European Autos & Parts A view from the street Arndt Ellinghorst Global Head of arndt.ellinghorst@credit-suisse.com +44 207 88 80295 For published research reports, including disclosures and other information relating to such reports, please visit the website at http://www.credit-suisse.com/researchandanalytics
Where do YOU put your kids money? Buy some bonds or car suppliers... Conti E.ON Germany 5,625% 2016 bond Siemens Savings account floating Deutsche Bank Daimler PSA 0% 2% 4% 6% 8% 10% 12% Compund Annual Growth (%) Produced by: Date: 22/06/2010 Slide 2
The longer term story remains a sad one Auto stocks destroy value... 7.0x 6.5x Investors take a clear view: The Auto industry in operating with diminishing returns, which is reflected in a constant de-rating of EU automotive stocks 6.0x 5.5x 5.0x 4.5x Low profitability (margins) in conjunction with a high capital intensity (low asset turnover) lead to falling capital returns (RoCE). 4.0x 3.5x 3.0x Over the cycle, the industry is not earning its cost of capital and thus destroying value. 2.5x 2.0x 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E EV/EBITDA (RHS) EU Auto industry does not earn its cost of capital The lack of consolidation is driving negative net pricing (too many irrational players) and thus hindering even the good players generating sufficient returns. Tightening fuel efficiency regulations, an ageing population in Western markets and limited incremental support from Financial Services add to the pressure. Produced by: Date: 22/06/2010 Slide 3
Asian OEMs are rewarded for their higher returns and growth 5 HOLT Economic P/E FAW 4 Value-to-Cost Ratio (HOLT price-to-book) Renault 3 2 Mitsubishi Isuzu 1 Ford Honda Daimler Nissan Toyota Fiat Porsche BMW Suzuki Mazda Fuji Daihatsu VW Peugeot Hyundai Chongqing Astra SAIC Maruti Geely Jiangling Mahindra Kia Dongfeng Denway Beiqi Europe Japan Non-Japan Asia US Exponential (Global) Linear (Europe) 0-5 0 5 10 15 20 Forecast CFROI % Produced by: Date: 22/06/2010 Slide 4
Car demand: Permanently damaged? Western European car sales no major correction yet 18,000 16,000 1990's recession / German reunification: Peak to trough drop = -17% 14,000 12,000 No return to previous peaks until 2015E 10,000 8,000 6,000 4,000 2,000 1970's Oil Shock I: Peak to trough drop = -12% 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1970's Oil Shock I: Peak to trough drop = -6% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010E 2007-10E credit crisis: CS estimated peak to trough drop = -16% over 3 years TODAY 2012E 2014E 2016E 2018E Produced by: Date: 22/06/2010 Slide 5
US Consumer Confidence improving...? US light vehicle sales it took long, but now at the bottom 18000 17000 16000 15000 14000 US Sales (12MM SUM) US Consumer Confidence 160 140 120 100 13000 80 12000 60 11000 10000 9000 Replacement demand = c.12-13m units 40 20 8000 0 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Produced by: Date: 22/06/2010 Slide 6
Channel Mix: 2009 by market Biggest market distortion ever private vs fleet sales EU -29% -2% 18% UK -17% -8% 5% Italy TOTAL -24% Corporate / Fleet -2% 8% Fr ance Priva te -1% 6% 14 % Spain -33% -20% -8% Germany -23% 26% 90% Other EU -43% -25% -10% -6 0% -4 0 % -20 % 0% 2 0% 40% 60 % 8 0% 100 % Produced by: Date: 22/06/2010 Slide 7
EU CO2: Still a major issue! Major progress has been made, but more is still needed (95g/km by 2020) 180 CO2, 2009 DAI g/km 170 2008 BMW Nissan 160 VW Ford GM Hyundai 150 Target Curve 130g Fiat Toyota Renault Average 140 PSA 130 130g/km industry average 120 110 100 Target Curve 95g 90 95g/km industry average 80 Vehicle mass, Kg 1100 1125 1150 1175 1200 1225 1250 1275 1300 1325 1350 1375 1400 1425 1450 1475 1500 1525 1550 1575 1600 Source: Company reports and Credit Suisse estimates. 2008 reported emission data Produced by: Date: 22/06/2010 Slide 8
US Emission Standards: Where we stand Passenger Car proposals German makers need to ship EU engines (more expensive) 43 41 2016 39 2015 37 2014 2013 Fleet average mpg 35 33 31 2012 Honda Hyundai Nissan Toyota Kia 29 27 Porsche VW BMW GM Chrysler Ford Daimler 25 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 Fleet average footprint (sq feet) Produced by: Date: 22/06/2010 Slide 9
Demographics Baby Boomers to Empty Nesters Populations are getting older W.Europe age transition 60% 50% 40% 30% 20% Age of car customers 2006 vs 2020 (Germany) 30.0% 25.0% 20.0% 15.0% 10.0% 10% 5.0% 0% 1980 2000 2020E 2050E 0.0% below 29 30-39 40-49 50-59 60-69 70 and abov e 16,000 14,000 12,000 Over 60 20-59 Average mileage/year by age (US) 2006 2020 40% older than 60: By as soon as 2020, customers older than 60 are likely to represent 40% of car buyers in developed markets (from currently below 30%). 10,000 8,000 6,000 4,000 2,000 0 16-19 20-34 35-54 55-64 65+ All 20-30% falling replacement demand: People above 65 drive ca. 45% fewer miles/year compared to the average car owner, a higher penetration of this customer group will inevitably reduce replacement demand. Together with a generally increasing durability of cars, this could lead to structurally falling sales in developed markets by the magnitude of 20-30% Produced by: Date: 22/06/2010 Slide 10
Car buyers are sensitive to finance costs The era of cheap credit cant last forever Carmakers are selling up to 80% (premium makers) via leasing/financing 300bps increase of finance rates increase TCO by 10% Higher TCO should lead to fewer car sales Economies of scale will thus decrease and consolidation should instead trigger efficiency gains Financial Services penetration rates (leasing and financing) TCO sensitivity to finance rate 90% 12000 Finance cost sensitivity: 80% 70% 60% 50% 40% 30% 20% 10% Finance cost over 3 years, 10000 8000 6000 4000 2000 'Premium' 100bp = 1,050; 3% of TCO 'Mid' 100bp = 630; 3% of TCO 'Mass' 100bp = 315; 2.5% of TCO 0% Mercedes BMW Porsche VW PSA Renault Fiat 0 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Captive Non-captive Finance rate Source: Credit Suisse Estimates, *selling price assumptions: mass= 15k, mid= 30k, premium= 50k Produced by: Date: 22/06/2010 Slide 11
P.O.M. premium over mass Major outperformance of premium automotive stocks 230 210 190 Premium / Mass 'Premium' = Daimler + BMW 'Mass' = PSA + RNO + Fiat 170 150 130 110 90 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Produced by: Date: 22/06/2010 Slide 12
Sector: Marketweight Long anything but mass EU Autos BMW: O/P (FOCUS LIST), 52 TP: Product drives pricing Daimler: O/P, 50 TP: Least expensive trucks exposure Conti: O/P 52 TP: Window of opportunity Fiat: O/P, 14 TP: Spinoff/Removal of the conglomerate discount MAN: O/P, 78 TP: Cheapest pure play Renault: O/P, 43 TP: Nissan Play Porsche: O/P, 69 TP: A way into VW fundamentals? VW Pref: O/P, 83 TP: Valuation outweighs corporate governance concerns 1) Avoiding EU private demand ahead of scrappage expiry 2) Fleet demand to recover versus declining sales to privates 3) Long non-eu-autos exposure (CNH, trucks, intl exposure) Short mass EU and expensive truck exposure PSA Peugeot Citroen: U/P, 21 TP: highest exposure to EU private demand Michelin: U/P, 46 TP : Great expectations at a high price Autoliv: U/P, $51 TP : Overlooked play on overhang? Scania: U/P, SEK96 TP : Expensive, illiquid, at risk Volvo: U/P, SEK78 TP : Expensive, NA truck exposure better played via Daimler Special situations Porsche/VW: Buy Porsche as a way into merger Volkswagen: Beware of the overhang in the prefs (QIA 25%) MAN/Scania/VW: Who will take the lead? Stock-selection to prevail over macro themes in 2010E 4) Fiat is a play on CNH/Brazil. Daimler is the best premium/trucks pure play 5) VW pref is the cheapest global mass producer 6) RNO is a cheap way to buy undervalued Nissan Produced by: Date: 22/06/2010 Slide 13
Thank you Produced by: Date: 22/06/2010 Slide 14