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

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.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. 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. please see page 174 8 December 2009 3 .

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

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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

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.PA / UG FP Stock Rating 2-EQUAL WEIGHT Sector View 2-NEUTRAL Price Target €26. which will include the sale of selected property assets and of any non-strategic investments. but with the defensive characteristics of downside protection.3bn of gross cost savings.Barclays Capital | European Autos & Auto Parts Peugeot (2. For equity investors who are looking for exposure (delta) to the underlying equity. We also believe that of the targeted €3. 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.Equal Weight.00 Price (04-Dec-2009) €47. While we maintain a positive stance toward VW prefs (with a 1-Overweight and €85 target). against the near-term low valuation in light of Qatari share sales.1bn. we believe that this leaves plenty of upside to the current share price when recovery sets in. 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. which we confirm against peer average EV/EBITDA multiples in order to reach our price target of €26. Renault (1. which we check against peer average EV/EBITDA multiples to reach a price target of €42.PA / RNO FP Stock Rating 3-OVERWEIGHT Sector View 2-NEUTRAL Price Target €42. which in turn drives our 1-Overweight rating. €55 price target) (see page 121) PSHG_p. we believe that public shareholders in both firms face transactional risk around the future fundraising and eventual merger ratios. an income advantage and strong takeover and dividend protection features our Barclays Capital convertibles analysts recommend Peugeot’s 2016 convertible. we base our valuation on a SotP methodology. the company is only likely to retain €2. In the near term. As at Peugeot. €26 price target) (see page 101) PEUP. likewise.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. senior status. such as the Volvo stake. We are initiating coverage of Peugeot with a 2-Equal Weight rating.Equal Weight. 7 8 December 2009 . €42 price target) (see page 132) RENA.DE / PAH3 GY Stock Rating 2-EQUAL WEIGHT Sector View 2-NEUTRAL Price Target €55.Overweight.00 Price (04-Dec-2009) €35. We are optimistic that 2010E will herald the beginning of an improved cash management strategy. 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. 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.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. offers better protection against the vagaries of offering dilution and exchange ratios than do the Porsche prefs. While Porsche’s near-term prospects as a sports car manufacturer are strong in the face of a challenging market. 8% Porsche (2. 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. With VW we believe that the ultimate earnings power.00 Price (04-Dec-2009) €24. we base our valuation on a SotP methodology.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. 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). 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.

Overweight. At the same time.Barclays Capital | European Autos & Auto Parts Volkswagen Prefs (1. Given the erratic movements of Volkswagen’s shares many investors are loath to enter into a position that could result in substantial losses. 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. we recognize that VW is seen as a consensus overweight – yet has been a stock that has repeatedly punished the consensus trade. in our view.DE / VOW3 GY Stock Rating 1-OW prefs / 2-EW ords Sector View 2-NEUTRAL Price Target €85.39 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.00 prefs / €100.DE / VOW GY VOWG_p. which lead us to our €85 price target for prefs and €100 for ords. we do not view the potential Porsche merger and attendant financial manoeuvring as posing significant downside risk to VW pref holders. price target €100) (see page 152) VOWG.00 ords Price (04-Dec-2009) €63. We value the VW shares based on an average of EV/sales and EV/EBITDA metrics at historical and peer average multiples. Moreover. as VW appears to have protected itself against an inordinate amount of net debt on Porsche’s balance sheet.50 prefs / €80. 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). with the benefit that the maximum loss to a long call or put position is the premium paid. price target €85) and Volkswagen Ords (2. and with a 2-Equal Weight and €100 price target for the ordinary shares. 8 December 2009 8 .Equal Weight. These investors should.

932 2.2mn in 2008.462 670 14.543 1.561 1.2% -5.179 14.828 2012E 3.312 622 15.147 2.638 2009E +21. The European auto downturn of 2008-09 came after nearly a decade of sales that fluctuated mildly in Western Europe (between 14.132 2.966 13. 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.493 2.2% -17.050 1. masking what would have been a steep 25% decline in total Europe.708 1. had scrappage schemes not been initiated.579 11.750 1.1% -3.087 2.934 744 2.054 19. 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. UK & Spain. 870.0% -15.904 2.7% +9.8% -9.4% in W Europe and -14% in total Europe (or a cumulative decline since 2007 of -12% and -18% respectively).1% +10.7% +6.960 2.6% +7.347 978 13.000 2.1% -12.460 13.876 13.1% +5.7% -10.4% +5.4% -12.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%. Barclays Capital 8 December 2009 9 .0% Note: * assumes low level of extension to scrappage schemes in Italy.7% +9.6% -43. For the full year 2009.798 1.740 2.5% +11. France.065 1.9m in Russia. likely effects of pull ahead of 2010E sales into 2009.860 2.0% +8.090 2.934 2010E* 2. 2009 W European sales would have declined 19% to 11mn units without government interventions W European sales to fall only -3.404 2.1mn sales in W EU in 2009E are likely to have been subsidized by scrappage programmes. This will be a difficult hole to climb out of given limited spillover of scrappage programmes into 2010.1mn in Western Europe.892 1.6% +16.550 1.4% (-14% total Europe) in 2009E but masking a -19% drop (-25% total Europe) had scrappage schemes not proliferated.9% +22. Turkey and former Soviet Union states – for a net decline of -3. Source: ACEA.773 1.1mn) while growing healthily in Eastern Europe to 1.5% +4. JD Powers.7% -7.2% -4.109 807 2.252 1.0% +8.162 2.161 2. However.162 15.385 2011E 2.615 3.746 1.1% YoY Chg (%) 2010E -32.000 938 17. we expect sales to reach 13.882 1.000 1.2% +10.2mn units and 15.0% -51.320 932 12.100 870 14.8% -13.700 2. Figure 1: European car registrations historical and forecast.117 14.708 820 15.4% +7.377 2008 3.549 2009E 3.725 12.4% +4.300 1.228 1.9% -24.101 18.364 1.075 14.7% -12.000 in Eastern Europe and 1. and expected weak euro area macroeconomic growth. We believe that government interventions clearly distorted the European market in 2009. nearly 3mn of the 13.071 1.4% -26.150 880 2.5% -14.7% 2011E +13.384 2.

New car max 140 gCO2/km 5 months 2009 SK: €2000 > 10 years €22. We estimate that scrapping programmes in WE provided nearly 3mn units of sales. 8 December 2009 10 . 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. depending on the design of the programme.000 max) > 10 years. and had a relatively minor positive affect in Eastern Europe. Of the remaining scrappage sales. However. max 140gCO2/km 1.750 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. as critics of the programmes point out. or 250. at least some of these sales would have occurred anyway in 2009.000 km car max 5 years.000 vehicles 11 months 2009 E: Plan 2000E: €2000 Plan VIVE: interest free loan (€10. > 13 years. To estimate the base underling rate we assume that.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: €750–1.5 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.000 cars €750–1.1 mn 9 months 2009 RO: €1000 > 10 years Max 60. we estimate that c50% were incremental sales and c50% a pull-forward of 2010E sales in 2009E. between 30% and 35% of the buyers would have found their way into showrooms with or without scrappage incentives. other countries showed significant boosts as well.

460 13. Russia & FSU Total Europe (inc Russia) YoY chg(total Europe) Source: ACEA.1m 09E.8mn in total Europe (incl.1% Scrappage boost 1. Note that while our 14% decline forecast for 2010E will bring sales down to 11. brings the underlying base rate of sales to 11. 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.30% of total 2.549 -4.425 10. Russia) – a YoY decline of 19% in WE and 26% overall.750 1.132 2.740 3.150 880 2.0mn in 2009 in WE and 13.162 2.550 1.934 13.000 2. far lower than the comfortable 14mn run rate of recent months in WE (sales even reached a SAAR of 15mn in Oct 09). Backing out the estimated 2. JD Powers and Barclays Capital 2009E 3.763 -25.050 1.934 -14.561 1.934 15.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 14.090 2.100 870 14.829 1. Barclays Capital 8 December 2009 Jan-09 .860 2.161 2.3mn. we believe that the true underlying rate is closer to 11mn in WE– a far deeper hole from which to climb out. 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).877 740 2. and in line with the 25% declines seen in the US prior to cash for clunkers.965 3.675 1.0mn scrappage sales that otherwise would not have occurred in 2009E (assuming c.966 13.600 285 400 390 200 50 2.809 18.000 1.987 30% 30% 842 11.8% 2008A Germany UK Italy France Spain Rest of WE W Europe New EU States Pan-EU Turkey.3% As opposed to the scrappage fuelled headline number of 13.720 1.925 40 2.965 2.9mn scrappage sales would have occurred in the year even without scrappage).

010 -12 -1. In addition. at least a few countries still have budget or plans for scrappage in 2010.Barclays Capital | European Autos & Auto Parts 2010 sales of 11. but not assumed in our analysis. offsetting some of the payback from pull-ahead sales. 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 2.132 change in base demand 6% 5% 5% 5% 2% 5% 5% 5% 3.746 1.000 to EUR700mn on 1 January 2010 and to EUR500mn on 1 July 2010. a segment in which sales fell from the ‘normal’ range of 1.500 2.000 1.543 1. there is still expected to be some carryforward into 2010E as the scheme was based on orders placed rather than on deliveries.1% 5% 850 14.806 1. optimistically.020 400 100 80 100 60 50 790 60 850 Pro forma ex scrappage 2.773 1.000 2.2mn units in 2009.703 1.860 2.8mn from continuation of scrappage schemes but battling a headwind of 1.132 14.7% Pay back from Continued 2009 scrappage scrappage boost -560 -85 -140 -137 -70 -18 -1.2mn to 13mn in WE. particularly in Germany.3mn in total Europe – well below the consensus range which we estimate at c.000 units.0mn units in 2010E. some sales were undoubtedly pulled forward from 2010E as consumers accelerated purchases.8mn units to 1.934 15. a government draft budget document is set to reduce the incentive support from the current level of EUR1. German automakers appear to be pressing for a subsidy programme (or changes in personal taxation of company-provided cars to reflect actual price vs.150 880 2.252 2. The UK recently extended its scheme by an additional 100. Although. In particular. while we believe the scrappage programmes.759 1.3mn in WE and 14.556 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.limited scrappage boost and modest euro area economic growth We believe that extension of scrappage programmes could provide a further scrappage boost of 1. of which 300. list price) focused on company fleets.320 932 12. we believe that VW likely as an order book of at least 500.934 744 2. to bring total sales to 11.3mn likely in W Europe .385 -9.000 are likely to be delivered in 2010 in the winter and early spring.100 870 14.750 1.934 -14.000 vehicles and it is expected that the Spanish and Italian schemes will also be extended to some degree.6% could provide an additional boost of.547 11.0mn sales that were pulled forward from 2010E into 2009. In France.460 13. attracted many customers who would not otherwise have bought a new car. and underlying euro area growth of 1. As a result. 5% to auto sales.12.540 884 12. At the same time.579 11. and there has been no suggestion that an extension can be expected. 8 December 2009 12 . the German programme ran out of money in early September. the net impact of scrappage in 2010 will be negative – a likely boost of 0.971 754 2.

000 10.000 8.yet we still remain significantly below consensus with our 11.0% -2.9% 5. In looking at prior cycles in Western Europe.3mn (-13.2% -13.000 14. ACEA.034 YoY change % 1.1% 0. after a near-17% decline in 1993.0% Source: JD Powers. we expect a decline in Western Europe of 25% (with the aid of scrappage incentives). Figure 7: Western European historical & forecast car sales cycle.4% or on average 0.7% 0.9% 1.6% 6. only slightly worse than the 1992-93 downturn but significantly worse than other post 1970 downturns.636 10.160 8.6%) estimate for Western Europe in 2010E (we believe consensus is expecting only an 8-10% decline).004 10. across the 2008-10 cycle.0% 9. 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.000 6. the average rebound was 3.152 10. Figure 6: W European historical car sales.4% average of prior 2nd year rebounds 7.5% -0.498 11.532 10.6% -2.252 11. 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. Barclays Capital 8 December 2009 13 .6% -16.460 10.684 13.3% 3.000 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.416 13.Barclays Capital | European Autos & Auto Parts Overall.517 13.9% -5.000 4.000 2.938 12.416 9.817 10. 2009 stripped of scrappage distortions) will grow 5% .7x the prior year’s downturn.9% 4.1% 13.431 8.8% average of prior first year rebounds 3. 1970-2012E (units in 000’s) 16.6% 0.107 9.5% 3. The sharpest rebound was 6% in 1994.664 11. JD Powers.000 12.

6 1.6 2.8 2.2 -9.0 0.8 1. Source: ACEA.4 0.7 3.23 1% change in Real GDP = 1.7 3.0 0.8 -2. this implies registration growth of 3.0 13.0 4Q09 3.4 -5.8 1.0 0. Barclays Capital 8 December 2009 14 .9 2.1 2.6% growth in WE GDP for 2010.7 -0.2 3Q09 3.2 -1.8% change in registrations -4% -2% 0% 2% 4% 6% Car Registrat. when we back out the likely scrappage payback in 2010E.4 -6.0 -4.3 -4.2 1.4 2. regression shows that for every 1% change in euro area GDP. somewhat below consensus expectation of 2.8x multiplier (where every 1% change in Real GDP correlates to 1.1 1. Figure 8: Barclays Capital estimates for real GDP growth.3 0.6 -3.6 -4.5 0.0 0.0 6.3 4.7 -6.9 1.7 2.5 2.3 -1.9 2.4 0. with growth rates varying from -0.0 0.1 -0.2 -0. Note while we examined other macro factors.6 -13.0 1Q10 1.7 -5.4 -10.5 2Q09 -0.5 0.1 1. 2008-2010E Real GDP % over previous period.6% in Germany.4 -4. 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).4 3.6 -0.3 2. a somewhat weak) fit.0 2.8 2.5 1.7 -12.0 0.3 -3.6 2.5 2.1 0.0 0.9 5.2 3.4 -3.1 1.4 0.2 2.3 1.8%.0 0.7 1.2 2.8 1.2 0.1 2.7 -15.0 2.5 -4.4 4.7mn units in Germany in 2010E.3 1.8 17.5mn units. However.8% change in auto registrations as per Figure 10 below).1 1. 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 %). our BarCap economics colleagues forecast 1.1 -4.7 -19.2 -10.1 -2.2 3.0 3.5 2010 1.7 -8.3% in Spain to 2.6 -0. unemployment and interest rates.9 3.3 2.5 2.7 2.8 -3.6 2009 -4.4 3. Using the 1.6 2. Figure 9: EU car registrations vs.7 -7. we are left to forecast just 2.8 Overall.9 2.0 2.8 1.3 3.4 0.4 -2.6 2.6 0.6 3. 1995-2009 15% Registrations (yoy % c 10% 5% 0% -5% -10% -15% -6% R2 = 0.1 1.2 -4. Hungary Poland Russia Source: Barclays Capital Real GDP % annual change 2Q10 2.7 1. GDP alone provided the best (albeit.0 -0.5 4.0 1. with 23% R-squared. automotive registrations will change about 1.2 -26.8 -4.9 1.3 3. including income growth.3 2008 1.4 -2.Barclays Capital | European Autos & Auto Parts Moreover.5 2.0 0.9 -7.3 -9.5 1.2 1. with the strongest growth in base demand likely in Germany – which had the greatest scrappage distortion.5 3Q10 2.4% (consistent with prior rebounds). SAAR 1Q09 Europe and Africa Euro area Germany France Italy Spain Netherlands United Kingdom Sweden EM Europe & Africa Czech Repub.6 1. real GDP YoY Chg (%). Haver Analytics. Barclays Capital Real GDP Real GDP (YoY % chg) Source: Haver Analytics.0 -2.4 -1.2 7.7 -0.6 1.8 7.9 2.

units in mn 4Q10E 15.0 3. Figure 11: Pan European production (including LCVs and Russia): 2007-2015E (and quarterly).2 8. in our view.0 2.7 2.8 5.9mn units.6 11. As a result. Furthermore.7 1.6 13.7 4. which we do not expect to reoccur in 2010.0 5.5 15. Barclays Capital 8 December 2009 2015E 15 2015E .5 3.5mn in October and a 1H09 average of 9.4 14.9 2.2 15.4 4. Barclays Capital At the same time. we expect European production to decline in 2010 to 15.1 19.0 3.6 3.0 14.8 4.1 12. Indeed.2 4.0 4.5 18. down from an estimated 16.Barclays Capital | European Autos & Auto Parts EU PRODUCTION TO WEAKEN SEQUENTIALLY BUT GLOBAL GROWTH PICKS UP Supported by the region’s scrappage programmes. with most government incentives ending in 2009.2 4.1 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 2007 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E 2008 2009E 2010E 2011E 2012E 2013E Source: CSM. However.5 3. North American production volumes in 2009 were depressed due to the industry’s need to correct for excess inventory.3 20.5 12. Figure 12: North America light vehicle production – 2007-15E (and quarterly). units in mn 21.6 16. as recent US sales performance suggests signs of a recovery. US sales have improved modestly in 4Q09.5 2.9 17.7 1. the region is likely to experience some payback from pulled forward demand.4 2.7 22.6mn units in 2009 to 11.5 3.2 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2014E 4Q09E 1Q10E 2Q10E 3Q10E Source: CSM. European production in 2009 recovered somewhat from 3.2mn units in 2009. with November SAAR reaching 10. up from 10.2mn units in 2010.9 4.9mn. we expect North American production to increase from an estimated 8.4 4.6mn.4mn in 4Q09.8 21.4mn units in 1Q09 to an estimated 4.8 2.

6 2008 8.7 8.5 13.3 3.5 66.8 15.4 5. Barclays Capital 8 December 2009 16 .6 61.8 15.3 2.9 11.1 14.5 2015E Source: CSM.1 1.8 5.0 14.5 16.2 13.0 4.6 2009E 55.5 7.7 1.0 11.7 12.5 2011E 6.6 2.7 72.1 15.6 1.1 11.1 14.4 7.4 2014E 22.7 2.7 14. fuelled by a rebound in North America and continued growth in BRIC countries.6 10.4 18.6 65.7 4. we expect light vehicle production to increase.5 20.7 10.0 2.6 13.9 4.2 12.8 81.2 2010E 6. Figure 13: Global light vehicle production – 2008-15E 77.3 14.2 19.Barclays Capital | European Autos & Auto Parts On a global basis.9 13.0 3.9 17.1 5.6 3.0 2013E 79.1 14.5 2012E 7.9 1.2 14.1 5.3 South Asia South America Middle East/Africa Japan/Korea Greater China Pan Europe North America 21.0 13.1 12.4 5.

2009E 33.4% 10. the European scrappage programmes.5% Figure 14: Western Europe mass vehicle segment mix 2008 vs.6% -0. the German programme alone contributed 4. Ford Mondeo).5% 8.0% 7.7% 33.9% 1. eg.3% 3. eg. while was actually flat in the ten year period 1998-2008.2% -0. shifted mix dramatically downward. VW Passat. however.1% 0. even acknowledging the longer-term shift to A (city car. by design. 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. the A segment gained 270 points of segment share over 2008.8% 3. VW Golf. VW Polo.1% 0.2% -0.3% 0.1% 31.0% 1.0% -2. the B segment 360bp while C segment lost 180bp and 29. 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. eg.7% 0. in the volume market. As a result.4% -0. the A segment only grew by 350bp between its 2003 low of 6.5% -1.7% 10. Ford Fiesta) vehicles.4% -0.2% 0.8% -1. Ford Focus) and C/D and D segments (midsize.Barclays Capital | European Autos & Auto Parts DESPITE LONG-TERM DOWNSIZING. 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. The B segment grew by 400bp over the same ten-year period. Barclays Capital B segment 29. Going forward. we believe the fastest growing segments through 2012 will actually be volume C segments (compact.5% 4.2 share points in 2009 to the overall European increase in volume B segment share vs.5% C segment 31.4% and 2008.0% A B 2008 2009 C D Source: JD Powers. For example. Figure 15: A-C volume segment market share and YoY chg by country.2% -0.5% 0. Fiat Panda) and B class (subcompact. In 2009.2% 13.7% 0.4% 29.8% 29. 8 December 2009 17 .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. in the mid-term we expect mix to somewhat renormalize in a recovering market. eg.6% 13. 2008.

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 .0% 0.4% 42.8% 29.4% 29.0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 A Source: JD Power.4% 2012 12.4% 2009 13.3% 82.7% 38.1% 31.8% 44.1% As a result.7% 39.1% 31.9% 38.Lower Medium D .5% 79.2% 29.Small -540 A .2% 38.9% 8.0% 5.D Source: Barclays Capital 2007 8.1% 2011 11.0% 36.0% 30.1% 81.6% 83.1% 46.0% 25. Figure 18: Change in volume by segment 2009 to 2012E F .5% 40.Small Memo: A + B C .4% 2010 11.4% 2008 10.8% 6.0% 6.6% 41. Figure 17: A to D volume market segment share 2006-12E 2006 A .9% 8.4% 8.Luxury E .Lower Medium B .0% 39.0% 35.0% 32.Barclays Capital | European Autos & Auto Parts Figure 16: Western Europe overall segment share 1994-2008 40.Upper Medium C .8% 32.6% 7.0% 10.1% 37.7% 33.5% 32.3% 78.4% 40.0% 20.6% 6. the A and B segments are likely to shrink by almost 1mn units.Upper Medium Memo: C + D Memo: A .4% 31.0% 31.8% 31. Barclays Capital B C D E Going forward. while the D segment should grow slightly and the C segment remain flat. we expect some renormalisation of mix.4% 9.3% 31.1% 82.0% 15.8% 44.Basic B .5% 29.0% 79.Executive D .

the European market has been plagued by excess capacity. Barclays Capital Historical average Government interventions during the downturn of 2009 forestalled the capacity reduction that might normally accompany a sharp cyclical downturn.0 75.0 85.9mn units of capacity reduction in the overall European market.0 12. Figure 19: European capacity utilisation rates.Barclays Capital | European Autos & Auto Parts SCRAPPAGE AND LOAN PROGRAMMES PRESERVED EXCESS CAPACITY With well-known restrictive labour relations in most Western European countries.0% 90.0 13.0 22.0% 2008 2010E 2012E 2014E European capacity 80. whereas production has fallen by 4.8mn units in 2005.3mn units during the same period.0 20. Barclays Capital European Production (mil) European Production (LHS) Source: CSM.0 18.0% 17. Note that the downturn has only resulted in 3. European capacity (excluding Russia and Turkey) stood at 20.0 16. Figure 20: European total production & capacity 2005A2010E (mn) 24. with capacity utilisation averaging only 84% from 2001 to 2007. 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. Barclays Capital 8 December 2009 19 .0 16. 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.2mn units. and is likely to close 2010 at 18.0 2005 Figure 21: European overall market production vs capacity utilisation 2005-2015E 19.0 18.0 70.0% 14.0% 2006 2007 2008 2009E 2010E European Capacity (mil) Source: CSM.0 15.0 14.

Barclays Capital *total market ex-BMW. 8 December 2009 20 . even trumping premium peers. they will be overtaken by their Asian peers in 2011E and will still linger below the 85% level until 2014.0% 13.Barclays Capital | European Autos & Auto Parts Volume capacity particularly hampered by government interventions Having averaged 83% from 2001 to 2007. Government intervention to hinder major capacity reduction plans. 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. Figure 22: European volume* production vs capacity utilisation 2008-2015E 14. Porsche Audi & JLR/Tata Although EU volume manufacturers will maintain utilisation above market average from 2010E onwards. which has the greater amount of savings to achieve since it has one of the lowest capacity utilisation rates in the market.0 Millions 85.0% 10.0% 11. PSA. RNO. Mercedes. helped partly by rationalisation schemes at Aulnay and Rennes and also by upcoming model launches in C-segment.0 75. we believe that PSA’s cost-cutting efforts are well understood by the market and that by contrast.0 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 70. However.0 90. €6bn loaned by govt to PSA and RNO dependent on no plant closures in France. 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. eg. will actually surprise the market by its ability to significantly increase the scale-effects with Nissan (see RNO section later in this report).0 80. Barclays Capital *European volume comprises Fiat. when production volumes are expected to attain near pre-crisis levels.0% European Volume Production (LHS) EU volume capacity utilisation % (RHS) Source: CSM.0% 12. capacity utilisation for the volume market is not likely to surpass 80% until 2012 and will not reach 90% levels until 2015.

0 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 80. Capacity utilisation fell to 77% in 2009 (from a six-year historical average of 91%).000 units of excess capacity. Audi and Porsche are likely to maintain capacity utilisation in 2010 of 93%.0% 75.0% 2. 90. Although average historical utilisation at 91% far exceeds excess capacity will linger for premium OEMs in 2010 with only 81% utilisation. while Mercedes and Tata (Jaguar/Land Rover) will stall at 74% and 77% respectively. Barclays Capital 8 December 2009 21 . Porsche & JLR/Tata The premium market excess capacity is not evenly distributed -. Daimler likely will have about 370. 85% and 84%.000 for BMW and 135k for Audi.0 95.0 85.000 Fiat PSA Renault VW ex-Audi Source: CSM. Barclays Capital *BMW. spurred by rebound in export demand and modest expansion of European demand. nor was capacity artificially preserved by explicit government intervention.Barclays Capital | European Autos & Auto Parts Premium manufacturers suffer from lack of demand but more room to manoeuvre The premium market suffers from overcapacity. Mercedes.0 1.BMW. In terms of units. Audi.0% EU Premium Production EU premium capacity utilisation % (RHS) Source: CSM. albeit not to the same extent as its volume peers. 3. but could reach 88% by 2012E and 95% by 2015. compared to 80.0% Millions Figure 24: European premium* production vs capacity utilisation 2008-2015E 5.0 4.0 0.0% that of the volume market. 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. Figure 25: European volume OEM excess capacity by company 2010e Volkswagen Ford Renault PSA Fiat General Motors Toyota Nissan Honda Hyundai 0 Source: CSM.

Barclays Capital Mercedes Tata/JLR Premium avg 8 December 2009 22 . Barclays Capital Excess production capacity Source: CSM.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.

against a 1. 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. also mean that manufacturers are not now in a position to significantly raise prices in countries affected by currency devaluations.1. which have local companies with high volume share. In new Member States. In particular. real prices in EE countries decreased on average (-6.272 List price (Euros) € 7. manufacturers are facing particularly price-sensitive consumers. But the various scrappage 1 European Commission “Car Price Report at 1. induced by both government scrappage schemes and companies’ own attempts to drive down overstockage via pricing promotions. consumer are even more price-sensitive as lower incomes have historically led a high share of consumers to opt for second-hand cars. Even excluding the effects of scrappage incentives across the EU. deal seeking consumer as has developed in the US.286 € 9.2009”.799 € 10. Figure 29: European list prices for volume segments A-D.613 According to a recent report published by the European Commission1. 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. the weak capacity utilisation in Western Europe has been counterbalanced by relatively robust pricing in the volume car market. translating into a fall in real car prices of 3. inflationadjusted) car prices declined in 23 out of 27 Member States between January 2008 and January 2009. Prior to the scrappage programmes. Jan 2009 IE PT BE D LU FR ES AT IT NL FI CY EL M UK Source: European Commission € 10.454 € 10.878 € 10.462 € 9.9%).681 € 10. including VAT and registration taxes) decreased by 1. However.498 € 10. leading to more transparent pricing and a price shopping.3%.1%.870 € 10.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. France and Germany. Historically. the more concentrated major markets. manufacturer rebates had been minimal and sporadic in most countries. tend to have higher list prices than less concentrated markets such as Spain and the UK without indigenous manufacturers.8% rise in overall prices.810 € 9. The EU price index for cars (reflecting nominal prices paid by consumers.703 € 9.548 € 10. and rarely widely advertised. As a result.993 € 9.747 € 10. published June 2009 8 December 2009 23 . real (ie.

500 2.000 to €2. less is genius] Vehicle Base price Govt rebates OEM rebates TOTAL Rebates Net price Advertising pitch Nissan Micra 11.950 2.500 4. less is better. weniger ist genial [Less is more.500 € prämien sichern [Save up to €6.990 Fiat Grande Punto 11.500 4.550 2.500 13. with even additional rebates in some countries for the most environmentally friendly cars.Barclays Capital | European Autos & Auto Parts programmes led to intense media coverage around the level of government 'cash on the bonnet.000 € 1.220 2. Figure 30: Scrappage incentive levels per vehicle by country (EUR) € 2.960 9.' which ranged from €1.000 6.500 2.500 per vehicle.000 6.secure your rebate now] Source: Company data.690 Fiat Bravo 15.200 4.500 4.500 .460 5.500 10.720 Nissan Note 16. some manufacturers would offer up to double the government cash in heavily advertised offers.690 2.500 € 2.860 6.000 6.190 2.120 France UK Italy Spain Germany Source: ACEA & Country statistics In addition.690 Jetzt bis zu 6.990 Weniger ist mehr.790 2. 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 € 1. trade press 8 December 2009 24 .360 4.290 Nissan Qashquai 20.700 4. weniger ist besser.500 4.000 € 1.500 3.

000 $2.500 $2. sales fell in late 2001 due to payback.8% In the US market. The programme. Figure 33: US monthly sales (000’s) and monthly incentives per car (US$) 400 350 300 250 200 150 $4.5/car in early 2001 to $2.7% Dec 2008 €2.1mn units in September 2001 to a peak of 21. 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. The German government’s “Umweltprämie” or €5bn scrappage incentive programme ran out of money in September.Barclays Capital | European Autos & Auto Parts In Germany list prices are currently about 5.7k in October and to over $3k/car in late 2002. GM launched its 'Keep America Rolling' programme. insurance and servicing provides savings of as much as €1. To restart its own sales (and arguably to reboot a key part of the US economy). US auto makers boosted incentives to restart sales (and.3mn in the following month -. Rather than accepting the decline. which allows greater flexibility for manufacturer/dealer incentive packages. at least for GM to 'run the business for cash' to cover fixed costs). Barclays Capital Oct 2009 2. 8 December 2009 Jul-07 25 . quickly matched by both domestic and transplant manufacturers.6% Sep 2009 2.000 $1. Fiesta and Ka compacts in Germany and a package of cheap loans.000 rebate for the Focus. After the events of September 11.485 11. offering zero-percent financing. showroom traffic slowed dramatically. which rose from a SAAR of 16. prompting carmakers to step up discounts yet further: for instance Ford is currently offering zero-percent financing and a €2.500 Thousands Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 US monthly car sales Source: Autodata Avg monthly incentive per car (US$) However.500 $3.5% more than the average for the 16 eurodenominated countries. leading to a relatively profit-less recovery.000 $3.as average incentives rose steadily from US$1.500 $4. a somewhat analogous anti-recession incentive programme (albeit only company funded) led to a marked deterioration in pricing that persisted for years. threatening US automotive production further in the midst of the post techboom recession.292 10.330 on most VW models.528 11. leading to three years of rising incentives but stalled sales. led to a marked rebound in sales.

Barclays Capital | European Autos & Auto Parts Figure 34: US monthly sales (000’s) and monthly incentives per car (US$). the real price of new cars and trucks fell steadily until this past year. 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.1% on a real basis. 8 December 2009 Jan-07 Jul-07 .000 $1. pricing stands on the cusp of following the profitless American-style path.500 $3. Already in 2009. pricing appears to have deteriorated by 3. 2002-07A 400 350 300 250 200 150 $4.500 Thousands Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 US monthly car sales Source: Autodata Avg monthly incentive per car (US$) While manufacturers attempted to the boost list price to offset some of the incentives.US market 1996-09A.500 $4.000 $3.500 $2.000 $2. With residual value depreciation comprising c47% of the total cost of vehicle ownership. as incentive programmes wind down. Figure 35: Real new car CPI -. 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.

To date. Figure 37: Euro area new and second-hand car prices. Volume manufacturers point to manufacturer incentives being frequently added on top of government incentives. 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 . 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. this pressure has been only partially buffered by new model roll outs. as well as the 3Q09 result discussions. revealed pricing concerns across the spectrum. With the conclusion of scrappage program in Germany. Most manufacturers believe pricing pressure is more acute in the retail market. albeit with falling order volumes – leading to risks of future price cuts. 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. while corporate programme buyers show less price sensitivity. manufacturer incentives are remaining constant.

500 $4.500 $1.Barclays Capital | European Autos & Auto Parts Figure 39: Manheim index of residual values.000 $2.000 $1.500 $3. Jan 01 to date (US$) $4. YoY chg % Figure 40: Average European OEM monthly incentive spending per car in US market.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 .500 $2.000 $3.

486 1.70 0.915 0. Ryton plant.890 0. BMW is also one of the most insulated in our coverage to both the US and UK.70 1. Fiat.484 1.20 1. PSA and VW’s low proportion of sales in the US (and VW’s plant in Mexico and future plant Tennessee. Of all OEMs. the pound has fallen 15% relative to the euro while the US dollar has slipped 12%.50 Jan-05 Figure 44: Forward rates do not imply GBP burden will ease 0. US) leave them less exposed to the US dollar weakness.492 1.10 1. the aggressive fiscal and monetary stimulus taken by the UK and US governments have led to a weakening of their currencies. Figure 41: Current EURUSD spot rates painful to importers 1.60 0.490 1.885 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 . creating further pressures (perhaps unintended) on importers into those markets.488 1.480 1. while Nissan is partially hedged. 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.80 0.900 0.30 1.478 1.50 1. Over the last year.905 0.00 0.474 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 1.90 0. but with a significant manufacturing presence in the UK and the US.40 1.910 0. 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).895 0.476 1.00 Jan-05 Figure 42: EURUSD forward rates remain close to US$1.482 1.Barclays Capital | European Autos & Auto Parts CURRENCY SHIFTS PRESSURE US AND UK IMPORTS Arguably.5 1. All other manufacturers have meaningful pound sterling exposure.60 1. especially after PSA chose to close its UK.

3% -0.7% 5.7% 3.9% 13.Barclays Capital | European Autos & Auto Parts WE FAVOUR THOSE WITH DOMINANT HOME MARKET C & D POSITIONS Overall the WE volume market is highly fragmented. Fiat 45% share in Italy A/B car.6% 1.3% Segment/country concentration favours home country incumbents -.5% 8.3% 20.6% 4.2% 1.1% 10.8% 10.3% 1.8% 0.500.1% -1.8% 5. 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 18.3% 0.8% 11. WE appears fragmented on an overall basis (HHI under 1500.0% Concentration index (HHI) Top 3 share Source: JD Powers. B car in Italy) are highly concentrated. many volume segment/country markets (eg. 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. 8 December 2009 30 . Ford still seen as UK local firm with 25% of C market).4% 1. home country preferences in volume market remain strong (eg.2% -0.4% 5.1% 4.despite years of EU directives aimed at harmonization.7% 14.4% 9. offering competitors pricing power.3% 9. French have 40% share in France.6% 1101 45.5% 6.5% 3.8% 0. no player over 25% share). Barclays Capital 1039 44.7% 5.2% 0.9% 1.1% 8. While WE appears fragmented on an overall basis (HHI under 1. VW 30% share in Germany.6% -0.2% -1.8% 5.1% 11.3% -0.

Barclays Capital (ie. offering pricing power if the lead competitor chooses to set a price umbrella. Fiat in Italy) As a result.000 is considered highly concentrated. several pockets of concentration remain. over 3000 highly concentrated Source: JD Powers.RNO & PSA combined share in France. Note we measure concentration using the Hehrfindal-Hirschman index (HHI).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. while a market over 3.000 would be a one-layer market (10000 = 100*100 ). A market over 1. market share of domestic manufacturers -. Smart & VW in Germany. and other competitors follow suit. over 1800 is considered concentrated. which is the sum of the squares of the market shares of the participants.800 is considered concentrated. An HHI of 10. 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. while a two-player market with each player at 50% share would have an HHI of 5000 (= 50*50 + 50*50). Barclays Capital 8 December 2009 31 .

1% 1.0% 541 3.3 0.5% 33.0% 237 2.8 0. Barclays Capital Concentration index A Source: JD Powers.2% 1. Barclays Capital The luxury market remains highly concentrated -.0% 536 3.280 1.0% 7.523 2.0% 0.005 39.4% 37.0% 0.945 1.5% 0.740 1.184 2.0% 30.343 2.0% 5.Upper Medium Spain UK Van Millions France Source: JD Powers.655 2.9% 17.Lower Medium Germany Italy D .643 1.3% 2.429 2.715 1.5% 0.939 12.0% 0.4% 33. Figure 49: Concentration ratios by country: A and B volume segments UK Spain Italy Germany France 1.210 26. 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 100.1 0.8% 0.7% 3.0% 17 6.2 0.6 0.0% 0.0% 29 3.1% 36.7% 35.0% 1.0% 0.Small C .1% 1.090 2.0% 44.Basic B .7% 29.3% 0.5% 0.112 Source: JD Powers.5% 0.9% 0.954 3.0% 5.9% 0.2% 24. 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.828 33.200 8.Barclays Capital | European Autos & Auto Parts Figure 48: Key Western European markets: estimated volume by segment 2011E (units) 1.5% 37.614 1.497 2.5% 0.0% 0.0% 0.199 3.9% 0.0% 0.4% 80.0% 0.9 0.5% 35.260 2.8% 0.050 Figure 50: Concentration ratios by country: C and D volume segments UK Spain Italy Germany France 1.6% 1.4% 6.5 0.7 0.112 Concentration index C Source: JD Powers.679 30.1% 0.0% 0.5% 22.5% 0.0 A .2% 1.359 1.0% 132 10. Barclays Capital B D Figure 51: Western European premium market shares by segment/manufacturer.3% 0.which has in the past supported strong pricing.1% 1. Barclays Capital 8 December 2009 32 .347 35.2% 263 3.0% 0.2% 44.0 0.0% 0.483 1.0% 0.483 3.000 30.0% 196 3.4 0.

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

Figure 53: Global production of major B segment platforms by OEM (000’s units) – 2011E 2. Despite its strength in the B segment in Europe.Barclays Capital | European Autos & Auto Parts Figure 52: Estimated impact of increasing commonality Cost components Impact on Product Cost view Est. with over 2mn units in 2011. scale by platform is the starting point.103 1.460 1. the largest scale in the C segment. VW and Ford are second and third. with 1.5% 3. 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. VW.215 796 596 378 1. Fiats lack of an Asian or integrated North America presence has it trailing most competitors (except for GM) in the B segment. with close to 2mn units in 2011. somewhat surprisingly. albeit with we believe little commonality across vehicles. is likely the leader when volume and commonality are considered together. Barclays Capital 8 December 2009 34 . Nissan-Renault have the largest scale in the B segment.0% 8.5% 70% 60% 66% 385 180 565 Source: Company reports. Hyundai has.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.5mn units. Barclays Capital In phase 2. although Ford will only get to a truly common platform in C car with the Focus relaunch in 2010/11.

parts commonality not just within a platform.685 315 934 1. for example. 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. followed at a distinct second and third by Hyundai and Honda.814 1. it appears to have not driven true platform cost sharing. generally premium) Figure 54: Global production of major C segment platforms by OEM (000’s units) – 2011E 1.and cross-platform commonality is considered in.that is. with its scale of the common Elantra platform.372 1. with its modular approach.788 1.as well as lowering the overall complexity of the organisation and supporting manufacturing flexibility (multiple platforms on the same assembly lines).208 1. although both are likely to have a moderate level of commonality. we believe that VW. Phase 3 involves modular architectures . By further driving down the scale curve additional efficiencies result . with plans to compress to two sets of modules (MQB for traverse.6mn units on the Camry platform. generally volume) and MLB for longitudinal.946 1. 8 December 2009 35 . the C segment.048 1.Barclays Capital | European Autos & Auto Parts Toyota’s strength lies in the D segment. VW is acknowledged by competitors as the global benchmark for modularity. capture the greatest scale economies.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. with over 3.369 1. but across platforms (and across geography). While Renault/Nissan has scale. highlighting an opportunity to drive the alliance to the next level Both PSA and Fiat fall short on sheet scale.426 1.352 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. and Hyundai. Barclays Capital Asia Middle East/Africa North America South America When intra.132 1.

Barclays Capital 8 December 2009 36 .000 Scale .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 1.000 Source: CSM.units 000 2.

6% -. valuations for 2010 appear fairly valued. pricing will come under pressures as discount-addicted customers and dealers demand and receive automaker-funded rebates. Sales will likely decline by 13. Against this difficult 2010 backdrop. the 2010 EU sector average of 27% (range from 7% to 44%). 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. To make matters worse. is only just below the 2002-08 historical average of 28% (excluding Porsche). We believe 2010 will be a disappointing year for European automakers as the unintended consequences of scrappage programmes play out across Western Europe.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. 37 BMW AG . although with a broad range across our coverage. The drop in production will highlight the endemic overcapacity that the scrappage programmes and loan programmes preserved.far greater than market expectations which we believe are looking for an 8-10% decline -. In terms of EV/sales.while production will likely slip below 16mn units.

3x 5.4x 4.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. the 2010 EU sector average of 2.5x 1.1x to 5.3x.1x 1.2x 2.9x 1. 38 BMW AG Ford Motor Co.9x 1.4x) is somewhat more below the 2002-08 historical average of 3.6x (range from 1. Figure 59: 2010E EV/EBITDA 7.6x 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. BMW AG .2x 2.

7x 14.3x 5.8x.7x (excluding Fiat.3x Fiat SpA Peugeot SA Renault SA Porsche Volkswagen (Ords) Volkswagen (Prefs) EU sector average Source: Barclays Capital Daimler AG Given depressed 2010 earnings.1x 5.0x 0.5x 58.3x 15.0x Volkswagen (Prefs) EU sector average 30.4x 3.3x 3. BMW AG .7x 2.9x 1.2x Renault SA Porsche Volkswagen (Ords) 12.0x 32.8x Ford Motor Co.Barclays Capital | European Autos & Auto Parts Figure 60: 2002-08 historical average EV/EBITDA 10. for P/E the 2010 EU sector average of 30.6x 1.6x 20.0x Fiat SpA Peugeot SA 67. RNO) (range from 12x to 59x) is well above the 2002-08 historical average of 12. Figure 61: 2010E PE multiples 209.4x 3. 39 Source: Barclays Capital 8 December 2009 Daimler AG BMW AG Ford Motor Co. PSA.8x 2.

9x 16. driving earnings recovery. 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. as cost reductions mount and sales recover in 2011.3x 12. In terms of EV/sales.3x 13.3x.3x 8. in terms of industrial EV/Industrial EBITDA. the 2011 sector average of 2.1x) is well below the 2002-08 historical average of 3.4x 17.7x 8.9x to 4. 40 BMW AG Ford Motor Co.0x (range from 0.Barclays Capital | European Autos & Auto Parts Figure 62: 2002-08 average PE multiples 22. 2011 valuations are more enticing.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. BMW AG .8x 5. 8 December 2009 Ford Motor Co. the 2011 sector average of 22% (range from 7% to 40%) is below the 2002-08 historical average of 28% (excluding Porsche).8x 13.

2x 10.1x 1.Barclays Capital | European Autos & Auto Parts Figure 64: 2011E EV/EBITDA multiples 4.7x 2. Figure 65: 2011E PE multiples 25.0x 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 12.4x 7. 41 BMW AG Ford Motor Co.0x 9.2x (range from 7.4x 8.0x 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.1x 0.9x 1.3x 10.7x 1.5x 12.3x to 25.3x 6.4x 16.1x 4. BMW AG .4x) is also below the 200208 historical average of 12.3x 7.7x 1.3x 1.3x 3.8x.

BMW’s management has kept more tight-lipped about its cost-saving potential of late.DE / BMW GY Stock Rating 1-OVERWEIGHT Sector View 2-NEUTRAL Price Target €41.75 Potential Upside 25% Given the pricing.and 3-series in 2011-12E). while not part of Strategy #1. demand. BMW is a well-understood story as regards its upcoming model cadence sweetpoint (with a raft of model launches in train. Nevertheless. We believe this more cautious approach has led the market to dismiss the full potential of “Strategy #1” and hence undervalue the BMW share. While Daimler’s “in excess of €4bn” savings target for 2009E has been widely touted. We value the BMW share based on an average of EV/sales and PE metrics at historical and peer average multiples. BMW’s more extensive manufacturing presence in the UK and US provides more of a natural currency hedge offsetting the strength of the euro.Barclays Capital | European Autos & Auto Parts BMW – POTENTIAL FOR FURTHER COST CUTS DRIVES 1-OVERWEIGHT RATING BMWG. implying 25% potential upside from current levels.00 Price (04-Dec-2009) €32. Moreover. We are initiating coverage with a 1-Overweight rating and a €41 price target. we believe the market is underestimating the company’s potential for deeper and further cost savings. 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 .and mid-term cost reductions ahead of market expectations.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. 8 December 2009 42 . A strong core balance sheet and superior cash generative ability should further support share price accretion. €41 price target We are initiating coverage with a 1-Overweight rating. which lead us to our €41 price target (please see the valuation section for further details). 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. we favour companies that can deliver and retain near. 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. beginning with the 5series in 2Q10E and building up to 1. and currency pressures we expect to continue in the premium market.

2009E (€mn) 1000 505 941 3.7% 0.232 6.2x 0. Costs should also benefit from stronger capacity utilisation.829 3. in our view. Figure 67: BMW Auto EBIT walkdown.84 Sales Reported EBIT EBIT margin (%) BC EPS € Consensus EPS € EV/sales (%) EV/EBITDA P/E ratio (%) -20% 1.4bn in both 2010 and 2011 even in the face of these external burdens: BMW will benefit from its push for modularity.4% 3.0x 3.88 16% 0.30 20% 2.14 2012E 52.5x 20.197 921 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 . With investors now increasingly looking beyond 2009E to the prospects for 2010 and 2011.5x Source: Company data. we feel that BMW is better placed than its premium rivals to overcome these burdens.882 7.Barclays Capital | European Autos & Auto Parts Figure 66: BMW – headline data and valuation multiples.and 7-series (which share a platform) are rolled out.371 395 0. 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.1x 10.51 2009E 48.1x 60.9x 8.61 18% 1.595 3.903 1. especially as the new 5.8% 0.080 690 500 0 -500 -1000 -1500 -2000 690 -738 911 -1.24 2010E 47.8% 1. we believe that BMW has positioned itself for a faster than expected recovery in its automotive EBIT. BMW can better capture productivity savings as it has a substantially longer-tenured workforce that provides greater potential for further headcount reductions.450 196 801 387 452 1. 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. with the savings flowing in lower materials costs.2x 137.530 3. 2008-2012E (€mn) 2008A 53. BMW will.64 2011E 50. pursue four interrelated cost levers that should drive EBIT improvement of €1.4% 3.0x 1.01 18% 1.4x 2. BMWs expanding global manufacturing footprint not only supports growth but also provides better natural hedging relative to Daimler.

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).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). 8 December 2009 44 . we expect to see the back-end loaded savings from this modular strategy starting to ramp up from 2010E. Additionally. company data and Barclays Capital Ageing workforce to boost productivity Strategy #1 targets a reduction of €6bn in costs by 2012E. 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. €2bn of which are to come from fixed costs/R&D. in our view.000 workers in 2008. sharply followed by new 5-series in 2Q10 and X3 in 4Q10. material costs & R&D should increasingly become shared across all model series on a platform. 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. Temporary workers are paid a similar hourly rate to their permanent counterparts but (according to Jens Koehler. the company has much more flexibility to manoeuvre its workforce. BMW is likely to be the fastest improver in the sector in terms of average product age. the scope to rehire on a temporary basis when production begins to recover. Although BMW has not been grabbing the headlines so recently with announcements on headcount reductions like its close peer Mercedes. As the new modular strategy is rolled out across new products. BMW product launches start in earnest in 4Q09 with 5-series GT and X1 coming on line. 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. BMWs strong product cadence will. rather than on a standalone model basis. to a lesser extent. trade press. As a result. 2% at Mercedes). 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. We believe that these savings are not yet widely credited by consensus forecasts. Figure 69: BMW forecast new model introduction schedule. Daimler) for greater modularity and commonality across vehicles. BMW has historically relied much more heavily on temporary workers (hence the ability to reduce the workforce by 10. also demonstrate the cost savings associated with BMW’s push (as at VW and. of which 60% were temporary workers) which provides additional flexibility to react speedily to changes in production. will position the company well from a fixed cost perspective. With c20% of all workers aged >50 years (vs. Although the current BMW workforce is comprised of only a tiny percent of temporary workers.

Barclays Capital | European Autos & Auto Parts Figure 70: BMW average worker age vs. BMW is closing the gap on competitors not only with its increased commonality of components.0% 85.6 42.0% 90. Figure 71: BMW production (mn) & capacity utilisation (%) vs average for premium market.4 0.4 40. Barclays Capital 8 December 2009 45 . This further encourages us to favour the share over its closest luxury rival.8 0.0% 100. This production build.6 17 25 2 2 Unlike Daimler. 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% 95. in an effort to improve BMW’s longer-term pricing power. 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%). However. 2008A-15E 1.2 0.8 41. with the lowest level of excess capacity units of all peers. 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.0% Figure 72: European premium excess capacity. combined with moves to draw down dealer inventory.0% 75.0 2008 2010E 2012E 2014E BMW Production BMW capacity utilisation % (RHS) Premium average capacity utilisation % 80. explains the larger-than-expected Q3 loss in the Auto division.6 0. 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.4 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 Q409.2 1. Daimler (years) Average age (yrs) Percent over 50 yrs (%) BMW hourly BMW salaried Daimler hourly Daimler salaried Source: Company data 39. Barclays Capital Source: CSM.0 0.

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. We therefore credit the company with the ability to sell 46. 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). despite European sales likely flat.000 units. 19% of unit sales are US-based and the Chinese market is now BMW’s fourth-largest market.Barclays Capital | European Autos & Auto Parts Figure 73: BMW & Mercedes production units. after recording 25% growth YTD in 2009. thus giving the company a stronger foothold in this fast-growing market and providing a natural hedge to exchange rate fluctuations. 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).000 extra vehicles 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. 8 December 2009 46 . A recovery in the US market and exposure to more resilient emerging markets. Production at the second plant is due to commence early 2012E and to increase total Chinese capacity to 100.000 pa.

000 100% 133.400 350.000 units of British capacity in 2010E) and the Hams Hall engine plant.100 51.000 143. or at the very least maintain.100 8.000 35% 72.500 8. we believe that BMW’s efforts to expand.500 206. Leipzig.700 500 9. *** 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.300.200 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.000 143. Barclays Capital 123. only 40% and 0% respectively for Mercedes) lead us to forecast a €450mn negative EBIT impact from FX in 2010E . based on 44% natural hedging in the US and 45% in UK (vs.000 95% 89% 50% 100% 91% 93% Source: CSM. 2010E (000s) Region Production 2010E Capacity 2010E Capacity utilisation % Germany* UK US (Spartanburg) China (Shenyang)** Other*** BMW Total (ex-JVs) 870.300 135.000 pa capacity in 2010 in preparation for the next generation X3 launch). Mini brand’s Oxford and Rolls Royce Goodwood plants in the UK (providing 245.939 1. % 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. With the US market likely to rebound ahead of the scrappage-restrained European market in 2010E.889 55% Our calculations of exposure to the GBP and USD. Barclays Capital *Regensburg.397.000 1.090 35% 1. 8 December 2009 47 .500 270.085 133.Barclays Capital | European Autos & Auto Parts Figure 75: BMW estimated plant capacity.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.000 920.082 2. Munich. ** JV with Brilliance. Dingolfing.000 4. provides shelter from the vagaries of the USD.000 217.000 130.085 133. Likewise. Company data. BMW’s Spartanburg plant (which will ramp up to 270. provide natural hedging from negative GBP currency effects. despite only an estimated 30-40% sourcing of components locally.100 100% 8.021 3.000 244.050 1.000 75. 2010E Units Sale Value in US$ mil N Am sales N Am production 276. BMW’s 21% revenue share should also set it apart from some of its volume peers. with 70% locally sourcing.000 1.000 75. 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.000 14.

90 0.800 95% 1.104) (307) 540 69.200 60% 1. Our own forecasts incorporate €1bn of improvement in BMW’s Automobile segment (€1.300 20% 0.085 44 9. SG&A.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.7 728 1.558 1.890 90% 0.and 7-series.70 (120) (330) 238.42 (370) 123.3 2.80 0.958 425 54.90 0.36 (210) 154.500 55 2.35 40 130.49 1.€mn Prior year Auto EBIT Volume Memo: additional volume (units) Fixed costs: Price/Mix Raw materials & other input costs Productivity/efficiency Currency Personnel.1 8 December 2009 48 .3bn improvement.000 20% 1.000 52 8.500 90% 1.900 52 8. despite the company’s superior model mix.400 0% 1.500 55 2.90 (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).180 60% 0.350 90% 0.190 45 8.90 0.958 4.40 1.7 1.873 6.100 55 2.49 (30) 153.90 0. 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.428) (183.49 1.47 1.000 48 7. 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 1.49 1.000 54 1.492 (1. on our estimates. €750mn of additional FX and raw material costs still allow an EBIT margin improvement of 240bp YoY.230 550 (60) 490 915 (307) -0.79 (310) (300) 276.000 53 2.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. €540mn to volume improvement and €345mn to the price/mix effects of new 5.48 (220) 136.89 (150) (370) 300. Barclays Capital 303.84 (150) (480) 289.300) 100 400 (300) 620 911 431 (997) 345 (270) 500 (480) 400 495 1.205 728 600 76. Figure 78: We forecast an EBIT delta of €1bn at BMW Autos in 2010E BMW Auto cost walkdown (Delta) . Barclays Capital 2009E 2010E 2011E 2012E 690 (1.5bn at group level) – of which €900mn relates to cost efficiencies. market assumptions for BMW estimate only a €1. 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. 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.

However.000 for 7-series 8 December 2009 49 . should provide a further €245mn boost to EBIT. we are convinced that EBIT/vehicle is set to improve significantly at BMW even in a weak demand and pricing environment. 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. Likewise.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.000 EBIT contribution/vehicle for incremental 5-series sales and €15. 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).000 450 30. based on a €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.000 150 (1.000 5. with consumer expectations skewed by a year of discounts from both governments and manufacturers alike. Our forecasts do not assume any benefit from an improvement in mix to corporate buyers.000) (500) (500) 245 345 600 200 45 Source: Barclays Capital. we also credit the company with the ability to price both its 5-series and 7-series models ahead of its predecessors. Although ill-discipline in pricing has spread to even the luxury end of the market. *assuming €5.000 3. thus providing a likely €600m positive contribution to EBIT. mix effect* Total BMW EBIT delta (€mn) 150. with the 5-series launch also heralding the beginning of a more modular strategy. bringing greater commonality across model ranges. 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. However. the launch of the all-new 5-series range in 2010E should form some degree of buffer from pricing negatives. though we expect these to return to the market in greater numbers in 2010E. 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. and more than compensating for the price erosions on other models.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).

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. we do forecast a further €1bn gross cost savings in 2009E (as per Figure 78 above). This should provide some buffer against the -€1. €400mn relates to internal productivity measures and €620mn to personnel savings – the likely full-year effects of 10. 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.000 employee departures in 2008 (of which 4. it is a well-argued thesis that the luxury market will be better protected from any scrappage pull-back effects felt in 2010E. 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. SG&A. should yet provide further upside to the share.4bn volume negative in 2009. to help the Autos business return to above 4% margins (though still some way from historical peak and Strategy #1 target of 8-10%).3bn price/mix effect and -€1. In 2010 and 2011. we believe that this issue has already been factored in to current share price. as with product cadence. preferring instead to caution investors on the likely external burdens to 2010E earnings. so investors have much less visibility over cost-savings achieved already in YTD 09A. 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. as discussed above. 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. the cost benefits of the company’s strong positioning in environmentally friendly products (via its Efficient Dynamics range).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. 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 . BMW does not give useful quarterly walkdowns of its Auto EBIT margin.000 were permanent workers). Whilst. Of these. Figure 80: BMW Auto EBIT walkdown 2010E (€mn) 1000 800 600 400 200 0 -200 -400 Volume Price/Mix Productivity RMs FX Peronnel. we agree that BMW is positioned to outperform the overall market from 2010E onwards.

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. we believe BMW remains an attractive stock due to its superior balance sheet. By comparison luxury peer DAI’s historical average is 42% and on our estimates is currently trading at 44% 2010 EV/sales.000 6. 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. Barclays Capital Industrial FCF (op cash-capex) Rating We are initiating coverage with a 1-Overweight rating. giving it easy access to credit to support the funding of its financial services business.000 8.8bn at 3Q09). 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.000 12. A strong core balance sheet and superior cash generative ability should further support share price accretion. Figure 82: Solid cash generation drives steady rise in net cash. €mn 18. Although downgraded one notch by rating agencies.000 2. the highest in the auto sector. 8 December 2009 51 .000 4.000 14.rating from S&P.000 10. 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. 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. We believe that the current BMW share price significantly undervalues the share based on this valuation metric.000 0 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 3000 2500 2000 1500 1000 500 0 Industrial Net Cash Source: Company data. especially since we remain below consensus on our top-line forecasts for BMW in 2010E. the debt has an A.000 16.7bn per annum and average net industrial debt of €6bn during the same period (€7. BMW has typically been a share favoured by leverage-averse investors.

viewing both companies at similar multiples. We believe that the company should trade at its historical level of 11x. 8 December 2009 52 .6% 4. Using its own historical average of 39% implies BMW should trade at €50/share.Barclays Capital | European Autos & Auto Parts Figure 83: Below consensus revenue estimates but expecting higher margins 2010E Barclays Consensus Variance Revenue (€mn) EPS (€mn) 47.3% Source: FactSet consensus.903 1.8x for the sector as a whole).734 1. Barclays Capital BMW EV/Sales P/E Historically BMW has traded at an average of 11x P/E (vs 13x at Daimler and 9. Looking out to 2011E. from which we derive a price of €35. when we expect autos markets to have normalised to a greater degree. 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. our above consensus EBIT estimates put BMW at only 10x at the current share price. 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.64 50.57 -5. 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.

4x 1.44x 1.32x 2.2x 33.7x 9.2 46 1.4x 2.4x 27.1 54 1.3x 3.0 20 1.0x 26.2x 0.1 54 1.4x 23.1x 2.0x 1.3x 21.0x 29. 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 2.4x 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.8x 11.9 52 1. Barclays Capital A weighted average of both these valuation metrics leads us to set a €41 price target for the share.7x 5.0x 9.Barclays Capital | European Autos & Auto Parts Figure 86: Other than during the recent downturn.7x 5.1 44 1.8x 9.0x 1.1x 3.4x 1.2x 10.4 20 1.4x 2.2x 114.2x 137. Barclays Capital 8 December 2009 53 .6 38 1.4x 21.9 52 1.1x 27.9 20 2.0 16 0.3x 21.9 18 1.24x 0.0x 9.6 42 1.1x 22.1 44 1.8x 60.1 17 1.7x 9.5x 25.0x 6.6 38 1.2x 2.4 39 3.4x 26.2x 33.1x 3.4x 20.0x 6.7 41 1.5 18 1.1 19 1.1 46 1.7 40 2.4x 8.0 20 2.7 39 3.4x 146.5x 29.8x 60. implying 25% upside from current market price.45x 2.4x 26.1x 3.6x 133.8x 6.5 40 1.5x 5.9x 2.0 Industrial EV/sales (%) Industrial EV/clean EBITDA Industrial EV/clean EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Source: Company data.8 43 1.4 18 1.3x 1.

and belief that current provisioning in Financial Services is adequate. potential for further cost reductions. could make our forecasts difficult to achieve. given their expectations for moderate revenue growth. also rate BMW Overweight believing that while there are risks to BMW's ratings. BMW’s larger than average financial services penetration would result in a greater downside risk than for peers. Rob Perry and Darren Hook. with Moody's particularly at risk of downgrading to high BBB. 8 December 2009 54 . Credit perspective Barclays Capital credit analysts. BMW could remain low A through next year. leading to an even weaker demand and pricing environment than we currently assume.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. 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.

9% (40.631) (2.530 2012E 52.874 2.544) 8.124 8.2% (300) 2932 5.6% 4.660) (2.4% (339) 3.4% 0 3.70 654 1.369) 241 921 (5.829 3.595 Cost of sales R&D Gross profit Memo: gross margin (% of sales) (37.722 (739) 19% 3.8% Taxes Tax rate (ex RRExch.2% 1.100) 50.903 45.232 6.14 6 2501 4.070 (880) 30% 2.6% 0.9% 4.119 15.395) 6.873 72 778 159 3882 Automobiles EBIT margin Motorcycles EBIT margin Financial services EBIT margin Group EBIT % Source: Company data.51 6 150 0.3% 4.5% 5.074) 30% 2.329) (2.232 (4.254) 200 4.7% -0.8% (300) 3582 6.70 Automobiles Motorcycles Financial services Miscellaneous/consolidations Group revenues Segmental reported EBIT: 47.4% (40.247 (11. tax-free gains) Net profit Memo net profit ex-non recurring (1.958 64 762 447 3232 2.50 653 0.515) 5.0% (41.8% 1.882 7.725 (12.7% 4.018 48.84 No of shares (average.180 12.265 11.5% 3.968) 56.197 2009E 48.079) 250 395 (4.3% 0 395 0.608 (39) 20% 156 156 (459) 30% 1.734) 200 3.5% 1.018 2008 53.9% -1.212 (5.446 1.070 1.4% Financial result Profit before tax Memo: PBT margin % 74 4.5% (44.079 (11.80 6 324 0.7% (200) 195 0.4% 6.70 653 0.579 15.832) (2.224 10.230 15.530 47.168 15.3% 5.415 16.30 653 0. 2006A-2012E Year-end December (€mn) Revenues 2006 48.344 6.0% 7.4% (300) 1529 3.829 (4.552 (11.5% 5.9% (570) 351 0.1% 0.818 1.873 6.112) 48.424) (2.30 653 0.526) 7.4% 5.050 8.212 7.2% 8.7% 5.24 6 1064 2.999 53.215 1.3% 0.8% 3.550) (2.134 3.266 16.948 (10. 000s) DPS (Euros) Segmental Revenue: 654 0.250) 34% 2.139 14.4% 1.341 1.0% 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 (%) (4.4% 4.323) (2.Barclays Capital | European Autos & Auto Parts Figure 88: BMW Group income statement.500) 48.4% 8 December 2009 55 .411 (9.630) 8.548) 200 3.64 6 2046 4.8% 0 1.9% 6.196 15.8% 4.0% 6.0% 3.1% 7.500) 47.1% 6.920) 9.9% (43.940 (12.540) 53.4% 6.972) 227 4.052 2.316 1.825) 6.903 2011E 50.507 Attributable to MI Net profit attributable to shareholders Net margin % EPS 6 2868 5.06 653 0.3% 6.5% 2. Barclays Capital 6.371 2010E 47.8% 0 3.0% 3.39 8 3126 5.551) 200 1.134 (21) 6% 330 2.049 11.882 (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 1.228 13.197 41.423) 4.782 1.8% (39.999 2007 56.0% 5.052 (1.507 2.050 (5.371 42.795 17.1% 3.600) 52.767 1.

240 1.214 5.938 5.836 103.484 Industrial equity Financial services equity BMW shareholders’ equity 15.489 84.086 52.980 (3.429 99.401 5.212 268 2.935 7.202 12% 10.585 65.403 11.702 12.212 10.920 28.419 69.900) 6.178 2.401 5.752 20.300 11.426 Working capital/sales Industrial net cash (debt) 12% 5.792 101.401 5.744 8 20.183 51.199 65.070 15.778 6.997 53.629 70.870 254 6.139 21.253 66.725 64.784 2. 2006A-2012E As at end-December (€mn) Industrial/Auto Assets: 2006 2007 2008 2009E 2010E 2011E 2012E Intangible assets Property.506 24.775 3.885 8 15.513 4.300 13.906 12.900) 5.737 84.656 88.074 268 2.787 17.128 19.796 2.401 5.733 22.581 5.200 2.795 8 17.183 51.130 11 21.965 19.743 47.997 53.861 16.758 Industrial non-current liabilities Industrial current liabilities Industrial total liabilities 11.983) 402 (4.235 18.841 30.508 7.747 Financial services total liabilities GROUP TOTAL LIABILITIES 42.073 29.414 59.775 3.266 Minority interests Group shareholders' equity (incl MI) 4 19.749 (3.385 12% 7.877 16.631 22.419 69.728 23.845 30.348 1.346 18.740 1.565 Inventories Trade receivables Financial & other receivables Marketable securities Cash and cash equivalents Industrial current assets 6.005 2.333 10.135 15.266 101.725 79.629 70.315 4.249 5.340 (3.994 51.200 2.529 17.401 6.040 80.680 83.045 33.365 11.170 6.880 13% 11.018 1.126 21.203 84.265 11.274 Industrial total liabilities & equity 37.836 103.995 12.831 13.377 7.775 3.337 7.200 11.728 23.567 5.728 23.134 33.470 50.861 21.880 5.046 14% 9.450 17.886 33.656 88.061 Industrial total assets Financial services total assets GROUP TOTAL ASSETS 37.734 1.393 Unfunded pension 'debt' Industrial net debt (cash) post pensions (4.750 15.394 5.458 8 15.302 (3.915 70.183 69.260 254 448 2.240 1.481 3.900) 6.100 11.184 1.493 Gearing (pre-pension) Source: Company data.775 3.429 99.266 101.792 101.919 5.086 52.775 3.048 6. Barclays Capital 35% 33% 40% 54% 64% 61% 58% 8 December 2009 56 .900 2.728 23.598 268 2.725 79.767 27.986 19.306 268 2.438 14.249 28.366 5.626 71.927 55.700 2.861 21. plant and equipment Leased products Investments Financial assets & other assets Industrial fixed assets 5.729 28.052 15% 9.297) 5.235 12.758 Financial services total liabilities & equity TOTAL GRP LIABILITIES & S'HOLDERS EQUITY Balance sheet analysis & drivers: Net industrial working capital 5.994 51.240 1.728 22.267 7.240 13% 10.265 18.450 (3.339 99.036 2.407 5.374 34.273 8 18.602) 2.743 47.813 65.797 10.488 11.057 52.248 5.Barclays Capital | European Autos & Auto Parts Figure 89: BMW Group balance sheet.272 268 2.407 30.915 70.710 6.760 59.147 5.861 21.517 67.626 71.414 5.339 99.414 59.057 52.428 10.276 11.183 69.900) 7.470 50.583 4.861 20.

567 (499) 9 597 571 1.7 8.6% 5.177 4.5% 12.000) (195) 138 1.8 7.168 650 9.711) (3.711) (6.667 8.890 12.0% 12.000) (9.5% 12.413 (81) 534 (1.4% 7.0% 131.018 1.607 9.0% 6.9% 7.183 5.000) (8.824 (2.132 2.9% 80.891) FS cash flow from investing Group cash flow from investing (9.685) (3.533 1.000 2.018 1.061 0 334 0 1.685) (5.937) (317) (20) (278) (4.241) 52 (28) (200) (4.099) (3.568 (78) (663) 371 85 (207) 6.373 2.833) (131) (5) (130) (4.000 9.670) (13.638 0 (200) (100) 90 (210) 5.0% 6.218) (18.7 8.6% 14.000) (9.0% Source: Company data.146 4.963 3. **Industrial Cash from operations + Net Capex 8 December 2009 57 .621 0 500 200 (330) 370 4.253) (13.864 1.4% 90.0% 80.9% 13.945 0 (196) 3.537 0 (457) 1.891) Capital Increase Dividends Paid Change in Debt Industrial cash flow from financing (253) (419) (525) (1.002 Total movement in WC Industrial Cash inflow from operating activities FS cash flow from operating activities Group cash flow from operating activities 4.5 7.246 226 3.665 (308) (703) (98) 368 (433) 5.668 10.111 Group FCF FCF per share Group capex/Sales Industrial capex/sales Group capex + R&D/Sales Group capex/D&A 5. Barclays Capital * Industrial Cash from operations + Industrial cash from investing.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 2.0% 8.0% 13.2 7.259) (6.064 7.8 7.110 12.476 3.8% 115.520 3.311 9.000) 804 834 0 (196) 822 0 (327) 1.185) 0 0 (2.0% 5.000 9.197) 0 (458) (1.711) 0 0 0 (3.8% 8.340 6.652) (4.872 6.259) 0 0 0 (3.916 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 (4.864 2.9% 6.323 (137) 8.904 3.322 0 (963) 0 154 Industrial FCF (company definition*) Industrial FCF (Barclays Capital definition**) 956 1.277 1.864 0 (300) (100) (249) (649) 6.111 2.000 9.970) 530 1.417) (3.660 (1.730 8.449 3.715 285 3.248) (14.264 5.777 4.0% 12.198) (17.000 10.980 5.649 3.654 FS change in net cash (debt) Group Change in net cash (debt) Cash flow Statement analysis & drivers: (148) (285) 241 1.024) (1.8% 7.804 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) 4.6% 7.575 1.787 4.482) (10) (694) 4.9% 8.000) (9.4% 87.147 2.471 (422) 3.603 10.891) 0 0 0 (3.057 1.2% 7.1 7.552) (3.259) (3.2% 114.218 9.075 5.215 6.500) (5.

Barclays Capital Figure 93: BMW unit sales by model.Upper Medium B .Lower Medium SUV Van 2014E X5 8% 5 Series 16% Z3/Z4 2% X3 5% 3 Series 39% BMW Source: Company data Source: CSM. Barclays Capital D . 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. 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. 2010E Figure 96: BMW EBIT margin by division.Barclays Capital | European Autos & Auto Parts Figure 91: BMW revenue mix by division 2009E Figure 92: BMW revenue mix by division.Basic C .Small Industry avg Figure 95: BMW EBIT mix by division. 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 . Barclays Capital 8 December 2009 Other 58 .

and 7-series Lower capacity utilisation rates and levels of modularity provide less potential for savings than at peer BMW 8 December 2009 59 . Based on our FX forecasts for USD and GBP exposure we believe that Mercedes faces significant currency exposure in 2010E. superior fuel efficiency credentials and higher level of modularity). Daimler management has been vociferous on the company’s achievements regarding cost cutting in 2009. 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. 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.and 7-series models. with gross savings of €3. we are concerned that the majority of these will likewise be absorbed be negative factors (price. which leads us to initiate coverage of Daimler with a 3-Underweight rating.91 Potential Downside 11% We are initiating coverage of Daimler with a 3-Underweight rating and €32 price target. we favour companies that can deliver and retain near. We believe that DAI is more exposed to pricing risks than BMW. demand.4bn of YoY EBIT improvement in 2010E (despite new 5.Barclays Capital | European Autos & Auto Parts DAIMLER – MARKET OVER OPTIMISTIC ON COST-CUTTING POTENTIAL DAIGn.5bn achieved YTD and the company announcing that it is on track to exceed its €4bn target for the full year. we reach a €32 price target. FX and raw material costs). Given the pricing. as consensus on trucks may be too optimistic given the tepid recovery potential. 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. We also think that Mercedes’ youthful workforce (hence less scope to cut labour costs).00 Price (04-Dec-2009) €35. at best. Yet it is difficult to reconcile these €3. and its belated efforts in the field of fuel economy provide less fat to trim in the next 12-18 months. its lack of modular-focused savings (relative to BMW and especially Audi/Porsche). due to its lower degree of natural hedging than BMW. Whilst market estimates for German peer BMW look for only €1.and mid-term cost reductions ahead of market expectations. whereas we believe market assumptions are overestimating the retention potential.5bn gross savings with the disclosures of net impact on EBIT. Of course. for the European truck market). this provides only €2bn additional EBIT (and risky. having unfortunately launched its E-class six months too early into a falling luxury market. though admittedly DAI also incorporates high-rated trucks) and using a SotP methodology (for further detail see the valuation section). 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. market estimates for Daimler are expecting a much more aggressive €4bn EBIT delta. and currency pressures we expect to continue in the premium market.DE / DAI GY Stock Rating 3-UNDERWEIGHT Sector View 2-NEUTRAL Price Target €32.

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%

8 December 2009

62

000 new E-class sales in 2010 at an estimated €2. we also believe the market is over-playing the future benefits of other cost saving efforts. Figure 104: Despite positive mix effects of new E-class. 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.Barclays Capital | European Autos & Auto Parts Despite the positive price and mix effects of E-class and S-class renewals on 2010 EBIT. this combined €575mn positive impact from new E-class is more than negated. both of which have been produced based on the modular concept. This forecast is based on 200.7bn negative impact in 1H09 when Mercedes like all other OEMs was attempting to drive down overstockage via pricing promotions). but our estimates for 2010E assume a €300m negative EBIT impact from price and mix. Although there are still incremental savings to be made via increased commonality between models. has been buffered only partially by new model roll outs. 8 December 2009 63 . Additionally.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).000 400 (1. this is due to the fact that BMW has come later to the modularity game. For mix. Mercedes faces higher R&D costs in the years ahead as it lags behind its Munich-based peer in fuel efficient technologies. saw a great deal of costs taken out of the production system before we even entered the market downturn. However. 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. EBIT mix effect (€mn)* Total Mercedes EBIT delta (€mn) 200. the details of which have yet to be disclosed. Rather unfairly.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. leaving it more potential in future to improve productivity. we believe this pressure. *assuming €5. Whilst we believe that this risk is already fully understood by the market. we estimate. leaving them less room for flexibility when markets recover. we believe that its potential for deeper and more permanent savings is much less than at BMW. Unfortunately for Mercedes. negative pricing for the overall market will drive an expected €100mn price/mix headwind in the year To date.000 2.000) (880) 175 (880) 175 (300) 400 Source: Barclays Capital. we assume a €5. We expect the full availability of new E-class to boost price and mix by €770mn in 2H09E (versus an estimated €2. and of which so far there has been little evidence of achievement at the net level in 2009. by the overall negative pricing environment which we expect to affect pricing on all other European and US vehicles by a negative €1.000 incremental contribution per unit for the model. 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).000/vehicle. 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. its hugely successful CORE restructuring programme which ended in 2007.

20% at BMWs).000 workers who left the company in 2009.6 42. 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. With c2% of all workers aged >50 years (vs. this provided greater flexibility to use schemes such as kurstarbeit (or short-time work) in Germany. In 2009E. Our 2010E EBIT walkdown (see Figure 78) gives the company the benefit of €1.6 39. we believe. Barclays Capital Source: CSM. be a drag on earnings in 2010E.8 41.3bn 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. Daimler still has the greatest excess capacity among its premium peers in Europe – with the likely ability to manufacture 369. as well as the further redundancies the company has discussed.000 more vehicles in 2010E than the market will demand. 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.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. we believe that there is less flexibility in the workforce than at BMW due to its more youthful age. However. longer term. natural attrition will not be such an easy lever for Mercedes going forward. Barclays Capital Despite the efforts of the CORE restructuring programme. Figure 107: DAI average worker age vs.4 8 December 2009 64 . over-capacity will. With no major new models due to come to market in the next 12 months. Youthful workforce does not aid further productivity savings Mercedes has been grabbing the headlines recently with announcements on the potential for further headcount reductions.

800 4.100 3. 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.100 18. the pound has fallen 15% relative to the euro while the US dollar has slipped 12%. US$ Natural hedging percentage GBP exposure – Mercedes & Smart cars 262.400 17.010 0 3. 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. we still expect a US$14bn net currency position in FY10E. Although sourcing in USD in Mexico and also to a large degree in China helps to balance the gross currency exposure. or 40% natural hedging. With 20%. Over the last year.883 24. although Daimler trucks (and to a much lesser extent Van & Buses) also has a small degree of FX exposure.100 0 79. leaving the company with net imports of 100. as US sales collapsed.Barclays Capital | European Autos & Auto Parts Size of impact from USD and GBP weakness likely to surprise the market The aggressive fiscal and monetary stimulus taken by the UK and US governments have led to a weakening of their currencies. we expect the total US SAAR to recover back to 12mn vehicles in 2010E.800 161. emerging market sourcing in US$ Net currency position. plus a further 260.300 40% Units Sales value in GBPmn UK sales UK production Net vehicle imports 79.103 6. or €18bn. GBP Natural hedging percentage Source: Company data. Barclays Capital 79.100 240 3.010 UK engine imports Net currency position. creating further pressures (perhaps unintended) on importers into those markets.000 vehicles. 2010E Units Sale value in US$mn N Am sales N Am production Net vehicle imports 262. 250. Daimler has one of the largest US dollar exposures of all European OEMs.683 1. GL-class and R-class) were produced.250 0% 8 December 2009 65 .500 14. thus leaving MBC with 162. 40% natural hedging from USD leaves MBC with a likely $14bn net currency position (pre-financial hedges) in 2010E Natural hedging provides shelter from USD but zero natural protection from GBP In 2008.000 engines. The main transactional currency risk lies in the MBC car division.683 100.000 vehicles (Mclass. of group revenues in North America in 2008. we do not expect the benefits of this to be seen for at least another 4-5 years. Figure 108: Mercedes estimated natural hedging protection for USD and GBP.700 N Am engines imported Gross currency position US$ Est.000 vehicles imported from euro-denominated countries.000 MBC vehicles were sold in North America but only 153. Although this figure fell significantly in 2009.

Zero percent natural hedging therefore leaves the company with £3bn net exposure to sterling FX rates in 2010E.80 0.84 (360) (900) 20% 0.480 0% 3.89 0.500 90% 1. 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. MBC has a £3bn net currency position (pre-financial hedging) from UK sterling Unlike BMW.850 North American volume (units) Natural hedging volume in USD (%) Net currency position. Figure 109: DAI estimated USD and GBP exposure.200 Financial hedged volume (%) Spot rate Effective rate GBP impact on EBIT (€mn) TOTAL XR impact on EBIT (€mn) Source: Company data.100 20% 1. Mercedes’ UK exposure is not mitigated by any production facilities in the region.91 0.400 44% 13.89 (210) (650) 0% 0.49 1. 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. Barclays Capital 95% 0. N Am (USD mn) 282. Mercedes’ negative EBIT delta from FX is -€450mn higher than our estimate for BMW’s FX exposure in FY10E.500 60% 1.680 0% 3.800 0% 1.000 vehicle sales in the region in 2010E.91 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). due to BMW’s higher level of production in both the US and UK. (GBP mn) 0% 2.48 (440) 69. 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 -.820 2012E 286.49 1.300 41% 16.45 1.37 (680) 108.75 (270) (950) 95% 0.250 0% 2.79 (200) (50) 60% 0. 8 December 2009 66 .890 0% 3. due to Daimler’s lower degree of natural hedging in the regions.420 2010E 262. 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 79.200 Financial hedging volume (%) Spot rate Estimated effective rate USD Impact on EBIT (€mn) 90% 1.49 (110) 77.9bn in FY10E Mercedes’ 2010E EBIT impact from FX forecast to be €0.39 1.100 41% 29.400 40% 14.42 (540) 79.49 1.35 150 92.000 40% 14. Despite financial hedging DAI’s EBIT FX impact likely €0.91 0.900 UK volume (units) Natural hedging volume in GBP (%) Net currency position. Despite selling fewer cars than BMW in both the UK and US.9bn-every further 1cent weakening in USD rates.680 2011E 275.enough to wipe out 70% of the expected effects of personnel and SG&A based productivity savings in the year. 2008-12E (units as stated) 2008 2009E 228.

R&D Other* Total change in fixed costs Operating margin delta (2.4 Trucks at rock bottom but speed of recovery likely to lag cars With truck peers not currently rated by Barclays Capital.250 630 1. we base our Daimler truck forecasts on what we believe to be consensus estimates for the European.848) (100) (220) 600 (900) 1. in particular.484 1.478 1.€mn Prior year EBIT 2009E 2010E 2011E 2012E 2117 (1.8bn cost savings MBC cost walkdown (Delta) .486 1.490 1.905 0. 8 December 2009 67 .895 0.45 1. Barclays Capital (731) -1.8 309 0.119 2.900 0.474 1 day Figure 111: Forward rates imply GBP burden will intensify 0. 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.168) (2. Figure 112: We forecast an EBIT delta of €1.7 849 1. only provides an extra €2bn EBIT to the group. Even presuming truck margins recover from 2009’s low of -5.910 0. North American and Asian truck markets 2010-12E.Barclays Capital | European Autos & Auto Parts Figure 110: EURUSD forward rates remain close above $1.680) (731) 410 309 510 849 470 Volume Price/Mix Raw Materials & other input costs Production & procurement Currency Personnel/SG&A.040 430 300 (700) 0 30 540 290 (200) (200) 270 Current year EBIT EBIT margin (%) Source: Company data.000) 200 (50) (50) 732 (1. with €1.9 1.0bn for MBC in 2010E.5% by 2012E (just ahead of pre-crisis level averages for 2005-07 but behind 2007’s peak of 7.915 0.885 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.476 1.480 1.5%).482 1.3% to 6.890 0.492 1.488 1. Whilst other manufacturers have significant exposure to either the USD or GBP.

4 8 December 2009 68 .000 6 70 6.35 9.074 1 61 0.2 1.5 2.60 10.5 9. 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.5yrs old.71 11. with Q409E and early 2010E likely characterised by deterioration in regional mix.7 -5. weaker pricing and restructuring costs.1 9.000 10 70 9.925 -46 75 -36.1 6.7 1.4 1.5 328.2% of sales in the W EU market.0 1. Daimler management have also urged caution against over-optimism on the truck outlook.3 Other businesses to recover. according to KBA data). Whilst GDP growth in 2010 in the NAFTA region should trigger higher transportation volumes.8 1.53 11. Although Daimler is not a market leader in this segment. 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. 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. as consensus on trucks may be overly optimistic given the tepid recovery potential.3 24.73 10.7 348.3 9.5 283.0 25. at best.2 8.5 14.38 10.Barclays Capital | European Autos & Auto Parts We note that using market estimates is risky. Barclays Capital 472. A youthful European truck fleet (German >16t trucks are just 3.82 10. Barclays Capital 1. 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.8 9. there are currently a large proportion of parked trucks which will be utilised ahead of new purchases.9 1. 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.5 9.9 88. for the European truck market.4 5.6 -485 256.000 16 70 15. we expect it to benefit from the recovery in the overall market and to return to 6-7% margins by 2012E.9 6.0 9.

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.4 -1.5 8. 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.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 12.0% 10.000 125 2.5 8.000 34 6.000 40 -35.500 128 -13. Although liquidity has now returned to the market and lower interest rates will aid the spread on new customer contracts.4 32.0% Opel Other 3% Daimler 6% 9% PSA 25% 11.1 2.5 Financial Services returns muted Although Daimler’s financial services business provided a stable profit-stream historically.600 125 1.591 118 10.0% Van share of WE Market DAI vans share of WE van market Source: CSM and Barclays Capital Likewise. thought still behind 2008’s level of 8.5 4.000 34 7. the credit crisis and resultant liquidity squeeze and US leasing issues have drastically reduced the returns from this business.0% 7.5 6.0 206.5 34.0% 15.000 125 14.0% Fiat 14% VW Group 15% Source: CSM and Barclays Capital RenaultNissan 17% 6.0% Ford 11% 8. Barclays Capital 40.0% 10.0 Unit sales (units) Implied Rev/unit (€ 000) Revenue growth (%) EBIT margin (%) Source: Company data.0% 2006 2008 2010 2012 2014 5.5% by 2012E.0 39. thus hurting RoE for some time to come.9 6.0 39. we expect ongoing strong city bus development to boost revenues and help EBIT margins recover to 6.4%.0 7.0 208.198 33 1.000 34 1.6 191.7 6.6 153.0% 9.2 5. 8 December 2009 69 .

0 8. Much of this increase was aided by a reduction in inventories (which boosted working capital in the cash flow by €3.90% 0. ROA to slowly recover 20% 16% 12% 8% 4% 0% FY05A FY07 FY09E FY11E 0. Barclays Capital Cost of Risk (%) RHS Balance sheet remains attractive From a balance sheet perspective Daimler remains an attractive asset after generating €2.0 -1. will help maintain a relatively stable level of cash on the balance sheet.0 2005 2006 2007 2008 2009E 2010E 2011E 2012E 4.0 6. Note that our autos credit analysts.0 -7.0 2.0 3.0 "DAI Net Industrial Cash (€bn)" Source: Company data.40% 0.0 -5.80% 0.5bn at 9M09).0 -6. 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.30% DAI's FS managed portfolio (€bn) Penetration rates (%) Source: Company data.1bn in Dec 08).0 0.0 -2. 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.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 4.70% 0.0 -4. Figure 120: Solid balance sheet and cash generation potential 14.0 10.3bn of FCF in 9M09 and thus increasing its net liquidity to €6.0 0.7bn (versus €3.0 1. Barclays Capital DAI Industrial FCF (€bn) RHS 8 December 2009 70 .60% 0.50% 0. Barclays Capital DAI's RoA (%) Source: Company data.0 12.0 -3.0 2. Darren Hook and Rob Perry.

peer EV/sales and EV/EBIT multiples for Daimler Trucks and bring in Finance companies and Vans & Buses divisions at historical average multiples.883 1.5 2.2% -44. We expect pricing.00 4.00 8.and midterm cost reductions ahead of market expectations.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. and currency pressures to continue in the premium market and therefore favour companies that can deliver and retain near. demand. despite its supposedly higherrated truck division historically comprising 25% of earnings.9% -56.0 2. Barclays Capital SotP Using a sum-of-the-parts valuation we arrive at a €33 price for Daimler. 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.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.00 -2.0 3.61 82.0 4.00 2.00 6. Figure 121: After months of downgrades.00 0.5 3. We base our calculation on a blended average of peer EV/sales and PE multiples for the core Autos business.5 Aug-08 Dec-07 Apr-08 Jun-08 Oct-08 Feb-08 1. 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. In reality we have seen that Daimler has tended to trade much closer to BMW multiples.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 -4.5 4.684 2.2% Source: FactSet consensus.0 1. We also apply a 5% discount to the SotP valuation to take account of the historical holding discount for the trucks business.638 1.40 Feb-09 -2. 10-11E EPS estimates have recently been rising but are too high 10.453 0. 8 December 2009 Oct-09 . implying 7% downside to its current market price.00 Figure 122: Analyst recommendations have recently been growing more positive on DAI – we believe its too early 5.

Barclays Capital BMW EV/Sales 8 December 2009 72 .8x equity value FY10E Net Industrial Cash Under-funded pension status. 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. 2010E (assuming 30% tax shield) Healthcare in North America (assuming 30% tax shield) Financial Services EV Operating business 3.5% options (to convert on or after 1 July 2010) at 0. 11x 11E PE has 22.400 4.800 11. incl 7.297 31.632 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. ex Chrysler €m € per share REMARKS Mercedes-Benz Cars Daimler Trucks Van & Bus Chrysler EADS SotP Industrial business 11. BMW has traded at a median average EV/sales of 39% and has ranged from 20% to 59%.570) (594) (1.115 29. Barclays Capital Historical average DAI EV/Sales Source: Company data.360 33.075 4 35 Industrial net cash/(debt) Group pension Healthcare liabilities Minorities Total EV EV with holding discount Source: Company data. Applying Daimler’s own historical average multiple would imply a price of €31. On the same time frame. Barclays Capital 5.450 (3.Barclays Capital | European Autos & Auto Parts Figure 124: Daimler SotP implies downside to current share price Sum-of-parts valuation.5% equity interest.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.400 0 2.

2 35 3.0 41 1. 8 December 2009 73 .2x 1.4x 29.8x -6.1x 2.2 44 4. with Daimler returning to revenue growth.2x 8.2 52 1.3 72 1.5x 8.3x 7. Credit Perspective Barclays Capital credit analysts. is likely to lag that of premium autos and management is likely to take a cautious approach to increasing inventory levels. leading to an even stronger demand and pricing environment than we currently assume.7x 12.2 46 1.8x 29.1x 50.7x 14.4 45 11.3 43 1.5 Industrial EV/sales (%) Industrial EV/EBITDA Industrial EV/EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Source: Company data.2x 1.3x 3.2x 3.7x -3.0x 27.3) 8.6x (25.0 44 5.8 46 1.2x 3.7 40 5.7) (15.4 44 4.0 41 10.1x 18.8x 7.5 57 4.8 40 3.1x 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. could mean that the company exceeds our forecasts Were truck markets to improve faster than consensus (and our) estimates.1 48 1.1x 0.2x 0.8x -6.1 48 1.1x 11.7 37 3.6x 15.4x 29. rate Daimler Market Weight. this would ease the FX burden for Mercedes’ earnings forecasts.3 72 1.8x 7.9 38 3.0x 2.8x 29.8 46 1.3x 7.9 48 1. 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 4.0x 11.2x 3.6x 54.3x 16.0 49 1. The believe that the recovery in trucks.7x 3.6) 8.5 41 2.7x 10.1x 18. however.4x 9.6x -3. supported by the new E-class as well as further cost cutting progress.7x (28.2x 0.5x 16. this would provide upside to the current share price Currency risk – if USD or GBP rates were to improve significantly against the euro.2) (16.1x 11. They view Daimler as a high BBB credit given their expectations for credit metric recovery through 2010.0 45 1.7x 3.1x 0.1x 0.3x 16.0x 4.5x 16.4x 29.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.6 40 1.2 57 4. Rob Perry and Darren Hook.

8% (10.5% 7.453 1.730 2.340 (350) 4.181 65 2.0% 7.9% Financial income/expense & other Pre-tax income (90) 4.036 949 1375 713 0 2.314) 21.690 4.018) 594 4.089) (3.399 9. Bus.481) 6.476) (1.003 (350) 3.430 28.722 77. Barclays Capital 10.20 0.8 44.1% 981 7.8 40.8% 0 3.8 46.8% 2.139 (71.8 41.744 3.0% 6.057 630 7.02) 0.1% 4.5% (660) (959) -1.7% 4.328) (3.040) 309 566 342 0 1.50 (870) 3.8% (11.879 76.2% 8.5% 5.2% 8.055) (2.348 1.8% 4. Other (from 05) Chrysler Group Industrial Clean EBIT 3231 2133 313 -468 5.0% 6.507 11.902 471 9.430 (69.594) (3.462) (3.453 1.502 MBC EBIT % Trucks EBIT % Mercedes-Benz Vans Daimler Buses 3.591 1.0% 5. 2006A-2012E December year end (€mn) Net revenues 2006 99.948 1037.729 677 6.883 11.8% -5.795 (800) (2.0% 6.440 (75.772 28.252 2.6% 8.6% 8.789 13.559 (63.8% 7.360 12.023.1% 3.057 6.751) (3.821 22.258 11.1% 6.814 2.222 2007 99.basic DPS 617 3.023.598) (470) 4.5% 2.690 4.830 91.534 -731 -599 89 0 (1.0% 3.572 14.370 80.41 No shares (average) Daimler Segmental Revenue: 1022. share of associates & financial income Reported operating income Memo: reported EBIT margin (% of sales) (13.211 6.106 100.960 11.883 2011E 88.75 1.6% 4.958 19.8% (13.252 (1.00 0 627 0.280 65.782 Cost of sales Gross profit (78.953 MBC Cars Trucks (CVs before 05) Van & Bus (excl Chrysler & EADS post-2007) Industrial revenues Financial Services Total Group revenues Daimler segmental clean EBIT: 8.518 Financial Services Total Group clean EBIT Daimler Segmental Reported EBIT Margin % 807 6.307) (1.5% 4.3% 2.61 0.912 1019 1574 817 0 3.022) 31% (66) 2.040) 1.118) 19.326) 47% (6) 4.070) (2.258 2012E 91.419) (450) 1.9% -8.531 (64.7 47.024) (3.785 1.151 91.598 88.502 4.619) -2.8% 0.619) 20.710 8.979 3.9% 8 December 2009 74 .8% 6.453) 16.417 18.3% -1.410 31.979) (3.4% 5.873 11.571 24.25 0 2.158) 852 8.4% Financial Services EBIT % Total Group EBIT % Source: Company data.711 99.282 95.814 Net income from discontinued ops Group Interest EPS .41 0.9% 2.729 7.6% 0.Barclays Capital | European Autos & Auto Parts Figure 128: Daimler Group income statement.2% 0 4.849 (1.127 (4.2% 6.7% -2.091) 39% (66) 1.60 0 (2.446) 2.3% 2.995 (74.2% 0 1.736) 35% (39) 3.7% 1.00 (290) 1.992 5.507 2010E 80.1% (10.1 51.7% 2.087 10.66 1.810 10.099 2498 1811 1410 -1390 5.8% 8.5% 0.4% -1.8% (3.3% 4.070) (309) 31% (66) 627 (1.873 2009E 77.9% Non-recurring income and (expenses) Memo: clean EBIT Memo: clean EBIT margin (% of sales) (1.023.6% 13.0% 5.2% (11.092) (1.690 984 4.466 14.023.782) 20.688 957.8 52.83 2.453 778 3.2% 1.975) 13.0% (12.404) 23.5% 6.250 4835 1957 801 -377 7.970 86.065) 6.8% 9.9% -2.399 2008 95.90 0 2.164 SG&A Research & development Other op costs.680) (681) 3.211 81 (959) 417 1.744 69.022 79.660 1.4% VBO EBIT % Industrial EBIT % 10.0% 3.0% 6.1% 7.152 Income tax Memo: tax rate Minorities/associates Net profit from continuing ops (1.123 90.638 415 17% (66) (2.502 4.782 MBC Cars Trucks (CVs before 05) Van.054 8.272) 31% (66) 2.512 1.

230 1.185 6.203 35.535 15.594 3.002 135.128 14.577 3.200 4.182 36.044 7.102) 33.900 50.412 Current Liabilities Financial Services Total Group Current Liabilities Total Industrial Liabilities 51.431 99.821 36.700 101.513 7.368 15.881 6.313 15.793 Balance Sheet analysis & drivers: Net Working Capital 11.700 134.285 Minority Interests Group Shareholders' Equity (incl MI) 421 37.486 4.200 55.200 48.392 90.317 61.699 47.164 63.718 26.913 48.800 51.664 (2.523 7.600 8.508 32.998 39.724 1.290) (14.s Other non current financial assets/securities Deferred Tax & Other Total Industrial Fixed Assets 7.900 28.668 15.106 18% 6.390 36.966 (4.107 15.099 34.758 2998 39.500 129.012 39.100 131.763 0 26.186 4.423 6.845 3.992 0 26.099 25.602 24.600 53.508 30.600 99.880 Total Financial Services Liabilities TOTAL GROUP LIABILITIES 109.723 Working capital / Sales Net Industrial Cash (Debt) 13% 9.632 31.900 131.400 75.000 75.046 8.346 1.468 Non-current Liabilities Financial Services Total Group Non-Current Liabilities Total Industrial Current Liabilities 57.200 4.802 24.681 13.900 29.918 7.207 217.335 73.009 0 25.490 66. Plant and Equipment Operating Leases Investments in Associates/non-consolidated co.649 39.727 80.258 2758 2998 40.866 39.565 13.100 56.639 5.686 24.612 96.386 180.094 67.430 Funded/(Unfunded) pension obligations Healthcare obligations/other post-employment benefits Industrial Net Cash (Debt) after Pensions (2.925 32.100) (848) (498) (5.717 36.894 (1.830 35.668 15.599 39.800 102.603 10.369 5.427 26.680 Industrial Equity Financial Services Equity DAI Shareholders' Equity 28.100) (848) (518) Gearing (pre-pension) Source: Company data.985 1.270 35.262 7.300 74.985 7.508 30.836 70.258 2.264 29.480 137.494 25.567 37.861 14% 12.375) 25.Barclays Capital | European Autos & Auto Parts Figure 129: Daimler Industrial and Group balance sheet. 2006A-2012E As at end-December (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Intangibles Property.704 13.912) (734) 9.120 73.473 Total Industrial Non-current Liabilities 33.645 76.258 2.419 35.104 8.901 13.493 5.584 4.700 49.773 Total Financial Services Assets TOTAL GROUP ASSETS 118.998 14.025 0 26.928 1.927 26.612 19% 3.022 7.468 24.101 65.769 12.873 7.400 50.580 52.950 13.011 12.102) (6.902 33.076 99.252 36.200 49.389 64.612 15.900 30.819 30.934) (848) (2.383 4.200 4.970 59.842 23.511 29.383 67.299 20.092 30.699 7.065 66.216 23.618 67.133 6.634 62.168 15.531 16.249 24.952 38.194 1.468 24.508 31.200 4.319 65.752 66.667 61.385 3.767 62. Barclays Capital -35% -39% -12% -28% -22% -20% -21% 8 December 2009 75 .956 15.618 Current Assets Financial Services Total Group Current Assets Total Industrial Assets 48.817 25.700 76.262 35.200 27.855 Inventories Accounts receivable Cash Other current assets Total Industrial Current Assets 17.974 37.602 41.512 38.060 24.500 51.736 7.468 24.200 100.964 16.470 19% 5.531) (1.258 2758 2998 41.326 13.493 6.244 6.604 6.676) (5.486 32.864 63.708 132.496 47.793 4.100) (848) (748) (5.185 4.135 14.758 2.508 29.450 18% 5.009 16.060 485 31.328 4.218 35.063 55.100) (848) 522 (5.495 60.219 64.390 13.994 89.452 37.652 31.155 Fixed Assets Financial Services Total Group Fixed Assets 69.000 57.967 13.288 57.200 17% 5.746 5.596 7.477 26.002 1.824 5.258 2758 2998 39.500 56.723 5.

813 29.758 0 6.632 3.395) 43 (5. Barclays Capital (6) 12.344) 6.367) (3.753 7.623) 4.447) -150 0 (3.5% 6.558 4.162) (1.500 (8.7% 69.644 1.377 2.466 (1.529) 0 0 0 0 (4.861) (2) (4.800 0 4.222 5.207) (1.864) (647) (1.880 (10.2% 9.7% 2.680) (1.306) (1.734) 2.523) (513) 3.735) (340) (37) 7.500) 0 (7.200 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. % Industrial additions to intangibles/ Sales % Capex + R&D as %age of Sales Industrial Capex/Depreciation & Amortisation Source: Company data.600 0 0 (377) (358) (282) (453) 0 5.793 4. net Additions to intangible assets Acquisitions less disposals of businesses Changes in wholesale & retail receivables Investment in shares Other INDUSTRIAL CASH FLOW FROM INVESTING (5.2% 1.813 (71) (8.327) 3.5% 75.440 (3.811 3.588 957 3.811 2.5% 1.301) 3.3% 90.056 (98) 346 7.016) (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 7.301) 1.000 (600) 1.272 (2.472 653 0 2.840) (1.0% 1.706) 5.659) (3.2% 8.719) 0 0 0 0 3.8% 2.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 2.0% (1.8% 2.528 23.5% 72.5% 2.230) 3.728 Capital expenditure.4% 8.123 653 (712) (2.162) 8.129 1.759) 0 0 0 0 (5.621) 198 246 (175) (1.687) 0 0 0 0 (5.644 112 (1.070 (7.218 4.457 2.220 3.773) (1.015) (1.842 5.747 261 4.218) (6.016) (1.510) (24.125) 3.751 1.173 0 0 124 (476) (587) 234 0 3.628) (517) (644) (984) (4.179) 1.643 1.352) (1.173 (464) (545) 224 (118) 122 (344) (116) (2.728) 3.834 (135) (10.660) (21.129 4.8% 2.115 1.361 0 0 0 0 (1.121 (1.0% 8 December 2009 76 .597) (3.2% 9.595) (2.130) (1.9% 72.0% 10 10 4.0% 1.215) (722) 306 (29) (1.7% (5.8% 6.318 10.6% 1.1% 70.234) (2.361 (1.267 0 0 253 (253) 243 (243) 0 6.2% 9.6% 80.599) Debt issued/(redeemed) Dividends paid Equity issued/(redeemed) Shares repurchased INDUSTRIAL CASH FLOW FROM FINANCING (1.016) 0 0 0 0 (246) 0 0 0 229 DAI cash flow analysis & drivers Industrial FCF Group FCF Industrial Capex / Sales.758 410 4.502) (2.943) (1.113) (1.500) (1.611 4.016) 4.865) (2.615) (1.

Bus. Barclays Capital Source: Company data.Barclays Capital | European Autos & Auto Parts Figure 131: Mercedes units by model.000) 14.000 80.000 40.000 2.000) (6.000 10. Barclays Capital 8 December 2009 77 .0% 2004 Figure 136: DAI Industrial Net Cash and Industrial FCF (€mn) 14. Barclays Capital Financial Services Figure 135: Daimler EBIT Margin by division.000 6.0% -10.000 10. 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.000 2.0% 10.000 100. 04A-12E (€mn) 120.000 0 2004 2006 2008 Trucks Daimler Buses 2010E 2012E Figure 134: Daimler Clean EBIT by division.000 6. 04-12E %) 15.000 8.0% 0.0% 5.000 (2.0% -5.000 2.000) 2004 MBC Cars Van.000 6. 04-12E (€mn) 10.000 (2.000 60. Other (from 05) Chrysler Source: Company data. Barclays Capital 2006 2008 Trucks 2010E 2012E MBC Cars Mercedes-Benz Vans Financial Services Source: Company data.000 20.000) 2005 2007 2009E 2011E Industrial FCF 2006 2008 2010E 2012E VBO EBIT % MBC EBIT % Trucks EBIT % Net Industrial Cash (Debt) Source: Company data.000 0 (2. YTD 09 smart 11% M/R/G 13% Figure 132: Daimler revenue by geography.000 4.000) (6.

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

Barclays Capital | European Autos & Auto Parts Figure 137: Fiat – headline data and valuation multiples (at current share price).Upper Medium A .7x 109.Basic B . capacity and pricing. While Fiat may indeed have the right long-term strategy with downsized vehicles and small.6x 46. it nevertheless will likely be hit in 2010 by the fallout from the end of the scrappage programmes in terms of volume.019 2.16 36 4.29 -31 3.362 5. The shift in segment share across Europe can more than be accounted for by the scrappage programmes in the top five countries – for example.05 0.Lower Medium D .Small Other Van Fiat Group Source: JD Powers.0x 54. with YTD Fiat selling 602k units in 2009 vs. 2008.5 1.36 0.242 1. further boosted Fiat’s A and B reliance.2mn in Western Europe.2 share points in 2009 to the overall European increase in volume B segment share vs. Barclays Capital Industry avg Volume down as boost to A and B segment fades In 2009.09 -0.565 1. Fiat is likely to have maintained sales volumes of 1.9 0.793 896 1. which is historically a smaller car market.8x 46.1 0. In Italy.0x Source: Company data.924 3. much of this relative success appears due to the artificial mix shift engendered by scrappage programmes.8 1. 604k in 2008. fuel efficient powertrains.6x 48. As a result. sales fell even less. 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 .0x 205. from 57% share to 63%.309 3. the German programme alone contributed 4. The various scrappage programmes.26 25 3.3x 29. In Italy.755 477 1. Fiat’s overall share of WE increased 60bp to 8.9%. in particular the Italian programme. 8 December 2009 79 . 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. industry decline of 3.0 0.35 35 5. a YoY increase of only 4% vs.3x 8.82 33 4.4%. A and B segments increased by 600bp. 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.0x 10.04 1.

4% 10. enough to accommodate many versions of the Mégane).504 -25. (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. was boosted by sales from the scrappage schemes. Overall.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. 2009 Fiat’s 2008 sales (volume market) Sources of chg: 1.034 1.9% in 2009. Barclays Capital B segment 29. The Italian scheme thus covered all of the Fiat 500s.5% -1.484 -24.482 Total A/B segment chg YoY Segment share Fiat share in segment 74.289.2% -0.500 – 3000 for CNG or other alternative fuels (a Fiat sub-specialty). the VW Polo and Golf.6% -0.000 units were from the overall increase of those segments in the European market.275.892 149. while at the same time excluding many variants of.1% 0. In the other countries.8% 3.7% 33. offset by some loss of Fiat share in these segments: Figure 140: Fiat volume segment in Western Europe source of change 2008 vs.3% 3. Fiat’s share of the Western European market.1% 0.5% 4.8% 29.2% 0.4% -0.980 Total Van and other segment chg YoY Segment share Fiat share in segment Fiat 2009 sales (volume market) Source: JD Powers Forecasting. Italy restricted its trade-ins of ten-year-old and older cars.0% 1.6% Fiat was one of the key beneficiaries of the scrappage boost. and most models of Fiat Bravo.2% 13. Fiat gained about 74k units of volume in the A and B segments. As a result. Barclays Capital -38. for example.8% -1.5% 0. of which 150.7% 0.500 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. with a €1. which rose from 8.0% -2. In Italy. with an additional €1.9% 1.3% 0.2% -0.331 8 December 2009 80 .3% in 2008 to 8.593 11. Fiat benefitted from the general tendency of scrappage buyers to choose A and B segment vehicles.5% C segment 31.669 -74. the scrappage programme was distinctly aimed at Fiat’s sweet spot in A and B segments.2% -0.777 Total C/D/E segment chg YoY Segment share Fiat share in segment -50.4% -0.559 -49. although its share of those segments slipped somewhat as other automakers rushed to fill demand.7% 0.

meaning that total sales in the volume market would fall by 1.000 vehicles for the manufacturer.Barclays Capital | European Autos & Auto Parts In 2010. with only modest economic growth. to a total of 4. Likewise.1mn cars in Western Europe. even with some trailing scrappage programme extensions. with combined share of the volume the W European market falling 400bp . In this context.from 47% in FY09 to 43% in 2010E. which we see growing at 3% across Europe in 2010E. 8 December 2009 81 . 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. we do not expect a significant rebound in the LCV market. we expect the distortion of the A and B segment share to fall.6mn.

Poland ran at 108% to meet Fiat 500 demand. April and May Cassino had some boost from LPG version of Bravo With the fall in sales.000.200. Barclays Capital Poland Turkey 8 December 2009 . Outside of Italy. with reduced recourse to temporary layoffs (from April. allowing for ‘only’ 280. Fiat had almost 500.2mn units in 2008. straight time capacity was trimmed to 970. Barclays Capital Poland Turkey Serbia Italy Spain Source: CSM. the incentivised CNG and LPG versions) and Alfa Mito. more than halved vs.000 1.000 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. albeit weaker in Poland and Serbia where Fiat is adding capacity. we expect Western Europe production to decline from the pace of 8.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. In mid-year. Idea (again.000 200.000 600. largely by stepping down straight-time capacity in Serbia.000 in 2011. The Mirafiori plant had good volumes for the Punto Classic.000 units of excess capacity – at the same time.000 units in 2009. As a result.400. (in particular LPG version) with reduced recourse to temporary layoffs in March. Overall in Europe.0mn units in 1H10E.6mn units in 2H09 to 8. Musa. and scheduled weekend overtime.000 1. January) and limited weekend overtime. Fiat will still suffer excess capacity in Italy of about 200.000 800. April and May due to production volumes for Grande Punto (especially the LPG and CNG versions that received extra incentives). Even the slated-to-close Termini Imerese plant enjoyed decent volume in the Ypsilon.000 units in 2009. perhaps converting to support agricultural equipment. In Italy. down from 1. 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. capacity utilisation is strong in Brazil. joining the current underutilised factories that make larger cars. 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. Figure 141: Fiat European capacity by country (units) 1. or about the equivalent of 1 to 2 plants. but was able to reduce to 280. several Fiat factories that had enjoyed strong utilisation due to A and B segment build will see weaker capacity utilisation. Excess capacity is likely to continue in Italy for the foreseeable future.000 400.000 units of excess capacity in 2008.

Consumers for A and B cars – even acknowledging that some were first-time new car buyers – have become accustomed to €1. Fiat has guided to a trading profit of €1. 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.6% 2.7% 2. Fiat (unlike Renault) is already well advanced in its move to modularity. And manufacturers have become accustomed to the lift to capacity utilisation provided by scrappage programmes. First. A further hit from likely weak A and B pricing in 2010 With its disproportionate focus on A and B segments. 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. the new plan will likely be a positive assuming it addresses some of the core overcapacity issues. may lead management to take a more cautious tone around the prospects for the core European business. we remain cautious near-term. often with matching manufacturer incentives on top.5bn. which we view as unlikely.6 improvement in working capital in 4Q09).292 10.528 11.500/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. 8 December 2009 83 . Fiat is particularly vulnerable to a post-scrappage price cutting pandemic. In 2010.Barclays Capital | European Autos & Auto Parts As CEO Marchionne turns his attention to a revised plan for Fiat Europe in 1Q10. we forecast trading profits of €660mn. Third.485 11. platforms with more potential commonality with Fiat than the body-on-frame Jeeps and Rams). the country with the most aggressive scrappage scheme in 2009. we do not see significant ability for these programmes to offset the pricing and capacity issues over the next few years for three reasons. driven by a €0. and likely has seen benefits already reflected in its 2008 and 2009 earnings.500 of government incentives.8% Progress in modularity unlikely to provide offset in near-term While Fiat has been a strong champion of modular architectures. Without an extension. especially as in the process of making the case for capacity reductions or increased flexibility. and a sales increase of up to 3%. Barclays Capital 2. Already in Germany.090bn) and a net industrial debt of less than €5bn for 2009 (we are at €4. Fiat lacks the global scale in its key platforms – especially C and D – relative to other auto makers and across platforms.5bn. Second. 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. Thus. Longer term.500-2. depending on scrappage programme extensions in Italy and elsewhere. OEMs have significantly added to the government’s €2.

to a margin of 0.Barclays Capital | European Autos & Auto Parts FGA earnings likely to fall by over €350mn Assuming no extension of scrappage schemes in Italy.1% 30 -5 5 15 30 0 75 423 4. while we expect a bottoming and modest rebound in CNH and Iveco in 2010. 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. as well as the spread of pricing pressures in post-scrappage Europe.2% 276 1.2% CNH and Iveco not likely to provide meaningful offset until 2011 At the same time.6% in 2009.9% 8 December 2009 84 .6% 47 0. we expect FGA income to fall by €370mn further in 2010.4% 46 0 0 0 0 0 46 469 4. 1. 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 1.2% vs.

contributing €0. to justify the recent run up in valuation.7% market share).2mn assuming 10. Given what we view as achievable. Chrysler would contribute only €0. as opposed to more aspirational and longer term stretch targets./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. in our view.971/unit but rising to about $5.43 on management’s more optimistic projections) At its recent five-year plan presentation.5mn units. Chrysler management and CEO Marchionne outlined an aggressive set of plans to turn around Chrysler. In many respects.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. However. Note even if Chrysler hits management’s more optimistic projections.4mn units or a SAAR of 8. 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. using the higher variable contribution of $5. we see potential for Chrysler to earn an operating income of US$2. insufficient. What’s achievable: Survive through 2010 via fixed cost reduction.84/share to Fiat value in 2013 on our assumptions (and still only €5.43 per share to Fiat value (at 12x P/E) some 4 years hence. When the prior management team at Chrysler filed its “Viability Plan” in February 2008.600 per vehicle would imply EBIT breakeven at 1.5bn in 2013.300-$5. at this point. 8 December 2009 85 .6% 40 -50 10 10 0 30 40 0 80 110 4.600 in the plan period. 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. we prefer to value Chrysler’s potential contribution to Fiat around what we believe to be achievable in the next few years.4% Chrysler likely to survive but contribution modest Chrysler to add only €1.45 to Fiat EPS and €5. as well as the likely closing 2009 cash balance of US$6bn. Chrysler indicated its fixed costs were US$8-$10bn and variable contribution was $3. Jeep and Ram share.15 to Fiat EPS and €1.1% 161 -30 10 30 0 10 15 0 196 306 5.84/share to Fiat value at a 12x P/E multiple. defend/expand Minivan. the plans were well-founded and ahead of the direst predictions in the market.

0 550 $3.971 8. Barclays Capital 8 December 2009 86 .971 for 2008. and could earn an operating profit of US$2bn at production of 2.1 1.1 5.634 8. Chrysler indicated it could be at breakeven at annual production of 1. Figure 147: Chrysler to breakeven at 11mn US SAAR based on new Nov 09 plan Chrysler implied breakeven analysis Feb 09 plan Low contrib. contribution per unit Source: Company data.5 9. Variable contribution per vehicle (US$) Fixed costs (US$bn) Units for breakeven (000) Implied US SAAR (000) US market share NA Production/US SAAR 3. fixed costs appear to be in the range of -US$4-$6bn over the plan period.1 2.650 11.0 2.0 2. the implied variable profit per unit is $3.20 mn units Change in EBIT (US$bn) divided by: Change in units (000) = Var.2 2008 2009E Feb 09 plan 2010E Nov 09 plan (est.7% 1.7% 1.6X 3.5 10.636 6.636.586 10.438 8.636) per management’s Nov 09 plan Assuming that (as the plan guidance indicates) variable contribution is roughly constant over the life of the contract.Barclays Capital | European Autos & Auto Parts In the November 2009 plan.2mn. 5.181 10. With a change in operating profits of $2bn due to a production increase of 550.2 8.5% 1. Assuming Chrysler's planned level of Canadian. Barclays Capital 0.000 10.000 units. although below that plan’s rather too optimistic later year per vehicle contributions. 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.7 4.636 Chrysler can breakeven at 11m US SAAR (implying contribution/vehicle of $3. implied in Nov 09 plan 10.3 5.65 mn units 2.0 1.040 12. Figure 148: Chrysler fixed costs: Feb 2009 plan vs.6X High contrib.4X Nov 09 plan Memo: Nov 09 plan variable contribution analysis EBIT (US$bn) at: 1.8 10.) 2011E Source: Company data. about in line with the February plan level of $3.65mn units.

760. with most of the improvement coming from a resumption of fleet deliveries that were stymied in 2009 when Chrysler plants were shuttered. and growing export markets. we note that it is explainable due to increased fleet deliveries (about 150. plan of 2. in line with management delivery assumptions. 11mn in the Fiat plans).6% by 2011 and 14% longer-term targets) However.000 units) and non-recurrence of inventory destocking (400. introducing more fuel efficient powertrains (downsized. The key elements include refreshing vehicles mid cycle/near term.8% for Chrysler (vs. While Jeep has suffered from some cloned vehicles that stretched the brand. especially around the iconic Jeep Wrangler.3%. Finally. exports (100. but leading to overall fleet mix of 31% (off our lower market share) vs.3% market share for Chrysler in US in 2011 (vs. and has been successful in the past at eking out share gains. although we somewhat haircut the shares to 2.2.4% and 3. we believe Chrysler will be continuing to impair brand equity. especially for the iconic Jeep. which underneath reflects an assumed continued decline in retail share offset by increased fleet deliveries. 25% in management’s plans (which assumed higher retail sales in Dodge and Chrysler). management’s more ambitious 12. we view Chrysler’s goal of boosting share from 9% in 2009 to 12.7mn units in 2010 and nearly 2mn units in 2011 (note we are using a higher SAAR assumption – 12mn in 2010 vs.000 units. The new Ram brand organization appears to have identified growth opportunities to better segment and penetrate commercial markets. We see Chrysler’s estimates for Ram and Jeep market share -.4%) – roughly in line with the shares achieved in 2009. Chrysler’s product plan is directionally sound. we see assumptions for Canada and Mexico as reasonable. by continuing heavy reliance on incentives and fleet sales. turbocharged ICEs with dual clutch transmissions). The Ram pickup enjoys a loyal base.6% in 2011 and eventually reaching close to 14% US share as aggressive. defending and expanding the Jeep and Ram truck franchises.0% respectively to reflect the more recent weakness in their performance.000 units). At the same time. given their long history of market share losses. we believe that pickup trucks are likely to remain about 11% of US sales. 4. 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.Barclays Capital | European Autos & Auto Parts Defensible share in core products Overall. and note that the smaller Fiat-inspired vehicles are likely to be received well in those markets. car build in 2011 would be only 20% of the mix.1% in 2011. we assume share of 1. and prefer to value Chrysler based on the US share we see as achievable given Chrysler/Dodge/Jeep brand positioning. we see fleet share increasing from 1. 8 December 2009 87 .2% and 3. While the swing from 2009 to 2010 of 80% (that is. developing new vehicles based on shared platforms with Fiat. As a result. Finally. we see deliveries reaching 1. we are more sceptical of management’s aspirations for the Chrysler and Dodge brands.000 units or 27% in the November plan – thus limiting to some extent synergies with Fiat’s car platforms. we believe Fiat’s plans to greatly expand international sales – especially of Jeep – are eminently sensible given the strong Jeep brand image. Jeep enjoys a strong brand image.2%) and 3% for Dodge (vs. As a result. or 330.000 units) and overall market growth (130. unless the midcycle product refreshes are extremely successful.as fairly realistic.000 units).000 units) appears large. product portfolio and export opportunities – which in our view would yield 2011 share of 10. Our forecasts assume 10. nevertheless Fiat should be able to defend most of the Jeep share.3% in 2011 -. making relaunch of the vehicles – even if well designed with Fiat input – more difficult. Overall.9% in 2009 to 3. versus 429. On our assumptions. Similarly. In particular.

beyond 2011.845 26.6% 0.0% 9.9% 0.1% 1.8% 1.2% Dodge Dodge Dodge Dodge Car Minivan Other light truck Total 2.0% 4.6% 1.8% 3.8% Ram Ram Ram Large pickup Other pickup/comm'l van Total 2.3% 14.2% Nevertheless.726 25.0% 2.4% 3.3% 0.2% 1. even with a higher SAAR assumption we remain below management’s unit volume projections.0% 3.8% 0.8% 0.3% Cars (000 units) Trucks (000 units) memo: % cars Source: Company data.2% 1.8% 1.2% 3.5% 0.7% 3.8% 1.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% 10.161 27.1% 1.7% 3.0% 0.6% 11.0% 439 1.3% 0.4% 330 1.1% 406 1.8% 3.4% 1.3% 3.0% 0.4% 0.9% 2.5% 13.6% 1.1% 12.6% 0.5% 0.308 20.0% 0.3% 1.2% 4.6% 2.4% 1.047 27.0% 0.6% 0. 8 December 2009 88 .9% 579 1.9% 0.9% 0.7% 3.0% Jeep Plymouth Fiat GRAND TOTAL 2.9% 2.5% 0.4% 1.9% 0.7% 0.9% 0.2% 0.6% 2. Barclays Capital 678 1.3% 2.3% 2.8% 1.9% 187 594 24.8% 0.1% 1.8% 1.1% 1.5% 2.7% 2.8% 0.3% 1.6% 0.0% 2.8% 0.5% 2.

5x Figure 151: Chrysler unit sales at 1.958 10.120 2.) 2012E BarCap est.094 1.5 9.0% 1.5 13.618 1.Barclays Capital | European Autos & Auto Parts Figure 150: Chrysler deliveries to reach 1.33x 1.386 Exports (000 units) Total Chrsyler N Am Sales Inventory build (destocking) Production units Memo: Production/US Sales Source: Company data.1% 13.391 300 22% 300 1.600 14.227 2.712 1.0 10.4x -396 949 1.0 10.094 2.712 1.212 300 25% 200 1.6501.800 14.0x 1.065 1.991 1.400 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 2.43x 1.586 300 19% 500 2.348 2.4x 2.085 1.00x 1.38x 1.5 10.400 13.648 300 18% 400 2.991 1.8% 1.8% 1.458 300 21% 200 1.8% 1.348 1.4x 1.0 10.386 949 949 2011E Nov 09 plan (est.0 13. 2013E 2014E 8 December 2009 89 .650 11.5 10.4x 2.775 1. Barclays Capital estimates remain below management’s projections due to lower assumed market share 3000 2500 2. Barclays Capital 107 2. Barclays Capital 2.3% 16.600 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 13.175 2.42x 949 10.3% 1.0% 945 300 32% 100 1.094 1.800 2.6% 2.712 2.0% 2.5 10.065 2000 1500 1000 500 0 2008 2009E 2010E Feb 09 plan Source: Company data.345 12.386 1.5% 2.7 12.4 10.7mn units in 2010 based on Barclays Capital US SAAR estimates Chrysler Sales and Production by area (BC est.494 300 20% 300 2.065 13.40x Figure 152: Despite higher SAAR assumption.6% 2.3% 15.37x 1.8 13.3% 14.5 10.4x 2.200 2.348 1.5 9.991 1.200 12.

etc.5 7.5 1.0 5.6 2.15 € 1.7 4. Figure 153: Chrysler income statement .6% -5.15 EPS per Fiat share – implying about €1. we see 2011 EBITDA at US$4.5% -6.9 8.53 € 6.2 -42.8% -5.2% -5.8 2.5 -2. Barclays Capital -€ 0.65 € 0.9 -2.5 2012 57.0 2.1 -0. but enough of a difference that we would envision no net income and hence no contribution to Fiat’s equity income.3% -6.3 -4.5 -1.8 8.45 € 0.0% -5. Even using management’s assumptions.3 2.9 4.50.0 2.9 6.0 -1.1 -0.8 8.0 -2.02 € 0.Barclays Capital estimates Year-end December (€mn) Net Revenue 2008 47.7 Fixed Cost Operating Profit Operating margin -10.2 2.43 € 0.3 2.5 2014 67.0 2.9 0.5 2011 52.5 2013 62. etc.6 3.34 8 December 2009 90 .5 3.8 1.6 2009 16.2 0.0 -2.16 € 0.1 6.4 8.0 7.0 -1.5 -36.17 Figure 154: Chrysler income statement per Nov 09 plan Year-end December (€mn) Net Revenue 2008 47.7 -8.5 3.2 -13.9 6.42 in 2012.0 3.3 6.3 -2.1 -5.5 0.3 -4.3 Depreciation & Amortization (D&A) Interest.2 -13.5 2012 50.0 -3.0 -1.5 3.0 2.4 -3.4 -1.8 Memo -EPS per Fiat share (€) Value per Fiat share at 12x Source: Company data.0 2.0 3.5 Memo -EPS per Fiat share (€) Value per Fiat share at 12x Source: Company data. taxes.0 -1.2 3.0 -44.5 -37.5 Variable Cost Variable Profit -39.5 3.5 -1.3% -5.5 -48.2 1.9 -5.8 4.5 2010 44.42 € 5.2 -2.5 -57.1 2011 47.84 at a 12x multiple.5 3.8 -1.11 € 0.7 0. 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 €2.7 -53. Net Income/(Loss) -2. Even in 2013. Barclays Capital -€ 0.2% -6.1 0.5 2.1 -5.3 -3.7 0.5 6.6 -1. Net Income/(Loss) -2.5 -2.1 0.1% -6.5 2010 42.Barclays Capital | European Autos & Auto Parts Given these assumptions.7 -8.1 -2.5 0.0 -2.2 5. we see only €0.2 2013 56.0 9.6 2009 16.10 € 1.0 -6.05 € 0.6% -5.3bn only somewhat below management projections of $4.2 1.9 -1.45 € 5.0 7.8% -4.4% Depreciation & Amortization (D&A) EBITDA EBITDA margin 2.2 5.9 -1.2 0.2 Fixed Cost Operating Profit Operating margin -10.4 8.6 -47.3 10.2 -40.5bn.5 -2.7% Depreciation & Amortization (D&A) EBITDA EBITDA margin 2.3 -0.5 -2.0 Depreciation & Amortization (D&A) Interest.7 2.3 2.84 € 0.0 3.09 € 0.1 -2.0 -48.3 4.0 0. taxes.0 1.00 € 0.6 -3.5 4.3 -2.3 8.5 Variable Cost Variable Profit -39.6 -1.8 4.4 2014 57.12 € 1.8 -1.8% -4. Chrysler would contribute only €0.5 8.1 3.3 7.8 -3.

550 4 4 3 2 1 13 Average of: 25% EV/FGA Sales. given also the difficulty in addressing European capacity. Peugeot Mulls Letting it Ride on Mitsubishi. see Marchionne to Turn Attention to Fiat. Fiat is still well short of its 5mn unit ‘global player’ scale goal. As PSA demonstrates. not a significant premium to our €8 target. realistic upside potential from a spin-off of FGA from other industrial operations for three reasons: First. Wall Street Journal. Barclays Capital -4. an Asian partner adds access to faster growth markets.600 1. Fiat Group has traded at a discount to the “pure plays” of each of its components (volume car makers.150 16. 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. WardsAuto. 8X EV/EBIT. While there had been press speculation around a PSA tie up (perhaps put to rest with PSA’s approach to Mitsubishi). we believe that.071 ( 4) 0 ( 1) 9 FY10E Net Industrial Cash Rating We are initiating coverage with a 3-Underweight rating. using current multiples of peer companies is €9 per share. 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. 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). we do not see significant. (For press reports. and pooling of scarce R&DS around electric vehicles. Current CNH market cap Average of: 60% EV/sales. in our view).500 2. 5x 11E EBIT Average of 60% EV/sales. premium car. Fiat may follow the lead of PSA-Mitsubishi and begin the task of looking for alliance partners in Asia.600 3. Our sum-of-the-parts calculation. as well as the need for geographic diversification. while historically. 19 Nov 2009. by Giancarlo Perini. Second. with the likely pressures in FGA Europe (leading to a sequential decline in trading profit. truck and agricultural equipment). cost sharing across traditional vehicle platforms.725 0 -754 11.700 4. 8 December 2009 91 . Fiat is unlikely to generate sufficient progress in automotive to generate investor enthusiasm around a spin-out of FGA. Third. without Opel. this does not appear to be the case currently.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.com. 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. given the depressed earnings and multiples across the truck and agricultural equipment sectors.

7% -660 Source: FactSet consensus.324 0. Figure 156: Below consensus estimates Fiat 2010E Barclays Consensus Variance (%) Revenue (€mn) EPS (€) 48. 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. Fiat has traded at a 6-year average of 4. Barclays Capital 6-yr historical avg EV/EBITDA Our EV/EBITDA looks at adjusted industrial EV (backing out financial services) over industrial EBITDA.1x at current share price.05 49.036 0. from which we derive a €8 price target. EV/sales Fiat has historically traded at a six-year historical average of 28% EV/sales.3x EV/EBITDA (vs. Historically. But at current market price is trading at 35% 2010E EV/sales on our estimates.38 -2. and our target is based on 4. Looking out to 2011E our below consensus EBITDA estimates put Fiat at 4. 3x for the European sector as a whole).0x 2011 EBITDA. However.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. 8 December 2009 92 . The OEM sector average range is 27%. Fiat would trade at 28% EV/sales. At our €8 price target. with a reference to the SotP methodology (see Figure 155 above) based on peer multiples for the various divisions to confirm our valuation. highlighting our belief that the share is significantly overvalued at present. given the 2010 headwinds we believe this discount is justified. exactly in line with its historical average.

0x 2.0x 6.0x 8.Barclays Capital | European Autos & Auto Parts Figure 158: Fiat historical and forecast PE and current share price 14.0x 4.0x 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Adjusted EV/EBITDA Source: Company data.0x 12.0x 10. 8 December 2009 93 . 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 0.

45%) We believe that Chrysler’s turnaround plan is viable. Fiat soared €2 leading up to the forecast that Chrysler would make a profit inside two years. even if extended the scheme is unlikely to be impactful). price competition increases and government support schemes expire.bennett@barcap. 3m RV c.com Barclays Capital.com Barclays Capital. which caused results to be substantially flattered by various cash for clunkers schemes.Barclays Capital | European Autos & Auto Parts Figure 159: Potential catalysts Date Event Fiat Sep-10 €10(96%)-€8(77%) put spread Pay: €0.50/share by 2012. we are more conservative than management’s optimistic market share and earnings projections. London Abhinandan Deb +44 (0)20 777 32481 abhinandan. which is due to expire at the end of December 2009. As Chrysler was attributed little if any value before this date.75 (7.com Barclays Capital. and as this €2 rise is above our estimated Chrysler total value of €1. The future downside due to the higher Italian cost base would cap any upside should cash for clunkers be extended (in our view.deb@barcap.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. London Arnaud Joubert +44 (0)20 777 48344 arnaud. ref €10. delta 18% (IV c. 8 December 2009 May-09 Nov-08 Nov-09 Feb-09 94 . In October 2009.42-46%.joubert@barcap.2%). London Anshul Gupta +44 (0)20 313 48112 anshul.45. Should Italy extend its cash for clunkers scheme. However. especially given the difficulty of repositioning Chrysler’s current incentive driven line-up. Fiat is therefore likely to be hit harder than other auto firms as volumes fall. the government is likely to insist Fiat moves production from other cheaper countries towards Italy. current valuations have significant downside potential.gupta@barcap. London Fiat particularly exposed to end of cash for clunkers Fiat’s offering is heavily reliant on cheaper cars.

Nevertheless they note that credit metrics remain below requirements and while they expect material improvement through next year. credit ratios are likely to remain at levels more consistent with a mid BB rating. in their view. Rob Perry and Darren Hook. 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 .Barclays Capital | European Autos & Auto Parts Credit Perspective Barclays Capital credit analysts. rate Fiat’s debt Overweight.

3% 24% 1.4% 28% 3.4x 8.3x 18.3x 7.9x 109.9x 1.5% 0% 0.2x 8.0% 20% 2.0% 27% 1.4x 1.4% 40% 4.7% 0% 0.6x 7.8x 12.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% 3.2x 2.1x 27.3x 8.7x 21.2x 2.6% 33% 4.0% 36% 4.9x 8.7x 12.6x 84. leading to a stronger demand and pricing environment than we currently assume.5% 25% 3.4x 10.0x 2.3x 29.8x 8.8% 43% 2.6x 9.8x -33.5x 12.4% 24% 1.0x 12.6x 0.9x 0.2% 27% 3.2x 1.6% EV/sales EV/clean EBITDA EV/clean EBIT P/E FCF yield Price/sales Price/book Dividend yield Source: Company data.0x 39.0% 40% 4.2% 1% 0.0% 31% 3.3x 5.4% 27% 1.4x 1.7x 10.1x 7.9x 158.0x 9.2x 0.8x 8.2% 27% 1.9x 22.1x 7.9x 8.3x 5.0x 8.0% 31% 3.4x 3. 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 .6x 0.1% 35% 5.2x 0.9x 2.8x -33.1x 0.1% 30% 3.0% 27% 1.9x 0.2x 2.8% 43% 2.2% 0% 0.5% 28% 4.7% 26% 1.2x 205.8x 15.3x 6.1x 0. could make our forecasts difficult to achieve.5x 12. 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.4% 24% 1.3x 12.

42 € 0.426) 6.05 € 0.1% 4.237 € 1.Barclays Capital | European Autos & Auto Parts Figure 163: Fiat Group income statement.187 (466) -21% 1.4% (29) 1.237 € 0.321 -2.889 1.7% 105 1. ex special items No Shares (average) EPS EPS .438) 8.00 46.11 € 1.11 € 0.8% 1.571 (86) 1.237 € 0.497 2.9% 1.301 -2.972 (947) 162 2.7% (104) 1.240 € 1.985 (41.087 15.5% 6. 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 .600 2.374 1.380 (49.172 0 0 0 2.738 (347) 20% 1.4% (29) 2.060 2 (165) (111) 786 (699) 0 7 95 (28) -30% 66 (27) 39 219 1.233 190 (105) (166) 3.50 € 0.adjusted Dividend Source: Company data.6% 1.03 € 0.485 887 1.317 10.85 € 1.1% 1.388 8.7% 4.832 (43.241 (700) 19 561 (31) 5% 530 (17) 513 513 1.957 16.087 8.7% 50 3.874 13.075 8.53 € 0.902 1.9% 4.04 47.061 607 (450) (47) 2.133 (40.70 € 0.721 (109) 1.12 53.586 8.701) 6.612 1.391 (17) 1.374 1.362 20 (165) (245) 2.529 (50.9% 4.124 8.575 (42.237 € 0.401 2.629) 7.6% 1.061 (490) -24% 1.951 607 (450) (47) 2.5% 1.23 8 December 2009 97 .332 1.152 190 (105) (166) 3.16 58.29 € 1.888) 7.18 € 0.42 € 0.241 0 0 0 1.178) 5.5% (23) 3.172 (675) 241 1.433 (101) 2.17 € 0.944 15.3% 4.152 (719) -23% 2.05 € 0.40 59.262 € 1.525 (45.697 9.423) 9.955 12.8% 5.560 13.00 49.271 € 1.900 13.165 -2.9% 1. Barclays Capital 51.233 -2.7% 42 676 0 0 0 676 (740) 16 (48) 127 265% 79 (17) 62 62 1.

464 1.527 9.455 979 1.459) 46.310 6.071 4.937 825 1.768 25.497 26.000 5.244 (7.843 11.089 7.172 2.241 32 73 19 (18) (48) 2.921 (303) 12.515 455 1.668 (159) 11.668 29.093 1.000 783 1. Vehicles (Iveco) Components/Prod Systems (FTP MM Teksid Comau) 291 (33) 183 737 546 803 24 266 990 813 691 72 339 1.405 3.196 26.665 4.107 6.947) 50.447 (91) 10.906 420 1.811 437 1.190 66.192 4.114 Eliminations Group Revenues Segment trading profit Automobiles 441 1. 2006A-2012E Year-end December (€mn) Segment revenue Automobiles 25.280 7.702 519 1.145 4.279 521 675 (396) 1.102 58.850 473 2.837 573 763 (447) 1.619 7.227 (6.072 3.050 4.092 5.075 5.388 2006 2007 2008 2009E 2010E 2011E 2012E Fiat Group Automotive Maserati Ferrari Eliminations Agri and Const Equipment (CNH) Trucks and Comm.581 (6.102 Fiat Group Automotive Maserati Ferrari Agri and Const Equipment (CNH) Trucks and Comm.666 568 736 (432) 1.392 (6.Barclays Capital | European Autos & Auto Parts Figure 164: Fiat group divisional revenue & trading profit.721 (152) 10.192 510 661 (388) 1.046 24.863 23.122 838 414 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.808 22.064 (160) 11.683 28.383 4.174 29.136 26.723 10.719 (136) 10.812 694 1.916 29.447 837 1.720) 48.946 (141) 10. 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) 1.160 67.967 25.762 4.123 5.530 Components/Prod Systems (FPT MM Teksid Comau): FPT Powertrain Technologies Components (Magneti Marelli) Metallurgical Products (Teksid) Prod Systems (Comau) Component eliminations Other business 6.150 8.089 8 December 2009 98 .506) 53.784 662 300 603 1. Vehicles (Iveco) 23.

234 41.713 1.036 673 10.302 38 164 672 10.159 686 42.269 3.555 98 12.443 761 26 134 748 11.052 224 11.758 536 7.0 30.5 27.756 3. 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 6.785 11.239 4.5 8.159 686 48.929 4.522 1.366 5.789 6.434 59.391 754 11.103 7.448 2.4% 8 December 2009 99 .311 4.750 4.482 3.600 4.302 38 164 672 9.362 10.203 52.024 2.360 6.872 754 12.0 5.713 1.721 11.706 153 14.295 5.508 25.501 49.523 33.364 2.0 100. Barclays Capital 69.4% 75.312 754 10.4 30.118 11.4% 79.302 38 164 672 8.788 10.6 35.032 0 0 12.727 6.391 28.910 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.403 Minority interests Equity Industrial stockholders' equity Provisions: Employee benefits Other provisions 674 9.528 3.301 7.307 35.132 20 60.350 12.032 0 0 12.007 5.301 3.0 30.052 445 43.806 Assets held for sale Total assets 332 49.159 686 41.537 3.637 11.3 6.796 55.486 6.429 60.237 26.068 2.713 1.420 2.619 18.150 7.279 751 10.945 1.619 18.5% 98.737 23.713 1.121 30.569 10.311 4.351 4.482 30 54.508 26.350 11.1 120.2 6.606 3.325 2.259 5.458 7.4 104.311 4.721 22.032 0 0 12.537 83 52.498 2.758 536 14.4 5.032 0 0 12.251 3.891 2.0 5.758 536 8.0 103.365 6.614 3.604 28.619 18.508 25.341 4.950 2.746 7.302 54.945 1.623 20 59.806 226 9.637 5.301 6.509 3.7% 69.0 103.719 6.491 5.638 14.357 1.696 5.758 536 14.746 3.0 30.4% 80.745 20 55.216 6.146 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 8.361 13.910 Cash and cash equivalents Current assets 7.101 754 10.0 5.635 3.0% 85.444 4.508 25.558 11.945 1.548 27.619 18.225 25.3 36.203 2.606 11.403 3.912 1.646 2.250 3.094 3.990 1.078 13.2 103.751 5.159 686 48.756 2.772 20 53.250 10.311 4.798 2.858 53.064 1.581 4.115 3.567 7.676 39.0 95.259 5.302 38 164 672 7.753 6.531 3.945 1.Barclays Capital | European Autos & Auto Parts Figure 165: Fiat industrial balance sheet.

517) (2. 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.Barclays Capital | European Autos & Auto Parts Figure 166: Fiat industrial cash flow.109 7.523 8.194 11 (1.151 2.517) (2.633) 1.724) (4.163) (82) (2.980) (152) 204 10 24 -1194 (2.548 8. 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: (2.325 1.675 5.422) (2.015 12 0 (32) 3.152) (2.721 2.422) (2.725) (4.450) (4.574 149 2.045 79 2.307 9.125) 3.691 133 0 (30) 3.744 (138) 186 (165) (289) 1.056 3.919 1.446) 8 December 2009 100 .548 9.604 7.805 (119) 115 (149) (532) (3.810) 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 (2.180 7237 7.523 7.666) (136) 680 41 (2.070 4.944) 31 4.639 (921) 180 255 12 679 3.447 530 2.840 14 -238 (546) 3.889) (46) 71 46 (32) 698 (2.810) (442) (5.257) (425) (390) (310) (1.773) 355 (5.307 10.391 2.237 6391 6.054 2.854) (1.391 2.100) (3.756 1. Barclays Capital 6.773 Investments in PPE Equity investments and unconsolidated.995 0 0 (49) (49) (148) (148) (102) 1.088) (2. 2006-2012E Year-end December (€mn) Industrial Cash Flow from Operations: 2006 2007 2008 2009E 2010E 2011E 2012E Industrial Net result before minority.667 (704) 203 (13) (126) 1.121 (1.995 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.653 161 0 (432) 3.604) 156 (317) 2.256) 22 (23) (2.767 300 0 301 3.322 (3.949) (5.805) (6.

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

at least by French analysts) Risks: Too much expectation placed on new strategy which.2x 53. 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.135 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.87 3. at least in the near term. via a linear progression of savings in three key areas: 8 December 2009 102 .6x 4. via deep cost cutting and a solid refinancing plan.Barclays Capital | European Autos & Auto Parts Figure 167: PSA – headline data and valuation multiples (at current share price).5x) 47.313 (681) -1. responsible for strategy and performance objectives.9x (18. who arrived with a prior record of turning around the ex-British Steel company. 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.115 2.29 8 1.903 193 0.4 (1.044 3.0 2. The plan revolves around a targeted €3. 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.51) 13 1.0 (1. 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 (%) 54.9x) 51.28) (5.90) (0.0x 7. Indeed.3bn improvement in Automobile EBIT 2010-12.523 3.8 4.3x Source: Company data.4 (6. Barclays Capital *FactSet consensus data Key share price drivers: Positives: Success in product cadence helps drive sector-leading capacity utilisation.88 6 0.03) 10 1.3x) 47.1x (10.33) 13 2.8x (3.88 4.356 550 1.

The plan. Whilst not a wholly unrealistic strategy. the remaining bulk (55%) of savings are to be cost-driven . productivity and SG&A Figure 168: Peugeot targets €1. 15% improvement is expected in high-growth or emerging markets – China (nonconsolidated).100 1. Management did not give their internal targets for market share growth. 30% of savings are to come from sales and marketing: driven by market share momentum in Europe . SG&A Of which: Capacity utilisation Productivity SG&A Total 15 165 0. Whilst we believe that product renewal during this period. we are concerned that too much of the current strategy relies on top-line growth. Since we believe our own assumptions for 2010 auto demand in Europe to be significantly below consensus. capacity utilisation and quality. we struggle to find much to differentiate it from any of its peers in the sector. Russia and Latin America 3.4 3. will be well received by the market. all of whom are targeting market share gain. nor did they share with investors their assumptions for global demand over the targeted period. which likewise targeted product strategy.8 0. development.3 Increased from 81% to 105% hrs/vehicle -20% -€400m Source: Company data. Barclays Capital Strategy overly dependent on top-line growth We believe that management is targeting 140bp of market share gain by 2012E.Barclays Capital | European Autos & Auto Parts 1. The “new” 2010-12 strategy seemed rather a revamp of predecessor Streiff’s CAP 2012 strategy.6 0. We credit only 40bp of additional share and just €670m of the targeted €1. We were rather disappointed that so little new was offered to investors at Peugeot’s investor day 12 November 2009. 8 December 2009 103 .8 0.5 China Lat Am. increased capacity utilisation via improvements in commonality and geographical expansion. we are concerned that the market is giving too much credit to likely achievement of Peugeot’s topline strategy. does not lay out any specific margin targets.based both on growth in the business-to-business segment and new model launches.1bn per annum gross EBIT savings Lever % €mn/annum €bn 2010-12 Drivers/targets Sales & Marketing 30 330 1. improved brand management and expansion of service offerings 2.based on improvements in capacity utilisation. productivity. perhaps unsurprisingly given current market conditions. Russia 55 25 18 12 100 600 270 200 130 1.5bn savings (from sales & marketing and high growth countries).0 Market share momentum Brand management Services High-growth markets Production. particularly at Citroen brand.

0 1.6 6.Upper Medium Memo: C + D Memo: A .Lower Medium D .5bn plan. or 55% behind the company’s €1. However.7 39.3 21.4 1.0 31.0 32. whereas based on our detailed scrappage model (see front section of report for further detail) we forecast European (EU 27 +EFTA 3) sales down -12.5 26.2 27.1 31. Going forward.82 10. We are concerned that PSA’s demand assumptions may also be over optimistic. 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. our estimated positive total volume impact on EBIT for the company in the next three years is only €670mn.6 83. 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. Consensus.7 38. using an overall contribution margin of €3.6 1.9 38.2 29.1 46.0% 11. Figure 169: A to D volume market segment share 2006-12E Segment (%) 2006 2007 2008 2009 2010 2011 2012 A .0 36. Barclays Capital 1. with Peugeot’s core A & B segments likely down 200bp in share.5% C .3 82.Barclays Capital | European Autos & Auto Parts Though all European OEMs target market share gain. we expect some renormalisation of mix.300 +8.8 32.8 6.D Total Europe (units mn) 15.4 42.4 14.3 1.5% in 2010E.73 10.000 vehicles for PSA based on our 2012 market assumption.2% of sales in the overall W EU market.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 2009.1 37.0 8 December 2009 104 .1 1.8 21.000 -5.6 7.0 6.5 1.1 31.1 82. However.9 8.4 9.4 29.35 9.252 -12.1 12.5 32.8 29.7 33.3 31. or 700.8 44.6 41.53 11.5 40.7% By contrast. whereas we believe management may be targeting a much more aggressive 140bp increase.5 24.4 14.71 11.4 40.6% 13.740 -7.4 8.0 79.6% 12.9 14.€230mn.8 31.4 31. we believe. We expect this growth to provide an extra 45. We expect the European market to grow by only 5% (or 700. of course not all of them can be successful in achieving it. boosting Peugeot’s margin performance by c.000 units.000 vehicles) cumulatively from year-end 2009 to 2012E.5 29. We therefore base our current forecasts on 40bp of market share gain by 2012 (despite 2010’s scrappage pull back).700 +10.1 8.819 YoY chg in sales Source: Barclays Capital +3.8 44.Basic B .3 78. we see the European LCV market .0 25.4 15.960 +0.4 13. We expect the LCV market to grow 130bp from 2009’s level when the segment accounted for just 9.5 79.1 22. is currently at least 350bp too high (ranging from 8-10% fall in sales) for European demand in 2010E.60 10.2 38.9% 10.000/vehicle.5% 11.Small Memo: A + B 8.0 39. 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).1 81.38 10.

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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000 Source: CSM. We also think the mix of new model launches. with a focus on C&D segments.units 000 2.372 1. if not the strongest. 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. Barclays Capital Figure 179: PSA lacks scale on its global production platforms compared to rival RNO-Nissan group (000’s units) – 2011E 1. It is a well argued bull case among analysts that Peugeot’s product renewal schedule is likely to be one of the strongest. will help the company capitalise on our belief that these will be the fastest growing segments 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.000 Scale . in the industry in the next three years. 8 December 2009 109 .

Small Other 2012 0.3 0.Basic SUV Van C .15 0. are set to come thick and fast in the C&D segments.Lower Medium D .25 0.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. 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. JD Power. as we argued above. 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). we believe that despite a gradual erosion of market share from 2009’s peak. 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.35 0. beginning with the DS3 and then extended to the C&D segments with the DS4 and DS5. particularly for the Citroen brand. A raft of new LCV’s in 2008 helped Peugeot grow its market share even in 2009’s falling market.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).1 0. Trade press. 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. 3008 and 5008 – are all new additions to the company’s existing range and from 2010 the new ‘Distinctive’ Citroen range is launched.Upper Medium B . growth in the segment as a whole will provide an EBIT boost of €230mn to Peugeot over the next three years.2 0. Three of 2009’s new products – C3 Picasso. product renewals. Barclays Capital 8 December 2009 110 .

0% 30. However.0% 7.0% 2006 2008 2010 2012 2014 15.0% PSA 25% 11. JCI.0% 25. 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.0% Ford 11% 8.Barclays Capital | European Autos & Auto Parts Strength in fuel efficient engine technologies As well as expanding its model range. Faurecia – a turnaround story but well understood by investors Faurecia’s performance has long been a drag on its parent company. becoming somewhat more concentrated as suppliers exit Becoming more concentrated with Faurecia acquisition of EMCON. Eberspracher Front-end modules 2-3 5-6 Magna/Decoma. Despite our concerns for share erosion in the A&B segments in 2010E due to scrappage pull-back. and is due in 2010. 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. Currently 71% owned by PSA. Barclays Capital Figure 183: PSA no. The company’s first EV is to be a version of an existing Mitsubishi product. MGA JCI. Faurecia has been loss-making since 2006 and was hit hard by the severe OEM production cuts in 1H09. Longer term. Peguform and numerous others Concentrated oligopoly Fragmented business historically. company data and Barclays Capital RenaultNissan 17% 6.0% 9. its hybrid diesel technology is expected to launch in 2011. with a Plug-In HYbrid4 diesel to follow in 2012. the i-Miev. Peugeot is also devoting a great deal of attention to the development of fuel efficient technologies such as diesel hybrids and EVs. 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 12.0% Fiat 14% VW Group 15% Source: CSM. coming first on the Peugeot 3008 HYbrid4 and then the Citroen DS5 HYbrid4. the company’s management are highly focused on restructuring and efforts in North America in particular have already begun to pay off. numerous others TEN. An alliance with BMW on engines further highlights the company’s lead in this area.0% 10. 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. Plastal.0% Van share of WE Market PSA share of WE van market Source: CSM and Barclays Capital 8 December 2009 111 . solid growth opportunities as emissions control requirements for passenger and commercial vehicles become more stringent Highly fragmented Source: Company data.

00 -6.00 2.5% margin by 2011E (no 2012E consensus data is yet available).00 -4. Figure 185: Consensus earnings estimates have moved into the black for 2011E 6. However.0 1. Although the market is currently looking for only a 2. we believe that the French investment community already credit a great deal of longer-term restructuring success to the company.00 0. with the execution of the OCEANE convertible bond taking the holding down to 51%.5bn of debt (and thus aid Peugeot in regaining its investment grade debt rating). Although the recently announced EMCON deal will see Peugeot’s stake in the parts supplier diluted from 71% to 57%. hence we are wary of underweighting the share whilst M&A speculation abounds.at the top end of management’s 4. this still will not be low enough to allow PSA to deconsolidate Faurecia’s €1. The recent EMCON acquisition should further boost the company in the fast-growing exhaust systems segment. 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.Barclays Capital | European Autos & Auto Parts We therefore forecast that the company can reach a 5% group margin by 2012E .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 .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 5.0 4.5-5% target but just behind midterm peer benchmark margin. There has been much speculation in the press and the investment community for a long while surrounding the likelihood of a Faurecia disposal.5 2.0 2. thus boosting its parent company EBIT by an estimated €850mn.5 4.5 3.5 1. the PSA share has historically rebounded strongly on any news regarding an eventual disposal.00 4.00 -2.0 3. and therefore see less upside for the PSA shareholder.00 -8.

6% income pick-up over the stock (Figure 187).33 €24. 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.3. Resurgent new issuance. London Angus Allison +44 (0)20 7773 5379 angus. particularly in Europe.com Barclays Capital. including Peugeot and Faurecia. As such.64% delta to the stock price and a c. The convertible is generally less liquid than the stock.cridge@barcap. 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. its defensive profile compared to cash equity. rebounding sharply from its late-2008 trauma.62% 64% Note: As of 4 December 2009. CFA +44 (0)20 7773 5859 heather. has seen many companies raise convertible funds. 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 . While they expect credit metrics to improve through 2010. we estimate that the convertible’s valuation would rise 3. At our fundamental equity analysts’ stock price target.62% Convertible delta Current Target Target bond share price share price price €25.com Barclays Capital. For equity investors. We estimate that Peugeot’s 2016 convertible currently has a c. Adding the 3.beattie@barcap. This is below the 7. makes the convertible’s return more competitive. but with the defensive characteristics of downside protection (delta is higher on the upside than on the downside). they believe Peugeot has significantly improved its liquidity position. senior status. 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.com Barclays Capital.allison@barcap. we remain more cautious than the market on the demand side of the equation for the overall European market in 2010E. the investment rationale is not based on cheapness or richness per se. 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.com Barclays Capital.10 €24. but rather. Lastly.53 0.olsen@barcap.00% 3. following significant bond issuance this year and government funding.00 €32.8% from its current level (target bond price versus current bond price). many convertibles offer exposure (delta) to the underlying equity. Despite our confidence in Peugeot’s product strategy. an income advantage and strong takeover and dividend protection features. Figure 187: Peugeot 4.5% rise in the stock.60% Income advantage 3. although the €575mn bond has traded actively since launch in June 2009. London Peugeot’s 2016 convertible: Recommended for investors seeking defensive exposure The convertible asset class has attracted substantial interest this year.Barclays Capital | European Autos & Auto Parts Luke Olsen +44 (0)20 7773 8310 luke. however.6% pa income advantage. together with its income advantage and seniority.18 575 Dividend yield 0. London Stella Cridge +44 (0)20 3134 9618 stella.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. we view the convertible’s valuation as fair relative to the equity derivative (options) market and relative to other comparable convertibles. However. London Heather Beattie.18 €26. Source: Barclays Capital Credit perspective Barclays Capital credit analysts currently rate Peugeot Market Weight.

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.7x for the sector as a whole). 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. We credit the company with only €2.616 6. Figure 188: Peugeot SotP implies just 12% upside to the current share price.8x book value 20% 2011E EV/sales 15% 2011E EV/sales FY10E BS date FY10E BS date FY10E BS date Banque PSA Finance (0.8x 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. 8 December 2009 114 .267 -819 -329 6.0x 2011E Industrial EV/EBITDA (in line with Renault) 0.Barclays Capital | European Autos & Auto Parts revenue growth potential by 2012E. just ahead of its historical average. Barclays Capital -19 -4 -1 30 28 5% discount Group EV/EBITDA Historically PSA has traded at an 8-year average of 2.4x EV/EBITDA at a group level (vs 6x at RNO and 2.1bn of its targeted €3. Likewise. GEFCO and Faurecia at historical average multiples.888 5.078 12. Our slightly below consensus EBITDA estimates put PSA at 2.252 3. we think that the Faurecia recovery story.3bn in cost savings by 2012E.5x at current share price in 2010E.141 650 2. 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.706 6. is already well understood by the market. though significant. driving our 2-Equal Weight rating NAV. We believe that the company should trade closer to its historical level of 2. which would imply a share price of €23. 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. PSA €mn € per share Remarks 1) PSA Auto @ EV/sales multiple 2) PSA Auto @ EV/EBITDA multiple Peugeot Auto average 6. implying 12% upside potential to its current market price.4x. We are therefore initiating coverage with 2-Equal Weight rating and a €26 price target.121 -4.304 30 25 28 15% 2011E Industrial EV/sales (in line with Renault) 2.

5x 1.0x 1.5x 2.0x 2.0x 0.Barclays Capital | European Autos & Auto Parts Figure 189: PSA historical EV/EBITDA implies a 2.5x 0.0x 2000 2001 2002 2003 2004 2005 2006 2007 2008 Historical average Source: Company data.4x multiple is realistic to value the group 3.5x 3. Barclays Capital Adjusted EV/EBITDA 8 December 2009 115 .

4 12 0.4 12 0.1 12 0.4x 8.2x 4.6x na (18.9x 2.5x) -49.5x 0.2x 14.0 12 2.2x 17.2x 4.8 7 0.0x 8.1x) -3.9x 2.8x 2.5 13 0.3x) (13.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.8x 2.5x 0.7x) -37.9x 9.6x) -40.5x (37.4x 0.5x 5.0x (5.4 20 0.0x 23.4x 4.4 20 0.7 13 2.0 11 3.3 13 0.5x (40.1 11 0.5x 3.3x 25.3x 1.6x) (4.8 12 0.3x 1.3x (5.6 12 0.5x 0.6x 17.2x 14. Liquidity risk – current high gearing levels and lack of investment grade credit rating expose the share to balance sheet risk. 8 December 2009 116 .8x 2.7 17 2.8x) -3.9x na (18. 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.0 10 1.5x 0. this could provide further upside to the share and cause it to exceed our current price target.2 23 0.8 17 2.9x 2.0 16 2. could make our forecasts difficult to achieve.macroeconomic factors outside the control of the company. 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 2.3x 4.2 11 1.6x) (12. Barclays Capital Risks to price target Downside risks to our price target are as follows: Macroeconomic risks .4x 3.0 13 1.6x 17.7x 17.3x 8.9x 25.3 12 0.4x 4.5x) -49.2 23 0.8 17 2.2 8 0.0 15 2.1x) (3.3 11 0.5x 0. leading to an even weaker demand and pricing environment than we currently assume.3x 23.8x 59.8 Industrial EV/sales (%) Industrial EV/EBITDA Industrial EV/EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Source: Company data.8x 59.

88 DPS PSA segmental revenue: 1.4% 21.115 1.119 608 1.661 3.0% (6.00 38.523 440 2.789 1.9% 26.643 12.4% 1.7% 1.803) (1.0% (8.28) 226.055 Automobile revenues Faurecia revenues GEFCO revenues Industrial revenues Banque PSA Finance revenues Total Group revenues PSA segmental EBIT: 1.435) 12.0% 16.882) 10.436 17.999 60.6% 0.923 1.604 Banque PSA Finance EBIT Total Group EBIT PSA segmental EBIT margin % 604 1.594 1.4% 18.536 52.6% 0.5% 3.006 45.0% 3.393 0.313 1.7% -1.90) 226.192 19.841) (2.7 0.132 0.348 51.00 36.761 56.017) 1.011 3.4% 3.700) 7.0% 4.208 Minority Interest Group interest (114) 183 (59) 885 (157) (343) (100) (1.354) (2.Barclays Capital | European Autos & Auto Parts Figure 191: PSA Group income statement.1% 47.5% -2.920) 9.120 (917) (367) (700) (1.0% -0.7% 0.866) 1.88 227.020 51.752 2.0% 1.096 45.135 2.426) (100) (432) (100) 652 (100) 1.942) 10.046 20.8% Non-recurring income and (expenses) Reported operating income (809) 310 (632) 1.044 Automobile EBIT % Faurecia EBIT % GEFCO EBIT % Industrial EBIT % 0.433) (1.072) 1.326) 35 9% 40 (332) (321) 31% 40 752 (526) 31% 40 1.369 3.5% 3.920 47.9% 60.115 (42.033 (350) 1.6 (1.6% 4.831 3.044 3.4% 2.8% 3.940) 2.144 (225) 91 127 (7) (795) (281) 75 (1.566 11.178 20.819 9.9 (6.370 17.093 895 592 117 1.0% -2.594 (45.1% 54.35 44.251 49.3 3.705 0.5% 51.313 (39.9% 1.694 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 (1.649 3.7% 1.745) 193 0.3% 3.903 2.119 2.9 2.044 Financial income/expense & other Pre-tax income (105) 205 (40) 1.4% 2. Barclays Capital 34.080 (286) (653) (400) (1.903 (39.088 54.9 4.108 No of shares (average) EPS 228.00 40.245 53.0% (7.3% 2.0% -0.613 (48.062) (1.2% 5.523 3.9% 53.376 11.554 57.432) (1.822 11.2% 2.115 Automobile EBIT Faurecia EBIT GEFCO EBIT Industrial EBIT 267 69 151 515 858 121 155 1.5% 3.2% -1.861) (681) -1.4% (6.0% 3.1% Banque PSA Finance EBIT % Total Group EBIT % Source: Company data.2% -3.542 3.9% (6.781) (450) (407) (350) 1.381) (150) 43 (140) 1.0% 21.613 16.87 226.4% 47.356 (44.613 2.00 36.0% 1.084 10.519 12.00 41.069) 11.493 3.752 557 550 320 (681) 370 193 430 1.8% SG&A Research & development Clean EBIT Memo: clean EBIT margin (% of sales) (7.0% 30.045) 550 1.5% 2.51) 226.9 (1.5% 0.060 53.534) 8.576) (2.001) (375) 105 93 (177) 575 404 114 1.0% 2.383 0 2.4% (6.50 45.8% 8 December 2009 117 .80 228.712 18. 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) 56.356 1.135 (40.980 47.

106 69.973 31.292) 21.391 2086 515 5.780 38.040 14.061 14. Barclays Capital -1% -10% 22% 19% 36% 23% 12% 8 December 2009 118 .826 3.560 13.750 12.006 31.127 9.098 2086 515 7.321 595 681 23.719 2.191 69.094 28.559 329 11.418 (612) -1% 116 18.975 26.389 40.222 29.175 30.538 21.651 14.538 2.277 61.249 17.237 4.269 42.776 Total Finance Co assets TOTAL GROUP ASSETS 27.249 82 0% (1.001 2.200 9.836 2.018 2086 515 6.538 25.894 848 620 860 21.114 2.237 4.913 2.024 Total Finance Co liabilities Group shareholders' equity Minority interests Shareholders' funds TOTAL GROUP LIABILITIES & S'HOLDERS EQUITY 24.121 21.652 12.539 13.086 515 2.462 13.026 2.219 62.720 20.413 63.971 21.300 62.857 1.477 (317) -1% (2.399 36.188 6.237 4.404 20.074 11.339 19.043 1.652 1.874 14.442 21.330 3% (2.126 Balance sheet analysis & drivers: Capital employed Net working capital Working capital / Sales Net Industrial cash (debt) 19.965 39.009 6.581 6.906) 19.321 6.132 6.547 3.023 2% (4.381 61.221 1.086 515 7.488 3.718 388 14.840 (830) -1% 1.051 16.899 11. 2006-2012E December year-end (€mn) Industrial assets: 2006 2007 2008 2009E 2010E 2011E 2012E Goodwill Other intangibles Property.888 62.051 16.853 11.126 Total Industrial LT liabilities Total Industrial current liabilities Total industrial liabilities 10.143 134 13.592 6.094 25.442 26.393 65.237 4.990 848 620 940 20.897 1.990 229 12.610 1. plant and equipment Other non current financial assets Deferred tax & other Investments in associates/non-consolidated co.984 429 12.619 30.224 17.457 848 620 900 20.099 1.359 12.237 4.500 63.000 65.971 25.245 310 14.483 5.398 57 0% (2.111 1.270 848 620 820 21.646) Gearing Source: Company data.861 7.978 19.975 23.451 30.488 Inventories Accounts receivable Tax & Other receivables/assets Marketable securities Cash Total Industrial current assets Total Industrial assets 6.670 14.077 38.864 529 13.768 68.929 1.009 11.267) 20.812 1.226 14.885 14.720 24.170 25.481 16.289 39.Barclays Capital | European Autos & Auto Parts Figure 192: PSA Industrial and Group balance sheet.947 15.502 14.121 554 772 22.893) 20.051 16.757 2.051 16.312 1.185 18.623 17.870 19.s Total Industrial fixed assets 1.472 1.555 68.355 1.064 848 620 780 21.000 62.951 1.

076) 804 (2.215) (2.360 6.899 103 (197) 7.787) (1.719) (989) 100 0 0 0 (2.472) (1.2% 3.301 590 (22) (167) (5) (2.981 5.010 405 3.608) (1.924) (3.741 0 0 (140) 0 (2.536) 3. Barclays Capital 424 (23) 153 6.374 1.214 6.177) (1.0% 3.215) 6. % Source: Company data.954 918 3.947 0 (455) 0 0 0 2.837) (964) 100 0 0 0 (2.139) 7.Barclays Capital | European Autos & Auto Parts Figure 193: PSA Industrial and Group cash flow.247 PSA cash flow analysis & drivers: Total movement in WC Industrial FCF Group FCF Industrial depn & amort / sales.234 0 0 0 0 1.435 (1.063 0 0 0 100 0 4.9% 4.952) (1.722 2.080) (1.5% 4.362) (2.012) 100 0 0 0 (2.360 1.7% 920 1.069) 78 (2) (25) (79) (3.313 (810) (276) (254) (22) 586 298 372 296 148 4.374 (227) 1.5% 93 1.068 (181) (80) 236 118 4.686 (148) (139) (54) (17) 11 3.0% 3.707) (3.114 1.258) 100 0 0 0 (3.366 (1. % Industrial capex / sales.414 (582) 2.110) (1.0% 1.434 (87) 186 119 702 4.184 140 (1.3% (1.374 6.703) (300) 0 (143) 0 4.5% 4.099) 4.081 (Increase)/decrease in inventories (Increase)/decrease in receivables Increase/(decrease) in payables Movement in provisions/other INDUSTRIAL OPERATING CASH FLOW 63 54 241 66 3.664 (105) (455) 124 (37) 26 2.515 (851) 3.115) 0 0 (140) 0 1.985 0 (455) 0 0 0 1.948 462 2.731 (113) 29 252 3.520) (937) 160 (19) (1) (155) (3.247 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 1.5% 8 December 2009 119 .4% (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 (3.559 (227) (114) (94) (46) 32 3.833) (2. 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) 3.174 Capital expenditure Capitalisation of R&D Proceeds from disposals Investment in companies Investment in shares Other INDUSTRIAL CASH FLOW FROM INVESTING (2.015) (637) (558) 1.405 0 (455) 0 0 0 1.701) (1.9% 1.975) (87) 1.0% 3.924) (789) 156 (7) 11 (280) (2.

0% Automobile EBIT 38% 3. Barclays Capital Figure 198: PSA EBIT mix by division. Barclays Capital Source Company data. Barclays Capital Source Company data.0% 2000 2002 2004 2006 2008 2010E 2012E Autos EBIT Margin % Source Company data.0% -3. 2002A-2012E 6. 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. Barclays Capital PSA Group EBIT Margin % 8 December 2009 120 .0% -1.0% GEFCO EBIT 7% Faurecia EBIT 27% Source Company data. YTD 09 ROW Lat Am 9% 7% C&E Europe 8% Faurecia 20% Autos 70% W Europe 76% Source Company data.0% 1.0% 0. 2011E Banque PSA Finance EBIT 28% Figure 199: PSA EBIT margin %. Barclays Capital Figure 196: Peugeot WE unit sales by model. Barclays Capital -2. 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% 2.0% 4. YTD09A C1 10% C2 / Saxo 4% C3 (incl.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.0% 5.

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. against the near-term low valuation in light of Qatari share sales.370 15.6) 2. 2008-11E (€mn) 2008A 7.466 876 11. 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).76 23 1. we believe that public shareholders in both firms face transactional risk around the future fundraising and eventual merger ratios.00 Price (04-Dec-2009) €47.3 35.4 7.45 187 10.Barclays Capital | European Autos & Auto Parts PORSCHE – MERGER BENEFITS MAY NOT FLOW TO PREF HOLDERS: 2-EQUAL WEIGHT PSHG_p.260 676 10.7 1.362 977 11.912 1. Overall. while most of the value of Porsche is in its VW stake.95 209 10.4) 6. With VW we believe that the ultimate earnings power.51 Potential Upside We are initiating coverage of Porsche with a 2-Equal Weight rating and a €55 price target.2) 7. 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 .74 2012E 8.73 40 3.8x 263.47 2011E 8.29 2010E 7.95 2009E 6. While Porsche’s near-term prospects as a sports car manufacturer are strong in the face of a challenging market. €55 price target We are initiating coverage of Porsche with a 2-Equal Weight rating and a €55 price target.5x (84.61 16% Sales Adjusted/clean EBIT EBIT margin (%) BC EPS € Consensus EPS € Industrial EV/sales (%) Industrial EV/EBITDA P/E ratio (%) 35. reflecting the uncertainties and risks in the next 16-18 months.DE / PAH3 GY Stock Rating 2-EQUAL WEIGHT Sector View 2-NEUTRAL Price Target €55. Figure 200: Porsche – headline data & valuation multiples (at current share price). 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).3x Source: Company data. and we are positive on VW prefs.7 4.094 760 10.8x 2.8x -14. While we maintain a positive stance toward VW prefs (with a 1Overweight and €85 target).81 27 2.8x (53.5x (6. offers better protection against the vagaries of offering dilution and exchange ratios than do the Porsche prefs.3 -14. Barclays Capital *FactSet consensus data 2-Equal Weight.

134 0 96.3% 17% € 8.000 107.000 7.146 37. EBIT margin Incremental margin Incremental EBIT per unit Source: Company data.100 114.204 19.602 62.000 32.920 38.466 7.000 8.260 7.000 22.844 63.204 27.412 1.943 0 97.265 763 75.3% core operating margin for 2008/2009.238 76.162 63. underlying results of the sports car company within the financial speculation company appear strong. revenue fell by a likely €1.7% 10% € 6.000 26.000 109.5% 42% € 43.000 35. The strong performance was likely driven by a richening mix.906 34.000 90.115 18.2% -173% -€ 587.294 977 11.326 1.172 7.200 68.794 102.058 18.568 7.724 7.2bn – indicating incremental margins of 17%.747 31.000 89.070 34.337 1.415 33.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).362 7.954 59.500 23. Adjusted EBIT Adj.800 68.000 17.930 Average selling price (€) Revenue Total operating perf.256 6.826 41.7% 17% € 12.420 116.560 760 10.652 105.000 30.900 33.146 15.800 68.140 27. While about €200mn below the €876mn earned in 2008.0% 77% € 7.379 90.530 876 11.386 34.541 16.912 8.094 6.423 45.517 101.739 69.3% -274% -€ 237.723 6. indicating roughly €675mn of “clean” operating earnings for its sports car operations. Porsche disclosed a 10.889 13.884 0 88.733 21. 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.478 0 98.009 27. 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 18.4% 71% € 52.571 21.370 15.296 1.911 6.000 8. Barclays Capital 8 December 2009 122 .778 676 10.368 7.123 6.539 26.

9bn. page 243) VW fundraising and Porsche transaction timeline However. With €11. 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. the transaction structure has been designed to alleviate Porsche’s debt burden. As this margin expansion (incremental margins of over 70%) is based on VW contributions.000 unit growth in 2009/10. when margins could expand to 15%. In this quarter. In addition. The benefits of the VW modularity would likely not begin until 2012. and with incremental margins of 17% EBIT of €977mn. In 2010/11 (the likely time period for starting the IDS valuation).7%. 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. 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. we expect VW to finalize its purchase of 49% of Porsche AG for €3. if deliverable in physical delivery of shares) and about 65mn from a 8 December 2009 123 . we are looking for 14. and. the financial side of the story was less heartening. 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. by mid 2010. although it is not clear whether Qatar holds actual shares or options shares. closer to the 2001-07 average of 16. with margins reaching 10. driven largely by the Panamera.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. If not. alleviated somewhat when it was able to recapture use of €1.4bn of cash pledged as collateral for its derivatives on VW shares. driven by broader economic recovery.4bn of net debt.000. (Source: Porsche Annual Report 2008/09. 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. Barclays Capital 1% 35% 46% 46% 38% 32% 36% 27% 22% 2007/08 911 Cayenne 17% 2008/09E Panamera Going forward. it is not clear how much of that margin expansion would be shared with Porsche pref holders. as the annual report warns. Porsche disclosed that its liquidity situation was “critical” as of June 2009.9%. if options. units could advance by another 18.

Transaction sequence aimed at stepping down net debt However.9 5. VW is to purchase two assets – 49% of Porsche SE (for €3.9bn.5 -1. beginning with the initial purchase of 49% of Porsche SE. Porsche would also pursue a capital increase of about €5bn.55 EV Porsche SE capital increase (est. 2009 Sale of Porsche SE (4Q09) Porsche capital increase (1H11) Est. After the capital increase. the transaction structure has been designed to alleviate Porsche’s debt burden. 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 €3.8 -7. window likely 11 Mar-15 May) sometime in 1H11 sometime in 1H11 sometime in 2011 VW purchases Porsche Holding Salzburg for €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.8 -1.9bn 11 March 2010 sometime in 1H10 2011 VW FY09 results Potential VW pref issue (est €4bn. in our view.Barclays Capital | European Autos & Auto Parts VW pref issue in 1H10 (assuming €4bn raised at €60/share). Porsche SE (which at that times owns half of Porsche AG and its VW ord shares but has largely paid down its debt).4 3. operating cash flow 09/10 and 1H11 Est. paid to family shareholders of the auto dealer). merges into VW AG. Barclays Capital -11.55bn. Before the merger.5 -2. net debt at time of merger (inc. paid to Porsche AG) and Porsche Holdings Salzburg (for €3. €5bn) Porsche SE merges into VW AG Source: Company data. Figure 204: Porsche merger dynamics to reduce net debt €mn Transaction impact Running total Porsche net debt as of Nov.0 0. with Porsche ord shareholders largely receiving VW ords and Porsche prefs would get VW prefs (although merger details could vary). hybrids and pensions) Source: Company data. likely timed after Porsche/Piech family members receive the proceeds from the Salzburg sale.5 8 December 2009 124 .8 -3. much of the recent weakness in VW prefs. Barclays Capital We expect the VW pref issue at some point following the 2009 results announcement on 11 March 2010.

495 44.840 1. MAN) and subtract net debt. even at a 6x multiple for the SE earnings.647 10.400 1. Figure 205: Value of VW & Porsche operating businesses €mn Starting point – operating businesses and 'external' affiliates 2011 EBTIDA EV/EBITDA multiple 11. and including the value of financial services and MAN leads to an enterprise value of €44bn for VW.828 Net debt (cash) Minorities Hybrid liabilities Pension (after tax) Net value of firm before intracompany ownership per share per ord per pref -18. Porsche would have negative value (but for the VW shares). Step 1: Value of stand-alone operating firms Adjusting for VW's cash balance.Barclays Capital | European Autos & Auto Parts Porsche valuation driven by merger exchange formula As Porsche is basically a holding shell for Volkswagen shares. and add in ‘external’ affiliates (ie.765 6. valuation of Porsche must be in context of a future merger with VW.5x) for the industrial business. while the Porsche pref holders face greater downside risk around terms of the Porsche fund raising and merger valuations.671 9.372 -2. As we review these steps. Barclays Capital 20 8 December 2009 125 .396 35.905 11. we become convinced that VW pref holders face relatively little risk from the future share offerings and mergers.5 x vs historical average of 3. For purposes of this exercise.469 2. we have chosen a low adjusted EV/EBITDA multiple for VW (2. 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). again. For Porsche.161 -€ 7 at discount of Source: Company data. In terms of risks to valuation from these transactions. While Porsche operating business is strong.5x 1. we have chosen to be conservative as this would imply that VW ‘overpaid’ for Porsche SE).0x for a gross operating enterprise value of €10bn (note that this is somewhat below the €12.086 € 108 € 119 € 95 -431 -1. before giving effect to VW’s purchases of Porsche-related assets.020 8.0x VW Porsche Core auto operations Financial services "External" associates Gross value of operating firm and external affiliates less debt 28. or €95 per pref share (at a 20% discount).590 239 10.4bn VW pegged the value of Porsche SE at. we assume 6.

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. Porsche as an operating company has negative value.4bn paid for a 49% equity stake would imply a EV/EBITDA of 7. pref value per share would still be €89.500 -1.027 € 86 20 8 December 2009 126 . Even assuming VW overpaid for Porsche SE by €1.038 3.900 2.5bn (with no public financials we have arbitrarily assumed an overpayment). 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).000 -3.161 -€ 7 3.25bn (as the €12.900 -3.6x vs our assumption of 6. with more than 100% of the value of Porsche shares attributable to its holdings in VW. With the VW shares included (assuming a €102 per share. Porsche would have an indicative value of €86 per share at this point.086 € 108 Porsche -1.0x) and by Salzburg by 1. Also note that at this point.325 15.500 41.Barclays Capital | European Autos & Auto Parts Step 2: Giving effect to VW purchase of Porsche related assets One investor concern is that VW. near our target of €100 for the VW ords). in an attempt to gain Porsche family buy-in to the merger. Barclays Capital 15.724 41.038 -3. 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.

which is near our price target of €55. the shares would be diluted down from €76 to €62.724 45. Moreover. Porsche. Barclays Capital 20 8 December 2009 127 .743 € 62 per share per ord per pref at discount of Source: Company data. our VW price target of €85 can withstand dilution.000 125 € 40 300 4.041 18. even before adding a discount for transaction risk.724 Porsche -298 4. on the other hand. as the offer is likely to be tilted toward the family and other strategic ord purchasers.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.724 € 94 € 103 € 82 5. Were €5bn of shares offered at €40. Figure 207: Effects of fund raising €mn Value after sales to VW (ex cross-holdings) Fund raising VW 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. the need to raise that amount). pref shareholders run some risk of ill treatment. with the stated intention of raising about €5bn (and. given the debt walk down. is more vulnerable to dilution.000 80 € 50 488 45.

8 December 2009 128 . and Porsche SE is overvalued by a factor of 3x. Barclays Capital 20 Even assuming. merger synergies allocated more to VW. At our base case valuations.683 18. that Porsche shareholders get 45% of the combined firm.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. 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. Rating We are initiating coverage of Porsche with a 2-Equal Weight rating and a €55 price target. 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.400 12. and that VW is arbitrarily undervalued. 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. Porsche shareholders would get 37% of the economic value of the merged entity and VW shareholders 63% (roughly in line with ingoing ownership). reflecting the uncertainties and risks in the next 16-18 months.743 % of newco Per share per ord per pref 63% € 94 € 103 € 82 37% € 62 at discount of What if "unfair" 20% 27.291 27. 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. for example. Figure 208: Merger allocation options VW Who brought what to the table: Porsche VW shareholders ex Porsche Porsche shareholders Core business VW stake Total 31.734 22.683 4.Barclays Capital | European Autos & Auto Parts Step 4: Potential risk from relative IDW S1 relative valuations and pref/ord exchange ratios Finally. however.041 31.702 14. However.734 10. Porsche investors may have similar valuation risk were.

Barclays Capital We believe given the fundraising and merger risks that Porsche should trade at 50% EV/sales. when we expect the merger to finalize. 8 December 2009 129 .094 1. we conservatively believe that the company should trade at 3. Recognizing some of the risks inherent in the merger and future dilution.2% -46.1x. at the current market price the share is trading at only 1.6x EV to EBITDA during 2001-07 (before the extensive distortion of its options earnings) – vs 3. At current market price the shares are only trading at 27% 2010E EV/sales on our estimates. Figure 209: Slightly above consensus revenue & earnings estimates 2010E Barclays Capital Consensus Variance Revenue (€mn) EPS (€) 7. and implying a value of €60/share.73 -3.47 7.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. closer to the peer historical average of 43%.2% Source: FactSet consensus.3x. from which we derive a price of €50/share. although rose to 200% as sales dipped in 2009. Looking out to 2011E. An average of both these valuation metrics leads us to set a €55 price target. Barclays Capital EV/EBITDA Historically Porsche has traded at an average of 4. 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.4x for the sector as a whole).332 2.

8x 3.3x 5.3x 13.6 39 1.4) (6.0x 5.0x 0.0x 4.8x -24.3x 4.4x 1.3x 3.5x 310.6x 2.7x (53.5 246 1.2x (2.9x 3.8x (0.6x 3.7) 0.0x 8.9 39 1.1x 0.6 92 3.4x 1.1x 3.1x 0.7 192 1.1x 40 3.Barclays Capital | European Autos & Auto Parts Figure 211: Porsche EV/EBITDA 12.0x 5.9x 209 10.9x 6.0x 6.7x -40.9 122 1.9x 1.8 147 1.5x 263.9x 4.5x 2.6x 1.1x 1.2 152 5.6x 187 10.7 -14 (0.3x (84.5x (2.0x 2.3 136 7.2x 2. The pricing and terms for the equity issuance and future merger are not known at this point.9 44 2. Barclays Capital Risks to price target Risks to our price target are as follows: External risk – macroeconomic factors outside the control of the company.9) -0.0x 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Adjusted EV/EBITDA Source: Company data.9 108 4.6x Industrial EV/sales (%) Industrial EV/ EBITDA Industrial EV/ EBIT P/E FCF yield (%) Price/sales (%) Price/book Dividend yield (%) Source: Company data.1x 3.1 98 5. 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 5.8) -34.2x 2.8x 2.3 137 8.4) -0.7x 10.6x 5.7) (0.6) -14.2 154 9.2) 28.9x 27 2.2x 77 3.9 115 6.7x 3.3) 23.3x 23 1.8 355 21. and may be set in a way that prejudices owners of Porsche pref shares 8 December 2009 130 .0x 2.9x 1.1) 1. Risks from financial transactions – Porsche plans to issue future equity and complete a merger of Porsche AG into VW AG.1 169 2.1 252 3. leading to a stronger demand and pricing environment than we currently assume.0x 1.0x 10.8x 1.8 141 0.6x 3.1 238 1.6x (52.9x 8.8x (99.1x 4.

097 -1.7% -500 477 -4.500 5.300 VW minority at 62.587 127.560 € 68.000 6.47 1.800 127.47 4.190 122.077 829 4.316 137.898 10.140 257 1.500 15.290 100 -3.000 8039 450 729 9.826 6.100 1.744 7.773 -4.600 123.565 9.000 107.0% -3.558 -4.0% 622 10.000 6.6% 3.290 35.0% 650 10.100 4.501 -14.216 122.000 8336 464 766 9.161 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 € 63.7% 977 11.466 7.7% 1.270 5.900 -1.762 4.0% 676 10.170 -1.200 -1.738 -901 -850 1.156 5.100 25.526 15.456 15.026 PBT margin Income taxes Tax rate (on pre-associate income) Net income 114.358 -569 -13.156 1.7% 1.4% 1.8% -2.9% 6.652 75.74 11.960 2.3% 1.200 4.900 5.200 100 6.260 6.477 3.070 1.8% -500 956 -4.36 0.6% 8.600 100 5.800 4.8% 1.172 6232 516 718 7.100 2.177 28.1% 7.0% 2.865 8.74 6.000 8647 478 804 9.0% 667 Adjustments/minority interests Net profit Porsche AG 101 6.505 -788 -710 977 11.526 15.569 60.6% (vs -1.3% -359 35.362 8.500 -1.400 -103.000 114.700 103.294 € 68.4% 1.529 8.215 -3.000 7276 424 662 8.929 9.470 -704 -600 760 10.26 9.912 8.000 107.586 -790 -760 1.29 -14.100 3.0% 158 5.3% 876 11.27 8.0% 310 9.100 100 7.900 100 3.7% -1.613 -800 -790 1.000 5.3% 751 110.370 15.41 8 December 2009 131 .7% 760 10.1% 2.456 -1.760 -1.960 2.979 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 19.800 107.621 9.331 7.10 -0.9% 2.800 2.569 6.456 15.094 7.84 10.4% -82 34.28 0.4% Consolidated Porsche SE income statement (includes VW from 5 Jan 09) 113.615 € 68.926 2.900 -109.700 -103.318 -1.000 -4.0% Consolidated adjusted EBIT Consolidated adjusted EBIT margin 876 11.4% -500 870 -4.826 6.238 89.000 113.8% 6.000 -100.709 103.7% 4.29 2.056 11.000 7781 437 695 8.897 4.300 -116.477 3.322 -600 -60.0% 3.960 -1.200 100 7.300 VW Other operating items VW EBIT VW financial result VW pre-tax -300 3.097 -1.400 118.7% -167 35.783 -1.4% -500 1.0% 8.432 -1.700 5.778 € 69.100 4.95 -900 -2.0% 565 10.73 4.628 127.85 8.066 132.156 5.7% -500 1.370 15.5% -350 35.392 -70.3% 859 8. Barclays Capital 30.500 5.4% -335 35.300 7.400 -700 1.19 -19.400 -3.500 15.501 7.60 7. VW net income -1.800 6.12 0.918 7.200 -1.4% Consolidated PBT Net income EPS ord shares EPS pref shares 8.911 5260 400 600 6.900 3.100 5.75 EPS core op'ns Source: Company data.94 35.900 VW tax etc.564 115.600 -120.900 3.709 103.400 350 -192 417 -107 544 21 572 49 587 64 595 72 VW contribution to Group Units (000s) Revenue 5.43 -1.609 -1.268 € 68.61 7.812 6.500 -300 1.412 € 68.61 0.50?) Consolidated revenues Consolidated EBIT Consolidated EBIT Margin 1.218 9.7% -520 240 -4.Barclays Capital | European Autos & Auto Parts Figure 213: Porsche income statement Year-end July (€mn) Porsche standalone Units 98.674 -838 -820 1.000 6052 412 630 7.100 2.700 -113.964 -1.8% -304 35.420 118.3% 497 -4.300 3.094 2.000 4.466 7.500 -1.962 € 68.270 5.

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. 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.6 2.37 9 1. we believe that this effect is already fully understood in relation to the RNO share. such as the Volvo stake.7 4.30) 2010E 32.1 (10. 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. and would argue that investors can choose more direct US exposure via other names in the global sector. we believe that increased focus on this longerterm potential will boost investor sentiment in the near term.299 6. of late.6 0. While we think that 2009E’s likely alliance cost savings will have been more a gut reaction to the crisis. 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.77 2012E 36.661 206 0. which will include the sale of selected property assets and any non-strategic investments.1) 0.46 8 0.27 11 0. Recent bull arguments for RNO have revolved around access to the early recovery in the US autos market. Barclays Capital *FactSet consensus data 8 December 2009 132 .5 3.23 11 1.74) 9 1.791 212 0. Though we do not expect the full benefits of such a strategy to materialise until 2012E.Barclays Capital | European Autos & Auto Parts RENAULT – POTENTIAL FOR GREATER COMMONALITY DRIVES 1-OVERWEIGHT RATING RENA.959 981 2.62 Sales Clean EBIT EBIT margin (%) BC EPS € Consensus EPS € Industrial EV/sales (%) Industrial EV/EBITDA P/E 2.3 10.00 Price (04-Dec-2009) €35. of waiting for evidence of cost streamlining and thus place very little equity value in the RNBV alliance.3 (3.0 60.5 24.0 Source: Company data. and Nissan’s strong Chinese exposure.9 6. We are therefore initiating coverage of RNO with a 1-Overweight rating and a €42 price target. 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.7 7. 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.23 2009E 32.8 4. we expect much longer-term actions to be in discussion and to start to bear fruit from 2010 onwards. via the Nissan stake. 2008-2011E (€mn) 2008A 37. We are also optimistic that 2010E will herald the beginning of an improved cash management strategy. we believe this leaves plenty of upside potential to the current share price.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.53 2011E 34.020 (863) -2.292 2. 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.59 Potential Upside 18% Figure 214: RNO – headline data and valuation multiples (at current share price). €42.7 (10. implying 18% potential upside from current levels.

there is still scope for additional commonality on B. C & D platforms 2. Barclays Capital 8 December 2009 133 . 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. In the B & C segments.103 1372 745 994 1. The most widespread argument at present relates to the necessity of reaching 1mn units per platform. as a combined group.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.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. From our analysis of current platform capabilities by manufacturer. On a segment by segment basis. For further detail please see valuation section. the two companies stand just ahead of Toyota. with 14% share of total available capacity. 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. 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. 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. and 2% pts behind VW. it would at first appear that the RNO-Nissan alliance is ideally suited to win in this area. Figure 215: Although RNO-Nissan far exceed PSA.

In other words.1% AB Volvo 20. Figure 217: RNO-Nissan alliance structure 44. was formed. RNBV is responsible for the strategic management of the alliance. a joint company incorporated under Dutch law and equally owned by Renault SA and Nissan Motor Co. but also to exploit that scale through common engineering and parts specifications. (RNBV).74% AvtoVAZ 25% 50% 50% NISSAN RENAULT-NISSAN b. we believe that RNO-Nissan have achieved 80% of phase 1 (purchasing/scale) of the modular process.Barclays Capital | European Autos & Auto Parts Achievement of scale but yet to realise commonality potential RNBV has currently achieved 80% of joint purchasing potential. 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). whilst at the same time protecting each company’s autonomy and separate brand identity. Ltd.43% Renault Samsung Motors 80. 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. 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.v. 30% of commonality and only a minimal proportion of potential modular savings As we argued in the front section of this report. 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 . around 30% of phase 2 (commonality) but are only just beginning to experiment with phase 3 (full modularity).v. to gain a competitive edge manufacturers need to not just produce 1mn units per key volume platforms. A further step was taken 28 March 2002 when Renault-Nissan b.3% RENAULT Dacia 99.

However. Cultural differences between the two companies. support functions. with 12 people dedicated to the generation of future synergies and divided between nine key areas: purchasing (RNPO).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. IT. powertrain & vehicle engineering and manufacturing. global logistics. targeting €1. have slowed the process. 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. 12-strong alliance committee reinforces group’s dedication to realizing full potential of alliance . but also lack of driving force from management while auto markets were supportive. powertrain. The strategy focuses on eight key areas for development. common platform & parts.5bn of combined savings. We expect to hear more definitive targets for 2010 and beyond in 1H10E. the harsh realities of a global recession.5bn of RNO-Nissan synergies targeted for FY09 LCV.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. 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. zero-emission business. €678m for RNO. including purchasing. Figure 218: €1. research and advance technologies and global sourcing. we believe. investors believe it has taken too long for management to generate discernable benefits from RNBV. 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. have finally forced management to act. 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. On 29 May 2009 the group presented a detailed strategy for potential alliance synergies in 2009.

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. 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. including four new vehicles in 2009. For instance. 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).475 -1. Nissan Versa. Renault plants currently produce Nissan vehicles in Korea (Almera) and Brazil (Livina). For instance. 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. By 2012E we forecast €150mn of annual savings from this source. Modus. 2. However.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. On a gross level. Micra. 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. SG&A Source: Company data. By the end of 2009 the alliance will cross-manufacture a total of 13 vehicles. At Renault’s investor day back in September 2004 management presented the benefits for the 136 8 December 2009 Industrial EBIT 2009E . we expect these savings to accelerate in the mid-term as new models come online and provide further opportunities for cross-manufacturing. the B platform – the group’s largest comprising models such as the Renault Clio. 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. and Dacia Logan and making up 34% of the total group global production – was the first where management saw the opportunity for commonality. 3. However. Savings from manufacturing & logistics to accelerate Like management. Mexico (Clio) and Spain (Trafic). 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. we expect savings to reduce to just €50mn per annum going forward. In 2009 this increased yet further such that by year end RNPO will cover 100% of purchasing. the original scope of the Renault-Nissan Purchasing Organisation (RNPO) back in 2002 was only for 30% joint purchasing. Barclays Capital 1. whereas Nissan assembles Renault vehicles in South Africa (Sandero).

remains a key area where further synergies must be achieved. However. thus greater scope for future savings. However. following the lack of payback from significant Laguna investments. for €400mn of YoY cost improvement.Barclays Capital | European Autos & Auto Parts new Modus model of sharing components with both the Micra and Clio. further sharing of development costs and manufacturing across the partnership should be a significant benefit. Total commonality at that point was 50% across the Clio/Modus range and 30% across the Micra/Modus.5l diesel engine in Europe. 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 . though again these will be back-end loaded (for further detail see Figure 222). In the field of shared engineering of models across platforms. Although we believe this to be an area with the largest potential for long-term improvement.(38% of total group production in Europe but only 22% globally) we believe there is even less commonality at present. five years on. The new SM5 in Korea in 2010E should help provide shared capacity on this underutilised platform. 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. We believe this area can contribute €200mn per annum in savings for RNO. 8 December 2009 137 .Mégane/Scénic/Qashquai/Sentra etc . 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. 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. there is still a long way to go before full modularity can be achieved across all RNO-Nissan platforms. 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. We see scope for much greater platform commonality in 2010 and beyond. 4. Currently 50% of powertrain components are shared and with increased emphasis on CO2 saving technologies. we believe commonality is still only around 35% in total across all models on the B platform. Even more urgently. we believe. as we believe there is currently very little commonality across vehicles in this segment.

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. to accelerate in future years. With an increased emphasis on electric vehicles. FX and price/mix.892 5.310 Current year automotive clean EBIT (€mn) Industrial EBIT margin (%) (395) (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.060 785 1.475) 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. we expect savings in R&D (particularly in the area of headcount in 2009) and SG&A.8% 1. the ability to share battery technology with Nissan (and its partner SAIC) should generate significant savings for the group. SG&A Other alliance savings Total other alliance savings 144 Total gross alliance savings* YoY change in automotive EBIT 370 489 (975) 1.6 (203) -0. We therefore expect a slight slowdown in savings in 2010E as we are looking for more considered.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. In 2010E we therefore forecast a further €630mn of alliance savings at Renault as per the breakdown provided above. 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. although on a net level many of these will be negated by company specific headwinds.Barclays Capital | European Autos & Auto Parts 5.080 (122) (1. such as volume.100) 176 35 (120) 140 0 (350) (275) 250 Raw materials Price/mix Currency Warranty Renault standalone tailwind/(headwind) RNBV alliance savings: 110 (1.2% Source: Company data.5% -4. 8 December 2009 138 . 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 FY09.263) -2.7% 582 1. 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. Finally.

but the potential that we see the company unlocking in the longer term.9 Source: FactSet consensus. 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.152 183 0.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. our projected gross cost savings and the impact of an improving C segment mix. take us to an above consensus EBIT and EPS forecast for 2010E. We use consensus estimates for Nissan and Volvo associate contribution since both companies are currently non-rated. 8 December 2009 139 . in where we see the company’s results in FY09E or even in 2010E (we forecast a -€203mn Automotive clean EBIT loss in 2010E. The Mégane should also herald the beginning of the modular approach which will eventually be rolled out on all future models. Although there have been recent minor upgrades to market assumptions for RNO’s earnings and to analyst recommendations. For 2010E we expect alliance savings to combine with a ramp up in manufacturing savings. our EPS estimates remain above consensus RNO Group 2010E Barclays Consensus Variance (%) Revenue (€mn) EBIT (€mn) EPS (€) 32. therefore. Indeed. further FX headwinds and weaker overall pricing. we expect the market to gradually give the company more credit for these savings thus providing momentum to the share.53 33. €206mn positive EBIT at the group level). Figure 223: Despite caution on top line. Barclays Capital Despite remaining below consensus on the overall demand equation in 2010E and also factoring in expected raw material increases of €150/vehicle. 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. 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.661 206 0. With firm targets and step-by-step detail on achievability of those targets. However. 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). and how exactly the group plans to realise those benefits.51 -1.6 3.5 12. 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. 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).

5-1mn units behind our own US SAAR assumption.5 4. we again believe that this theme is already well understood by the market. we prefer not to base our bull case purely on this well-discussed theme.00 10. We therefore agree that Nissan’s 7% US market share.0 Buy 140 .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. Figure 225: Analyst earnings assumptions overly cautious 20.000 35% 5. 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).6m units in the US market in 2010E to reach a 12m SAAR. With Nissan historically contributing >60% of Renault group EPS.4% Likewise.000 13. of course Nissan earnings growth will drop down to the RNO bottom line. especially since the Nissan share is publicly traded and can therefore be invested in directly. via its association with Nissan. such that every 1m addition to the US SAAR would bring €1.5 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 1.5 3. Barclays Capital 1.00 -15.83 to RNO EPS. However. 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.0 44% 504 1.00 -5. which we believe is well understood and already priced into the share.0 7.0 3.83 5. Figure 224: Every additional 1m units in US market.5 2. helps our bull case.0 2.400 5.00 5.00 Figure 226: Market ratings too cautious for RNO 5. especially since we are forecasting a recovery of 1.0 4.00 0. 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 -10. this could therefore provide some further upside potential for RNO.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.00 15.0 1.

8 6.4 8. Trafic (ng) Clio (ng).8 44.2 38.3% 0.D Source: Barclays Capital Dacia’s Logan range has been an unmitigated success for the company. Although 2009 was a peak year for RNO’s model cadence.7% 0.6 6.8% 0. the combined RNO-Nissan global market share stands at 9%.0 6.0 31. trade press.9 C .5 29.1 46.6% 0.0 36. 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.3 31.4 42.0 39. should also aid core profitability.0% 0.9% 2. which traditionally make mid-single digit margins for the group.4% 0. Likewise. Mégane CC.5 40. Fluence Dacia Samsung (RSM) SM3 Alpine.6% 8.5% 2.5% 0.7 33.6% 5.1 11. Master.4% 11.2% 4.4% 1. Espace Logan (ng) SM7 Source: JD Power.6% 10.Lower Medium D . Safrane.1% 2.5 79.4 11. 200bp YoY should help boost mix.1% 0. Barclays Capital 20. 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.0 32.4 12.0% 3. new LCV products (Master in 10E.1 81. 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) . Electric City Car.0% 0. making the partnership the third-largest group in the world in terms of sales.6 7.1 82. we believe.6 83. RNO’s strong presence in a segment C set to grow. Laguna (f/l) Logan SUV SM5 Mégane SUV.1% 0.6% 2.8 29.4 31.5% 28.7 39.4% 2.Barclays Capital | European Autos & Auto Parts Youthful product cadence to boost 2010E mix With the benefit of alliance scale.3 82.8 44.4% 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 .Upper Medium Memo: C + D Memo: A .1% 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% 6.8% 0.8% 0.8% 24. company data and BC estimates.4 13.8 31. Figure 228: RNO forecast new model introduction schedule.5 32. f/l – facelift.1 37. followed by Trafic in 2011E).8 32. The new Logan SUV is due to be launched in 2Q10E and should further bulk out the mix of this profitable brand. 2009-2012E 2009E 2010E 2011E 2012E Renault Scénic.0% 5.

2008A-15E Millions 1.4 1. Moreover. 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). the €4bn is likely a gross expenditure.2 0. 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. we believe that the €4bn to be spent on EV development will be spread over 10 years and shared between both companies. Russia should help Avtovaz achieve a lower breakeven point. whilst we do not necessarily credit RNO’s target of 10% market share for electric vehicles by 2020.8 0. 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. Flins and Valladolid. Figure 230: RNO production & cap utilisation vs average for volume market. rather than depending on separate R&D functions at RNO and Nissan).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.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.0 0. 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. In fact the company still targets -20% cut to cash R&D spend in 2009E.6 1.2 1.4 0. Government involvement in the French auto industry has tied RNO’s hands to some degree when it comes to improving its utilisation ratios. Nissan will receive a US$1.6 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. 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. Tennessee. Yet more potential benefits to reap from the conglomerate structure. Indeed. net expenditure is likely to be lower as government incentives (or low cost financing) will to aid the burden of developing electric vehicles. For example. despite its emphasis on EV development. although the company appears to have found ways to gradually phase out full assembly roles at Sandouville.6bn loan from the US Department of Energy to add flexibility to its Smyrna. Also. importantly. manufacturing plant to produce zero8 December 2009 142 . However. such that RNO’s annual R&D spend will only increase by €150mn per annum (8% of current R&D costs). which we expect to ease the cost structure.

000 units at dealers and 160.Barclays Capital | European Autos & Auto Parts emissions vehicles and lithium-ion battery packs. The fact that the company can still target positive FCF even without the aid of these sales. The expansion into electric vehicles will likely boost utilisation rates for existing (non-electric) models at the plant .000 vehicles but even before the downturn was only working at 73% capacity utilisation. Despite a change in payable terms in FY09. has been helped by scrappage-induced sales and also the company’s strong order book going into Q409. 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.000 batteries. 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. we believe.3bn after pension) leaving gearing at 51%. 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. The loan will help finance retooling the 26-year-old plant and build a new facility to manufacture batteries. RNO will struggle to strengthen its balance sheet and return to investment grade debt ratings via operational cash flow alone.2 cars and 3 trucks – thus in reality using the government money to aid core operations as well as new technology investments. the vehicle assembly plant will have the capacity to build 150. Company meetings and recent results presentations reinforce the notion that management are now firmly focused on the need for positive cash generation. When fully operational. Barclays Capital Industrial FCF The company has lined up €700-1bn of assets which it aims to sell in 2010E.000 on the group balance sheet) can be maintained going forward. The plant currently has a capacity of 550. However. The positive FCF target for 2009E was initially set presuming €300-500m of these asset liquidations would occur in FY09. 8 December 2009 143 . with positive FCF in 2009E being a firm target. we feel that the market is not giving enough credit to RNO for its ability to generate strong working capital inflows as production increases. However.3bn of inflows from WC in 2009E. positive Industrial FCF in 2010E also. Of course. with Industrial net debt levels currently at €7. or in other words presuming that the operational cash flow of the business would be a negative €500mn. helping to generate. 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. RNO is likely to generate €2.2bn (€8. The company argues that this new lower inventory level (c150. after €1bn cut to inventory.000 EVs a year and have an annual capacity of 200.000-170.

as political pressure may try to force RNO to inject further funds to the manufacturer.8% stake in Volvo will be the preferred option within the next 12 months RNO is the largest shareholder in Volvo with a 21. we see huge potential for upside from this stake. we anticipate that it would provide a positive catalyst for the RNO stock and aid the group’s longer-term debt reduction. no matter how well anticipated.8% stake. as well as the ability for Renault and Nissan to leverage off Avtovaz’s existing platform. 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 estimate that a potential disposal could generate €3bn of cash at current market levels. With 25% market share in the Russian market. Volvo disposal likely in short term We believe a disposal of part or all of Renault’s 21. 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. believing that the market is not currently crediting the share with sufficient potential for significant Alliance synergies in 2010E and beyond. liquid asset. therefore we expect that it will bide its time for a good exit window. 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. Of course RNO would look to maximise the return on its Volvo investment. with new management in place and a plan to reduce the breakeven point to 400. Avtovaz has been hard hit as the market crashed down from close to 3m vehicles in 2008 to <1. the market can still react positively. and so we believe that a disposal within the next 12 months would be a preferred option. Though management will not confirm the possibility. Unsurprisingly there has already been considerable speculation in the press and investment community surrounding this non-core.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). Rather we expect RNO to provide expertise and scale.000 drop in unit sales. we do not view it as likely that Renault will input any more cash into the Russian manufacturer.5mn in 2009E and was not prepared for the necessary cuts to production caused by a 400. Management have repeatedly emphasised the need to significantly reduce the company’s current debt burden. However.000 vehicles. many press articles have highlighted the likelihood of Renault considering the dispose of this non-strategic stake. when the action happens. but as we have seen in the past with M&A activity of this scale. the resultant broker upgrades will provide 18% upside to the current share price. the company will be well positioned to capitalise on the recovery. We think RNO will stand firm and provide strategic and operational expertise but no further cash outlay. Whilst we believe that the company’s exposure to high growth markets in 2010E via its Nissan stake is a well understood theme. If RNO were to dispose of its Volvo stake next year. we believe that once the company properly discloses its new Alliance targets to the market. and we also remain cautious on the company’s current debt structure. so that when the Russian market finally starts to recover. In the very near term we advise buying into any dips in the Renault share on the back of negative news flow. Rating We are initiating coverage of RNO with a 1-Overweight rating. However. were a buyer to be found.

However. or 18% upside potential to its current market price. 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. 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 also apply a 10% discount to the NAV in line with the average discount that the market has historically applied. 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. Figure 232: Renault is currently trading at a 20% discount to its SotP.

3% of Nissan share price of JPY605.963 7.5x at current share price.Barclays Capital | European Autos & Auto Parts Figure 233: RNO – Our SotP assumption leads us to a 1-Overweight rating and €42 price target NAV. SKr 65. EUR-JPY of 130 20.861 23 21. pre-associate stake) EV/EBITDA (vs 2.0x 0.0x 4. thus on a weighted average combination of both these valuation metrics we derive a €42 price target for the share.373 1.0x 2.6. Historically RNO has traded at an 8-year average of 6x unadjusted (ie.798 11. RNO Renault Auto @ PSA multiple Renault Auto @ PSA multiple Renault Auto Average Renault FS (0.4x for the sector as a whole).s) SOTP (base assumption) TP applying Holding discount Current share price Source: Company data.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. our above consensus EBITDA estimates put RNO at only 4. Sh. We believe that the company should trade closer to its historical level of 6x. EUR-SEK at 10. Figure 234: Renault Group historical EV/EBITDA implies the share is currently undervalued 12.293) (1.0x 10. Barclays Capital €mn 4.518 € per share 18 28 23 6 29 39 10 0.528 7.5 A shares.0x 6. Looking out to 2011E.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.59 Remarks 15% 2011E EV/sales (in line with Peugeot) 2x 2011E EV/EBITDA (in line with Peugeot) 0. which would imply a value of €43/share.4x at PSA and 3.8x book value 44.8x 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. 8 December 2009 146 . when we expect autos markets to have normalised to a greater degree.1 78 -26 -4 -2 1 46 42 35.901 10.9% of Volvo share price of B: SKr66.046) (517) 234 12.635 2.420 (7.0x 8.782 6.

8x 12.8% 13% 1.2x 8.2x 7.6x 9.6% 16% 1.7x 3.7x) 81.0% 11% 1.2% 29% 0.9% 72% 1.2% 10% 0.2x) 1750.5x (2.6x 0.3x -1.3x 8.6x 5.2x 6.8x 3.0% 19% 2.5x 10.5) 24.7x 11.2x 3.6x 0.2x 3.7x 8.3x 7.0x NA 36% 0.1x 3.3x -6.0% 39% 0.6x 3. despite the planned phasing out of European incentives. They believe that Renault's credit metrics will materially improve in 2010 and it can avoid significant cash burn through next year.4% 20% 1.1% 62% 1.2x 9. ie.9% 72% 1. 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. rate Renault Market Weight.6% 10% 1.7x 5.3x 8.6x 1.7x -0.2x (13.0x NA 39% 0.0x NA 35% 0.3x 13.8x 0.7% 42% 0.7x -0.9x (4.4x) 7.7x 8.7x 0.6% 13% 1.8% 11% 1.2x 7.0% 11% 1.0% 19% 2.7x) (3.1x 3.6x (28.7% EV/sales EV/Clean EBITDA EV/Reported EBITDA EV/Clean EBIT P/E FCF Yield Price/Sales Price/Book Dividend yield Source: Company data. Credit perspective Barclays Capital credit analysts.7x 1. They subsequently believe that Renault should be able to justify the ratings agencies' stable outlook.5x 4.6x 3.1% 62% 1.0% 13% 1.7x 0.7x (17.6x 9.5) 24.1% 28% 0.7% 42% 0.6x 5.1% 31% 0. Rob Perry and Darren Hook. 8 December 2009 147 .4x) 65.1x -21.2x (13.6x 11.7x 0.6x) (4.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% 1.1x 3. Barclays Capital Risks to price target Downside risks to our price target are as follows: Risks to our cost commonality assumptions.1x 5.2x 8.0x 7.4x 1.0% 11% 1.1x -21.0x 4.7x 3.5x 10.8x 3.0x 7.9% 32% 0.

4% -2.77 0.7% 22.045) (1.3% 0 1.3% 1.613) 400 60 (150) 166 600 200 0 1.431 800 300 0 3.0% Cost of sales financing Research and development Selling.332 2007 40.1% 3.292 Cost of sales Gross profit Memo: Gross Margin (% of sales) (31.4% 0.830 32.6% 23.292) (1.343) 8.8% -4.5% Financial Services EBIT % Group EBIT % Source: Company data.476) 7. pre dilution) DPS (Euros) Segmental Revenue: Automotive 256.121) (1.661 2011E 34.244 19.6% 2..224 30 2.582) 8.2% -0.063) (3.409 38.0% 1.621 10.063 472 1.161) (2.682 0.9% 1.299 2.Share in NI (loss) of Nissan Motor .850) (4.100 Financial income/(expense) Share in associate net income .299 1.23 3.7% 2.4% (200) 800 6.057) (1.089 34.3% -2.628 (10.756 Minority interest share of NI Net income..238 (329) (117) (400) (1..Barclays Capital | European Autos & Auto Parts Figure 236: RNO Group income statement.230 30.236) (863) -2.288 352 35 2.6% 3.669 28 571 30 (2.831 33.Share in NI (loss) of Avtovaz & other assocs Pre-tax income 1.382 Financial Services Group Revenues Automotive revenue growth 1.3% 4.960 (255) 19% 2.050) 0.3% 2.628 0.60 38.5% 1.791 -7.710 24.263) (150) 56 (150) 831 0 2.8% (29.53 0.408) 9.290 (1.10 258.119) (1.185 22.00 256.0% 2.2% 0.923 40.1% -12.892 Financial Services EBIT Group EBIT Segmental EBIT Margin %: Automotive EBIT % 492 1.9% (300) (1.2% 61 2.6% 22.985) (3.6% 21.354 487 212 400 (863) 409 206 399 981 407 2.738 Other operating income and (expenses) Reported Operating income Memo: Operating income..791 2009E 32.7% 2.770) 212 0.3% 8 December 2009 148 .994 11..989 22.7% 1.463 (1.6% 3.675 -0.23 0.063 2.661 2.734 (162) 50% 599 0 0% (2.0% 2. Renault share 74 2.5% (25.0% -15.757 30. % (186) 877 (116) 1.292 3.041 23.034 37.910 36.963) (4.949) 1.00 256.6% 3.2% (200) 310 2..254 (644) 28% 2.00 256.62 1.263) (203) 582 1.726 NoShares (average) Reported EPS (average shares.613) 0 0% 166 (177) 28% 1.4% 4.776) 6.0% (27.50 256.8% 4.5% (25.3% 2.0% (26.186) 2.2% -0.020 -15.3% 23.814) (4.3% 6.3% 5.219 (1.084) 206 0.215 1.155 (1.659) 8.277 3.858) (4.959 7. Barclays Capital 25.020 2010E 32.0% 76 1.5% -7.870 34.2% 7.888 384 5 3.8% 21. general and administrative expenses Clean EBIT (Operating margin) Memo: Operating margin.3% (31.682 2008 37.30) 0.003 40.3% 2.332 -2.Share in NI (loss) of AB Volvo .552 2.790 32. 2006A-2012E December year-end (€mn) Revenues 2006 40.6% 1.299 6.32 3.274 22.399 Current and deferred taxes Memo: Tax rate Group Net Income (255) 27% 2.898 (1.80 256.956) 981 2.959 2012E 36.8% 486 858 (288) (1.3% 441 437 -3.8% 5.918) 8.989 345 226 (134) 761 (400) (300) (350) (2.132 21.289 (1.6% 3.679 35.354 3. % Memo: Clean EBITDA (985) (1.2% 2.7% 2.886 65 2.850) (4.628 4.9% 0.643) 30 136 30 1.628 10.9% FS revenue growth Group revenue growth Segmental EBIT: Automotive EBIT 2.978) 1.

086 4.192 7.865 Total Industrial non-current liabilities Total Industrial current liabilities Total Industrial liabilities 7.263 12.Barclays Capital | European Autos & Auto Parts Figure 237: Renault Industrial and group balance sheet.391 20.751 15.355 16.369 12.839 3.668 10.7 -17.3% 0.338 19.198 62.286 62.210 1.221 Total Finance Co Assets TOTAL GROUP ASSETS 25.696 4.326 13.167 2.846 1.191) (7.678 1.824 48.338 19.813 517 16.5 -45.010 26.214) Net Industrial debt/EBITDA Gearing Source: Company data.851 25.956 2.985 48.357 46.186 964 523 33.401 527 588 32.788 12.141 11.644 19. 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 16.186 964 523 33.147 26.186 964 523 34.338 19.338 19.106 1.485 10.088) (7.623 1.718 4.605 1.745 2.423 585 603 33.167 2.448 21.106 3.184 1.959 457 21.333 62.0% 2.330 62.918 14.4% 3.949 10.507 7.445 15.916 21.696 1.345 2.573 68.237) (1.189 13.474 63.943 2.053 63.167 2.865 Balance Sheet analysis & drivers Industrial Net Cash (Debt) (2.057) (1.046) (9.644 64.739 547 17.661 64.831 18.745 2.3 -43. Barclays Capital 0.339 15.507 5.330 29.179 5.307 1.212 13.897 46.621 14.943 10.260 21.632 1.803 14.801 4.6 -15.339) (1.084 577 19.144) (3.1% 1.293) (8.198 23.895 18.342 47.186 964 523 34.0% 8 December 2009 149 .927 2.851 23.301 2.558) (1.280 16.046) (8.168) Pension 'Debt' Industrial net debt incl pension debt (1.046) (8.087 13.775 30.306 20.198 16.633 4.831 20.106 4.392 1.182 19.167 2.751 62.261 1.574 1.106 4.697 14.0 -47.186 964 523 33.821 15.207 20.414) (2.305 62.2% 3.846 487 16.645 2.611 29.448 21.605 29.106 4.280) (1.372 68.5 -52.177 1.366 68.192) (3.785 48.804 1.198 20.167 2.338 19.744 15.046) (8.201 27.722 16.963 15.1 -54.045 2.521 45.046) (8.391 20.944) (7.011) (7.862 13.916 21.588 483 23.990) (1. 2006A-2012E December year-end (€mn) 2006 2007 2008 2009E 2010E 2011E 2012E Property.113 Total Finance Co Liabilities Group Shareholder's equity Minority Interests Group Shareholders' Funds TOTAL GROUP LIABILITIES & S'HLDRS EQUITY 23.5% 2.236 Inventories Automobile receivables Other current financial assets Other current assets Cash and cash equivalent Total Industrial current assets Total Industrial assets 5.577 492 24.645 68.

325 1.941) (1.0% 7.440) 0 (3.017) (1.4% (260) (102) 10.820) 0 (2.254 10.524) 0 (3. Barclays Capital (304) (23) 7.438 (1.562 (862) (171) 1. net of disposals Net decrease (increase) in other securities & loans Industrial Cash Flow from Investing 884 23 421 (3.8% 8 December 2009 150 .4% 8.581) (3.588) (664) (22) (33) (719) (995) (22) 0 (1.093) (236) 1.765) (2. 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 2.469) (1.943 (431) 688 (644) 3.129) (3.141) 942 41 652 (2.838) 0 (2.160) (4.676) (895) (2.6% (1.177) (3.875) 600 0 0 (2..180 707 3.440) (943) (2.782) 2.934 0 4.820) 1.603 2.. % Industrial capex as % of sales Source: Company data.768) 3.0% 8.682) (3.050 150 (500) 1.7% 1.668) 936 (185) 4.5% 8.000 0 0 (2.572 (86) (31) 275 0 158 2.507) (1.835 (2.154 3..977) 8.842 Operating cash from Sales Financing TOTAL GROUP OPERATING cash flow (916) 2.934 (181) (64) 164 0 (81) 4.8% 1.347) (3.572 0 2.536) (500) 1.524) 0 0 0 (3.922 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 3.2% (339) (590) 10.044) (50) (2.005 2.186 2.440) 0 0 0 (3.3% 8.172 1.576 584 283 (2.795 3.562) 753 11.420) (912) (2.842 .947) (62) (3.335 1.309 (800) 170 (200) 3.588) 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 (3.654 2.078) (1.049) (60) 0 (1.272) 602 (487) 3.011 7.295 2.Purchase of PPE (net of disposals 2000-2003) Industrial capex (pre-disposals post-2004) (1..865 (1.100) 430 0 4.281 2.043) (4.462) (2.0% 8.528) (3.083 (310) 0 (200) 2.524) (906) (2.548 (300) (300) (102) (402) (200) (328) (718) (918) (200) (611) 843 643 Industrial gross FCF (before WCR) Industrial FCF Industrial depn & amort / sales.2% (273) (2.494 (2.Barclays Capital | European Autos & Auto Parts Figure 238: Renault Industrial and Group cash flow.220) (880) (2.795 41 (192) 0 3.539) (3.048 2.0% 7.258 (393) 3.037 1.Purchase of intangibles .338 0 2.602 556 2.588) Disposals of PPE Acquisitions of investments.340) (4.112 (2.167) 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 (1.604 548 4.295 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) (2.314 3.872) 835 (587) 97 (3.008 (1) (26) 4.338 (231) (27) 7 0 (251) 2.704) 408 954 272 888 200 2.

2 0. 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 8 December 2009 151 .000 29.000 1. YTD 09A Figure 242: RNO EU sales mix 09e vs industry average (%) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 0.35 0.000 0 (1.000 37.000) 2000 Nissan Figure 244: RNO EBIT margin by division.25 0.000 35.000 31.3 0.000 27.000 2000 Dacia 14% Renault 81% 2002 2004 2006 2008 2010E 2012E Automotive Source: Barclays Capital Financial Services Source: Company data.15 0.000 33.000 3.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 41. 2000A-2012E 43.000) (2.05 EExecutive Pickup A .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. Barclays Capital Figure 241: RNO WE unit sales by model.Basic C .000 25.1 0.000 39.000 2.000) (3. Barclays Capital Source: Company data. Barclays Capital Industry avg Figure 243: RNO associate contribution to net income (€mn) 4.

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. 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 2010.40 6.8x 8. These investors should.00 prefs / €100. with the benefit that the maximum loss to a long call or put position is the premium paid.6x 64.94 47 4. we do not view the Porsche merger and attendant financial manoeuvring as posing significant downside risk to VW pref holders.024 2.52 14 2. we recognize that VW is seen as a consensus overweight – yet has been a stock that has repeatedly punished the consensus trade.631 4.2x 26. 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). many investors are loath to enter into a position that could result in substantial losses.62 2.6 11.8 7. Given the erratic movements of Volkswagen’s shares. which lead us to our €85 price target for prefs and €100 for ords (see the valuation section for further details). We value the VW shares based on an average of EV/sales and EV/EBITDA metrics at historical and peer average multiples.3x Source: Company data.8x 102.5x 110.256 3.00 ords Price (04-Dec-2009) €63. consider options as an alternative to the shares. and with a 2-Equal Weight and €100 price target for the ordinary shares.34 6.339 2. At the same time.54 16 2. in our view.316 2.908 2.Barclays Capital | European Autos & Auto Parts VOLKSWAGEN – SCALE TO WITHSTAND PRICE WARS VOWG.94 11. 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). Moreover.DE / VOW GY VOWG_p.96 3.8x 103.4x 14. Key share price drivers: Positives: Global scale and scope. 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. as VW appears to have protected itself against an inordinate amount of net debt on Porsche’s balance sheet.2x 116.50 prefs / €80.1x 11.61 13 2. Barclays Capital *FactSet consensus data 8 December 2009 152 .3 3.DE / VOW3 GY Stock Rating 1-OW prefs / 2-EW ords Sector View 2-NEUTRAL Price Target €85. with leading position in Europe.333 5.51 70 8.5 9.0 1.276 4.204 5.

importantly. VW also has. making it the number one global OEM in terms of total BRIC market share (having 10. the increased ability to exploit its scale through modularity to improve operating results even with increased price pressures.3 4.1 3. with top 2 ranking in Brazil (21% market share) and number 1 position in China with 11% market share. Moreover. Depending on the sales and production accounting -. strong emerging market positions. GM.whether.3 3. the gap to Toyota. 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. we believe that VW has both the scale. Global scale just the starting point The scale arguments for VW are fairly well known. VW’s dominant European and leading global scale provide the starting point for its strategy.8 2009E 8 December 2009 153 .2 5.6% share vs. or narrowed significantly. VW’s dominant market position in Germany.4 3.0 6. albeit due to the hit Toyota has taken in the US market relative to the buoyancy VW enjoyed from the German scrappage programmes.VW is either the largest or second-largest automaker in the world.4 2.6 4. VW has either surpassed.8 6.6 7. the next highest at 9% and RNO-Nissan at 8%).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. for example.1 6. and in the C segment across Europe.6 5.1 6.2 3.0 4. and.6 4. to include various distantly-affiliated joint venture subsidiaries -.1 5. Barclays Capital 2. may give it some ability to resist deep price cutting.

7% 0.0% 4.6% 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.4% 2.3% 0.9% 4. Barclays Capital 5.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 20.4% 19.1% 2.4% 0.6% China 11.8% 0.0% 3. Barclays Capital 2012 8 December 2009 154 .9% 6.9% 1.1% 4.0% India 1.2% 7.2% 7.1% 0.0% 4.5% 2.2% 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.9% 10.7% 0.2% 6.1% 3.0% 0.0% 5.1% 0.4% 9.2% 0.5% 0.6% 0.0% 0.4% Russia 4.0% 0.5% 0.4% 5.1% 0.9% 0.4% 28.9% 8.2% 2.0% 0.1% 5.6% 12.8% 24.0% 0.7% 2.9% 2.0% 0.5% Total BRIC 10.6% 0.5% 0.1% 0.

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

with over 2mn units in 2011.352 1.946 1. with close to 2mn units in 2011. Figure 250: Global production of major B segment platforms by OEM (000s units) – 2011E 2.460 1. with 1.426 1.215 796 596 378 1.814 1.369 1.788 1. Barclays Capital Asia Middle East/Africa North America South America 8 December 2009 156 . Barclays Capital VW trails Hyundai only slightly in the C segment. VW. is likely the leader when volume and commonality are considered together.103 1.112 926 745 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.5mn units.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. C and D.372 1. we believe they have little commonality across vehicles.132 1. Figure 251: Global production of major C segment platforms by OEM (000s units) – 2011E 1.Barclays Capital | European Autos & Auto Parts VW already has top-three segment scale in B. While Nissan-Renault have the largest scale in the B segment.

200 600 300 9. As Audi rolled out its MLB platforms. VW has the potential to reach 6mn units on the single platform across B.5% 5. VW estimates up to one year shorter design cycle – so even if the product cycle remains at 4 -5 years. the modular approach can cut time to market by eliminating redesign steps in new vehicles.1%. Barclays Capital 8 December 2009 157 . albeit with lesser scale. In addition.1% Audi operating margin Source: Company data. While less discussed for brand purposes. as VW has demonstrated with the Polo mid-cycle reengineering.700 2. leverage modularity across its product lines). some evidence of the potential success of MQB can be seen in the Audi results because Audi led the Group in modularity. 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.Barclays Capital | European Autos & Auto Parts As MQB is rolled out.8% 5.1% 8.3% 4.0% 8. Beyond cost saves. Audi’s leverage of the MLB platform provides a significant competitive advantage in the premium segment (although we believe BMW will. VW may have opportunities to use common components even before vehicles are completely redesigned.6% 4. MQB could enable roughly 60-70% parts commonality among VW's volume brands.9% 5. 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.900 10.300 Total Source: Company reports. 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 6.9% to 8.200 While early in VW volume implementation. VW could save up to €7-10bn from its 2008 baseline costs (well above what we have included in our model). its margins expanded from 4. C and D and related CUV/MPV segments.300 8% 8% 10% 10% 10% 15% 500 200 6. Figure 252: Potential additional cost savings through modularity 2009 spend Savings potential % Savings potential €mn R&D in income statement Engineering Materials 5.3% 4.900 62. Barclays Capital 6. Savings from modularity will help both in ER&D and in ongoing unit costs. Overall.

800 is considered concentrated.Small Other 158 F VW group Source: JD Powers. while a market over 3. which is the sum of the squares of the market shares of the participants. 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 . Barclays Capital 20% C 25% 30% 35% While we remain concerned about price wars post-scrappage in Europe.000 would be a one-layer market (10000 = 100*100 ).Upper Medium SUV Van B . 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. Barclays Capital 8 December 2009 G Industry avg . The German C segment and D segments are among the most concentrated markets in Europe. with its corporate volume tilted toward C. A market over 1. Note we measure concentration using the Hehrfindal-Hirschman index (HHI). while a two-player market with each player at 50% share would have an HHI of 5000 (= 50*50 + 50*50).Basic Pickup MPV C . An HHI of 10.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.Lower Medium D . beginning in Germany where scrappage programmes first ended.000 is considered highly concentrated. we believe that VW’s dominant position in Germany offers some protection.

>3000 highly concentrated Source: JD Powers. Across the auto business. 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. with overall operating profit up just €300mn. in 2006. VW leads in all other volume segments except for A and MPV. Industrial EBIT flat in 2010 but recovering in 2011 and 2012 Given the post-scrappage pressures in 2010.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. with over 50% share in 2009. largely due to improvements in financial services as the credit crisis and residual value issues fade. in part because VW used Golf as a scrappage programme leader. In a more normal year VW still dominates the segment. 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. 8 December 2009 159 . Barclays Capital analysis VW dominates the C segment in Germany.4bn progress on product and fixed-cost reduction as modular strategies are further spread. we expect that post-scrappage VW will attempt to moderate direct cash incentives. >1800 considered concentrated. Going forward. we expect the slight improvement in mix to be offset by volume and pricing pressures. currency to continue unfavourable but continue €1. for a cumulative positive of €600mn year to date. VW has posted positive pricing (in its revenue walk) every quarter in 2009. its C share amongst volume players was 44%. instead using bundled offers and let other fight heavier incentive wars. we do not expect a sharp recovery in earnings.

7 -0.2 0.2 -0.1 0.1 5. again leaving room conservatively for pricing pressure.3 -4.1 0.0 2.1 -1.3 -10 -498 -127 Porsche merger valuation risks do not detract from value Despite VW’s strong business operating positions.3 0.4 -0.1 -0.1 4. to much of the recent weakness in VW prefs. in our view.Barclays Capital | European Autos & Auto Parts We expect cost cutting to continue through 2012.5 0.1 0.3 278 4. the VW rights issue will be close to current market price. while subject to modification.0 -0.4 0. and further assuming that VW shareholders receive an ‘unfairly’ low share of the combined entity. 8 December 2009 160 .500 per unit operating profit improvement in 2011 and €1. In 2011 and 2012.000 in 2012. we expect volumes (ex China) to improve. 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 6.4 1.3 0. 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.9bn.3 0.8 0.1 -0. 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. although we are only modelling a €2.1 -0. if deliverable in physical delivery of shares) and about 65mn from a VW pref issue in 1H10 (assuming €4bn raised at €60 per share).6bn of cost reduction.3 0.0 0.3 293 Current year operating profit memo: volume delta units 000 Source: Company data. even assuming arguendo for stress testing that VW has overpaid for Porsche AG and Porsche Holdings Salzburg.0 0.0 0. by mid 2010.2 1. is becoming increasingly clear. but note that between 2009 and 2012 we have included €4. VW fundraising and Porsche transaction timeline The Porsche-VW transaction timeline. we believe that there is not significant downside to our €85 price target.3 2. we expect VW to finalize its purchase of 49% of Porsche AG for €3.3 -0.1 0. 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.5 0.1 6.2 2. In addition.6 -0. In this quarter.2 0.8 1. However.0 0. conservatively well below the €7-10bn potential described in the prior section. 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. if options.2 2. and. although it is not clear whether Qatar holds actual shares or options shares. Barclays Capital 6.

paid to family shareholders of the auto dealer).5 x vs historical average of 3. Hypothetical overpayment and dilution would not detract from €85 target value In terms of risks to valuation from these transactions.9bn 11 March 2010 sometime in 1H10 2011 VW FY09 results Potential VW pref issue (est €4bn. After the capital increase. MAN) and subtract net debt. and add in ‘external’ affiliates (ie. Step 1: Value of stand-alone operating firms Adjusting for VW's cash balance. €5bn) Porsche SE merges into VW AG Source: Company data.55bn. 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. For purposes of this exercise. with Porsche ord shareholders largely receiving VW ords and Porsche prefs receiving VW prefs (although merger details could vary). we have chosen to be conservative as this would imply that VW ‘overpaid’ for Porsche SE). again.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. 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). before giving effect to VW’s purchases of Porsche-related assets. Barclays Capital We expect the VW pref issue at some point following the 2009 results announcement on 11 March. Before the merger.0x for a gross operating enterprise value of €10bn (note that this is somewhat below the €12.4bn VW pegged the value of Porsche SE at. For Porsche. Porsche would also pursue a capital increase of about €5bn. likely timed after Porsche/Piech family members receive the proceeds from the Salzburg sale. VW is to purchase two assets – 49% of Porsche SE (for €3.9bn. paid to Porsche AG) and Porsche Holdings Salzburg (for €3. 8 December 2009 161 . we have chosen a low adjusted EV/EBITDA multiple for VW (2.5x) for the industrial business. and including the value of financial services and MAN leads to an enterprise value of €44bn for VW. window likely 11 Mar-15 May) sometime in 1H11 sometime in 1H11 sometime in 2011 VW purchases Porsche Holding Salzburg for €3. or €95 per pref share (at a 20% discount).55 EV Porsche SE capital increase (est. we assume 6.

Even assuming VW overpaid for Porsche SE by €1.372 -2.590 239 10. MAN) Gross value of operating firm and external aff.495 44.396 35.765 6.4bn paid for a 49% equity stake would imply a EV/EBITDA of 7. Barclays Capital 20% Step 2: Giving effect to VW purchase of Porsche related assets One investor concern is that VW.905 11.6x vs our assumption of 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).161 -€ 7 at discount of Source: Company data. Porsche as an operating company has negative value. less debt 28.828 Net debt (cash) Minorities Hybrid liabilities Pension (after tax) Net value of firm before intracompany ownership per share per ord per pref -18.086 € 108 € 119 € 95 -431 -1.25bn (as the €12.469 2.647 10.671 9. with more than 100% of the value of Porsche shares attributable to its holdings in VW. 8 December 2009 162 .020 8.5x 1.0x VW Porsche Core auto operations Financial services "External" associates (ie.0x) and by Salzburg by 1. pref value per share would still be €90.5bn (with no public financials we have arbitrarily assumed an overpayment).400 1.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. Also note that at this point.840 1. in an attempt to gain Porsche family buy-in to the merger.

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 14.724 41. for an issuance of 80mn new pref shares. enough to fund the initial Porsche purchase for €3.000 80 € 50 488 45.724 45. The resulting dilution would be €8 per pref share. that is.500 -1. nevertheless we assume that €4bn is raised at €50 per share.900 2.038 3.724 Porsche -298 4.161 -€ 7 3.027 € 86 20 Step 3: Giving effect to potential dilution from fund raising Another investor concern is around dilution around the planned pref offering in 1H10.000 -3.9bn (although the EGM has authorized up to 135 mn additional shares).000 125 € 40 300 4. While there is some possibility VW postpones any offering.086 € 108 Porsche -1.724 € 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.500 41. 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 44.325 15. Barclays Capital 15.041 18.743 € 62 € per share € per ord € per pref at discount of (%) Source: Company data.900 -3. in our view.724 € 94 € 103 € 82 5. We believe that VW will seek to raise about €4bn.038 -3. while still leaving value at €82 per share. Figure 262: Effects of fund raising €mn Value after sales to VW (ex cross-holdings) Fund raising VW 41.

734 22. 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. Porsche shareholders would receive 37% of the economic value of the merged entity and VW shareholders 63% (roughly in line with ingoing ownership). 8 December 2009 164 .683 4. Moreover.734 10.683 18. we do not view the Porsche merger and attendant financial manoeuvring as posing significant downside risk to VW pref holders.743 % of newco € per share € per ord € per pref 63 € 94 € 103 € 82 37 € 62 at discount of (%) What if "unfair" 20 27. would only dilute VW pref value to €72 – in part because any undervaluation of VW shares detracts from Porsche share value. and Porsche SE is overvalued by a factor of 3x.Barclays Capital | European Autos & Auto Parts Step 4: Potential risk from relative IDW S1 relative valuations Finally. 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 31.041 31. as VW appears to have protected itself against an inordinate amount of net debt on Porsche’s balance sheet. that Porsche shareholders get 45% of the combined firm. 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). with a 2-Equal Weight and €100 price target for the ordinary shares. and that VW is arbitrarily undervalued. however. 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. 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.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.400 12.291 27. At our base case valuations.702 14.

especially as we remain only just above consensus on our top-line estimates for 2010E. Figure 264: Slightly above consensus revenue & earnings estimates 2010E Barclays Consensus Variance Revenue (€mn) EPS (€) 102. We believe that the current VW pref share price significantly undervalues the share based on this valuation metric. 8 December 2009 165 . still well below the 2001-05 range. from which we derive a share price of €80 for the prefs and €95 for the ords.2% Source: FactSet consensus.5x adjusted EV to industrial EBITDA (vs 3.908 3.437 3.7x.3x at the current share price. Recognising some of the risks inherent in the merger and future dilution. we conservatively believe that the company should trade at 1. our estimates put VW at only 1.63 0. EV/sales VW prefs have historically traded at an eight-year average of 40% industrial EV/industrial sales.96 102. Looking out to 2011E.4x for the sector as a whole).5% 9. Barclays Capital We believe that VW should trade at least at 25%. 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.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. 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. although rose to 66% as sales dipped in 2009. when we expect auto markets to have normalised to a greater degree.

8x 3.9 40 1.9x 10.4 55 1.5x 11.1x 3.5x 11.1 34 1.4x 10.2x 10.5x 6.9 66 2.4 55 1.1x 16 2.1x 2.1x 14 2.9x 52.4 36 1.8x 3.9x 1.8x 9.1x 5.1x 1.4x 17.7x 62 7.1x 1.8x 22 2.4 34 0.9x 40.3x 4.8x 5.0x 8.9 29 0.3 72 2.1x 34.3x 4.8x 70 8.9x 25 3.8x 24.0x 8.3x 11.Barclays Capital | European Autos & Auto Parts Figure 266: VW has historically traded around 3.0x 64.3x 2. Barclays Capital 8 December 2009 166 .5x 7.1x 2.1x 26.2x 7.2x 1.8x 9.7x 1.8x 2. Inherent in our valuation is a 20% spread between the prefs and the ords.7x 7.7x 7.1x 34. following likely DAX inclusion.6x 9.2x 22.7x 60 5.1x 6. which is below the historical 35% discount.8x 60 5. 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. as well as limited effective voting rights for the surviving public ord shares.3x 4.9 66 2.4x 17.2 33 0.3x 12.9x 14.8x 21 2.0x 13 2.4x 74.3 72 2.1x 5.8x 6.0 85 2. With the pref shares becoming the primary trading vehicle going forward.7x 4.8x 27 4.8x 2.1 31 0.1x 6.6x 7.8x 47 4. we believe the discount should narrow.8x 47 4.9x Industrial EV/sales (%) Industrial EV/ EBITDA Industrial EV/ EBIT P/E FCF yield (%) Price/Sales (%) Price/Book Dividend yield (%) Source: Company data.4x 10. 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.7x 9.5x 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.4x 1.

8 December 2009 167 . purchase assets from Porsche and Porsche family companies. 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. 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.Barclays Capital | European Autos & Auto Parts Figure 268: After peaking at -90% Nov 08. dipping as low as 90% -. and may be set in a way that prejudices owners of VW pref or ord shares.any return to ‘abnormal’ discount levels would put our pref target at risk. could make our forecasts difficult to achieve. leading to an even weaker demand and pricing environment than we currently assume. 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. Risks around pref/ord discount: the pref to ord discount has been volatile. Risks from financial transactions – VW plans to issue future equity.

consider options (with equal notional) as an alternative to the shares. January at-the-money (ATM) call options on VW preferred shares can currently be bought for an implied volatility of 50%. Additionally the planned issue of new preferred shares could weigh on the share price. London Abhinandan Deb +44 (0)20 777 32481 abhinandan. delta 55% 8 December 2009 168 . a long position in the preferred shares has the disadvantage of being fully exposed to any event that weighs on the share price. the preferred are likely to rise during a membership change. London Arnaud Joubert +44 (0)20 777 48344 arnaud.com Barclays Capital. but losses are capped at the relatively low premium. Under this rule VW ordinary shares would exit membership of the DAX. 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. in our view.deb@barcap.com Barclays Capital.bennett@barcap.4 (6. VW preferred share Jan10 €64 call indicative offer: € 4. 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. with the benefit that the maximum loss to a long call or put position is the premium paid. usually two trading days after the announcement. 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.com Barclays Capital. and VW preferred shares (as they are the top member of November’s selection list) would replace them. Such a position benefits from offering exposure to any upside in the preferred shares. London If Qatar exercises its Dec09 expiry call options on Volkswagen’s ordinary shares. For instance should Qatar roll its call option position to a later expiry. These investors should.joubert@barcap.8%). As a large number of index trackers would have to buy the preferred shares. we see substantial upside to the strategy. ref €64. 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. a discount to the current 61% three-month realised volatility.com Barclays Capital. As we have a €85 target price on the VW preferred shares. we see potential downside to the preferred shares.4. London Anshul Gupta +44 (0)20 313 48112 anshul.gupta@barcap. or if Qatar disposes of its remaining VW preferred share stake after the 31 December 2009 lock-up expires.

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

196 11.271 2.4% € 4.93 € 1.584) 6.608 3.855 -1.1% 106.355 13.521 -96 4.210 374 3.752 14.716 Minority interest Net profit attributable to shareholders -1 1.942 1.3% 12.431 12.476 46 1.897 92.86 388 96.120 65 4.774 5.259 -759 6. Barclays Capital 9.727 (1.1% 11.969 12.707 923 30% 2.133 -82 3.170 90.184 29% 2.400 2.5% 10.632 14.90 € 1.220 -1.708 201 -590 -389 2.34 € 1.421 37% 4.102 17.6% 910 -635 275 6.151 13.178 14.6% 734 -342 5.489 -1.315 3.121 -745 5.18 € 4.254 41% 3.967 29% 4.64 € 2.18 € 4.402 15.985 15.623 12.2% 614 -1.751 1.07 € 1.00 € 2.899 105.409 -795 2.866 99.299 12.620 Earnings per ord share Diluted earnings per ord share Earnings per pref share Ordinary Dividend Preferred Dividend Number of Shares Automotive Income Statement: € 5.29 € 1.8% 9.219 -692 1.668 29% 4.440 (1.636 3.009 -501 29% 1.8% 12.43 € 10.603 16294 15.2% 12.138 15.31 € 5.96 404 94.533 92.99 394 98.03 € 5.363 (2.27 € 11.27 € 11.485 12.3% € 11.006 500 4.094) 3.194 5.347 809 -560 249 5.562 Financial result Automotive Profit before tax 280 5.35 € 1.543 Income tax expense Tax rate % Profit after tax (162) -9% 1.505 29% 3.98 € 11.207 -618 29% 1.49 € 10.016 12.764 15.503 12.88 € 1.321) 6.492 354 2.6% 500 -1.31 € 5.931 Automotive EBITDA EBITDA margin % Source: Company data.078 14.737 14.Barclays Capital | European Autos & Auto Parts Figure 270: Volkswagen Group and Automotive income statement.67 € 8.2% 116.41 400 94.16 412 111.495 2.5% 8 December 2009 170 .009 11.23 € 2.887 -2.920 29% 4.612 17196 15.739 1.10 € 2.7% € 5.670 -68 2.2% SG&A Other operating expense (income) Operating profit Operating margin % Equity income Other financial result 11.9% 5.17 € 1.867 5.603 1.7% 375 -1.960 (2.06 408 104.92 € 11.501 9.478 14.631 29% 3.2% 108.811 18.839 13.683 Financial result Profit before tax -216 1.2% 124.571 10.8% 10.428 5.2% Sales revenue Gross profit Automotive gross margin % SG&A Other operating expense (income) Operating profit Automotive operating margin % Equity income Other financial result 10.106 275 -601 -326 4. 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 % 104.004 12.020 13855 13.7% € 10.0% 113.2% € 11.955 2.914 18.9% 12.124 4.753 -37 1.474 Income tax expense Auto tax rate Automotive Profit after tax Memo: -513 38% 834 -2.2% 580 -300 -392 1.793 392 6.80 € 1.2% 12.108 5.132 16.875 91.808 96.333 12.108 11.006 5.5% 106.169 12.6% 12.294 (2.688 930 35% 1.040 400 -612 -212 5.3% 281 -994 -712 3.677 527 -1.154) 5.431) 6.954 -2 4.555 13.3% 11.6% € 8.871 15.201 1.36 398 102.7% 13.032 16.844 500 2.858 500 5.30 € 1.00 € 5.122 1.67 € 8.365 4.

Production and EBIT by division.892 104.299 570 270 5 281 47 1.901 483 5.Barclays Capital | European Autos & Auto Parts Figure 271: VW Group Revenues.7% -9.648 1.194 Financial Services Group Operating income Operating margin 843 5.6% 1.449 634 298 6 289 49 1.1% -47.6% 1.2% 5.7% 8.865 -32.8% 1.193 94.517 7.6% 8.168 6.139 5.365 2.3% 916 3.6% -5.7% 10.2% 2.9% 6.2% 4.252 6.164 566 322 4 267 43 1.720 7.872 111.026 5.151 2.3% 4.1% 11.8% 1.607 3.347 3.440 1.1% 6.336 5.383 -631 5.155 533 282 4 272 45 1.960 5.6% 2.113 5.918 96.495 2.402 77.084 9.879 66.705 712 8 155 305 NA 2.213 Volkswagen Audi Skoda SEAT Bentley Commercial Vehicles Scania Remaining Companies and other Automotive Operating Income 918 2.2% -27.710 31.2% 1.0% -1.9% 8.8% 0.5% 0.299 73.451 1.853 65.478 3.5% 4.217 38.2% 2.204 465 -285 -171 41 170 -650 5.720 5. Barclays Capital 1.687 1.2% -2.3% 4.196 1.289 1.319 3.323 6.5% 4.054 515 -159 137 138 NA 1.579 -25.471 2.092 NA 73.004 5.156 NA 694 5.2% 5.617 8.060 3.151 -29.3% 3.186 5.9% 10.167 NA 3.9% 0.555 1.400 1.039 5.269 4.752 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: 3.940 2.2% -47.139 562 419 10 388 NA 3.387 1.200 620 411 10 427 NA 3.317 2.7% -6.7% 1.195 4.899 1.811 -28.772 565 -78 10 375 417 -1.9% -19.226 1.341 94.966 NA 3.139 -25. Unit Sales.315 4.4% 5.4% 7.969 6.136 4.004 -33.840 3.2% 1.5% 1.280 2.6% -2. 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 70.275 626 375 8 439 31 989 5.490 1.2% 2.774 -63 4.138 6.6% 0.591 5.5% 1.874 1.133 862 6.760 30.3% 8 December 2009 171 .631 NA 3.021 271 -319 -228 -13 84 -600 2.262 6.832 7.196 8.2% -0.0% 8.476 30.2% Volkswagen Audi Skoda SEAT Bentley Commercial Vehicles Scania Financial Services Automotive Operating Margin Source: Company data.3% 6.607 5.296 6.942 3.7% NA 957 6.863 1.861 8.928 34.024 7.664 1.930 6.998 3.272 6.385 98.3% NA 905 6.944 33.345 3.600 343 -344 -194 13 126 -650 4.2% 5.715 2.660 930 5.858 -27.9% 3.5% 7.2% 1.1% 7.704 34.192 6.297 NA 72.738 705 6.2% 1.879 335 -228 -228 -113 168 -800 2.1% 2.340 8.376 9.446 5.0% -8.511 479 5.036 102.

570 22.342 3.376 17.505 -46 4.145 -88 10.681 31.685 -46 11.820 40.452 -88 8.326 -46 12.286 90.333 1.433 22.146 54.570 28.002 47.758 68.336 14.927 38.468 21.556 103.384 21.600 313 0 11.084 13.484 21.843 3.684 20.024 51.144 34. 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 13.238 28.912 58.024 163 0 11.822 1.Barclays Capital | European Autos & Auto Parts Figure 272: VW Automotive balance sheet.590 17.440 103.002 46.443 98.002 48.900 63.901 34268 72085 39190 76754 42370 88748 51.240 14.206 36.996 14.561 -88 12.114 68.022 38.002 50.112 3.959 15.805 263 0 11.584 16. Barclays Capital 8 December 2009 172 .727 29.159 18.905 5.384 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 14.860 18.677 1.349 101.259 20.731 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.059 17.195 18.234 17.790 19.319 -46 5.240 14.388 17.007 3.417 90.654 -88 15.852 213 0 11.642 39.905 5.513 36.348 15.570 30.608 1.240 14.570 21.733 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 30.905 10.683 43.394 16.582 32.218 101.400 18.335 98.905 5.

947 2.937 7.684 24.218 -447 -5.170 131 -199 8.298 7.580 -5.213 -2.218 4.795 50 0 0 0 -10.290 7.844 100 0 100 0 -51 -2.675 -2.878 -5.398 21.314 13.680 132 591 11.737 -1.848 8.520 1.477 5.404 -6.336 -2.336 3.474 -1.517 -1.519 -9.227 Change in working capital Inventory Receivables Liabilities Change in other provisions Cash flow from operations 4.429 99 190 11.091 Automotive cash at EOP Securities and loans Gross automotive liquidity Total third-party borrowings Net automotive liquidity Source: Company data.721 13.269 20.439 4.204 496 942 1.457 -6.100 382 8.367 -2.786 12.500 -6.901 3.092 1.973 6.555 -1.478 -57 934 7.318 -5.902 5.070 2.773 -1.677 -1.117 5.564 9.846 1.178 -2.112 407 Change in investments in securities Cash flow from financing Exchange rate.484 24.984 -2.219 -555 2.196 100 10.455 13.598 2.762 246 -384 7.631 8.707 -1.194 20.106 -618 9.644 -1.020 -10.610 50 0 0 0 -9.008 100 4.679 13. 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 7.394 3.926 573 12.745 1. Change in auto cash -998 -3.133 -81 -1.194 15.357 50 0 0 -8.639 5.506 13.996 3.075 11.083 -587 7.279 8.893 10.298 -7.202 1.215 1.762 -2.191 -6.216 -277 297 -2.020 -4.386 0 4.770 8.491 5.892 -9. etc.590 4.656 5.879 -2.478 -50 -114 -1.105 -7.650 -2.311 -9.925 2.047 15.285 -5.040 -2.951 -202 -6.831 100 5.384 25.184 7.431 -6.527 -4.130 1.340 16.684 0 507 21.562 -1.107 2.328 100 -4.039 160 11.Barclays Capital | European Autos & Auto Parts Figure 273: VW Automotive cash flow.166 -197 -15 79 -7.571 2.519 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) -3.597 10.038 13.172 8.040 -1.584 20.089 -118 701 431 3.771 4.218 2.688 -1. Barclays Capital 8 December 2009 173 .194 19.668 -672 109 4.982 0 -3.446 -80 251 -869 -2.

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

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

An average of both these valuation metrics leads us to set a €85 price target for the preference shares. We believe that VW should trade at least at 25%. 2) EV/EBITDA . still well below the 2001-05 range.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: 1.7x. in our view. when we expect the merger to finalize. especially as we remain only just above consensus on our top-line estimates for 2010E. EV/sales.6x EV to EBITDA during 2001-07 (before the extensive distortion of its options earnings) -.vs 3. could make our forecasts difficult to achieve. as well as limited effective voting rights for the surviving public ord shares. dipping as low as 90% -.Historically Porsche has traded at an average of 4. Looking out to 2011E. EV/EBITDA . which is below the historical 35% discount. at the current market price the share is trading at only 1. Risks which May Impede the Achievement of the Price Target: Risks to price target The main risks to our price target. We believe that the current VW pref share price significantly undervalues the share based on this valuation metric. The pricing and terms for the equity issuance and future merger are not known at this point. Looking out to 2011E. implying a value of €90 for the prefs.4x for the sector as a whole). from which we derive a share price of €80 for the prefs. at may be set in a way that prejudices owners of Porsche pref shares Source: Barclays Capital 8 December 2009 176 . leading to a stronger demand and pricing environment than we currently assume.Porsche prefs have historically traded at an eight-year average of 100% EV/sales.historically VW has traded at an eight-year average of 3. and complete a merger of Porsche AG into VW AG.VW prefs have historically traded at an eight-year average of 40% industrial EV/industrial sales. and implying a value of €60/share. 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. we conservatively believe that the company should trade at 3. Recognizing some of the risks inherent in the merger and future dilution. Inherent in our valuation is a 20% spread between the prefs and the ords. An average of both these valuation metrics leads us to set a €55 price target. At current market price the shares are only trading at 27% 2010E EV/sales on our estimates.4x for the sector as a whole). we believe the discount should narrow. from which we derive a price of €50/share. although rose to 200% as sales dipped in 2009. although rose to 66% as sales dipped in 2009.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 . With the pref shares becoming the primary trading vehicle going forward. could mean the company exceeds our forecasts. following likely DAX inclusion.Barclays Capital | European Autos & Auto Parts Valuation Methodology and Risks Volkswagen AG-PFD Preferred (VOW3 GY / VOWG_p.any return to 'abnormal’ discount levels would put our pref target at risk Porsche Automobil Holding SE (PAH3 GY / PSHG_p. leading to an even weaker demand and pricing environment than we currently assume. The pricing and terms for the equity issuance and future merger are not known at this point. 2. and may be set in a way that prejudices owners of VW pref or ord shares. We believe given the fundraising and merger risks that Porsche should trade at 50% EV/Sales. are: 1) External risk – macroeconomic factors outside the control of the company.3x at the current share price. 3) Risks around pref/ord discount: the pref to ord discount has been volatile. At current market price the shares are only trading at 14% 2010E EV/sales on our estimates.1x. 2) Risks from financial transactions – VW plans to issue future equity. closer to the peer historical average of 43%. we conservatively believe that the company should trade at 1. purchase assets from Porsche and Porsche family companies.3x. Recognising some of the risks inherent in the merger and future dilution. 2) Risks from financial transactions – Porsche plans to issue future equity and complete a merger of Porsche AG into VW AG. when we expect auto markets to have normalised to a greater degree. our estimates put VW at only 1.5x adjusted EV to industrial EBITDA (vs 3.

EUR 10.MI.18). Research analysts employed outside the US by affiliates of Barclays Capital Inc. Risk Disclosure(s) Options are not suitable for all investors. but not limited to. New York. EUR 47. we provide sector views which rate the outlook for the sector coverage universe as 1-Positive.DE. 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. Because of the importance of tax considerations to many options transactions.com/disclosures or call 1-212-5261072. Risks: – – – – Call or put purchasing: The risk of purchasing a call/put is that investors will lose the entire premium paid.51).PA. – Call or put vertical spread writing/writing calls or puts (usually referred to as uncovered writing.DE. 1-Overweight/2-Neutral Volkswagen AG (VOWG. – 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. a portion of which is generated by investment banking activities. 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. 2-Equal Weight/2-Neutral Renault SA (RENA.theocc. 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. The Options Clearing Corporation’s report. 2008. 745 Seventh Avenue. EUR 35. 04-Dec-2009. Uncovered call writing: The risk of selling an uncovered call is unlimited and may result in losses significantly greater than the premium received. Please note that the trade ideas within this research report do not necessarily relate to. Investors 8 December 2009 177 .lehman.91).PA. 04-Dec-2009. 04-Dec-2009. the fundamental ratings applied to Barclays Capital Equity Research. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues.50).jsp Primary Stocks (Ticker.39). public appearances and trading securities held by a research analyst’s account. Barclays Capital acquired Lehman Brothers' North American investment banking. 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. or otherwise. whether as a result of differing time horizons. and private investment management businesses. and may directly conflict with. EUR 24. Supporting documents that form the basis of our recommendations are available on request. Price) and Risks of Standardized Options”. 2-Neutral or 3Negative (see definitions below). 1-Overweight/2-Neutral Daimler AG (DAIGn. EUR 80. equity-linked analysis. NY 10019 or refer to www. 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. fundamental analysis. quantitative analysis. Date. Uncovered put writing: The risk of selling an uncovered put is significant and may result in losses significantly greater than the premium received. 04-Dec-2009. 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. 04-Dec-2009. Johnson. capital markets. IMPORTANT DISCLOSURES CONTINUED For current important disclosures regarding companies that are the subject of this research report. On September 20. In addition to the stock rating. 3-Underweight/2-Neutral Peugeot SA (PEUP. Kristina Church and Brian A. hold and sell is not the equivalent of our rating system. 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”). 04-Dec-2009.59). 17th Floor. “Characteristics http://www.DE. 04-Dec-2009. 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. and trade ideas.DE.Barclays Capital | European Autos & Auto Parts ANALYST(S) CERTIFICATION(S) We. 04-Dec-2009.DE. 2-Equal Weight/2-Neutral Volkswagen AG-PFD Preferred (VOWG_p.com/publications/risks/riskchap1. methodologies. 3-Underweight/2-Neutral Fiat SpA (FIA. EUR 32. EUR 35. is available at BMW (BMWG.75). EUR 63. A rating system using terms such as buy. are not registered/qualified as research analysts with FINRA.56). All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc. please send a written request to: Barclays Capital Research Compliance. Barclays Capital produces a variety of research products including.

(BCC.The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 39% of companies with this rating are investment banking clients of the Firm.sector coverage universe fundamentals/valuations are deteriorating.MI) Renault SA (RENA.PA) Barclays Capital Inc. neither improving nor deteriorating. 2-Neutral . (BBSA. 44% of companies with this rating are investment banking clients of the Firm.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 Sell rating.PA) Volkswagen AG (VOWG.DE) Peugeot SA (PEUP. Stock Rating 1-Overweight .A. Sector View 1-Positive .DE) Fiat SpA (FIA. 40% have been assigned a 1-Overweight rating which. is classified as a Buy rating. (BCI. 3-Underweight . 32% of companies with this rating are investment banking clients of the Firm. 13% have been assigned a 3-Underweight rating which. Below is the list of companies that constitute the "sector coverage universe": European Autos & Auto Parts BMW (BMWG. for purposes of mandatory regulatory disclosures. Equity Research has 1375 companies under coverage.sector coverage universe fundamentals/valuations are improving. Toronto) 8 December 2009 178 . Barclays Capital offices involved in the production of equity research: London Barclays Capital. Hong Kong branch (BB.sector coverage universe fundamentals/valuations are steady. 2-Equal Weight .DE) Distribution of Ratings: Daimler AG (DAIGn. 45% have been assigned a 2-Equal Weight rating which. Tokyo) São Paulo Banco Barclays S. Hong Kong) Toronto Barclays Capital Canada Inc.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.DE) Volkswagen AG-PFD Preferred (VOWG_p. the investment banking division of Barclays Bank PLC (Barclays Capital.DE) Porsche Automobil Holding SE (PSHG_p. is classified as a Hold rating.The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12month investment horizon. London) New York Barclays Capital Inc. New York) Tokyo Barclays Capital Japan Limited (BCJL. for purposes of mandatory regulatory disclosures.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. São Paulo) Hong Kong Barclays Bank PLC. 3-Negative . RS-Rating Suspended . for purposes of mandatory regulatory disclosures.

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