusted/clean EBIT margin Other financial income PBT 19.456 15.100 5.964 -1.362 8.161 2007/08 2008/09E 2009/10E 2010/11E 2011/12E 2012/13E 2013/14E 2014/5E Average selling price Vehicle revenues Spare parts and accessories' revenue Other revenue (from credit financing/leasing) Revenue Total operating performance € 63.10 -0.318 -1.000 7781 437 695 8.8% 6.200 100 6.358 -569 -13.

7 4.0 60. Our 1-Overweight rating relies on the assumption that the ‘glass is half full’ in relation to future potential synergies from the Renault-Nissan BV (RNBV) alliance.00 Price (04-Dec-2009) €35.299 6.292 2. 2008-2011E (€mn) 2008A 37.Barclays Capital | European Autos & Auto Parts RENAULT – POTENTIAL FOR GREATER COMMONALITY DRIVES 1-OVERWEIGHT RATING RENA.5 3. we believe this leaves plenty of upside potential to the current share price. such as the Volvo stake.1) 0.661 206 0. But we also believe that RNO management are now whole-heartedly focused not only on cash management but also on turning their association with Nissan into something more immediately tangible. of late.62 Sales Clean EBIT EBIT margin (%) BC EPS € Consensus EPS € Industrial EV/sales (%) Industrial EV/EBITDA P/E 2. €42. While we think that 2009E’s likely alliance cost savings will have been more a gut reaction to the crisis. We expect next March’s Geneva Motor Show to present a good opportunity for management to disclose a new alliance strategy and unlock the value of scale from the RNO share.9 6.3 10. Barclays Capital *FactSet consensus data 8 December 2009 132 . we believe that this effect is already fully understood in relation to the RNO share.5 24.8 4. Though we do not expect the full benefits of such a strategy to materialise until 2012E. The unlocking of such synergies has long caused heated debate among analysts (the alliance has now been up and running for 10 years and many would argue has yet to crystallise any significant synergies for RNO) and we believe that investors have tired.7 7. We are also optimistic that 2010E will herald the beginning of an improved cash management strategy.59 Potential Upside 18% Figure 214: RNO – headline data and valuation multiples (at current share price). Whilst we acknowledge that the company is currently in a far from secure position in balance sheet terms and is yet to show evidence of current profitability in its automotive business. which will include the sale of selected property assets and any non-strategic investments. and would argue that investors can choose more direct US exposure via other names in the global sector.30) 2010E 32.020 (863) -2.3 (3. we expect much longer-term actions to be in discussion and to start to bear fruit from 2010 onwards.PA / RNO FP Stock Rating 3-OVERWEIGHT Sector View 2-NEUTRAL Price Target We are initiating coverage of Renault (RNO) with a 1-Overweight rating and a €42 price target. via the Nissan stake.74) 9 1.23 2009E 32. Whilst we agree that a strong position in the US market (as well as in those emerging markets which have remained resilient throughout the crisis) is likely to aid Nissan’s performance.791 212 0.6 0.1 (10.53 2011E 34.46 8 0.77 2012E 36. we believe that increased focus on this longerterm potential will boost investor sentiment in the near term.37 9 1.23 11 1.6 2.0 Source: Company data.959 981 2. Recent bull arguments for RNO have revolved around access to the early recovery in the US autos market.27 11 0. of waiting for evidence of cost streamlining and thus place very little equity value in the RNBV alliance. We believe that additional value can be extracted from the RNO share via the potential for increased use of commonality on platforms shared with its Asian associate.7 (10. We are therefore initiating coverage of RNO with a 1-Overweight rating and a €42 price target. implying 18% potential upside from current levels. and Nissan’s strong Chinese exposure.

Key share price drivers: Positives: Greater potential for longer-term commonality/scale via Nissan alliance Geographical breadth and access to fastest growing markets in 2010E via Nissan stake Potential for debt reduction via exiting from non-strategic investments Youthful model mix in recovering C segment Risks to our 1-Overweight view: Under-delivery on expected alliance benefits Current high gearing levels add risk to share.132 233 Renault-Nissan B (Clio) Renault-Nissan C (Megane) Europe RNO-Nissan D (Laguna) Asia PSA PF1 (207) South America PSA PF2 (308) PSA PF3 (408) Middle East/Africa Source: CSM. On a segment by segment basis. and 2% pts behind VW.Barclays Capital | European Autos & Auto Parts Valuation: We base our €42 price target on a weighted average combination of a sum-of-the-parts valuation (to which we apply a 10% holding discount for the associate companies) and peer average EV/EBITDA multiples. with 14% share of total available capacity. The most widespread argument at present relates to the necessity of reaching 1mn units per platform.103 1372 745 994 1. especially if further cash injection is required for Avtovaz (though we view this as unlikely) With more than 60% of earnings generated by Nissan (>70% by total associate contribution) any significant downturn in either Nissan’s or Volvo’s earnings stream would have a major knock-on affect on Renault’s own bottom line. the two companies stand just ahead of Toyota. For further detail please see valuation section. it would at first appear that the RNO-Nissan alliance is ideally suited to win in this area. as a combined group. Further alliance savings possible through greater commonality and modularity One of the common strategies that OEMs have been emphasising in recent months is the ability to leverage global scale and parts commonality. the RNO-Nissan group is set to achieve well above the requisite 1mn units/platform in the B & C segments by 2011E and approaching the 1mn level on its D platform (Figure 216). in the scale stakes. C & D platforms 2. Figure 215: Although RNO-Nissan far exceed PSA. From our analysis of current platform capabilities by manufacturer. Barclays Capital 8 December 2009 133 . there is still scope for additional commonality on B. In the B & C segments.

Figure 216: Further savings potential from greater commonality and modularity Phase 1: Purchasing/ Scale Phase 2: Commonality Phase 3: Modularity Source: Barclays Capital Background to the alliance Renault and Nissan signed a partnership agreement 27 March 1999 in order to develop potential synergies from combining the strength of the two companies.3% RENAULT Dacia 99. Dedicated Alliance team 100% Joint companies RNPO (Renault-Nissan Purchasing Organization) RNIS (Renault-Nissan Information Services) 15%(1) Note: (1) No voting rights Source: Company data 8 December 2009 134 . a closer analysis of the actual commonality between models on its so called shared platforms shows that there is still a long way to go before a true modular strategy is achieved. to gain a competitive edge manufacturers need to not just produce 1mn units per key volume platforms. we believe that RNO-Nissan have achieved 80% of phase 1 (purchasing/scale) of the modular process.43% Renault Samsung Motors 80. 30% of commonality and only a minimal proportion of potential modular savings As we argued in the front section of this report. RNBV is responsible for the strategic management of the alliance. A further step was taken 28 March 2002 when Renault-Nissan b.Barclays Capital | European Autos & Auto Parts Achievement of scale but yet to realise commonality potential RNBV has currently achieved 80% of joint purchasing potential. was formed.74% AvtoVAZ 25% 50% 50% NISSAN RENAULT-NISSAN b. (RNBV). around 30% of phase 2 (commonality) but are only just beginning to experiment with phase 3 (full modularity). Whilst the RNO-Nissan alliance may have already extracted significant economies of scale based on joint purchasing volumes (with common suppliers used for >40% of total group purchasing and RNPO now responsible for 100% of group purchasing – see discussion below).v.v. In other words. but also to exploit that scale through common engineering and parts specifications.1% AB Volvo 20. whilst at the same time protecting each company’s autonomy and separate brand identity. Ltd. a joint company incorporated under Dutch law and equally owned by Renault SA and Nissan Motor Co. Figure 217: RNO-Nissan alliance structure 44.

12-strong alliance committee reinforces group’s dedication to realizing full potential of alliance . zero-emission business.more focus on phases 2 & 3 of the modular process (commonality and modularity) There is now an alliance team specifically in place to oversee the performance of the alliance. research and advance technologies and global sourcing. Why we believe significant savings will be achieved in 2009 and beyond We believe that the alliance has now become one of the key areas of focus for Renault (along with cash generation) and that they are no longer talking about theoretical savings but are now taking definitive action to generate those savings. IT. Figure 218: €1. 48 Manf'g and logistics 363 Research & engineering 70 Sales & Marketing 63 LCV 41 IT & Support 12 Manf'g and logistics 179 Powertrains 289 Purchasing 105 Vehicle engineering 74 Source: Company data Powertrains 134 8 December 2009 135 . we believe.5bn of combined savings. targeting €1. have finally forced management to act. investors believe it has taken too long for management to generate discernable benefits from RNBV. have slowed the process. support functions. However. powertrain.Barclays Capital | European Autos & Auto Parts Why has it taken so long? Despite the promise of significant synergies since the inception of the alliance 10 years ago. On 29 May 2009 the group presented a detailed strategy for potential alliance synergies in 2009. Management of the separate functions within Nissan and RNO will now have to report into this “alliance committee” who we believe are currently in the process of setting future alliance targets. We expect to hear more definitive targets for 2010 and beyond in 1H10E. common platform & parts. Cultural differences between the two companies. including purchasing.5bn of RNO-Nissan synergies targeted for FY09 LCV. the harsh realities of a global recession. global logistics. 102 Research & engineering 115 Sales & Marketing 147 Purchasing 157 Vehicle engineering 279 Source: Company data Figure 219: RNO Group targets €678m of these synergies IT & Support. with 12 people dedicated to the generation of future synergies and divided between nine key areas: purchasing (RNPO). but also lack of driving force from management while auto markets were supportive. €678m for RNO. The strategy focuses on eight key areas for development. powertrain & vehicle engineering and manufacturing. we believe.

and Dacia Logan and making up 34% of the total group global production – was the first where management saw the opportunity for commonality. On a gross level. Savings from manufacturing & logistics to accelerate Like management. Mexico (Clio) and Spain (Trafic).Barclays Capital | European Autos & Auto Parts Figure 220: Barclays Capital estimated Industrial EBIT walkdown showing expected alliance savings FY09E (€mn) 60 130 -288 100 -1. For instance. whereas Nissan assembles Renault vehicles in South Africa (Sandero). including four new vehicles in 2009. By 2012E we forecast €150mn of annual savings from this source. Greater scope for commonality of models Production shutdown costs in 2009 fully compensated by alliance manufacturing and logistic savings of €179m in 2009 Only 70% of alliance production is on common platforms and currently only 35% commonality of components even on a common platform Currently common platforms account for 70% of the alliance’s production volume but the percentage of shared components across models on a shared platform is still very low. Micra. By the end of 2009 the alliance will cross-manufacture a total of 13 vehicles. The ease with which additional economies of scale could be achieved by increasing the group’s purchasing commonality was further realised in 2008 when RNPO expanded its scope to cover 90% of alliance purchasing turnover.475 -1. However. we expect these savings to accelerate in the mid-term as new models come online and provide further opportunities for cross-manufacturing.263 70 -80 180 -100 140 Manufacturing & logistics Purchasing Production stoppage Commonality of powertrains Other Alliance Savings Industrial EBIT 2008E Commonality of product RNO standalone headwinds Aid to suppliers R&D. At Renault’s investor day back in September 2004 management presented the benefits for the 136 8 December 2009 Industrial EBIT 2009E . Common purchasing well utilised by alliance but still further savings to realise 100% shared purchasing via RNPO in 2H09 provides €100m of likely savings Common purchasing has been an area targeted by RNBV since its inception. For instance. However. we expect to see the greatest achievement in the field of manufacturing and logistics as the company begins to further realise its potential for sharing facilities (or phase 2 of the alliance process). Renault plants currently produce Nissan vehicles in Korea (Almera) and Brazil (Livina). SG&A Source: Company data. 2. we expect the company to fully achieve its €179m target in this area in FY09 but that these savings will be entirely matched by additional costs of production shutdowns in the year. In 2009 this increased yet further such that by year end RNPO will cover 100% of purchasing. the B platform – the group’s largest comprising models such as the Renault Clio. Nissan Versa. we expect savings to reduce to just €50mn per annum going forward. Modus. Barclays Capital 1. We expect scale economies from this area to provide €100m of savings for RNO in 2009 but since we believe that this is an area where 80% of synergy savings have been achieved already. 3. the original scope of the Renault-Nissan Purchasing Organisation (RNPO) back in 2002 was only for 30% joint purchasing.

Currently 50% of powertrain components are shared and with increased emphasis on CO2 saving technologies. thus greater scope for future savings. Even more urgently. However. We see scope for much greater platform commonality in 2010 and beyond. However. we believe commonality is still only around 35% in total across all models on the B platform. Although we believe this to be an area with the largest potential for long-term improvement. Ongoing improvement on commonality of powertrains Co-operation on powertrain development and manufacture has been exploited by the alliance for some years now – for instance back in 2002 the Nissan Almera was fitted with Renault’s 1.5l diesel engine in Europe. we expect the new Mégane and Scénic models to have improved the commonality ratios on the C platform and that RNO will thus benefit from €70mn of savings in FY09E. five years on. Total commonality at that point was 50% across the Clio/Modus range and 30% across the Micra/Modus. though again these will be back-end loaded (for further detail see Figure 222). further sharing of development costs and manufacturing across the partnership should be a significant benefit. following the lack of payback from significant Laguna investments.Barclays Capital | European Autos & Auto Parts new Modus model of sharing components with both the Micra and Clio. we believe. with new model launches in the D and LCV segments providing opportunity for further platformsharing (see discussion on model cadence below) but it will not be until 2012 (with new generation Clio) that these savings will really start to accelerate with the potential. Figure 221: Commonality only c35% across all models on RNO-Nissan’s biggest platform RNO-Nissan B platform Commonality (%) As reported by RNO Sep 04 Clio/Modus Micra/Modus FY09E Barclays estimates Across all B platform models* Upperbody parts Platform parts Powertrain Total 25% 80% 100% 50% 5% 60% 100% (diesel)/ 0% (petrol) 30% 10% 50% 70% 35% Source: Company data and Barclays Capital On the C platform . remains a key area where further synergies must be achieved.Mégane/Scénic/Qashquai/Sentra etc . for €400mn of YoY cost improvement. We believe this area can contribute €200mn per annum in savings for RNO. 4.(38% of total group production in Europe but only 22% globally) we believe there is even less commonality at present. as we believe there is currently very little commonality across vehicles in this segment. In the field of shared engineering of models across platforms. we also think that it will be the area in which savings will take the longest to achieve as the company must wait for the renewal of its full model portfolio before full modularity can be realised. the D segment where RNO currently makes a double-digit operating loss. there is still a long way to go before full modularity can be achieved across all RNO-Nissan platforms. 8 December 2009 137 . The new SM5 in Korea in 2010E should help provide shared capacity on this underutilised platform.

7% 582 1. we expect savings in R&D (particularly in the area of headcount in 2009) and SG&A. We believe company management will provide the investment community with a schedule of its own targets in early 2010 along similar lines to those estimated above and showing that savings will accelerate gradually until 2012E when the full modular potential can truly begin to be realised.310 Current year automotive clean EBIT (€mn) Industrial EBIT margin (%) (395) (1. such as volume.263) 300 (300) 450 (70) 50 430 50 100 80 230 200 200 100 100 200 630 (203) 290 0 (300) (30) 0 40 50 225 100 375 250 250 100 100 200 825 582 230 0 0 0 0 230 30 250 150 430 400 400 120 130 250 1. longer-term alliance benefits to start to materialize but really expect these to be much more back-end loaded and to fully ramp up from 2012E onwards.5% -4. 8 December 2009 138 . Barclays Capital * ex-aid to suppliers and costs of production stoppage Whilst the €680mn of savings we forecast for 2009E we expect to have been the ‘easy’ savings or more short-term cost cutting associated with a crisis year.475) 100 130 70 (80) 130 Purchasing Commonality of powertrains Commonality of product Aid to suppliers Total purchasing/commonality savings 220 180 (100) 80 140 60 200 680 Gross manufacturing & logistics Production stoppage costs Manufacturing & logistics 96 R&D. With an increased emphasis on electric vehicles. although on a net level many of these will be negated by company specific headwinds.060 785 1.892 5.2% Source: Company data.Barclays Capital | European Autos & Auto Parts 5.8% 1. as will the streamlining of the two companies’ separate R&D departments into one division Figure 222: We expect synergy cost savings to be mainly back-end loaded with the full modular potential not realised until 2012E RNO EBIT walkdown (€mn) Prior year automotive clean EBIT (€mn) Volume (variable costs) 2H09E (884) 2009E 2010E 2011E 2012E (288) (1.6 (203) -0. We therefore expect a slight slowdown in savings in 2010E as we are looking for more considered. FX and price/mix. SG&A Other alliance savings Total other alliance savings 144 Total gross alliance savings* YoY change in automotive EBIT 370 489 (975) 1. In 2010E we therefore forecast a further €630mn of alliance savings at Renault as per the breakdown provided above. to accelerate in future years.080 (122) (1. the ability to share battery technology with Nissan (and its partner SAIC) should generate significant savings for the group.263) -2. Many other areas for savings have been identified – notably research into new technologies In total we credit RNO with the full €680m of targeted alliance synergies in FY09. Finally.100) 176 35 (120) 140 0 (350) (275) 250 Raw materials Price/mix Currency Warranty Renault standalone tailwind/(headwind) RNBV alliance savings: 110 (1.

Figure 223: Despite caution on top line.9 Source: FactSet consensus. 8 December 2009 139 . and how exactly the group plans to realise those benefits. but the potential that we see the company unlocking in the longer term. further FX headwinds and weaker overall pricing. We believe that the market is underestimating the potential of these savings because it has been disappointed in the past by failure to produce synergies. our EPS estimates remain above consensus RNO Group 2010E Barclays Consensus Variance (%) Revenue (€mn) EBIT (€mn) EPS (€) 32. Indeed. However. Barclays Capital Despite remaining below consensus on the overall demand equation in 2010E and also factoring in expected raw material increases of €150/vehicle.6 3. With firm targets and step-by-step detail on achievability of those targets. we expect the Geneva Motor show to be a good forum for presenting a new alliance strategy (along similar lines to Fiat’s 4 November Chrysler synergy presentation). which is likely to focus on both improved commonality of platform production across all models but also potential R&D savings from greater pooling of resources. therefore. The Mégane should also herald the beginning of the modular approach which will eventually be rolled out on all future models.152 183 0. We use consensus estimates for Nissan and Volvo associate contribution since both companies are currently non-rated. in where we see the company’s results in FY09E or even in 2010E (we forecast a -€203mn Automotive clean EBIT loss in 2010E. we believe that commonality is finally a theme high on the agenda for all management meetings and that investors will start to hear more in coming months about the tangible benefits.5 12.Barclays Capital | European Autos & Auto Parts RNO Automotive to remain loss-making in 2010E but consensus too pessimistic Our argument for buying into the RNO share lies not.661 206 0. €206mn positive EBIT at the group level).51 -1. as production recovers on the back of RNO’s strong model mix (with the youthful Mégane likely to capitalise on our theory that the C segment will be the fastest growing segment in Europe in 2010E). Although there have been recent minor upgrades to market assumptions for RNO’s earnings and to analyst recommendations. we still believe the market is drastically underestimating the company’s longer-term earnings potential based on the new concerted effort to achieve full alliance synergies. For 2010E we expect alliance savings to combine with a ramp up in manufacturing savings. our projected gross cost savings and the impact of an improving C segment mix. we expect the market to gradually give the company more credit for these savings thus providing momentum to the share. take us to an above consensus EBIT and EPS forecast for 2010E.53 33.

5-1mn units behind our own US SAAR assumption.5 3. we again believe that this theme is already well understood by the market.000 13.0 3.000 35% 5.83 5. which we believe is well understood and already priced into the share.Barclays Capital | European Autos & Auto Parts Geographical scope to enable further earnings expansion We prefer to highlight RNO’s alliance synergy potential rather than the more popular bull argument for buying into RNO’s superior geographical reach. via its association with Nissan. Barclays Capital 1.83 to RNO EPS. of course Nissan earnings growth will drop down to the RNO bottom line.0 7. We therefore agree that Nissan’s 7% US market share.0 44% 504 1. we prefer not to base our bull case purely on this well-discussed theme.00 Figure 226: Market ratings too cautious for RNO 5.0 Buy 140 . Figure 224: Every additional 1m units in US market.0 1. Figure 225: Analyst earnings assumptions overly cautious 20.6m units in the US market in 2010E to reach a 12m SAAR.00 -10. especially since the Nissan share is publicly traded and can therefore be invested in directly.5 2. With Nissan historically contributing >60% of Renault group EPS. helps our bull case.00 15.0 2.0% 70. incremental contribution per unit (EUR) Tax rate Multiple to incremental earnings Renault ownership in Nissan Value to Renault (€mn) Value per Renault share (€) Extra value as % of Renault current price Source: Company data. this could therefore provide some further upside potential for RNO.00 -5.5 4. especially since we are forecasting a recovery of 1.00 5. would boost RNO EPS by almost €2 Renault sensitivity to US US SAAR change (m) Nissan market share in US Nissan incremental units sold (units) Average price per Nissan unit (EUR) Est.00 0.0 4.00 10.400 5.5 Aug-08 Dec-07 Apr-08 Jun-08 Oct-08 Feb-08 Sell Nov-07 Nov-08 May-08 May-09 Mar-08 Mar-09 Nov-09 Sep-08 Sep-09 Jan-08 Jan-09 Jul-08 Jul-09 Aug-09 Dec-08 Renault FY09E EPS Renault FY11E EPS Source: Datastream Renault FY10E EPS RNO Cons Recommendation Source: Datastream 8 December 2009 Dec-09 Apr-09 Jun-09 Feb-09 Oct-09 1. such that every 1m addition to the US SAAR would bring €1. However. Since we use consensus earnings numbers for Nissan to calculate the associate income contribution from the Asian OEM and believe that consensus is currently 0.00 -15.4% Likewise. although we agree the attraction of Nissan’s exposure to the Chinese market (20% of global Nissan sales) and the combined RNO-Nissan group’s geographical breadth (though E European and Russian markets have yet to show signs of recovering into 2010E).

8 6.5% 0. Laguna (f/l) Logan SUV SM5 Mégane SUV. company data and BC estimates. should also aid core profitability.4 12.Barclays Capital | European Autos & Auto Parts Youthful product cadence to boost 2010E mix With the benefit of alliance scale.5 79.5% 2. Although 2010E will be a tough market for small-car market skewed manufacturers as the overhang from scrappage phase out will take its toll on the European market (we forecast A&B segments combined market share to fall 400bp in 2010) .0 39.3% 0.4 11.1% 0.6% 2.3 82.0% 3.6% 10.4 13.8 44.2 38. Espace Logan (ng) SM7 Source: JD Power.5 29.0% 0. Figure 227: RNO’s Mégane to provide mix boost from C-segment growth in 2010E Market Share (%) 2008 2009 2010 2011 2012 A – Basic B – Small Memo: A + B 10.9 C . The new Logan SUV is due to be launched in 2Q10E and should further bulk out the mix of this profitable brand. which traditionally make mid-single digit margins for the group. Barclays Capital 20. trade press. Mégane CC.8% 0.0% 5.8 29.0 6.8% 24. Although 2009 was a peak year for RNO’s model cadence.8 32.6% 5. Electric City Car.4% 11.4% 2. Likewise.8% 0.6 83. scrappage benefits boosted A&B share at the detriment of the C segment and so the benefits of improved mix from the full Mégane roll out were not felt as strongly as in a more ‘normal’ year.7 39.1 46. new LCV products (Master in 10E.8 31.4 8.6% 8.Upper Medium Memo: C + D Memo: A .4% 0.8% 0. Safrane.6% 0.6 6.9% 6.7 33.6 7.1 81.5 32.0% 0. 2009-2012E 2009E 2010E 2011E 2012E Renault Scénic.2% 4.5% 28.9% 2.0 31. Fluence Dacia Samsung (RSM) SM3 Alpine. the combined RNO-Nissan global market share stands at 9%.7% 0.1% 2.1 82.8 44.1% 0.1 37.4 31.4 42. Figure 228: RNO forecast new model introduction schedule.0 32. 200bp YoY should help boost mix.4% 1.Lower Medium D .5 40. we believe.1 11.1% 0. followed by Trafic in 2011E). Master. making the partnership the third-largest group in the world in terms of sales.0 36. RNO’s strong presence in a segment C set to grow.D Source: Barclays Capital Dacia’s Logan range has been an unmitigated success for the company. f/l – facelift.4% 2 6 1 5 15 12 1 11 24 15 23 25 9 8 11 15 14 7 1 11 10 17 22 8 December 2009 141 .3 31. Trafic (ng) Clio (ng). ng – new generation Figure 229: RNO-Nissan group have the best emerging-market after VW Market Share Group Brazil China India Russia Total BRIC Brazil China Rank India Russia Porsche-VW Group Renault-Nissan Group Fiat Group PSA Group BMW Group Daimler Group Source: JD Powers.

despite its emphasis on EV development. such that RNO’s annual R&D spend will only increase by €150mn per annum (8% of current R&D costs). Figure 230: RNO production & cap utilisation vs average for volume market.4 0. In fact the company still targets -20% cut to cash R&D spend in 2009E. rather than depending on separate R&D functions at RNO and Nissan). Yet more potential benefits to reap from the conglomerate structure. we agree with the company’s premise that the only way to make electric vehicles cost efficient is to roll them out en masse (a similar strategy to BMW’s use of ‘Efficient Dynamics’ across all models).0 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% RNO Production (LHS) Source: CSM. and does not merely see this cut as a gut reaction to the current crisis but believes that spending can be maintained at this low level (mainly as a result of sharing resources across the entire alliance. RNBV is well placed to capitalise on its scale and its in-house battery development with NEC in order to share the costs of its EV investment. the €4bn is likely a gross expenditure. Indeed. For example.2 1. Also.2 0. Government involvement in the French auto industry has tied RNO’s hands to some degree when it comes to improving its utilisation ratios.6 0. we see significant potential for streamlining of products across brands – for instance the SM5 in Korea should hopefully ease the burden on the D platform and Nissan/RNO production in Togliatti. we believe that the €4bn to be spent on EV development will be spread over 10 years and shared between both companies. Barclays Capital RNO capacity utilisation % (RHS) Focus on electric Many investors worry that Renault’s focus on electric vehicle development is a risk to the share given the significant financial outlay necessary. importantly.6bn loan from the US Department of Energy to add flexibility to its Smyrna.8 0. 2008A-15E Millions 1.0 0.4 1. which we expect to ease the cost structure. Nissan will receive a US$1.Barclays Capital | European Autos & Auto Parts Below average capacity utilisation leaves significant scope for upside Our analysis of capacity utilisation in the volume sector shows that RNO has one of the lowest levels in the market – leaving significant room for improvement. We also believe that the US$6bn (€4bn) that the group has announced it will need to spend in the field of EVs will be spread thinly over a long timeframe. Flins and Valladolid. Russia should help Avtovaz achieve a lower breakeven point. Moreover. net expenditure is likely to be lower as government incentives (or low cost financing) will to aid the burden of developing electric vehicles. whilst we do not necessarily credit RNO’s target of 10% market share for electric vehicles by 2020. manufacturing plant to produce zero8 December 2009 142 . although the company appears to have found ways to gradually phase out full assembly roles at Sandouville.6 1. However. Tennessee.

RNO is likely to generate €2. with positive FCF in 2009E being a firm target. Despite a change in payable terms in FY09. helping to generate. the vehicle assembly plant will have the capacity to build 150. Of course.000 EVs a year and have an annual capacity of 200.2bn (€8. When fully operational. we feel that the market is not giving enough credit to RNO for its ability to generate strong working capital inflows as production increases. The loan will help finance retooling the 26-year-old plant and build a new facility to manufacture batteries.000 units at dealers and 160.000 batteries.2 cars and 3 trucks – thus in reality using the government money to aid core operations as well as new technology investments. positive Industrial FCF in 2010E also.000 on the group balance sheet) can be maintained going forward. However. after €1bn cut to inventory. The positive FCF target for 2009E was initially set presuming €300-500m of these asset liquidations would occur in FY09. RNO will struggle to strengthen its balance sheet and return to investment grade debt ratings via operational cash flow alone. Company meetings and recent results presentations reinforce the notion that management are now firmly focused on the need for positive cash generation.3bn of inflows from WC in 2009E.3bn after pension) leaving gearing at 51%. Figure 231: RNO debt levels peaked in 2008 – reduction of debt remains key focus of mgt 8000 7000 6000 5000 4000 3000 2000 1000 0 2000 2002 2004 2006 2008 2010E 2012E 2014E -3000 -4000 0 -1000 -2000 2000 1000 Industrial Net Cash (Debt) Source: Company data. 8 December 2009 143 . has been helped by scrappage-induced sales and also the company’s strong order book going into Q409. We agree that this is not a share for leverage-averse investors in the short term but we believe that the market is underestimating the company’s potential to materially improve its cash position. However. we believe. The expansion into electric vehicles will likely boost utilisation rates for existing (non-electric) models at the plant . with Industrial net debt levels currently at €7. Barclays Capital Industrial FCF The company has lined up €700-1bn of assets which it aims to sell in 2010E. The company argues that this new lower inventory level (c150. or in other words presuming that the operational cash flow of the business would be a negative €500mn.Barclays Capital | European Autos & Auto Parts emissions vehicles and lithium-ion battery packs.000-170. there will be a major ramp up in production levels in Q409E which will aid that goal but we think continued tight inventory management will also enable further cash benefits in 2010E. The fact that the company can still target positive FCF even without the aid of these sales. Cost savings and disposals should aid longer-term debt reduction High debt levels and lack of significant cash generation have weighed on the RNO share in recent years. The plant currently has a capacity of 550.000 vehicles but even before the downturn was only working at 73% capacity utilisation.

liquid asset. as political pressure may try to force RNO to inject further funds to the manufacturer. when the action happens. Management have repeatedly emphasised the need to significantly reduce the company’s current debt burden. With 25% market share in the Russian market. so that when the Russian market finally starts to recover. We think RNO will stand firm and provide strategic and operational expertise but no further cash outlay. therefore we expect that it will bide its time for a good exit window.Barclays Capital | European Autos & Auto Parts Dividend income no longer provides FCF boost Dividends from associates have traditionally brought in c€600m per annum to RNO’s cash flow but have become a much smaller income stream in 2009 and are likely to disappear entirely from 2010E cash flow (although leaving room for further upside surprises if Nissan were to declare a dividend in 2009). we anticipate that it would provide a positive catalyst for the RNO stock and aid the group’s longer-term debt reduction. believing that the market is not currently crediting the share with sufficient potential for significant Alliance synergies in 2010E and beyond. Unsurprisingly there has already been considerable speculation in the press and investment community surrounding this non-core. We estimate that a potential disposal could generate €3bn of cash at current market levels. If RNO were to dispose of its Volvo stake next year. Whilst we expect the Nissan dividend to return in 2011 we do not see dividend income returning to pre-crisis levels in the mid-term. the company will be well positioned to capitalise on the recovery. However. we see huge potential for upside from this stake. as well as the ability for Renault and Nissan to leverage off Avtovaz’s existing platform. and so we believe that a disposal within the next 12 months would be a preferred option. but as we have seen in the past with M&A activity of this scale. Rating We are initiating coverage of RNO with a 1-Overweight rating. we believe that once the company properly discloses its new Alliance targets to the market. In the very near term we advise buying into any dips in the Renault share on the back of negative news flow.8% stake.000 drop in unit sales. However. with new management in place and a plan to reduce the breakeven point to 400.8% stake in Volvo will be the preferred option within the next 12 months RNO is the largest shareholder in Volvo with a 21. the resultant broker upgrades will provide 18% upside to the current share price. many press articles have highlighted the likelihood of Renault considering the dispose of this non-strategic stake. Avtovaz has been hard hit as the market crashed down from close to 3m vehicles in 2008 to <1. we do not view it as likely that Renault will input any more cash into the Russian manufacturer. Rather we expect RNO to provide expertise and scale. were a buyer to be found. the market can still react positively. Of course RNO would look to maximise the return on its Volvo investment. Volvo disposal likely in short term We believe a disposal of part or all of Renault’s 21. Though management will not confirm the possibility. and we also remain cautious on the company’s current debt structure. no matter how well anticipated.5mn in 2009E and was not prepared for the necessary cuts to production caused by a 400. Whilst we believe that the company’s exposure to high growth markets in 2010E via its Nissan stake is a well understood theme. Avtovaz a short-term drag but long-term opportunity We do not view it as likely that Renault will input any further cash into Avtovaz We expect negative headlines relating to Renault’s investment in Avtovaz to continue for the next few months.000 vehicles. Valuation Methodology We value the RNO share using a SotP methodology which we confirm against historical and peer average EV/EBITDA multiples to reach our €42 price target: 8 December 2009 144 .

We base our calculation on a blended average of peer Industrial EV/sales and Industrial EV/EBITDA multiples for the core Autos business and bring in associates at market value. Figure 232: Renault is currently trading at a 20% discount to its SotP. Barclays Capital Expensive Jan-08 Jul-08 Jan-09 Jul-09 Historical avg discount 8 December 2009 145 . Company data.Barclays Capital | European Autos & Auto Parts SotP Using a sum-of-the-parts valuation we arrive at a €42 price target for Renault. or 18% upside potential to its current market price. However. versus a historical average of 10% 80% 60% 40% 20% 0% -20% -40% Jan-06 Cheap Jul-06 Jan-07 Jul-07 Discount to SotP Source: Datastream. we also apply a 10% discount to the NAV in line with the average discount that the market has historically applied.

Sh.635 2.5x at current share price.5 25% stake at market value FY10E BS date FY10E BS date FY10E BS date FY10E BS date 10% discount EV/EBITDA We also cross-check our SotP calculation against peer and historical average multiples.0x 8.0x 0.528 7. RNO Renault Auto @ PSA multiple Renault Auto @ PSA multiple Renault Auto Average Renault FS (0.963 7.6. when we expect autos markets to have normalised to a greater degree. SKr 65.420 (7.8x book value 44.798 11.373 1.046) (517) 234 12.0x 2.4x at PSA and 3.1 78 -26 -4 -2 1 46 42 35.4x for the sector as a whole).861 23 21.5 A shares.0x 10.Barclays Capital | European Autos & Auto Parts Figure 233: RNO – Our SotP assumption leads us to a 1-Overweight rating and €42 price target NAV. Barclays Capital €mn 4.518 € per share 18 28 23 6 29 39 10 0.293) (1. pre-associate stake) EV/EBITDA (vs 2. Historically RNO has traded at an 8-year average of 6x unadjusted (ie.3% of Nissan share price of JPY605. which would imply a value of €43/share. our above consensus EBITDA estimates put RNO at only 4. thus on a weighted average combination of both these valuation metrics we derive a €42 price target for the share. 8 December 2009 146 .s) SOTP (base assumption) TP applying Holding discount Current share price Source: Company data.9% of Volvo share price of B: SKr66. Figure 234: Renault Group historical EV/EBITDA implies the share is currently undervalued 12.8x equity) Renault Core Nissan stake at Market Volvo stake at market Avtovaz stake at market Group EV Net debt Pension Underfunding Minorities Options exercise (Treas. EUR-SEK at 10.0x 6. Looking out to 2011E.901 10.0x 2000 2002 2004 2006 2008 2010E 2012E 2014E Historical average Source: Company Data and Barclays Capital UNADJUSTED EV/EBITDA We give a greater weight to our SotP valuation.0x 4.59 Remarks 15% 2011E EV/sales (in line with Peugeot) 2x 2011E EV/EBITDA (in line with Peugeot) 0. We believe that the company should trade closer to its historical level of 6x. EUR-JPY of 130 20.782 6.

rate Renault Market Weight.1% 31% 0. They believe that Renault's credit metrics will materially improve in 2010 and it can avoid significant cash burn through next year.5x 10.5) 24.0x 4.0% 13% 1. despite the planned phasing out of European incentives.8x 3.6% 16% 1.8% 11% 1.7x 8.6x 0. 8 December 2009 147 .0x 7.2x 3.7x 1.8x 12.1x -21.2% 10% 0.1% 62% 1.8x 0. Rob Perry and Darren Hook.6x 9.4% 20% 1.0% 39% 0.7% EV/sales EV/Clean EBITDA EV/Reported EBITDA EV/Clean EBIT P/E FCF Yield Price/Sales Price/Book Dividend yield Source: Company data.3x -6.2x 7.2% 29% 0.3x 13.6x 5.4x 1.0x NA 36% 0.8x 3.7x 0.0x NA 35% 0. Barclays Capital Risks to price target Downside risks to our price target are as follows: Risks to our cost commonality assumptions.6x 3.7x 3.7% 42% 0.4x) 7.6x) (4.1x 3.3x 8. under-delivery on expected alliance savings Current high gearing levels add risk to share With more than 60% of earnings generated by Nissan (>70% by total associate contribution) any significant downturn in either Nissan or Volvo’s earnings stream would have a major knock-on affect on Renault’s own bottom line.1x 3.2x 7. ie.5x 10.0% 19% 2.6x (28.6x 11.1x -21.1% 62% 1.3x 8.7x 0.2x 8.8% 13% 1.0% 19% 2.3x -1.7x -0.6x 0.1x 5.2x 8.7x 5.7% 42% 0. Credit perspective Barclays Capital credit analysts.7x 3.2x 6.7x 0.2x 3.0% 11% 1.9% 72% 1.7x 11.2x 9.6x 3.6% 10% 1.0% 11% 1.1x 3.6x 1. They subsequently believe that Renault should be able to justify the ratings agencies' stable outlook.7x -0.7x 8.5x (2.7x) 81.0x NA 39% 0.2x) 1750.9% 72% 1.2x (13.4x) 65.7x (17.0% 11% 1.3x 7.Barclays Capital | European Autos & Auto Parts Figure 235: RNO key valuation metrics 2006 Valuation Multiples at Current Price 2007 2008 2009E 2010E 2011E 2012E EV/sales EV/Clean EBITDA Unadjusted EV/EBITDA (pre-Associates) EV/Clean EBIT P/E FCF Yield Price/Sales Price/Book Dividend yield Valuation Multiples at €42 Price target 10% 1.6x 5.5) 24.6x 9.5x 4.2x (13.0x 7.9% 32% 0.1% 28% 0.7x) (3.9x (4.6% 13% 1.

Barclays Capital | European Autos & Auto Parts Figure 236: RNO Group income statement.682 0.8% 5.299 2.850) (4.870 34.850) (4.Share in NI (loss) of AB Volvo .8% 486 858 (288) (1.4% (200) 800 6.254 (644) 28% 2.910 36.2% 7..9% 0.886 65 2.0% -15.289 (1.020 -15.343) 8.4% -2.277 3.669 28 571 30 (2.050) 0.476) 7.1% -12.776) 6.121) (1.274 22.53 0.6% 3.582) 8.6% 22.949) 1.3% (31.3% 4.3% -2.814) (4.3% 2.020 2010E 32.155 (1.790 32.3% 8 December 2009 148 .399 Current and deferred taxes Memo: Tax rate Group Net Income (255) 27% 2.5% (25.230 30.6% 1.994 11.354 487 212 400 (863) 409 206 399 981 407 2.10 258.50 256.9% FS revenue growth Group revenue growth Segmental EBIT: Automotive EBIT 2.3% 23.Share in NI (loss) of Nissan Motor .244 19.063 472 1.552 2.5% -7.628 10.185 22.892 Financial Services EBIT Group EBIT Segmental EBIT Margin %: Automotive EBIT % 492 1.041 23.3% 2.0% 2.8% 4.989 22.2% 61 2.978) 1.959 7.923 40.238 (329) (117) (400) (1.898 (1. general and administrative expenses Clean EBIT (Operating margin) Memo: Operating margin.23 3..5% Financial Services EBIT % Group EBIT % Source: Company data.119) (1.858) (4.288 352 35 2.791 2009E 32.959 2012E 36.463 (1..831 33.770) 212 0.0% 1.3% 2.985) (3.710 24. % (186) 877 (116) 1.621 10.661 2011E 34.6% 23.299 1.057) (1..60 38.0% 76 1.757 30.5% (25..756 Minority interest share of NI Net income.62 1.628 4.32 3.7% 2.263) (203) 582 1.084) 206 0.2% -0.679 35.132 21.299 6.643) 30 136 30 1.100 Financial income/(expense) Share in associate net income .292 3.354 3.956) 981 2.063) (3.6% 3.628 (10.738 Other operating income and (expenses) Reported Operating income Memo: Operating income.3% 0 1.2% 2.2% (200) 310 2.408) 9.382 Financial Services Group Revenues Automotive revenue growth 1. Barclays Capital 25.0% 2.292 Cost of sales Gross profit Memo: Gross Margin (% of sales) (31.4% 4.290 (1.6% 2.063 2.7% 2.734 (162) 50% 599 0 0% (2.431 800 300 0 3.Share in NI (loss) of Avtovaz & other assocs Pre-tax income 1.1% 3.7% 22.661 2. pre dilution) DPS (Euros) Segmental Revenue: Automotive 256.5% 1.8% (29.6% 3. 2006A-2012E December year-end (€mn) Revenues 2006 40.9% (300) (1.613) 0 0% 166 (177) 28% 1.3% 441 437 -3.034 37.6% 21.963) (4.00 256.292) (1.80 256.161) (2.236) (863) -2.219 (1.8% -4.224 30 2.628 0.3% 1.4% 0.23 0.888 384 5 3.0% Cost of sales financing Research and development Selling.726 NoShares (average) Reported EPS (average shares.003 40.332 -2.3% 6.30) 0.675 -0..409 38.263) (150) 56 (150) 831 0 2.089 34.215 1.0% (27.2% -0.00 256.0% (26. % Memo: Clean EBITDA (985) (1.045) (1.2% 0. Renault share 74 2.00 256.659) 8.332 2007 40.7% 2.77 0.6% 3.918) 8.7% 1.186) 2.3% 5.830 32.8% 21.791 -7.960 (255) 19% 2.682 2008 37.989 345 226 (134) 761 (400) (300) (350) (2.9% 1.613) 400 60 (150) 166 600 200 0 1.

186 964 523 33.167 2.744 15.0 -47.198 16.338 19.326 13.189 13.221 Total Finance Co Assets TOTAL GROUP ASSETS 25.696 1.916 21.507 5.739 547 17.106 3.846 1.053 63.751 15.210 1.621 14.943 2.0% 8 December 2009 149 .801 4.414) (2.927 2.168) Pension 'Debt' Industrial net debt incl pension debt (1.633 4.485 10.179 5.261 1.645 68.661 64.944) (7.237) (1.086 4.338 19.167 2.5% 2.177 1.087 13.775 30.990) (1.333 62.895 18.448 21.5 -52.558) (1.106 1.330 29.831 18.084 577 19.046) (9.369 12.198 20.280 16.521 45.668 10.813 517 16.644 19.804 1.865 Balance Sheet analysis & drivers Industrial Net Cash (Debt) (2. plant and equipment & intangibles Investments in associates Investments in non-consolidated Co's Other non-current financial assets Deferred tax assets Total Industrial non-current assets 16.339 15.831 20.897 46.214) Net Industrial debt/EBITDA Gearing Source: Company data.718 4.824 48.184 1.263 12.106 4.803 14.751 62.963 15.916 21.186 964 523 33.644 64.011) (7.391 20.192 7.423 585 603 33.355 16.862 13.147 26.745 2.5 -45. Barclays Capital 0.696 4.045 2.198 23.345 2.010 26.366 68.7 -17.445 15.301 2.851 23.611 29.605 29. 2006A-2012E December year-end (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Property.574 1.186 964 523 34.959 457 21.577 492 24.144) (3.3% 0.106 4.588 483 23.286 62.448 21.186 964 523 33.Barclays Capital | European Autos & Auto Parts Figure 237: Renault Industrial and group balance sheet.949 10.192) (3.342 47.678 1.236 Inventories Automobile receivables Other current financial assets Other current assets Cash and cash equivalent Total Industrial current assets Total Industrial assets 5.046) (8.182 19.088) (7.821 15.372 68.605 1.2% 3.338 19.0% 2.507 7.330 62.167 2.846 487 16.293) (8.260 21.392 1.839 3.788 12.6 -15.391 20.201 27.113 Total Finance Co Liabilities Group Shareholder's equity Minority Interests Group Shareholders' Funds TOTAL GROUP LIABILITIES & S'HLDRS EQUITY 23.186 964 523 34.1% 1.057) (1.851 25.943 10.207 20.623 1.918 14.474 63.357 46.865 Total Industrial non-current liabilities Total Industrial current liabilities Total Industrial liabilities 7.141 11.305 62.046) (8.985 48.046) (8.191) (7.167 2.697 14.4% 3.1 -54.745 2.306 20.785 48.645 2.212 13.3 -43.307 1.280) (1.632 1.401 527 588 32.338 19.573 68.106 4.339) (1.338 19.167 2.198 62.722 16.956 2.046) (8.

524) (906) (2.782) 2.469) (1.186 2.8% 1. Barclays Capital (304) (23) 7.654 2.338 (231) (27) 7 0 (251) 2.765) (2.524) 0 (3.177) (3.Barclays Capital | European Autos & Auto Parts Figure 238: Renault Industrial and Group cash flow.258 (393) 3. % Industrial capex as % of sales Source: Company data.2% (339) (590) 10.768) 3.3% 8..943 (431) 688 (644) 3.078) (1.5% 8.795 41 (192) 0 3.272) 602 (487) 3.112 (2.438 (1.325 1.Purchase of PPE (net of disposals 2000-2003) Industrial capex (pre-disposals post-2004) (1.604 548 4.0% 7.977) 8.524) 0 0 0 (3.100) 430 0 4.017) (1.043) (4.8% 8 December 2009 150 .220) (880) (2.865 (1.008 (1) (26) 4.295 2.842 .083 (310) 0 (200) 2..309 (800) 170 (200) 3.494 (2.603 2.941) (1.338 0 2.820) 1.528) (3..048 2.676) (895) (2.044) (50) (2.005 2.872) 835 (587) 97 (3.562 (862) (171) 1.548 (300) (300) (102) (402) (200) (328) (718) (918) (200) (611) 843 643 Industrial gross FCF (before WCR) Industrial FCF Industrial depn & amort / sales.440) (943) (2.0% 7.588) Disposals of PPE Acquisitions of investments.420) (912) (2.172 1.934 0 4.682) (3.875) 600 0 0 (2.347) (3.462) (2.180 707 3.795 3.576 584 283 (2.254 10.4% (260) (102) 10.141) 942 41 652 (2.588) (664) (22) (33) (719) (995) (22) 0 (1..440) 0 (3. 2006A-2012E December year-end (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Industrial net income Industrial depreciation and amortisation Industrial share in net income of associates Dividends received from associates Other unrealised income & expenses Gross cash flow 2.572 0 2.281 2.2% (273) (2.581) (3.4% 8.037 1.000 0 0 (2.947) (62) (3.335 1.835 (2.295 Sales & Financing cash flows from financing TOTAL GROUP FINANCING cash flow Net change in Industrial cash NET CHANGE IN GROUP CASH Cash flow analysis & drivers (14) 260 668 (180) (248) (2.093) (236) 1.922 Decrease/ (increase) in inventories Decrease/ (increase) in auto receivables (Decrease)/ increase in trade payables Change in other Industrial WC Decrease/ (increase) in Industrial working capital Industrial operating cash flow 656 51 (522) 96 281 3.050 150 (500) 1.838) 0 (2.049) (60) 0 (1.820) 0 (2.011 7. net of disposals Net decrease (increase) in other securities & loans Industrial Cash Flow from Investing 884 23 421 (3.572 (86) (31) 275 0 158 2.602 556 2.588) Investing cash from Sales Financing TOTAL GROUP INVESTING cash flow Dividends paid to parent company shareholders Dividends paid to minority shareholders Capital Increase and other Industrial cash flows with investors 74 (3.440) 0 0 0 (3.539) (3.154 3.704) 408 954 272 888 200 2.314 3.842 Operating cash from Sales Financing TOTAL GROUP OPERATING cash flow (916) 2.0% 8.536) (500) 1.129) (3.507) (1.Purchase of intangibles .7% 1.6% (1.340) (4.934 (181) (64) 164 0 (81) 4.668) 936 (185) 4.167) 0 0 0 0 0 0 0 0 0 0 (128) 0 0 (128) 0 (128) (411) 0 0 (411) 0 (411) Net change in financial assets & liabilities (Industrial) Industrial cash flow from Financing 966 247 (1.160) (4.0% 8.562) 753 11.

000 3.000 29. Barclays Capital Figure 241: RNO WE unit sales by model.000 31.000 35.000) (3.000 41.000 0 (1.000 1.000 27.Lower Medium Van G 0 Trafic Kangoo 5% 9% Espace 2% Laguna 6% Koleos 1% Master Mascott Other 1% Twingo 5% 1% 9% Clio 25% Sandero 2% Megane 23% Source: Company data Logan 6% Modus 5% Renault Group Source: CSM.000 25. Barclays Capital 8 December 2009 151 .Barclays Capital | European Autos & Auto Parts Figure 239: RNO unit sales mix by brand YTD 09 Renault Samsung 5% Figure 240: RNO revenue mix by division.000 2000 Dacia 14% Renault 81% 2002 2004 2006 2008 2010E 2012E Automotive Source: Barclays Capital Financial Services Source: Company data.000) (2.000 33.000) 2000 Nissan Figure 244: RNO EBIT margin by division. 2000A-2012E 43.25 0. YTD 09A Figure 242: RNO EU sales mix 09e vs industry average (%) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 0.1 0.Basic C .000 39.2 0.05 EExecutive Pickup A . Barclays Capital Source: Company data.35 0.15 0.000 2. 2004A-2015E 10% 8% 6% 4% 2% 0% -2% 2004 2006 Auto EBIT % FS EBIT % 2008 2010E 2012E 2014E 2002 Volvo 2004 Other 2006 2008 2010E 2012E Motorcycle EBIT % Group EBIT % RNO Core Contribution to NI Source: Company data. Barclays Capital Industry avg Figure 243: RNO associate contribution to net income (€mn) 4.000 37.3 0.

62 2.52 14 2.2x 26.256 3. we recognize that VW is seen as a consensus overweight – yet has been a stock that has repeatedly punished the consensus trade. which lead us to our €85 price target for prefs and €100 for ords (see the valuation section for further details). We believe that VW is the most advanced of the European auto makers in capturing economies of scale – and is likely the world benchmark for modularity – which should give it the cost position to withstand the intense price competition we expect in 2010.276 4.00 prefs / €100. many investors are loath to enter into a position that could result in substantial losses.61 13 2.3 3.94 11. with leading position in Europe. consider options as an alternative to the shares. 2008-12E (€mn) 2008A 2009E 2010E 2011E 2012E Sales EBIT EBIT margin (%) BC EPS € Consensus EPS € Industrial EV/sales (%) Industrial EV/EBITDA P/E ratio – prefs 113808 6.40 6.Barclays Capital | European Autos & Auto Parts VOLKSWAGEN – SCALE TO WITHSTAND PRICE WARS VOWG.631 4.00 ords Price (04-Dec-2009) €63.908 2.339 2. in our view.34 6. We believe any potential ‘overpayment’ for Porsche assets is only at most in the range of €6-7 per VW pref share – small in light of the significant upside potential as VW returns to 4% EBIT margins by 2012 (which would be below our longer-term projections of 6-7% in 2014-15).51 70 8.316 2. as VW appears to have protected itself against an inordinate amount of net debt on Porsche’s balance sheet. and with a 2-Equal Weight and €100 price target for the ordinary shares.54 16 2.94 47 4. with the benefit that the maximum loss to a long call or put position is the premium paid.96 3.6 11.2x 116. Barclays Capital *FactSet consensus data 8 December 2009 152 .39 ords Potential Upside 34% prefs / 24% ords We are initiating coverage of Volkswagen with a 1-Overweight rating for the pref shares and a €85 price target.3x Source: Company data.333 5.4x 14.8x 8.8x 102.5x 110. These investors should.8x 103. Given the erratic movements of Volkswagen’s shares.DE / VOW3 GY Stock Rating 1-OW prefs / 2-EW ords Sector View 2-NEUTRAL Price Target €85.5 9. We value the VW shares based on an average of EV/sales and EV/EBITDA metrics at historical and peer average multiples. Moreover.DE / VOW GY VOWG_p.204 5.024 2. At the same time. Key share price drivers: Positives: Global scale and scope.0 1.8 7. Brazil and China Modular strategy to drive additional cost savings while enhancing product differentiation Continued dominance of German market provides buffer against weak post-scrappage pricing environment Porsche merger valuation mechanics not as impactful on pref value as market believes Risks: Continued selling pressure as Qatar liquidates remaining pref shares Rights issue in 2010 creates additional supply and selling pressure Clarity on Porsche merger pricing not likely until 2011 European pricing war undermines profit recovery and stalls margin recovery Figure 245: VW – headline data and valuation multiples (at current share price).50 prefs / €80. we do not view the Porsche merger and attendant financial manoeuvring as posing significant downside risk to VW pref holders.1x 11.6x 64.

4 3. Figure 246: VW narrowing gap to Toyota in global sales (units in mn) Fiat PSA Honda Hyundai General Motors Ford Renault-Nissan Volkswagen Toyota 2008 Source: JD Power. VW has either surpassed.3 4.Barclays Capital | European Autos & Auto Parts Scale drive can offset pricing pressures While we are concerned about the potential for a pricing war to break out across Europe as scrappage incentives fade.6 7.1 3.whether.1 6. VW also has. we believe that VW has both the scale.0 6. the increased ability to exploit its scale through modularity to improve operating results even with increased price pressures. Depending on the sales and production accounting -.4 2. for example. the next highest at 9% and RNO-Nissan at 8%). the gap to Toyota. importantly. with top 2 ranking in Brazil (21% market share) and number 1 position in China with 11% market share.VW is either the largest or second-largest automaker in the world.6 4. albeit due to the hit Toyota has taken in the US market relative to the buoyancy VW enjoyed from the German scrappage programmes. Global scale just the starting point The scale arguments for VW are fairly well known. Moreover.8 6.0 4. Barclays Capital 2. GM.1 5.6% share vs. and. and in the C segment across Europe. making it the number one global OEM in terms of total BRIC market share (having 10. VW’s dominant European and leading global scale provide the starting point for its strategy. to include various distantly-affiliated joint venture subsidiaries -.6 5.1 6.6 4.2 3.8 2009E 8 December 2009 153 . or narrowed significantly. strong emerging market positions. VW’s dominant market position in Germany.2 5.3 3. may give it some ability to resist deep price cutting.

1% 2.0% 5.5% 2.0% India 1.1% 3.9% 2.8% 24.6% Brazil 2 China 2 Rank India 10 Russia 8 Renault-Nissan Group Fiat Group PSA/Mitsubishi BMW Group Daimler Group GM (inc Opel) Ford Group Chrysler Group Toyota Group Honda Group Source: JD Power.5% 0.0% 4.4% 28.1% 4.2% 0.0% 0.0% 4.7% 0.9% 0.4% 5.0% 0.1% 0.0% 0.1% 0.8% 0.4% Russia 4.5% Total BRIC 10.9% 8. Barclays Capital 2012 8 December 2009 154 .6% 12.6% China 11.9% 4.3% 0.9% 10.2% 7.2% 6.1% 0.4% 19.4% 2.1% 0.7% 2.6% 0.1% 5.5% 0.2% 6 1 5 14 11 3 4 10 8 7 12 24 13 23 25 5 15 28 3 7 9 12 14 16 15 7 8 1 10 5 16 21 2 6 24 5 6 4 12 Figure 248: BRIC markets comprise 25% of VW group sales in 2009 and closing the gap on GM by 2012E 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 41% 44% 30% 29% 25% 27% 20% 23% 18% 19% 17% 21% 17% 18% 8% 11% 6% 8% 5% 8% RenaultNissan GM VW Group Honda Ford Toyota Fiat & Chrysler PSA BMW Daimler Group 2009 Source: JD Power.4% 0.0% 0. Barclays Capital 5.5% 0.Barclays Capital | European Autos & Auto Parts Figure 247: VW ranks first and second by market share in the two largest BRIC countries Market Share Group Porsche-VW Group Brazil 20.0% 0.4% 9.6% 0.2% 2.9% 6.2% 7.0% 0.9% 1.7% 0.0% 3.

enabling quick design and manufacturing. literally. leveraging their engineering and tooling across larger production runs. Jetta. Polo. VW's Fox. Octavia and Superb. VW plans to have the same distance from the front wheel axis to the pedals. Already. Golf. VW's approach was developed by the current management team while at Audi. Beetle. and simplify the manufacturing processes to allow for greater production flexibility within a plant and across geographies. Leon. For example.. and Seat's Ibiza. MQB will roll out first in 2011 with the new Audi A3. VW is generally acknowledged by competitors to be the furthest advanced in its thinking (along with Toyota) around modularity across platforms and geographies. only recently did VW begin to drive greater benefits from its scale. Altea and Toledo). Eos and Passat. VW first used the modular approach at Audi. literally. Barclays Capital China 18% VW sets benchmark for modularity through its ‘building blocks’ approach Scale is only the starting point for the VW strategy. electrical/electronics. rear-wheeled or all-wheel drive) platforms. VW now intends to move the bulk of its volume cars to the MQB architecture (Modularer Querbaukasten. Cordoba.Barclays Capital | European Autos & Auto Parts Figure 249: VW – good geographical breadth. suspension and rest of vehicle. and centres around maximum commonality of components across vehicle platforms without compromising brand integrity and vehicle differentiation. from the A4 to the A8. Underneath the MQB and MLB are “building blocks” around four major component sets: powertrain. The goals are to leverage internal engineering and research and development (ER&D). We would expect the MQB platform to include all of VW’s volume (and some smaller premium) offerings in the B. suppliers have similar scale savings. Touran. they must conform to a standard geometry. where the MLB architecture (Modularer Längsmotor-Baukasten. Modular Transverse Building Blocks). across all MQB models regardless of size. Modular Longitudinal-Motor Building Blocks) was developed to communize all of Audi’s longitudinal (that is. While the size of the parts will differ across vehicles. as well as related CUVs (Q5 and Q7). Within each are several sets of unique modules (some of which will likely cut across MQB and MLB) that vehicle designers can choose from. Moreover. C and D classes (e. While VW has had the leading scale in Europe for years. Audi's A3 and TT. 2009E unit sales Africa & Middle Germany East N Am 19% 1% 9% Lat Am 13% Rest of Asia 2% W EU (exGermany) 29% E Europe 9% Source: JD Powers. Roomster.g. allowing VW to reduce engine mounting component variants from 18 to 2. Skoda's Fabia. 8 December 2009 155 .

103 1.460 1.5mn units.112 926 745 Fiat TYPE 169 (500) Ford B2e (Fiesta) GM Global Gamma (Aveo) Europe Asia Honda GSP (Fit) Hyundai PB PSA PF1 (207) (Accent) RenaultNissan B (Versa) Toyota NBC-2 VW (Yaris) PQ24/PQ25 (Polo) Middle East/Africa North America South America Source: CSM.426 1. Barclays Capital Asia Middle East/Africa North America South America 8 December 2009 156 . with over 2mn units in 2011. C and D. with close to 2mn units in 2011. VW. with 1. Barclays Capital VW trails Hyundai only slightly in the C segment.788 1. Figure 250: Global production of major B segment platforms by OEM (000s units) – 2011E 2. While Nissan-Renault have the largest scale in the B segment. is likely the leader when volume and commonality are considered together. we believe they have little commonality across vehicles.215 796 596 378 1. Figure 251: Global production of major C segment platforms by OEM (000s units) – 2011E 1.369 1.Barclays Capital | European Autos & Auto Parts VW already has top-three segment scale in B.132 1.352 1.372 1.946 1.814 1.301 Fiat TYPE 199 (Punto) Ford C1 (Focus) GM Global Delta (Cruze) Honda C5 (Civic) Hyundai HD PSA PF2 (308) (Elantra) RenaultNissan C (Sentra) Toyota MC-C (Corolla) VW PQ35/PQ36 (Golf) Europe Source: CSM.

While less discussed for brand purposes.3% 4.300 8% 8% 10% 10% 10% 15% 500 200 6.200 While early in VW volume implementation. as VW has demonstrated with the Polo mid-cycle reengineering. the modular approach can cut time to market by eliminating redesign steps in new vehicles. Barclays Capital 6.200 600 300 9.1% Audi operating margin Source: Company data. Overall. its margins expanded from 4.700 2. albeit with lesser scale. the vehicle when released will be fresher and more in keeping with contemporary themes as the design lockdown date can be moved closer to the production launch. Audi’s leverage of the MLB platform provides a significant competitive advantage in the premium segment (although we believe BMW will.9% 5. VW has the potential to reach 6mn units on the single platform across B. Savings from modularity will help both in ER&D and in ongoing unit costs.900 62.6% 4.1%. VW may have opportunities to use common components even before vehicles are completely redesigned.5% 5. some evidence of the potential success of MQB can be seen in the Audi results because Audi led the Group in modularity.9% to 8.1% 8. VW could save up to €7-10bn from its 2008 baseline costs (well above what we have included in our model).8% 5. Figure 253: Increased modularity drove higher Audi margins 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009E 6. Beyond cost saves. modular sharing in upper luxury car sharing is likely to expand as Porsche is integrated. Assuming a 10% reduction in upfront costs and 20% in unit costs. As Audi rolled out its MLB platforms. MQB could enable roughly 60-70% parts commonality among VW's volume brands. VW estimates up to one year shorter design cycle – so even if the product cycle remains at 4 -5 years.300 Total Source: Company reports. C and D and related CUV/MPV segments.Barclays Capital | European Autos & Auto Parts As MQB is rolled out. leverage modularity across its product lines). In addition. Figure 252: Potential additional cost savings through modularity 2009 spend Savings potential % Savings potential €mn R&D in income statement Engineering Materials 5.3% 4. Barclays Capital 8 December 2009 157 .0% 8.900 10.

while a market over 3. Figure 255: VW exceeds the Industry average for total sales in the C segment in Europe 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% EExecutive A . while a two-player market with each player at 50% share would have an HHI of 5000 (= 50*50 + 50*50). beginning in Germany where scrappage programmes first ended. An HHI of 10. The German C segment and D segments are among the most concentrated markets in Europe. A market over 1.800 is considered concentrated. with its corporate volume tilted toward C. Figure 254: VW’s combined share in B & C segments is highest in the industry Fiat Hyundai Toyota General Motors Ford Renault-Nissan PSA VW 0% 5% 10% 15% B Source: JD Powers. which is the sum of the squares of the market shares of the participants.Lower Medium D . Barclays Capital 8 December 2009 G Industry avg .Small Other 158 F VW group Source: JD Powers.Barclays Capital | European Autos & Auto Parts German dominance and C segment focus provides price war buffer In Europe overall VW is a leader in the C segment. we believe that VW’s dominant position in Germany offers some protection.000 would be a one-layer market (10000 = 100*100 ). Barclays Capital 20% C 25% 30% 35% While we remain concerned about price wars post-scrappage in Europe.Upper Medium SUV Van B .000 is considered highly concentrated.Basic Pickup MPV C . Note we measure concentration using the Hehrfindal-Hirschman index (HHI).

Barclays Capital | European Autos & Auto Parts Figure 256: Concentration ratios & degree of concentration by country/segment – volume OEMs HHI ratios: A B C D E G sports MPV Pickup SUV Van France Germany Italy Spain UK Degree of concentration: 2945 1343 3050 2090 1715 MEDIUM LOW HIGH MEDIUM LOW 2429 1359 2199 1497 1280 MEDIUM LOW MEDIUM LOW LOW 2112 2483 1260 1523 1483 MEDIUM MEDIUM LOW LOW LOW 3184 2655 2643 1740 1614 HIGH MEDIUM MEDIUM LOW LOW 4311 3528 9450 3431 4444 HIGH HIGH HIGH HIGH HIGH 3133 4263 3688 3853 3293 HIGH HIGH HIGH HIGH HIGH 2715 2211 1885 1442 2256 MEDIUM MEDIUM MEDIUM LOW MEDIUM 2821 3176 2855 2783 2938 MEDIUM HIGH MEDIUM MEDIUM MEDIUM 2753 3021 2627 2104 2267 MEDIUM HIGH MEDIUM MEDIUM MEDIUM 2745 2152 2020 2019 1705 MEDIUM MEDIUM MEDIUM MEDIUM LOW France Germany Italy Spain UK Note: Concentration ratio = sum of squares of market shares. in 2006. instead using bundled offers and let other fight heavier incentive wars.4bn progress on product and fixed-cost reduction as modular strategies are further spread. VW leads in all other volume segments except for A and MPV. we do not expect a sharp recovery in earnings. currency to continue unfavourable but continue €1. largely due to improvements in financial services as the credit crisis and residual value issues fade. we expect the slight improvement in mix to be offset by volume and pricing pressures. in part because VW used Golf as a scrappage programme leader. In a more normal year VW still dominates the segment. with overall operating profit up just €300mn. >1800 considered concentrated. we expect that post-scrappage VW will attempt to moderate direct cash incentives. VW has posted positive pricing (in its revenue walk) every quarter in 2009. Across the auto business. >3000 highly concentrated Source: JD Powers. with over 50% share in 2009. Going forward. 8 December 2009 159 . Industrial EBIT flat in 2010 but recovering in 2011 and 2012 Given the post-scrappage pressures in 2010. Barclays Capital 8 8 12 8 22 12 11 10 5 15 12 10 6 6 4 5 11 12 9 5 7 1 5 4 6 19 12 5 3 0 0 8 11 0 56 6 8 1 3 5 5 9 15 7 11 1 0 14 0 12 10 9 7 6 5 5 3 8 Despite the pressures on pricing in Europe and Brazil in 2009. for a cumulative positive of €600mn year to date. Barclays Capital analysis VW dominates the C segment in Germany. for example. Figure 257: VW sales by segment as percentage of German volume market sales (%) Manufacturer VW A 4 B 31 C 51 D 41 MPV 22 Van 37 Total 35 GM Ford PSA Renault-Nissan Fiat Hyundai Toyota Daimler Group Other Source: JD Powers. its C share amongst volume players was 44%.

0 0.Barclays Capital | European Autos & Auto Parts We expect cost cutting to continue through 2012. The net result is to almost double the ‘publically held’ pref share count from the 55mn outstanding prior to Qatar’s initial sale to about 170mn – leading. There is also mid-term uncertainty over the valuation of interim transactions and allocation of shares to Porsche SE holders around the eventual merger of Porsche and VW. conservatively well below the €7-10bn potential described in the prior section.1 -0.4 1.2 0.0 -0. and.3 278 4.1 6.9bn.2 1.8 1. although we are only modelling a €2. by mid 2010.0 0. However.1 0.3 -0.3 2. and further assuming that VW shareholders receive an ‘unfairly’ low share of the combined entity. the VW rights issue will be close to current market price.2 0.7 -0.000 in 2012. 8 December 2009 160 .5 0.2 2.0 2. VW fundraising and Porsche transaction timeline The Porsche-VW transaction timeline.0 0. again leaving room conservatively for pricing pressure.1 0.3 0. we believe that there is not significant downside to our €85 price target.3 -10 -498 -127 Porsche merger valuation risks do not detract from value Despite VW’s strong business operating positions.1 -1.1 0.1 0.3 293 Current year operating profit memo: volume delta units 000 Source: Company data. we believe the trading value is now dominated by near-term technical issues around a potential increase in supply from Qatar Investment Fund sales and future VW fundraising. In addition. Figure 258: VW estimated profit walk €bn 2008 2009E 2010E 2011 2012 Prior year operating profit Volume/price/mix Currency Product cost Fixed cost/depreciation Resende sale Scania Volkswagen Financial Services 6. is becoming increasingly clear. In 2011 and 2012.2 -0.3 0.2 2.8 0.6 -0.500 per unit operating profit improvement in 2011 and €1.3 -4.5 0.3 0. even assuming arguendo for stress testing that VW has overpaid for Porsche AG and Porsche Holdings Salzburg. the market will be asked to absorb up to roughly 90mn additional VW pref shares – up to 25mn from Qatar Holding LLC (whose lock up period expires on 31 December 2009. to much of the recent weakness in VW prefs. in our view. we expect volumes (ex China) to improve.4 -0. In this quarter. Barclays Capital 6.1 4.1 -0. if options.4 0. although it is not clear whether Qatar holds actual shares or options shares. but note that between 2009 and 2012 we have included €4. while subject to modification.1 5.1 -0. we expect VW to finalize its purchase of 49% of Porsche AG for €3.6bn of cost reduction. if deliverable in physical delivery of shares) and about 65mn from a VW pref issue in 1H10 (assuming €4bn raised at €60 per share).3 0.0 0.

For purposes of this exercise. Barclays Capital We expect the VW pref issue at some point following the 2009 results announcement on 11 March. we assume 6. Before the merger.5 x vs historical average of 3. €5bn) Porsche SE merges into VW AG Source: Company data. paid to family shareholders of the auto dealer).9bn.Barclays Capital | European Autos & Auto Parts Figure 259: Merger timeline Date 2009 Event 3 December 2009 3 December 2009 18 December 2009 31 December 2009 by 31 December 2009 2010 Announcement of DAX official ranking as of 30 Nov VW EGM gave authorisation for VW pref share issuance Qatar option expiry on VW ords Expiry of Qatar lock-up period on VW prefs Purchase of 49% of Porsche AG by VW for €3. or €95 per pref share (at a 20% discount). again. For Porsche. we start with the value of the core operating businesses of both VW and Porsche (as this will likely form the basis for the future IDW S-1 valuation). we have chosen a low adjusted EV/EBITDA multiple for VW (2. likely timed after Porsche/Piech family members receive the proceeds from the Salzburg sale. 8 December 2009 161 . After the capital increase. with Porsche ord shareholders largely receiving VW ords and Porsche prefs receiving VW prefs (although merger details could vary). MAN) and subtract net debt. Porsche SE (which at that time owns half of Porsche AG and its VW ord shares but has largely paid down its debt) merges into VW AG. Step 1: Value of stand-alone operating firms Adjusting for VW's cash balance.0x for a gross operating enterprise value of €10bn (note that this is somewhat below the €12. we have chosen to be conservative as this would imply that VW ‘overpaid’ for Porsche SE). and add in ‘external’ affiliates (ie.5x) for the industrial business. VW is to purchase two assets – 49% of Porsche SE (for €3.4bn VW pegged the value of Porsche SE at.9bn 11 March 2010 sometime in 1H10 2011 VW FY09 results Potential VW pref issue (est €4bn. Hypothetical overpayment and dilution would not detract from €85 target value In terms of risks to valuation from these transactions. window likely 11 Mar-15 May) sometime in 1H11 sometime in 1H11 sometime in 2011 VW purchases Porsche Holding Salzburg for €3.55 EV Porsche SE capital increase (est. before giving effect to VW’s purchases of Porsche-related assets. paid to Porsche AG) and Porsche Holdings Salzburg (for €3. and including the value of financial services and MAN leads to an enterprise value of €44bn for VW. Porsche would also pursue a capital increase of about €5bn.55bn.

396 35.25bn (as the €12.828 Net debt (cash) Minorities Hybrid liabilities Pension (after tax) Net value of firm before intracompany ownership per share per ord per pref -18.0x VW Porsche Core auto operations Financial services "External" associates (ie.5x 1.4bn paid for a 49% equity stake would imply a EV/EBITDA of 7. MAN) Gross value of operating firm and external aff.469 2. in an attempt to gain Porsche family buy-in to the merger.Barclays Capital | European Autos & Auto Parts Figure 260: Value of VW & Porsche operating businesses €mn Starting point – operating businesses and 'external' affiliates 2011 EBTIDA EV/EBITDA multiple 11.400 1. Also note that at this point. less debt 28.372 -2.020 8. agreed to overpay for the initial stake in Porsche SE (which provides cash to pay down Porsche net debt) and for control of Porsche Holding Salzburg (which will provide cash to the families to use to subscribe to Porsche fund raising).590 239 10. with more than 100% of the value of Porsche shares attributable to its holdings in VW. pref value per share would still be €90.161 -€ 7 at discount of Source: Company data.495 44.905 11. Barclays Capital 20% Step 2: Giving effect to VW purchase of Porsche related assets One investor concern is that VW.5bn (with no public financials we have arbitrarily assumed an overpayment). Porsche as an operating company has negative value. Even assuming VW overpaid for Porsche SE by €1.765 6. 8 December 2009 162 .0x) and by Salzburg by 1.086 € 108 € 119 € 95 -431 -1.647 10.6x vs our assumption of 6.671 9.840 1.

Barclays Capital 20 8 December 2009 163 .Barclays Capital | European Autos & Auto Parts Figure 261: VW purchase of Porsche assets €mn Net value of firm before intracompany ownership € per share Plus intra-group transactions VW minority in Porsche AG: Value of equity business interest Cash received/(paid) Debt (assumed)/shed Memo: value creation (dilution) VW purchase of Porsche Salzburg Value of business interest Cash received/(paid) Memo: value creation (dilution) Value after sales to VW (ex cross-holdings) -862 862 VW 44. The resulting dilution would be €8 per pref share. nevertheless we assume that €4bn is raised at €50 per share.743 € 62 € per share € per ord € per pref at discount of (%) Source: Company data. while still leaving value at €82 per share.086 € 108 Porsche -1.038 3.161 -€ 7 3. that is. in our view.000 125 € 40 300 4.900 2.724 45. Barclays Capital 15. for an issuance of 80mn new pref shares.500 41.724 € 102 € 112 € 90 -298 Value of Porsche AG stake in VW Net value of firms before fund raise € per share € per ord € per pref at discount of (%) Source: Company data.000 -3.724 € 94 € 103 € 82 5.041 18.724 Porsche -298 4. While there is some possibility VW postpones any offering.038 -3.724 41. enough to fund the initial Porsche purchase for €3.325 15.500 -1.000 80 € 50 488 45.027 € 86 20 Step 3: Giving effect to potential dilution from fund raising Another investor concern is around dilution around the planned pref offering in 1H10. We believe that VW will seek to raise about €4bn.900 -3.702 Shares issued € price per share New share count Value of firms after fund raise (ex cross-holdings) Value of Porsche AG stake in VW Net value of firms after fund raise 14.9bn (although the EGM has authorized up to 135 mn additional shares). Figure 262: Effects of fund raising €mn Value after sales to VW (ex cross-holdings) Fund raising VW 41.

Barclays Capital | European Autos & Auto Parts Step 4: Potential risk from relative IDW S1 relative valuations Finally.683 18. Moreover. and that VW is arbitrarily undervalued. as VW appears to have protected itself against an inordinate amount of net debt on Porsche’s balance sheet. would only dilute VW pref value to €72 – in part because any undervaluation of VW shares detracts from Porsche share value. that Porsche shareholders get 45% of the combined firm.291 27.041 31.400 12.734 10. with a 2-Equal Weight and €100 price target for the ordinary shares. however.743 % of newco € per share € per ord € per pref 63 € 94 € 103 € 82 37 € 62 at discount of (%) What if "unfair" 20 27. Porsche shareholders would receive 37% of the economic value of the merged entity and VW shareholders 63% (roughly in line with ingoing ownership). We believe that VW is the most advanced of the European auto makers in capturing economies of scale – and is likely the world benchmark for modularity – which should give it the cost position to withstand the intense price competition we see in 2010. Figure 263: Merger allocation options VW Who brought what to the table: Porsche VW shareholders ex Porsche and after capital raise Porsche shareholders Core business VW stake Total 31.702 14. we do not view the Porsche merger and attendant financial manoeuvring as posing significant downside risk to VW pref holders. 8 December 2009 164 . and Porsche SE is overvalued by a factor of 3x. Even assuming. Barclays Capital 20 Rating We are initiating coverage of Volkswagen with a 1-Overweight rating for the preference shares and an €85 price target. Any ‘overpayment’ for Porsche assets is only at most around €6-7 per VW pref share – small in light of the large upside as VW returns to 4% EBIT margins by 2012 (which would be below our longer-term projections of 6-7% in 2014-15). At our base case valuations. we think investors are concerned that VW pref shareholders will wind up with less of the merged company than what they could consider their fair share.683 4.692 VW shareholders ex Porsche Porsche shareholders Core business VW stake Total % of newco € per share € per ord € per pref 55 € 82 € 90 € 72 45 € 76 at discount of (%) Source: Company data.734 22.

5% 9.Barclays Capital | European Autos & Auto Parts Valuation methodology We value the VW preference share based on an average of EV/sales and PE metrics at historical and peer average multiples: We value the VW ords using a 20% premium to the pref shares.437 3.63 0. Figure 264: Slightly above consensus revenue & earnings estimates 2010E Barclays Consensus Variance Revenue (€mn) EPS (€) 102.3x at the current share price. our estimates put VW at only 1.5x adjusted EV to industrial EBITDA (vs 3. although rose to 66% as sales dipped in 2009. 8 December 2009 165 . We believe that the current VW pref share price significantly undervalues the share based on this valuation metric. especially as we remain only just above consensus on our top-line estimates for 2010E. EV/sales VW prefs have historically traded at an eight-year average of 40% industrial EV/industrial sales. Looking out to 2011E. Barclays Capital We believe that VW should trade at least at 25%. from which we derive a share price of €80 for the prefs and €95 for the ords. still well below the 2001-05 range.7x. implying a value of €90 for the prefs and €105 for the ords. At current market price the shares are only trading at 14% 2010E EV/sales on our estimates.96 102.908 3.4x for the sector as a whole). Recognising some of the risks inherent in the merger and future dilution.2% Source: FactSet consensus. Figure 265: At current price VW appears undervalued on EV/sales metrics 70% 60% 50% 40% 30% 20% 10% 0% 2001A 2003 2005 2007 2009E 2011E 2013E 2015E Historical average Source: Company Data and Barclays Capital Industrial EV/Sales EV/EBITDA Historically VW has traded at an eight-year average of 3. we conservatively believe that the company should trade at 1. when we expect auto markets to have normalised to a greater degree.

1x 5.4x 1.3x 4.2x 7. Barclays Capital Historical average An average of both these valuation metrics leads us to set a €85 price target for the preference shares and €100 for the ordinary shares.4x 17.4 36 1.3x 4.5x 6.4 55 1. Figure 267: VW key valuation metrics 2006 Valuation multiples at current price 2007 2008 2009E 2010E 2011E 2012E Industrial EV/sales (%) Industrial EV/ EBITDA Industrial EV/ EBIT P/E FCF yield (%) Price/Sales (%) Price/Book Dividend yield (%) Valuation multiples at €85/€100 price target 62 7.8x 27 4.0x 8.4x 10.4 55 1. With the pref shares becoming the primary trading vehicle going forward.7x 1.8x 9.4 34 0.8x 47 4.1x 26.1x 1.1x 1.3 72 2.5x 7.4x 10.6x 7.8x 3.9x 10.1 34 1.8x 2.8x 24.8x 22 2.9 40 1.4x 74.9x 14.1x 16 2. we believe the discount should narrow.6x 9.5x 11.1x 2.7x 9.9x Industrial EV/sales (%) Industrial EV/ EBITDA Industrial EV/ EBIT P/E FCF yield (%) Price/Sales (%) Price/Book Dividend yield (%) Source: Company data.2 33 0.7x 4.9 66 2.8x 70 8.8x 9. following likely DAX inclusion.Barclays Capital | European Autos & Auto Parts Figure 266: VW has historically traded around 3.0x 64.3 72 2.2x 1.1x 6.9x 1.1x 34. Inherent in our valuation is a 20% spread between the prefs and the ords.4x 17. Barclays Capital 8 December 2009 166 .0 85 2.7x 7.9x 40. which is below the historical 35% discount.9x 25 3.1x 5.0x 13 2.9 66 2.7x 60 5.8x 21 2.0x 8.8x 6.1x 6.1 31 0.1x 2.5x EV/EBITDA 10 8 6 4 2 0 2001A 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E Adjusted EV/EBITDA Source: Company data.8x 60 5.7x 7.8x 47 4.2x 22.9x 52.8x 2.1x 34. as well as limited effective voting rights for the surviving public ord shares.3x 4.9 29 0.8x 5.5x 11.2x 10.3x 11.3x 2.1x 3.1x 14 2.7x 62 7.3x 12.8x 3.

Barclays Capital Historical average Risks to price target Risks to our price target are as follows: External risk – macroeconomic factors outside the control of the company.any return to ‘abnormal’ discount levels would put our pref target at risk. leading to an even weaker demand and pricing environment than we currently assume. purchase assets from Porsche and Porsche family companies. and may be set in a way that prejudices owners of VW pref or ord shares. The pricing and terms for the equity issuance and future merger are not known at this point. could make our forecasts difficult to achieve. and complete a merger of Porsche AG into VW AG. the pref ord discount has narrowed to 36% 0% -10% -20% -30% -40% -50% -60% -70% -80% -90% -100% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 VW historical pref discount Source: Datastream. dipping as low as 90% -. 8 December 2009 167 . Risks from financial transactions – VW plans to issue future equity. Risks around pref/ord discount: the pref to ord discount has been volatile.Barclays Capital | European Autos & Auto Parts Figure 268: After peaking at -90% Nov 08.

com Barclays Capital.com Barclays Capital. As a large number of index trackers would have to buy the preferred shares. with the benefit that the maximum loss to a long call or put position is the premium paid. As we have a €85 target price on the VW preferred shares. London If Qatar exercises its Dec09 expiry call options on Volkswagen’s ordinary shares. in our view. London Arnaud Joubert +44 (0)20 777 48344 arnaud. VW preferred share Jan10 €64 call indicative offer: € 4.4. Figure 269: Profit and loss of Volkswagen preferred Jan10 €64 call at expiry P&L at expiration 15 10 5 0 -5 40 50 60 Stock price Source: Barclays Capital 70 80 VW pref Jan10 €64 (99%) call is a lower-risk alternative to shares The arguably low implied volatility and the short-dated January expiry results in a low premium cost to the investor Given the erratic movements of Volkswagen’s shares many investors seem loath to enter into a position which could result in substantial losses.com Barclays Capital.4 (6.com Barclays Capital.gupta@barcap.8%). and VW preferred shares (as they are the top member of November’s selection list) would replace them. we see potential downside to the preferred shares. London Anshul Gupta +44 (0)20 313 48112 anshul. January at-the-money (ATM) call options on VW preferred shares can currently be bought for an implied volatility of 50%. delta 55% 8 December 2009 168 . ref €64. consider options (with equal notional) as an alternative to the shares.deb@barcap. we see substantial upside to the strategy.joubert@barcap. Additionally the planned issue of new preferred shares could weigh on the share price. Qatar could roll the Dec09 options to a later expiry While we believe VW preferred shares are likely to rise once Qatar exercises its Dec09 options. but losses are capped at the relatively low premium. Such a position benefits from offering exposure to any upside in the preferred shares.bennett@barcap. London Abhinandan Deb +44 (0)20 777 32481 abhinandan. These investors should. a discount to the current 61% three-month realised volatility. or if Qatar disposes of its remaining VW preferred share stake after the 31 December 2009 lock-up expires. we understand that the ordinary share free float would be considered by Deutsche Boerse to be less than 10% of the market cap and therefore subject to the fast-exit rule. Under this rule VW ordinary shares would exit membership of the DAX. a long position in the preferred shares has the disadvantage of being fully exposed to any event that weighs on the share price. The arguably low implied volatility and the short-dated January expiry results in a low premium cost to the investor.Barclays Capital | European Autos & Auto Parts VW preferred shares expected to replace VW ordinary shares as a member of the DAX if Qatar exercises Dec09 options Colin Bennett +44 (0)20 777 38332 colin. usually two trading days after the announcement. For instance should Qatar roll its call option position to a later expiry. the preferred are likely to rise during a membership change.

While flexibility in VW's low A rating is limited. currently rate Volkswagen Overweight. deleverage Porsche SE prior to the merger. and fund the acquisition with the issuance of preference shares illustrates its commitment to a low A rating.Barclays Capital | European Autos & Auto Parts Credit perspective Barclays Capital credit analysts. plans to execute the Porsche merger as a 2-stage process. in their view. While VW will face headwinds from the expiry of incentives in Germany next year. VW will still generate significant free cash flow. they believe that importantly. 8 December 2009 169 . Rob Perry and Darren Hook.

006 500 4.094) 3.839 13.Barclays Capital | European Autos & Auto Parts Figure 270: Volkswagen Group and Automotive income statement.49 € 10.808 96.752 14.543 Income tax expense Tax rate % Profit after tax (162) -9% 1.716 Minority interest Net profit attributable to shareholders -1 1.683 Financial result Profit before tax -216 1.608 3.612 17196 15.920 29% 4.138 15.688 930 35% 1.495 2.178 14.03 € 5.92 € 11.363 (2.855 -1.00 € 2.562 Financial result Automotive Profit before tax 280 5.121 -745 5.844 500 2.41 400 94.8% 9.124 4.942 1.707 923 30% 2.2% Sales revenue Gross profit Automotive gross margin % SG&A Other operating expense (income) Operating profit Automotive operating margin % Equity income Other financial result 10.31 € 5.3% 12.17 € 1.120 65 4.88 € 1.254 41% 3.078 14.914 18.811 18.967 29% 4.402 15.603 1.969 12.108 11.009 -501 29% 1.321) 6.421 37% 4.00 € 5.431 12.194 5.3% 281 -994 -712 3.93 € 1.727 (1.102 17.108 5.2% 580 -300 -392 1.5% 8 December 2009 170 .737 14.2% 124.30 € 1.899 105.440 (1.6% € 8.501 9.9% 5.2% 12.67 € 8.400 2.505 29% 3.489 -1.6% 12.1% 11.603 16294 15.476 46 1.4% € 4.858 500 5.2% 614 -1.708 201 -590 -389 2.431) 6.201 1.2% 116.184 29% 2.220 -1.960 (2.90 € 1.897 92.006 5.133 -82 3.6% 734 -342 5.170 90.5% 106.43 € 10.299 12.16 412 111.132 16.6% 910 -635 275 6.2% € 11.271 2.8% 12.7% 13.636 3.485 12.07 € 1.294 (2.0% 113.06 408 104. 2006A-2012E December year-end (€mn) Group Income Statement: 2006 2007 2008 2009E 2010E 2011E 2012E Sales revenue Cost of sales Gross profit Gross margin % 104.1% 106.571 10.474 Income tax expense Auto tax rate Automotive Profit after tax Memo: -513 38% 834 -2.3% € 11.29 € 1.34 € 1.866 99.871 15.670 -68 2.867 5.004 12.7% 375 -1.632 14.347 809 -560 249 5.016 12.793 392 6.151 13.8% 10. Barclays Capital 9.210 374 3.196 11.2% 108.620 Earnings per ord share Diluted earnings per ord share Earnings per pref share Ordinary Dividend Preferred Dividend Number of Shares Automotive Income Statement: € 5.355 13.020 13855 13.739 1.7% € 10.931 Automotive EBITDA EBITDA margin % Source: Company data.954 -2 4.492 354 2.64 € 2.774 5.27 € 11.409 -795 2.86 388 96.677 527 -1.555 13.96 404 94.99 394 98.18 € 4.36 398 102.23 € 2.040 400 -612 -212 5.478 14.7% € 5.875 91.333 12.2% SG&A Other operating expense (income) Operating profit Operating margin % Equity income Other financial result 11.533 92.887 -2.009 11.753 -37 1.365 4.9% 12.31 € 5.18 € 4.315 3.764 15.668 29% 4.2% 12.623 12.98 € 11.751 1.154) 5.985 15.521 -96 4.3% 11.80 € 1.169 12.6% 500 -1.106 275 -601 -326 4.955 2.584) 6.207 -618 29% 1.503 12.219 -692 1.5% 10.35 € 1.10 € 2.27 € 11.122 1.631 29% 3.032 16.259 -759 6.67 € 8.428 5.

139 -25.5% 7.7% 10.193 94.9% -19.0% -8.2% Volkswagen Audi Skoda SEAT Bentley Commercial Vehicles Scania Financial Services Automotive Operating Margin Source: Company data.365 2.383 -631 5.2% 1. Production and EBIT by division.865 -32.490 1.4% 5.5% 0.5% 1.9% 10.9% 0.7% -6.196 1.004 -33.217 38.213 Volkswagen Audi Skoda SEAT Bentley Commercial Vehicles Scania Remaining Companies and other Automotive Operating Income 918 2.3% 4.138 6.0% -1.6% -5.2% 2.2% 2.853 65.194 Financial Services Group Operating income Operating margin 843 5.092 NA 73.7% 1.167 NA 3.024 7.942 3.5% 4.892 104.3% 6.832 7.6% 1.879 335 -228 -228 -113 168 -800 2.555 1.617 8.660 930 5.872 111.607 3.1% 6.168 6.226 1.5% 1.192 6.275 626 375 8 439 31 989 5.6% 0.400 1.136 4.9% 6.299 73.297 NA 72.385 98.6% -2.262 6.280 2.811 -28.648 1.336 5.156 NA 694 5.2% -27. Unit Sales.858 -27.195 4.139 5.8% 0.164 566 322 4 267 43 1.7% NA 957 6.517 7.449 634 298 6 289 49 1.998 3.039 5.478 3.272 6.004 5.026 5.387 1.6% 1.8% 1.2% 1.196 8.930 6.2% -2.710 31.687 1.6% 8.151 2.715 2.901 483 5.3% 3.664 1.3% 8 December 2009 171 .2% 5.600 343 -344 -194 13 126 -650 4.2% 5.607 5.2% -0.879 66.296 6. Barclays Capital 1.376 9.084 9.345 3.1% 11.969 6.511 479 5.7% -9.752 Volkswagen Audi Skoda SEAT Bentley Commercial Vehicles Scania Volkswagen China Group Auto Unit Sales Group Unit sales Memo: Total Unit Production Operating Income by Division: 3.155 533 282 4 272 45 1.738 705 6.966 NA 3.252 6.471 2.054 515 -159 137 138 NA 1.861 8.5% 4.133 862 6.317 2.9% 3.940 2.631 NA 3.269 4.760 30.840 3.774 -63 4.446 5.036 102.139 562 419 10 388 NA 3.9% 8.2% 1.918 96.451 1.772 565 -78 10 375 417 -1.720 7.720 5.705 712 8 155 305 NA 2.1% 2.299 570 270 5 281 47 1.289 1.347 3.200 620 411 10 427 NA 3.113 5.2% 4.3% 916 3.0% 8.960 5.8% 1.899 1.204 465 -285 -171 41 170 -650 5.060 3.2% -47.2% 1.1% -47.2% 5.704 34.1% 7.476 30. 2006-2012E December year-end (€mn) Revenue by Division Volkswagen Audi Skoda SEAT Bentley Commercial Vehicles Scania Remaining Companies and Other Automotive Revenues Unit sales by division (units 000s) 2006 2007 2008 2009E 2010E 2011E 2012E 70.3% 4.Barclays Capital | European Autos & Auto Parts Figure 271: VW Group Revenues.319 3.3% NA 905 6.944 33.2% 2.579 -25.341 94.495 2.151 -29.323 6.021 271 -319 -228 -13 84 -600 2.315 4.4% 7.340 8.928 34.186 5.874 1.7% 8.440 1.6% 2.863 1.402 77.591 5.

240 14.084 13.342 3.513 36. 2006-2012E December year-end (€mn) Intangible assets PPE Leasing and rental assets Financial services receivables Noncurrent investments and other Total Noncurrent assets 2006 2007 2008 2009E 2010E 2011E 2012E 7110 20148 61 322 10176 37817 6736 19151 75 11602 37564 12186 22879 410 10903 46378 13.144 34.024 163 0 11.002 47.146 54.822 1.685 -46 11.218 101.433 22.333 1.727 29.376 17.912 58.022 38.400 18.900 63.820 40.758 68.684 20.556 103.790 19. Barclays Capital 8 December 2009 172 .927 38.905 10.238 28.336 14.024 51.384 21.240 14.860 18.319 -46 5.570 22.440 103.335 98.905 5.059 17.570 30.683 43.582 32.733 20774 20719 55 4539 13719 10603 28861 1759 7288 13403 22450 51311 72085 24802 24739 63 3645 12481 12383 28509 -1139 8202 16380 23443 51952 76754 28964 26841 2123 2240 12829 15619 30688 2865 9085 16380 766 29096 59784 88748 30.112 3.731 Equity attributable to shareholders Minority interests Noncurrent financial liabilities Provisions for pensions Other noncurrent liabilities Total Noncurrent liabilities Current financial liabilities Trade payables Other current liabilities Liabilities held for sale Current liabilities Total liabilities Total equity and liabilities Source: Company data.681 31.452 -88 8.234 17.642 39.505 -46 4.561 -88 12.259 20.002 50.286 90.349 101.843 3.852 213 0 11.996 14.443 98.326 -46 12.417 90.584 16.002 48.654 -88 15.145 -88 10.600 313 0 11.007 3.394 16.901 34268 72085 39190 76754 42370 88748 51.Barclays Capital | European Autos & Auto Parts Figure 272: VW Automotive balance sheet.805 263 0 11.484 21.002 46.905 5.348 15.608 1.388 17.570 21.468 21.677 1.159 18.240 14.114 68.590 17.905 5.570 28.195 18.384 Inventories Financial services receivables Current receivables and other Marketable securities Cash Assets held for sale Total Current assets Total assets Equity 12377 179 8571 5024 8117 13319 231 10002 6503 9135 6732 -103 13340 3730 7664 1007 14.206 36.959 15.

879 -2.519 -9.218 -447 -5.555 -1.762 -2.Barclays Capital | European Autos & Auto Parts Figure 273: VW Automotive cash flow.610 50 0 0 0 -9.314 13.684 0 507 21.745 1.439 4.519 Acquisition of PPE Capitalized development costs Change in leasing and rental assets Change in financial services receivables Acq and disposal of equity interests Other Cash flow from investing Net cash flow (CF from ops and CF from investing) -3.204 496 942 1.996 3.340 16.982 0 -3.477 5.878 -5.075 11.584 20.089 -118 701 431 3.590 4.117 5.677 -1.947 2.474 -1.386 0 4.008 100 4.846 1.431 -6.631 8.106 -618 9.020 -4.336 -2.892 -9.848 8.105 -7.925 2.357 50 0 0 -8.831 100 5.367 -2. etc.668 -672 109 4.202 1.404 -6.484 24.644 -1.478 -57 934 7.455 13.770 8.571 2.384 25.213 -2. Change in auto cash -998 -3.092 1.679 13.298 7.680 132 591 11.133 -81 -1.675 -2.285 -5.091 Automotive cash at EOP Securities and loans Gross automotive liquidity Total third-party borrowings Net automotive liquidity Source: Company data.656 5.639 5.398 21.219 -555 2.311 -9.506 13.215 1.721 13.216 -277 297 -2.457 -6.597 10.039 160 11.318 -5.196 100 10.762 246 -384 7.298 -7.194 19.107 2.218 4.394 3.269 20.170 131 -199 8.684 24.166 -197 -15 79 -7.478 -50 -114 -1.951 -202 -6.893 10.564 9.902 5.786 12.984 -2.926 573 12.527 -4. 2006-2012E December year-end (€mn) Cash flow Profit before tax Income taxes paid Depreciation Change in pension Other noncash income/expense Gross cash flow 2006 2007 2008 2009E 2010E 2011E 2012E 774 -742 7.178 -2.083 -587 7.038 13.707 -1.580 -5.844 100 0 100 0 -51 -2.194 20.688 -1.218 2.336 3.771 4.937 7.040 -1.328 100 -4.737 -1.446 -80 251 -869 -2.500 -6.795 50 0 0 0 -10.070 2.279 8.517 -1.100 382 8.194 15.112 407 Change in investments in securities Cash flow from financing Exchange rate.191 -6.047 15.491 5.773 -1.973 6.562 -1.172 8.227 Change in working capital Inventory Receivables Liabilities Change in other provisions Cash flow from operations 4.184 7.520 1.429 99 190 11.040 -2.020 -10.130 1.290 7. Barclays Capital 8 December 2009 173 .650 -2.901 3.598 2.

implying 7% downside to its current market price. given the 2010 headwinds we believe this discount is justified. Risks which May Impede the Achievement of the Price Target: The main upside risks to our price target. We apply a 5% discount to the NAV in line with the average discount that the market has historically applied when using the SotP methodology. SotP . in our view. historically BMW has traded at an average 11x PE (vs 13x at Daimler). and our target is based on 4x 2011 EBITDA from which we derive our €8 target price. Looking out to 2011E our below consensus EBITDA estimates put Fiat at a 4. when we expect autos markets to have normalised to a greater degree. implying 12% upside to its current market price. By comparison. However. BMW has traded at a median average EV/sales of 39% and has ranged from 20% to 59%. leading to a strong demand and pricing environment than we currently assume. We believe that the current BMW share price significantly undervalues the share based on this valuation metric.using a sum-of-the-parts valuation we arrive at a €33 price for Daimler.PA) Valuation Methodology: We value PSA using a combination of a Sum of the Parts methodology and historical and peer average EV/EBITDA multiples: 1.DE) Valuation Methodology: We value the BMW share based on an average of EV/Sales and PE metrics at historical and peer average multiples.macroeconomic factors ouside the control of the company. Secondly.1x current share price. But at current market price is trading at 35% 2010E EV/sales on our estimates. our above consensus EBIT estimates put BMW at only 10x at the current share price. are: 1) external risk . are: 1) risks to our commonality assumptions . 2. peer Daimler's historical average is 42% and on our estimates is currently trading at 44% 2010 EV/Sales. On the same time frame. in our view. In reality we have seen that Daimler has tended to trade much closer to BMW multiples.MI) Valuation Methodology: We value the Fiat share based on EV/sales and EV/EBITDA metrics against Fiat’s historical trading range.we believe that the worst is now behind the company is relation to writedowns on its financial services leasing book but were second-hand prices to fall significantly and cause further writedowns to residual values. Applying Daimler’s own historical average multiple would imply a price of €31. SotP: Using a sum-of-the-parts valuation we arrive at a value of €27/share for Peugeot. Fiat would trade at 28% EV/sales. BMW has historically traded at a 5-year average EV/Sales of 39%. EV/sales: Daimler has traded at a five-year historical median of 42% industrial EV/sales although during that period has ranged from a low of 13% in 2003 (incl Chrysler) to a high of 57% in 2007. Using its own historical average of 39% implies BMW should trade at €50/share. We take a weighted average of both these valuation metrics lead us to set a €41 price target for the share. We base our calculation on a blended average of peer EV/Sales and EV/EBITDA multiples for the core Autos business and bring in Finance companies. 1) EV/sales: Fiat has historically traded at a six-year historical average of 28% EV/sales. GEFCO and Faurecia at historical average multiples. We base our calculation on a blended average of peer EV/sales and PE multiples for the core Autos business. Fiat SpA (F IM / FIA. leading to an even weaker demand and pricing environment than we currently assume. Daimler AG (DAI GY / DAIGn. in our view. A weighted average of both these valuation metrics leads us to set a €32 price target for the share. Looking out to 2011E. from which we derive a price of €35. BMW's larger than average financial services penetration would result in greater downside risk than for peers. Risks which May Impede the Achievement of the Price Target: The main upside risks to our price target. 2) Group EV/EBITDA 8 December 2009 174 .if there were to be a more rapid turnaround at Chrysler than we currently forecast 2) a more rapid turnaround in truck and/or agricultural equipment than we assume in our forecasts could provide further upside to the share Peugeot SA (UG FP / PEUP. this would provide upside to the current share price 3) currency risk . 1. with a reference to the SotP methodology based on peer multiples for the various divisions to confirm our valuation. At our €8 target price. highlighting our belief that the share is significantly overvalued at present.if USD and GBP rates were to improve significantly against the euro. although it dipped to 20% during the credit crisis of 2008 and at current market price is only trading at 18% 2010E EV/Sales on our estimates. Risks which May Impede the Achievement of the Price Target: The main risks to our price target. exactly in line with its historical average. despite its supposedly higher-rated truck division historically comprising 25% of earnings. 2) risks to leasing book .Barclays Capital | European Autos & Auto Parts Valuation Methodology and Risks European Autos & Auto Parts BMW (BMW GY / BMWG. The OEM sector average range is 27%. We also apply a 5% discount to the SotP valuation to take account of the historical holding discount for the trucks business. 2) EV/EBITDA: our EV/EBITDA looks at adjusted industrial EV (backing out financial services) over industrial EBITDA. peer EV/sales and EV/EBIT multiples for Daimler Trucks and bring in Finance companies and Vans & Buses divisions at historical average multiples. Historically. Fiat has traded at a 6-year average of 4. could make our forecasts difficult to achieve.3x EV/EBITDA. We therefore cross-check our valuation against historical and peer average EV/sales estimated multiples and use a weighted average of the both methodologies to derive our target price. are: 1) external risk macroeconomic factors outside the control of hte ocmpany. this would ease the FX burden for Mecedes' earnings forecasts. We believe the company should trade at its historical level of 11x.DE) Valuation Methodology: We value Daimler using a SotP methodology but we acknowledge that this assumes the market gives full credit to each constituent part of the company. could mean that the company exceeds our forecasts 2) were truck markets to improve faster than consensus (and our) estimates assume.

1) Liquidity risk – current high gearing levels and lack of investment grade credit rating expose the share to balance sheet risk. leading to an even weaker demand and pricing environment than we currently assume. are: 1)Risks to our cost commonality assumptions. SotP . We believe that VW should trade at least at 25%. our estimates put VW at only 1. However. could make our forecasts difficult to achieve.4x for the sector as a whole). Looking out to 2011E. Risks which May Impede the Achievement of the Price Target: The main downside risks to our price target. implying a value of €90 for the prefs and €105 for the ords.3x at the current share price. which would imply a share price of €23.DE) Valuation Methodology: We value the VW preference share based on an average of EV/sales and PE metrics at historical and peer average multiples and then set a 20% discount to value the ordinary shares.Historically VW has traded at an eight-year average of 3. when we expect auto markets to have normalised to a greater degree. This 20% spread between the prefs and the ords. We give a greater weight to our SotP valuation. EV/EBITDA .VW prefs have historically traded at an eight-year average of 40% industrial EV/industrial sales. Recognising some of the risks inherent in the merger and future dilution.5x adjusted EV to industrial EBITDA (vs 3. We believe that the current VW pref share price significantly undervalues the share based on this valuation metric. 2) Risks from financial transactions – VW plans to issue future equity. Renault SA (RNO FP / RENA. thus on a weighted average combination of both these valuation metrics we derive a €42 price target for the share. Looking out to 2011E.7x for the sector as a whole). although rose to 66% as sales dipped in 2009. An average of both these valuation metrics leads us to set a €85 price target for the preference shares and thus €100 for the ordinary shares. An average of both these valuation metrics leads us to set a €85 price target for the preference shares and €100 for the ordinary shares. we conservatively believe that the company should trade at 1. Volkswagen AG (VOW GY / VOWG. from which we derive a share price of €80 for the prefs and €95 for the ords. in our view. under-delivery on expected alliance savings 2) Current high gearing levels add risk to share 3) With more than 60% of earnings generated by Nissan (>70% by total associate contribution) any significant downturn in either Nissan or Volvo’s earnings stream would have a major knock-on affect on Renault’s own bottom line.7x. We believe that the company should trade closer to its historical level of 2. and complete a merger of Porsche AG into VW AG.4x at PSA and 3.4x.Barclays Capital | European Autos & Auto Parts Valuation Methodology and Risks multiples: historically PSA has traded at an 8-year average of 2. especially as we remain only just above consensus on our top-line estimates for 2010E. 3) Risks around pref/ord discount: the pref to ord discount has been volatile. still well below the 2001-05 range.we also cross-check our SotP calculation against peer and historical average multiples. We believe that the company should trade closer to its historical level of 6x.5x at current share price in 2010E. dipping as low as 90% -. The pricing and terms for the equity issuance and future merger are not known at this point. leading to an even weaker demand and pricing environment than we currently assume. in our view. in our view. are: 1) External risk – macroeconomic factors outside the control of the company. especially were the Peugeot to finance any future alliance with Mitsubishi Motors with debt 2) M&A risk – if PSA were to embark on any further strategic alliances or seek to restructure its holding in Faurecia.any return to 'abnormal’ discount levels would put our pref target at risk. could make our forecasts difficult to achieve. Risks which May Impede the Achievement of the Price Target: The main downside risks to our price target. we also apply a 10% discount to the NAV in line with the average discount that the market has historically applied. ie. Our two valuation methodologies are: 1) EV/sales .5x at current share price. Risks which May Impede the Achievement of the Price Target: The main risks to our price target. purchase assets from Porsche and Porsche family companies. and may be set in a way that prejudices owners of VW pref or ord shares.using a sum-of-the-parts valuation we arrive at a €42 target price for Renault.PA) Valuation Methodology: Valuation Methodology We value the RNO share using a SotP methodology which we confirm against historical and peer average EV/EBITDA multiples to reach our €42 target price: 1. which would imply a value of €43/share.4x for the sector as a whole). following likely DAX inclusion. Our slightly below consensus EBITDA estimates put PSA at 2. as well as limited effective voting rights for the surviving public ord shares. A blended average of both these valuation metrics leads us to set a €26 price target for the share. when we expect autos markets to have normalised to a greater degree. 2) EV/EBITDA .4x EV/EBITDA at a group level (vs 6x at RNO and 2. are: Macroeconomic risks . At current market price the shares are only trading at 14% 2010E EV/sales on our estimates. Historically RNO has traded at an 8-year average of 6x unadjusted (ie. is below the historical 35% discount but with the pref shares becoming the primary trading vehicle going forward. 8 December 2009 175 . 2. this could provide further upside to the share and cause it to exceed our current target price. our above consensus EBITDA estimates put RNO at only 4. just ahead of its historical average. pre-associate stake) EV/EBITDA (vs 2.macroeconomic factors outside the control of the company. We base our calculation on a blended average of peer Industrial EV/sales and Industrial EV/EBITDA multiples for the core Autos business and bring in associates at market value. we believe the discount should narrow.

could mean the company exceeds our forecasts. We believe that VW should trade at least at 25%. following likely DAX inclusion. when we expect the merger to finalize. Recognising some of the risks inherent in the merger and future dilution. Risks which May Impede the Achievement of the Price Target: The main risks to our price target are: 1) External risk – macroeconomic factors outside the control of the company.vs 3.any return to 'abnormal’ discount levels would put our pref target at risk Porsche Automobil Holding SE (PAH3 GY / PSHG_p. leading to a stronger demand and pricing environment than we currently assume. We believe given the fundraising and merger risks that Porsche should trade at 50% EV/Sales. Risks which May Impede the Achievement of the Price Target: Risks to price target The main risks to our price target. closer to the peer historical average of 43%. and implying a value of €60/share. we conservatively believe that the company should trade at 1.6x EV to EBITDA during 2001-07 (before the extensive distortion of its options earnings) -. could make our forecasts difficult to achieve.DE) Valuation Methodology: We value the VW preference share based on an average of EV/sales and PE metrics at historical and peer average multiples: 1) EV/sales . and may be set in a way that prejudices owners of VW pref or ord shares. With the pref shares becoming the primary trading vehicle going forward. leading to an even weaker demand and pricing environment than we currently assume.7x.1x. at may be set in a way that prejudices owners of Porsche pref shares Source: Barclays Capital 8 December 2009 176 . At current market price the shares are only trading at 27% 2010E EV/sales on our estimates. 2) Risks from financial transactions – VW plans to issue future equity. dipping as low as 90% -. An average of both these valuation metrics leads us to set a €55 price target.Barclays Capital | European Autos & Auto Parts Valuation Methodology and Risks Volkswagen AG-PFD Preferred (VOW3 GY / VOWG_p.historically VW has traded at an eight-year average of 3. An average of both these valuation metrics leads us to set a €85 price target for the preference shares. EV/EBITDA . especially as we remain only just above consensus on our top-line estimates for 2010E. as well as limited effective voting rights for the surviving public ord shares. we believe the discount should narrow. Recognizing some of the risks inherent in the merger and future dilution. 2. in our view. from which we derive a price of €50/share. our estimates put VW at only 1. are: 1) External risk – macroeconomic factors outside the control of the company.3x.4x for the sector as a whole). purchase assets from Porsche and Porsche family companies.VW prefs have historically traded at an eight-year average of 40% industrial EV/industrial sales. when we expect auto markets to have normalised to a greater degree. still well below the 2001-05 range.3x at the current share price. At current market price the shares are only trading at 14% 2010E EV/sales on our estimates. which is below the historical 35% discount. Looking out to 2011E. although rose to 66% as sales dipped in 2009. we conservatively believe that the company should trade at 3. Looking out to 2011E. We believe that the current VW pref share price significantly undervalues the share based on this valuation metric. at the current market price the share is trading at only 1.Porsche prefs have historically traded at an eight-year average of 100% EV/sales. from which we derive a share price of €80 for the prefs. 2) EV/EBITDA . although rose to 200% as sales dipped in 2009. 2) Risks from financial transactions – Porsche plans to issue future equity and complete a merger of Porsche AG into VW AG.DE) Valuation Methodology: We value the Porsche preference share based on an average of EV/sales and EV/EBITDA metrics at historical and peer average multiples: 1. The pricing and terms for the equity issuance and future merger are not known at this point. and complete a merger of Porsche AG into VW AG.Historically Porsche has traded at an average of 4.4x for the sector as a whole). EV/sales. 3) Risks around pref/ord discount: the pref to ord discount has been volatile. Inherent in our valuation is a 20% spread between the prefs and the ords. implying a value of €90 for the prefs.5x adjusted EV to industrial EBITDA (vs 3. The pricing and terms for the equity issuance and future merger are not known at this point.

Barclays Capital produces a variety of research products including. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products.39). In addition to the stock rating.51). NY 10019 or refer to www. 2008. combinations or straddles (same expiration month for both options): The basic risk of effecting a short spread transaction is limited to the difference between the strike prices less the amount received in premiums. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues. Uncovered put writing: The risk of selling an uncovered put is significant and may result in losses significantly greater than the premium received. or otherwise.com/publications/risks/riskchap1. and may directly conflict with. Please note that the trade ideas within this research report do not necessarily relate to. EUR 80.PA. the fundamental ratings applied to Barclays Capital Equity Research. capital markets. IMPORTANT DISCLOSURES CONTINUED For current important disclosures regarding companies that are the subject of this research report. 04-Dec-2009. is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The risks of options trading should be weighed against the potential rewards. whether as a result of differing time horizons. is available at BMW (BMWG.jsp Primary Stocks (Ticker.56). public appearances and trading securities held by a research analyst’s account. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.com/disclosures or call 1-212-5261072. 745 Seventh Avenue. EUR 47. equity-linked analysis. EUR 10. 04-Dec-2009. hold and sell is not the equivalent of our rating system. Risk Disclosure(s) Options are not suitable for all investors. Call or put vertical spread purchasing (same expiration month for both options): The basic risk of effecting a long spread transaction is limited to the premium paid when the position is established. 04-Dec-2009. New York. Risks: – – – – Call or put purchasing: The risk of purchasing a call/put is that investors will lose the entire premium paid. methodologies.DE. and trade ideas. EUR 35.59). 3-Underweight/2-Neutral Fiat SpA (FIA. 17th Floor. 04-Dec-2009.theocc. please send a written request to: Barclays Capital Research Compliance.MI. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company.PA. are not registered/qualified as research analysts with FINRA. A rating system using terms such as buy. quantitative analysis.91). EUR 35. EUR 63.50). “Characteristics http://www. EUR 32. 1-Overweight/2-Neutral Volkswagen AG (VOWG.18). Because of the importance of tax considerations to many options transactions. On September 20.DE. 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sector coverage universe”).75).DE. EUR 24. we provide sector views which rate the outlook for the sector coverage universe as 1-Positive. 2-Equal Weight/2-Neutral Volkswagen AG-PFD Preferred (VOWG_p. 1-Overweight/2-Neutral Guide to the Barclays Capital Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight. a portion of which is generated by investment banking activities. and private investment management businesses. Research analysts employed outside the US by affiliates of Barclays Capital Inc. Price) and Risks of Standardized Options”. Kristina Church and Brian A.Barclays Capital | European Autos & Auto Parts ANALYST(S) CERTIFICATION(S) We. 04-Dec-2009.DE. 2-Equal Weight/2-Neutral Renault SA (RENA. 04-Dec-2009. 04-Dec-2009. Supporting documents that form the basis of our recommendations are available on request. Barclays Capital acquired Lehman Brothers' North American investment banking. The Options Clearing Corporation’s report.lehman. Uncovered call writing: The risk of selling an uncovered call is unlimited and may result in losses significantly greater than the premium received. Date. 3-Underweight/2-Neutral Peugeot SA (PEUP. – Call or put calendar spread purchasing (different expiration months & short must expire prior to the long): The basic risk of effecting a long calendar spread transaction is limited to the premium paid when the position is established. 1-Overweight/2-Neutral Daimler AG (DAIGn. 2-Neutral or 3Negative (see definitions below). Johnson. Investors 8 December 2009 177 . the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated options transactions. 2-Equal Weight/2-Neutral Porsche Automobil Holding SE (PSHG_p. fundamental analysis. 04-Dec-2009. but not limited to. – Call or put vertical spread writing/writing calls or puts (usually referred to as uncovered writing.DE. hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was.

for purposes of mandatory regulatory disclosures. (BBSA.The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. is classified as a Hold rating. Barclays Capital offices involved in the production of equity research: London Barclays Capital.The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12month investment horizon. Equity Research has 1375 companies under coverage.Barclays Capital | European Autos & Auto Parts IMPORTANT DISCLOSURES CONTINUED should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. (BCI. Sector View 1-Positive . Below is the list of companies that constitute the "sector coverage universe": European Autos & Auto Parts BMW (BMWG.MI) Renault SA (RENA.sector coverage universe fundamentals/valuations are improving. for purposes of mandatory regulatory disclosures.PA) Barclays Capital Inc.DE) Fiat SpA (FIA. neither improving nor deteriorating.A. 45% have been assigned a 2-Equal Weight rating which. 3-Negative . 3-Underweight . 39% of companies with this rating are investment banking clients of the Firm.DE) Peugeot SA (PEUP. is classified as a Buy rating. 2-Neutral . for purposes of mandatory regulatory disclosures. Tokyo) São Paulo Banco Barclays S. 13% have been assigned a 3-Underweight rating which.PA) Volkswagen AG (VOWG.DE) Volkswagen AG-PFD Preferred (VOWG_p. 32% of companies with this rating are investment banking clients of the Firm. 44% of companies with this rating are investment banking clients of the Firm. (BCC.sector coverage universe fundamentals/valuations are deteriorating. New York) Tokyo Barclays Capital Japan Limited (BCJL. Stock Rating 1-Overweight . São Paulo) Hong Kong Barclays Bank PLC. the investment banking division of Barclays Bank PLC (Barclays Capital. 2-Equal Weight .DE) Distribution of Ratings: Daimler AG (DAIGn. London) New York Barclays Capital Inc. Hong Kong) Toronto Barclays Capital Canada Inc. Hong Kong branch (BB.sector coverage universe fundamentals/valuations are steady. Toronto) 8 December 2009 178 . RS-Rating Suspended .DE) Porsche Automobil Holding SE (PSHG_p. 40% have been assigned a 1-Overweight rating which. is classified as a Sell rating.The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company.

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