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abc Asia-Pacific Equity Research Consumer: autos July 2012 Consumer – autos Autos team Yogesh Aggarwal* Analyst HSBC Securities and Capital Markets ...
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Asia-Pacific Equity Research Consumer: autos July 2012

Consumer – autos Autos team Yogesh Aggarwal* Analyst HSBC Securities and Capital Markets (India) Private Limited [email protected] +91 22 2268 1246 Carson Ng* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6625 [email protected] Paul Choi* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8758 [email protected]

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

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Autos

China Domestic OEMS Domestic OEMs Great Wall Geely BYD Chery FAW SAIC GAC Dongfeng Changan BAIC Brilliance Fujian Motor Qingling

India

Foreign OEMs with JVs in China European & U.S. OEMS Volkswagen-FAW Volkswagen-SAIC Audi-FAW BMW-Brilliance Daimler-BAIC Daimler-Fujian Motor PSA-Dongfeng PSA-Changan Fiat-GAC GM-SAIC Ford-Changan

Japanese, Korean and Taiwanese OEMs

Source: HSBC

Two Wheelers

Four Wheelers

Auto

Domestic OEMs

Domestic OEMs

Domestic OEMs

Bajaj Hero MotoCorp Mahindra Two Wheelers Royal Enfield TVS Motor Company Ltd

Foreign OEMs Honda Yamaha Piaggio Suzuki

Three wheelers Domestic OEMs Bajaj Atul Auto Mahindra & Mahindra TVS Motor Company Ltd  Force Motors Ltd

Foreign OEMs Piaggio

Hindustan Motors Mahindra & Mahindra Maruti Suzuki Tata Motors Ashok Leyland Eicher Motors (Volvo- Eicher) Force Motors

Foreign OEMs Honda Siel Cars Hyundai Motor BMW Fiat Force Ford General Motors Mercedes-Benz India Nissan Motor India Renault India SkodaAuto Toyota Kirloskar Volkswagen – Audi – Skoda

Hyundai Motor Corp Kia Motors

Tire Hankook Tire Nexen Tire Kumho Tire

Foreign OEMs GM Daewoo Renault Samsung Ssangyong Motor

Auto Parts Hyundai Mobis Mando Halla Climate

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Toyota-FAW Toyota-GAC Honda-GAIC Honda-Dongfeng Nissan-Dongfeng Suzuki-Changan Mitsubishi-GAC Hyundai-BAIC Yulong-Dongfeng Yulong-Fujian Motor Isuzu-Qingling Mazda-FAW Mazda-Changan

Korea

Asia-Pacific Equity Research Consumer: autos July 2012

Sector structure

Asia-Pacific Equity Research Consumer: autos July 2012

Sector price history 600.0 MSCI China Auto index

MSCI India Auto index

MSCI Korea Auto index

MSCI Asia

Benefiting from earthquake in Japan, which caused supply disruptions in the major Japanese automakers.

500.0

Concerns on the global macro outlook prevailed after the breakout of the European debt crisis.

400.0

Weakening auto demand in India due to excise duty hike and high cost of ownership due to rising petrol prices and high interest rates

300.0

200.0

100.0

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

Aug-11

Jul-11

Jun-11

May-11

Apr-11

Mar-11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

Dec-09

Nov-09

Oct-09

Sep-09

Aug-09

Jul-09

Jun-09

-

Source: MSCI, Thomson Reuters Datastream, HSBC

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Asia-Pacific Equity Research Consumer: autos July 2012

Autos: EBIT margin – asset turnover (2010-11) 9%

2.0

Maruti Suzuki India Ltd

1.9

High asset turn and high margins; profitable industry leaders strategies

Kia Motors

1.8

Hero MotoCorp

High asset turn efficient volume driven strategies

1.7

Bajaj Auto

1.6 1.5

Mando Corporation

Asset Turnover (x)

1.4 1.3

TAN Chong Motor Holdings

UMW Holdings Hyundai Mobis

1.2

Astra International

Tata Motors

1.1

1.01x

1.0

Great Wall Motor

Nexen Tire Corp

0.9 0.8

Hankook Tires Geely Automobile Holdings

Hyundai Motor

0.7

Brilliance Auto

0.6 Minth Group

0.5

Xinyi Glass

0.4 0.3

GAC Group

High margins; niche players or brands with strong pricing power

Low ROA companies. Business restructuriung may be required

0.2 0.1 -5%

0%

5%

10%

15%

20%

25%

30%

35%

EBIT Margin (%) Source: Thomson Reuters Datastream, HSBC

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Asia-Pacific Equity Research Consumer: autos July 2012

Sector description Asia’s auto manufacturing industry is dominated by China, Korea and India. China has been the largest producer of cars in the world since 2008. The top five manufacturers are SAIC Group, Dongfeng Motor, FAW Group, Changan, and Beijing Auto. The Korea auto sector is the fifth-largest in the world measured by unit production, with Hyundai-Kia accounting for near 80% of the domestic market. The Indian auto sector has enjoyed robust growth over the past decade, registering a CAGR of c14%. Key domestic players include Tata Motors, Maruti Suzuki, Mahindra & Mahindra, Bajaj Auto and Hero Motocorp. Seoul Securities Branch

Key themes China China’s auto manufacturers produce passenger and commercial vehicles, both domestic brands and models made via joint ventures with foreign companies. Due to rising GDP per capita and uneven income distribution, the premium segment has been the best performing sub-sector in the passenger vehicle sector. Domestic brands are losing market share to foreign rivals (down to 42.2% in 2011 from 45.6% in 2010), with German brands particularly popular (market share rose to 16.5% in 2012 from 14.1% in 2011).

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Yogesh Aggarwal* Analyst HSBC Securities and Capital Markets (India) Private Limited +91 22 22681246 [email protected] Paul Choi* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8758 [email protected] Carson Ng* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6625 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

A new government procurement policy encourages government organisations to use domestic brands such as Great Wall, Geely, BYD and Chery at the expense of joint venture models. China government has introduced different measures to help the domestic brands. In addition, the auto industry is no longer an “FDI-encouraged” industry which implies that it would be more difficult for new foreign manufactures to set up new plants in China.

Korea The main competitive strength of the Korean automakers is their cost efficiency driven by better economies of scale coming from platform integration. The value of their brands also continues to improve. Both Hyundai and Kia have surprised the market by gaining market share in the US, despite offering lower incentives to consumers.

India Two wheelers (motorcycles and scooters) are by far the most common means of personal transport for burgeoning middle/rural India. Largely dominated by two players, Hero Moto Corp and Bajaj Auto, the domestic two-wheeler market is the second largest in the world, with a CAGR of 17% over FY08-12. The rural sales story, which represents about 45% of sales for Hero, continues to drive growth. The car industry in India is dominated by entry level cars (mini and compact models), which together account for about 80% share of total car sales. Some 80% of these entry level cars are bought through financing arrangements, making them sensitive to interest rates. Increasing per capita income is helping to improve the product mix. The light commercial vehicle segment increased at a CAGR of 22% over FY04-11 compared with 15.5% for the entire commercial vehicle category. This is largely due to success of the hub and spoke model, whereby large trucks transport goods between the central hubs and smaller commercial vehicles facilitate transport of goods from hub to the spoke, thereby enabling the last mile connectivity. The need for last

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Asia-Pacific Equity Research Consumer: autos July 2012

mile connectivity is critical to the success of the entire supply chain and this trend has fuelled the demand for light commercial vehicles. Competition is increasing across the entire auto sector as foreign competitors expand their operations and aggressively add capacity.

Sector drivers China Rising per capita income has been a long-term growth driver of vehicle sales around the world and China is no exception. Car ownerships levels are also still low – about 46 units per 1,000 people and six per square kilometre. These are much lower than during the peak for Japan (about 330 units per 1,000 people and 110 per sq km) so the long-term growth outlook is good. While China plans to expand its expressway network to 108,000km in 2015 from 70,400km in 2010 its road density will still be much lower than developed countries such as the US and Japan.

Korea We believe average return on invested capital (ROIC) is a good measure of the health of an automaker in the current cycle. Hedging the risk of weaker sales volume in the advanced economies by higher emerging market exposure, both HMC and Kia have seen their ROIC improving since 2009 thanks to higher utilisation rates, cost reductions, new model launches, improved quality and brand and a balanced regional mix. In 2012 the Korea automakers plan launching 2-3 new models in each of the Korea, US, Europe and emerging markets, along with local customised models in China and India.

India The Indian passenger car market is an attractive opportunity, given the low level of car ownership, large population and high-growth economy. India has 15 cars per 1,000 people, far fewer than rival developing giant China (46). Economic drivers like robust GDP growth, favourable demographics, shifting consumption patterns and rising income levels add to rosy long-term outlook for the sector. The localisation of manufacturing vehicle parts and in-house product development should help improve margins.

Valuation In China, a single-stage PE method based on ROE and long-term growth is preferred as OEMs in China are still expanding their capacities, which would affect their free cash flow. The sector had wide 5-year historical PE trading range from low single digits to low-teens. EV/EBITDA has been widely used to value European/US OEMs. However, as some Chinese auto companies are using equity accounting to account for their joint ventures with foreign makers it would be difficult to calculate EBITDA for direct comparison between peers. In Korea, PB-ROE valuation is preferred given the cyclical nature of the industry. Korean auto names trade at a discount to their global peers and we continue to believe they are undervalued. As we think Korean automakers will generate higher growth on increasing competitive strength and improving market positioning, the valuation gap should narrow.

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Asia-Pacific Equity Research Consumer: autos July 2012

In India, a DCF based valuation is the best way to capture the long term growth outlook. Large conglomerates like Tata Motors are valued based on SOTP using EV/EBITDA and PE based relative valuation. The two-wheeler original export manufacturers (OEMs) like Hero Motocorp and Bajaj Auto historically trade at 14x and 15x one-year forward earnings, respectively.

Asia Auto: Growth and profitability (calendarised data) India Growth Sales EBITDA EBIT Net profits Margins EBITDA EBIT Net profit Productivity Capex/sales Asset turnover (x) Net debt/equity ROE

2008

2009

2010

2011e

2012e

-3.5% -3.7% -8.3% 41.4%

1.8% 16.6% 37.9% -14.0%

-6.2% 4.2% 21.9% 62.5%

22.4% 38.9% 45.0% 39.3%

7.2% 12.5% 13.6% 12.2%

8.7% 4.7% 6.0%

10.0% 6.4% 5.1%

11.1% 8.3% 8.8%

12.5% 9.9% 10.0%

13.2% 10.4% 10.5%

7% 0.8x 1.8x 28%

5% 1.0x 1.3x 24%

4% 0.9x 0.6x 23%

5% 0.8x 0.6x 24%

4% 0.8x 0.4x 22%

Note: based on all HSBC coverage of auto companies across Asia. All data is market cap weighted Source: company data, HSBC estimates

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Asia-Pacific Equity Research Consumer: autos July 2012

Sector snapshot Key sector driver: GDP per capita in China

Key sector stats Automobile

5% of MSCI Asia ex-JP

Trading data ADTV (USDm) Aggregated market cap (USDm) Performance since 1 Jan 2000 Absolute Relative to MSCI Asia 3 largest stocks

8,000

GDP per capita (USD)

GDP per capita (USD)

7,000 n/a 30,328

6,000

686% 4.8x HYUNDAI MOTORS, KIA MOTORS, HYUNDAI MOBIS

4,000

Correlations (5-year) with MSCI Asia

0.61

7,153 6,118

5,000

5, 289

3,000 2,665

2,000

3,758

1,000 0

Source: MSCI, Bloomberg, Thomson Reuters Datastream, HSBC

2007

Top 10 stocks

3,432

4,425

2008

2009

2010

Source: CEIC, IMF, ADB, HSBC

2000 P rice level 1800 1600 1400 1200 1000 800 600 400 200 0

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Source: MSCI, Thomson Reuters Datastream, HSBC

PB vs ROE

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5

Fw d ROE % (LHS) Source: MSCI, Thomson Reuters Datastream, HSBC

Dec-11

Dec-10

22 20 18 16 14 12 10 8 6 Dec-04

Source: MSCI, Thomson Reuters Datastream, HSBC

58.15 13.23 11.62 10.80 5.13 1.06

5x

Dec-09

KOREA INDIA INDONESIA CHINA TAIWAN MALAYSIA

Weights (%)

10x

Dec-08

Country

15x

Jan-07

Country breakdown

20x

Dec-07

Source: MSCI, Thomson Reuters Datastream, HSBC

PE band chart for Indian Auto

Jan-06

24.6% 12.6% 12.4% 11.6% 6.1% 3.8% 3.1% 3.0% 3.0% 1.9%

Dec-06

HYUNDAI MOTOR KIA MOTORS HYUNDAI MOBIS ASTRA INTERNATIONAL TATA MOTORS DONGFENG MTR. CHENG SHIN RUB. HANKOOK TIRE MAHINDRA & MAHINDRA BAJAJ AUTO

Jan-05

1 2 3 4 5 6 7 8 9 10

Index weight

Dec-05

Stocks

Jan-04

Stock rank

8

2011f 2012f 2013f

Fw d PB (x )