06 February 2014 Europe/Germany Equity Research Automobile Manufacturers (Automobiles & Components (Europe))

BMW (BMWG.DE) Rating UNDERPERFORM* Price (03 Feb 14, Eu) 79.99 INITIATION

Target price (Eu) 80.00¹ Market cap. (Eu m) 51,359.26 Lacking electricity Enterprise value (Eu m) 40,584.7

*Stock ratings are relative to the coverage universe in each ■ Initiating with an Underperform rating and €80 price target: BMW has analyst's or each team's respective sector. re-rated since 2010 following a surge in China luxury sales, positive model ¹Target price is for 12 months. momentum and the expansion of its geographical sales base. This valuation Research Analysts also reflects the sustainability of a high single digit margin (albeit falling), Mike Dean positive FCF and sustainable dividend payout ratio, more in tune with its 44 20 7883 2371 DAX peers. In our view, however, BMW's profile is now more akin to a [email protected] defensive stock with a beta of 1.1. This may partly explain 2013's Fei Teng 44 20 7883 9978 underperformance as investors sought beta and European recovery plays. [email protected] We believe the positive model momentum of the past three years is now fully reflected in the share price while potential risks and a lack of catalysts should leave BMW underperforming its peers for a second year running. ■ Variant view: Margins are on a downward trajectory, having peaked in 2011 and consensus fails to reflect future risks including higher R&D costs and slower model momentum. We refer to Pareto's 80/20 Law to explain how certain models have a disproportionately higher impact on an OEM's earnings profile; we estimate that 5/6/7 suffixed vehicles accounted for 80% of 2013E automotive contribution on 30% of volume. We forecast EBIT to suffer as these key models age (avg. 3.8 years in '15 vs 1.8 in '11) and model momentum fades. BMW also faces stiffer competition. We are less enthusiastic on China growth prospects, which disproportionately impacts sentiment on BMW. While electric vehicles may be great PR, we think they

are more instrumental in achieving 2020 CO2 targets than boosting earnings. ■ Risk/reward: BMW trades on 10.5x 2015E P/E and 3.1x 2015E EV/EBITDA, which is a significant premium to the sector average. Although BMW is a well-managed company with innovative products, a strong balance sheet and good long-term outlook, we view it as a potential "quality trap", as was the case in 2013.

Share price performance Financial and valuation metrics

Year 12/12A 12/13E 12/14E 12/15E 82 Revenue (Eu m) 76,848.0 76,004.7 78,385.8 78,799.6 72 EBITDA (Eu m) 12,016.00 11,972.96 12,299.64 12,657.30 Adjusted Net Income (Eu m) 5,096.0 5,198.2 5,038.8 5,018.6 62 CS adj. EPS (Eu) 7.77 7.93 7.69 7.66 52 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 ROIC (%) 31.29 24.21 20.93 19.03 Price Price relative P/E (adj., x) 10.29 10.09 10.41 10.45 P/E rel. (%) 83.6 72.5 83.6 94.9 The price relative chart measures performance against the EV/EBITDA 3.2 3.4 3.3 3.1 DEUTSCHE BORSE DAX INDEX which closed at 9133.19 on 03/02/14. On 03/02/14 the spot exchange rate was €1./Eu 1. - Dividend (12/13E, Eu) 2.78 IC (12/13E, Eu m) 22,833.06 Eu .74/US$1 Dividend yield (%) 3.5 EV/IC 1.8

Performance Over 1M 3M 12M Net debt (12/13E, Eu m) -10,909.5 Current WACC 8.5 Absolute (%) -4.8 -1.5 7.4 Net debt/equity (12/13E, %) -32.3 Free float (%) 53.7 BV/share (12/13E, Eu) 51.3 Number of shares (m) 656.25

Relative (%) -2.1 -3.5 -9.9 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

06 February 2014

BMW BMWG.DE Price (03 Feb 14): Eu79.99, Rating: UNDERPERFORM*, Target Price: Eu80.00 Income statement (Eu m) 12/12A 12/13E 12/14E 12/15E Per share data 12/12A 12/13E 12/14E 12/15E Revenue (Eu m) 76,848 76,005 78,386 78,800 No. of shares (wtd avg) 656 656 656 656 EBITDA 12,016 11,973 12,300 12,657 CS adj. EPS (Eu) 7.77 7.93 7.69 7.66 Depr. & amort. (3,716) (3,723) (4,294) (4,722) Prev. EPS (Eu) — — — — EBIT (Eu) 8,300 8,250 8,005 7,935 Dividend (Eu) 2.50 2.78 2.92 3.06 Net interest exp. (481) (450) (440) (400) Div yield 3.13 3.47 3.65 3.83 Associates — — — — Dividend payout ratio 32.16 35.00 38.00 40.00 Other adj, — — — — Free cash flow per share (0.54) 0.93 2.22 3.33 PBT (Eu) 7,819 7,800 7,565 7,535 (Eu) Income taxes (2,697) (2,574) (2,497) (2,487) Key ratios and 12/12A 12/13E 12/14E 12/15E Profit after tax 5,122 5,226 5,069 5,049 valuation Minorities (26) (28) (30) (30) Growth(%) Preferred dividends — — — — Sales 11.7 (1.1) 3.1 0.5 Associates & other — — — — EBIT 3.5 (0.6) (3.0) (0.9) Net profit (Eu) 5,096 5,198 5,039 5,019 Net profit 4.4 2.0 (3.1) (0.4) Other NPAT adjustments — — — — EPS 4.4 2.0 (3.1) (0.4) Reported net income 5,096 5,198 5,039 5,019 Margins (%) EBITDA margin 15.6 15.8 15.7 16.1 Cash flow (Eu) 12/12A 12/13E 12/14E 12/15E EBIT margin 10.8 10.9 10.2 10.1 EBIT 8,300 8,250 8,005 7,935 Pretax margin 10.2 10.3 9.7 9.6 Net interest (481) (450) (440) (400) Net margin 6.6 6.8 6.4 6.4 Cash taxes paid (2,462) — — — Valuation metrics (x) Change in working capital 1,755 (1,315) (371) (88) EV/sales 0.50 0.53 0.51 0.50 Other cash & non-cash items (2,036) 1,323 798 1,236 EV/EBITDA 3.2 3.4 3.3 3.1 Cash flow from operations 5,076 7,808 7,992 8,683 EV/EBIT 4.6 4.9 5.0 5.0 CAPEX (5,433) (7,196) (6,538) (6,499) P/E 10.3 10.1 10.4 10.4 Free cash flow to the firm (357) 613 1,454 2,184 P/B 1.7 1.6 1.4 1.3 Acquisitions (171) (36) (25) (25) Asset turnover 0.58 0.55 0.55 0.54 Divestments 149 — — — ROE analysis (%) Other investment/(outflows) (175) (1,395) (691) (650) ROE stated-return on 17.8 16.3 14.3 13.1 Cash flow from investments (5,433) (7,196) (6,538) (6,499) equityROIC 31.3 24.2 20.9 19.0 Net share issue/(repurchase) 19 (64) — — Interest burden 0.94 0.95 0.95 0.95 Dividends paid — — — — Tax rate 34.5 33.0 33.0 33.0 Issuance (retirement) of debt 392 600 600 600 Financial leverage 2.3 2.1 2.0 1.9 Other 1,722 (3,267) (1,691) (2,065) Credit ratios (%) Cash flow from financing 2,133 (2,731) (1,091) (1,465) Net debt/equity (42.9) (32.3) (30.6) (30.0) activitiesEffect of exchange rates (1) — — — Net debt/EBITDA (1.1) (0.9) (0.9) (0.9) Changes in Net Cash/Debt 1,775 (2,118) 363 719 Interest coverage ratio 17.3 18.3 18.2 19.8 . Net debt at start (11,253) (13,028) (10,910) (11,272) Change in net debt (1,775) 2,118 (363) (719) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Net debt at end (13,028) (10,910) (11,272) (11,991) (EUROPE) LTD. Estimates.

Balance sheet (Eu m) 12/12A 12/13E 12/14E 12/15E Assets Cash and cash equivalents 8,370 8,697 9,834 11,608 Accounts receivable 23,148 24,671 25,210 25,816 Inventory 9,725 11,015 11,125 11,127 82 Other current assets 9,271 9,212 9,212 9,212 72 Total current assets 50,514 53,595 55,381 57,764 Total fixed assets 13,341 15,383 16,911 18,012 62 Intangible assets and goodwill 5,207 5,207 5,207 5,207 52 Investment securities 1,062 1,098 1,123 1,148 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Other assets 61,726 61,723 62,914 64,064 Total assets 131,850 137,006 141,536 146,195 Price Price relative Liabilities Accounts payable 6,433 6,535 6,313 6,334 The price relative chart measures performance against the DEUTSCHE BORSE Short-term debt 30,412 31,412 32,412 33,412 DAX INDEX which closed at 9133.19 on 03/02/14 Other short term liabilities 11,586 11,541 11,541 11,541 On 03/02/14 the spot exchange rate was €1./Eu 1. - Eu .74/US$1 Total current liabilities 48,431 49,488 50,266 51,287 Long-term debt 39,095 39,695 40,295 40,895 Other liabilities 13,922 14,080 14,080 14,080 Total liabilities 101,448 103,263 104,641 106,262 Shareholders' equity 30,295 33,608 36,729 39,738 Minority interest 107 135 165 195 Total equity & liabilities 131,850 137,006 141,536 146,195 Net debt (Eu m) (13,028) (10,910) (11,272) (11,991)

BMW (BMWG.DE) 2 06 February 2014 Key charts

Figure 1: 2013 Global Sales by Region Figure 2: 2012 EBIT by Division

0.63%

0.10% 16.85% 12.8% 13.2% Germany 9.6% UK Automoniles 19.9% Rest of Europe Motorcycles 20.9% Americas Finacial Services 82.43% China Other 23.6% Rest of World plus RR

Source: Company data Source: Company data

Figure 3: Shareholder breakdown, end-2013 Figure 4: Model age bottomed in 2011, tracked by margin BMW brand avg. fleet age (LHS), EBIT margin (RHS, inv) 5 7% 8.0% 8% 9.2% 17.40% 4 9.3% 9.6% 9% STEFAN QUANDT 3.8 16.70% 3.8 10% 53.30% 3.5 JOHANNA QUANDT 3 10.6% SUSSANNE KLATTEN 11.6% 3.0 11% 12.60% FREE FLOAT 2.6 12% 2

1.8 13%

1 14% 2010 2011 2012 2013E 2014E 2015E Average age (LHS) Auto EBIT Margin (RHS)

Source: Company data Source: Company data, Credit Suisse estimates

Figure 5: Estimated BMW China Profitability Figure 6: China Sales and % of Group PBT in EUR millions (LHS), % of group (RHS) Unit sales in thousands (LHS), % of group (RHS) 3,000 40% 400 k 30% China PBT China PBT as % of Group 35% 2,500 23.6% 300 k 30% 21.2% 20% 2,000 25% 200 k 16.9% 13.8% 1,500 20% 10% 15% 100 k 8.5% 1,000 5.5% 10% 500 0 0% 5% 2008 2009 2010 2011 2012 2013 0 0% BMW China Sales % of Total 2010 2011 2012 2013E 2014E 2015E Source: Company data, Credit Suisse estimates Source: Company data

BMW (BMWG.DE) 3 06 February 2014 Table of contents

Key charts 3 Investment summary 5 Variant view 6 Event path 9 Targets for 2014 and beyond 9 Monthly sales have tough comparatives 10 BMW's model momentum fades 11 FX Rates: €/$ may provide some upside 12 Spartanburg US plant expands further in 2014E 12 China: BMW JV with Brilliance 14 Valuation and risks 15 Share performance 15 Valuation 16 Our target price is €80 17 Is BMW a "Quality Trap"? 18 Cash is cash 18 Credit Suisse HOLT valuation 19 Risks: Where could we be wrong? 20 Management 20 Valuation 21 Financials 23 Pareto's 80/20 Law: How this explains BMW's model momentum story 25 China 28 Why China is so important to BMW 28 BMW still benefits from strong premium growth 28 The European position 30 BMW JV with Brilliance 30 Company snapshot 33 Brief history of BMW 33 China 34 US 34 Germany 35 UK 36 Credit Suisse PEERs map 39

BMW (BMWG.DE) 4 06 February 2014 Investment summary

Initiating with an Underperform rating and €80 price target: BMW continues to be a quality automotive play, having performed well since the beginning of 2010. We believe the positive model momentum of the past three years is fully reflected in the price while the potential risks could leave BMW underperforming its peers for a second year running.

Figure 7: Summary valuations Rating Price Free float Mkt cap TP Euro EV P/E 2015E EV/EBITDA (€m) (€m) (x) (x) BMW UP 79.99 € 53.7% 51,282 80 € 37,717 10.5 3.1 DAI OP 60.69 € 91.5% 64,561 80 € 49,319 9.1 3.5 FIAT R 7.14 € 66.8% 8,924 R 25,783 R R PSA UP 11.17 € 63.9% 3,962 9.5 € 5,512 6.8 2.0 Porsche N 70.96 € 50.4% 10,684 75 € 8,138 n/m n/m Renault OP 62.71 € 65.6% 18,545 80 € 3,795 5.3 1.0 VW OP 185.50 € 100.0% 83,529 300 € 65,312 6.6 2.2 Source: Thomson Reuters, Credit Suisse estimates (as of 3 February 2014) Investors' perception of BMW has changed significantly over the past 4 years. The initial trigger was a surge in Chinese premium auto demand from March 2010 which also coincided with a huge upswing in the company's model momentum, beginning with the launch of a new 5-series. This was the first vehicle to take advantage of standardised architecture and modularisation, together with efficient dynamics, and were key components of the successful 2010 restructuring plan to achieve margins of 8-10% by 2012 and sell over 1.5m cars. BMW's positive model momentum gained pace following the 5-series (which we estimate represents the biggest bucket of profitability for the BMW brand) relaunch and was swiftly followed by X1 and then the new 3-series in 2011. It appears that BMW had entered a 'perfect storm' of good news and performance with robust domestic sales, booming high-end Chinese sales, US sales recovering and, since May 2011, BMW benefited from a weaker €/$ rate which had been a drag on earnings since 2002.

Figure 8: Performance versus SXAP since Jan 1 2010 Figure 9: Annual performance since 2010 200% 100.0% 80.0% 150% 60.0% 100% 40.0% 50% 20.0% 0% 0.0% BMW DCX FIAT RNO PSA POR3 VOW3 -50% -20.0% -40.0% -100% -60.0% -150% -80.0% 2010 2011 2012 2013 -200%

Source: Thomson Reuters Source: Thomson Reuters BMW was re-rated on the back of this improved earnings profile, however the question to now ask, following 2011 peak margins, is when will the current downward margin trajectory come to an end? In our view, BMW's share price now fully reflects the positives of a surge in Chinese premium demand, significant model momentum, the implementation of common architecture and modularisation, investment in efficient dynamics, and a weaker Euro/$ rate. We think consensus forward earnings have failed to reflect significant risks including higher R&D costs and the end of its recent positive model momentum; we estimate this to depress margins further. The recent CAPEX increase will also translate into higher depreciation.

BMW (BMWG.DE) 5 06 February 2014 Variant view

BMW is a well-managed premium company with an appealing product range. However, in our view, it lacks any medium-term spark/catalyst to allow it to outperform. Indeed, we see the average model age rising to 3.5 years in 2014E (from 1.8 in 2011) and see the evolutionary X5 as the only major launch for 2014E, which is unlikely to provide an incremental boost given the incumbent model has remained so popular. We also refer to Pareto's 80/20 Law to explain how certain models have a disproportionately higher impact on an OEM's earnings profile and we estimate that 5/6/7 suffixed vehicles accounted for 80% of 2013E automotive contribution but were only 30% of volume. BMW's earnings are forecast to suffer as these key models age and its model momentum fades. It is also these models where we anticipate future intense competition (particularly from Mercedes but also JLR, Porsche and Maserati). Moreover, for BMW, it's still all about China. In our sector initiation report, Electric expectations; fundamentals forgotten?, we curb our enthusiasm on Chinese growth prospects and their ability to positively surprise which would disproportionately impact sentiment on BMW versus the peer group. The dividend yields a modest 3%, and we think monthly sales growth figures are likely to slow or even turn negative against some very tough comparatives. We believe that BMW management will maintain their cautious tone from the 2013Q3 results meeting into the FY2013 results meeting on 20 March 2014 which will be the first opportunity for the company to provide forward guidance this year. Moreover, following disappointing 2013Q3 results, the risk continues on the downside for earnings and margins and we are currently 10% below consensus estimates for 2015E. ■ Where are the short-term catalysts? As our report title suggests, we don't see a spark to push the stock higher. We discuss this in more detail in the "Event Path" section but think that apart from a weaker €, better than expected i3 (immaterial to earnings) sales and robust Chinese auto sales, there are few catalysts in 2014. Indeed, we believe the latter point is fully priced in and discuss China risks below. ■ We see BMW's model momentum fading with the evolutionary new X5 (F15) being the only major launch until a new 5 Series in 2016: Though BMW are also rolling out a 2-series, 4-series and X4 in the next 12 months,, we view these more as 1-series / 3 series / X3 coupes rather than new models in their own right and are likely to cannibalise the incumbent models. While this strategy may, on the surface, lower the average fleet age we view it as the usual main model derivative rollout and ignore them in our average model age calculation. ■ We refer to Pareto's 80/20 Law (see page 25) and highlight the importance of certain models within a brand range. We estimate that the 5 / 6 / 7 suffix models accounted for 80% of BMW industrial profits in 2013E but only 30% of volume and therefore the launch profile of these products drives margins. In a normal product cycle, the X5 would provide a welcomed boost 6 months after production starts, however given the successful run out of the old model plus launch costs we see no incremental boost to earnings this time round. We provide more analysis in the Pareto's Law section in our accompanying industry initiation report. ■ Competition intensifies from Mercedes, JLR and Porsche. Mercedes is enjoying its own positive model momentum with the new A-class, GLA, CLA and soon to be launched C-class likely to take market share. The new S-class will impact 7-series sales which is not due for replacement until late 2015. In SUVs, BMW has been very successful, however competitor products are catching up. The E70 X5 was a huge step change in design whereas the new F15 X5 could be regarded as a major facelift. A new Jaguar SUV will provide stiff competition, while Porsche expands its SUV offering with the launch of Macan. We also anticipate a smaller Porsche saloon (possibly called Pajun) to be launched in 2015 which will compete directly with high end 5/6-series derivatives, as will the new Maserati Ghibli.

BMW (BMWG.DE) 6 06 February 2014

■ Consensus buy rating and investors overweight. BMW's stock has been well loved by analysts and the investment community alike, given the faultless execution of its recent restructuring plan. Investors were initially suitably rewarded with the stock outperforming between 2010 and 2012. This, however, is no longer the case with 20% underperformance versus the Stoxx Europe Automobile index (SXAP) in 2013 and our analysis provides no reason why this underperformance shouldn't continue in 2014 given a lack of catalysts and potential earnings downgrades.

■ Medium-term targets for the new "Strategy Number One" look undemanding, or are they just realistic? BMW is targeting 2m unit sales and an automotive return on sales of between 8-10% by 2016. This looks underwhelming given it was 36k units shy of the 2m target in 2013E with margins expected at the upper end of this range.

■ Unlike the peer group, BMW's consensus estimates have remained largely unchanged in 2013. Consensus EPS forecasts are largely unchanged over the past 14 months, despite a disappointing 13Q3. We estimate '15E EPS should fall by 10%.

■ Electric Vehicles make an interesting topic for discussion, but for BMW China is still the key focus. The risks here include a slower Chinese market, further tax rises, further car restrictions in big cities, increased competition and an overall slower Chinese economy. Regarding the latter, please see our strategists' report, China: Curb your enthusiasm (23 October).

■ Electric Vehicles remain a key interest among investors and we are impressed with the i3 following an estimated €4bn R&D costs. We view it, however, not as a profit driver and IHS estimate that EV will account for <3% of production going forward. Moreover, we see its primary aim is to assist BMW in meeting challenging

2020 CO2 emission targets through an enhanced weighting attached to EVs when calculating average fleet CO2. Indeed, 30% of the 30g reduction in average CO2 per km required by 2020 is forecast to come from "i".

■ Further €/US$ tailwind: Credit Suisse is forecasting a weaker euro into 2014 and potentially around the 1.30 €/$. This will no doubt improve sentiment towards exporters but BMW is ramping up US$-based production and has a significant level of hedging in place for 2014 and 2015.

■ Increased R&D and CAPEX levels: These have ramped up significantly in 2013 and are expected to remain high in 2014E and 2015E, above "Strategy Number One" targets, impacting earnings. Higher CAPEX will translate into higher depreciation with CAPEX/depreciation running at 1.5x 2013 9M versus 1.37x in 2012 and 1.0x in 2011. We forecast this ratio to fall to 1.2x in '15E with absolute depreciation rising by €1bn.

■ Valuation is far from supportive, with the share price near an all-time high. BMW squeezed up to an initial all-time high during September having been a significant underperformer versus its peers. It remains a laggard but, together with the SXAP, reached a new peak of €86 in January and currently trades on 2015E P/E of 10.5x.

■ The quality of Q3 2013 results was disappointing. Automotive EBIT fell short of expectations, with the "other" line playing its part and muted FCF. The company also retained its cautious tone from the FY2012 analyst meeting in March 2013 and highlights that most markets are experiencing high levels of price competition and in particular, Europe. We anticipate a continued cautious outlook at the 2013FY results meeting on March 19. The bulls will claim that BMW is always overly conservative when it comes to giving guidance but reality may yet bite.

■ Uses of cash. We forecast BMW to have net industrial cash of €12bn at the end of 2013. The CFO has indicated a preferred €10bn cash buffer going forward. We would welcome a special dividend in its centenary year of 2016, however we believe it is more likely that the company will reinvest its surplus cash.

BMW (BMWG.DE) 7 06 February 2014

■ Low-risk status. We perceive BMW as being particularly low-risk within Consumer Discretionary. Its current earnings and balance sheet profile is more akin to a defensive stock and appropriately has a 1.1 beta. This may explain part of the reason for the underperformance in 2013 as the market sought beta and focused on European recovery plays.

■ Potential 'quality trap'. Given much lower macro uncertainty, we would agree with our strategists' view of avoiding expensive quality stocks with poor momentum or catalysts: although BMW is a well-managed company with innovative products, a strong balance sheet and a good long-term outlook, we think this may create a "quality trap" for investors, as was the case in 2013.

BMW (BMWG.DE) 8 06 February 2014 Event path

We regard BMW as a well-managed premium company with an appealing product range. As our title suggests, however, we do not see a near-term spark to push the stock higher. Indeed, the only major launch is the X5 which is unlikely to have an incremental boost given the incumbent model has remained so popular. BMW's average model age is rising and model momentum fading particularly in the 5/6/7 suffixed models which we estimate accounted for 80% of auto EBIT in 2013E. The dividend yields a modest 3% and monthly sales growth figures are likely to slow or even turn negative against some very tough comparatives from 2013. We believe that BMW management will maintain their cautious tone from the 2013Q3 results meeting into the FY2013 results meeting on 20 March 2014 which will be the first opportunity for the company to provide forward guidance. Moreover, following disappointing 2013Q3 results, the risk is on the downside for earnings and margins and we are currently 10% below consensus estimates for 2015E.

Figure 10: BMW, Mini and Rolls-Royce new models through 2016 F – Facelift, S – Successor, N – New model, T – Termination, Q# - Launch quarter 2012 2013E 2014E 2015E 2016E BMW 3 Series (Estate) [N/Q4] 3 Series GT (Sedan) [N/Q2] 2 Series (Coupe) [N/Q1] C-MPV (MPV) [N/Q2] X2 (Crossover) [N/Q2] 3 Series (Sedan) [N/Q1] 4 Series (Sedan) [N/Q3] X6 (SUV) [S/Q4] 7 Series (Sedan) [S/Q3] 1 Series (H/B) [S/Q4] 7 Series (Sedan) [F/Q2] X5 (Sedan) [S/Q3] X4 (SUV) [N/Q3] X1 (Crossover) [S/Q3] 5 Series (Sedan) [S/Q4] Z4 [F/Q2] i3 (H/B) [N/Q4] 1 Series (H/B) [F/Q2] 1 Series (H/B) [N/Q2] 5 Series (Sedan) [F/Q4] X3 (SUV) [F/Q2] 6 Series Gran Coupe [N/Q2] 7 Series (Sedan) [F/Q2] 4 Series Cabrio (Coupe) [N/Q2]

Mini Mini Countryman (SUV) [F/Q4] Mini Clubvan (H/B) [N/Q1] Mini (H/B) [S/Q1] Mini Clubvan (H/B) [S/Q3] Mini Spacebox (MPV) [N/Q3] Mini Paceman (H/B) [N/Q1] Mini Clubman (H/B) [S/Q3] Mini Countryman (SUV) [S/Q3] Mini Coupe (H/B) [S/Q4] Mini Roadster (H/B) [S/Q4]

Rolls-Royce Phantom (Sedan) [F/Q2] Wraith (Coupe) [N/Q3] Ghost (Sedan) [F] Phantom (Sedan) [S/Q4] Phantom Drophead Cp [N/Q4] Source: Company data, IHS

Targets for 2014 and beyond BMW will provide their next update on March 19 when they release their 2013FY results. The guidance, we anticipate, will be for a similar level of revenue and profitability and unit sales as per the previous year. Given such tough comparatives, a target of matching the previous year's volumes may well be a stretch unless we see a recovery in European demand. Indeed, even if we do see a recovery, it is more likely to be focused on the periphery which are less important markets for BMW. Anything less than matching the previous year's levels will require downgrades to consensus expectations which have remained largely unchanged over the past two years, even increasing marginally. BMW has already set out new targets for its "Strategy Number One". This quantifies the ambitions for 2020 and Figure 11 details the mid-term targets for 2016. When compared to the European peer group, these appear impressive ambitions, however the comparison below is versus 2012 and appears underwhelming. Indeed, we highlight the downside risk to BMW's medium-term outlook as its model momentum fades.

BMW (BMWG.DE) 9 06 February 2014

Figure 11: BMW "Strategy Number One" mid-term targets, 2016 Strategy Number 1 2012 2016 R&D ratio 5.10% 5.0-5.5% CAPEX ratio 6.80% <7.0% Payout ratio 32% 30-40% Retail sales 1.845m 2m RoCE 75% >26% RoS 10.90% 8.0-10.0% FCF €3.809bn €3bn ROE Financial Services 21.2% >18% Source: Company data Monthly sales have tough comparatives BMW has enjoyed a surge in YoY unit sales growth over the last 3 years and that growth continued into 2013 with all regions contributing with the exception of Europe ex UK which continues to be depressed. During its Q3 results conference BMW reiterated that it still sees no sign of a recovery in Europe and price competition remains intense. Looking forward we are concerned that given an aging fleet and some tough comparatives, BMW may report a monthly sales decline for the first time since September 2009.

Figure 12: BMW unit sales growth rates – are they sustainable? YoY change in unit sales 2009 2010 2011 2012 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Germany -4.8% -1.3% 8.0% 0.7% 12.2% 9.9% -11.1% -7.4% -10.0% -16.0% 0.6% -15.5% -14.0% -2.9% -17.0% -24.3% UK -12.4% 13.6% 6.2% 4.3% 45.7% 44.6% 7.4% 30.6% 15.6% -10.8% 5.4% 11.3% 10.9% -1.3% -7.9% 9.0% Rest of -9.2% 3.5% 10.0% -0.5% -4.0% -0.6% -0.5% 1.3% 0.1% -2.1% 6.2% 5.4% 2.3% 0.5% 6.0% 8.9% Europe Americas -13.6% 12.0% 15.2% 11.9% 2.5% -10.1% 11.5% 11.7% 10.4% 19.1% 12.0% 29.3% 8.3% 6.2% 2.3% 1.8% China 37.5% 86.9% 37.4% 40.4% 14.7% 2.3% 5.3% 11.4% 14.8% 44.1% 39.4% 34.6% 20.8% 18.1% 16.9% 20.0% Rest of World -29.8% 24.7% 15.4% 15.1% 19.8% 29.3% 5.1% 5.9% 11.4% 13.5% 5.8% 10.3% 6.9% 7.3% 9.6% 7.4% plus RR BMW Group -10.4% 13.7% 14.2% 10.6% 9.9% 4.7% 3.0% 6.8% 6.0% 6.9% 12.3% 14.8% 6.3% 5.2% 2.7% 2.9% Source: Company data

BMW (BMWG.DE) 10 06 February 2014

BMW's model momentum fades

Figure 13: Average model age bottomed in 2011, margins follow closely BMW brand volume weighted average fleet age (LHS), EBIT margin (RHS, inv) 5 7% 8.0% 8% 9.2% 4 9.3% 9.6% 9% 3.8 3.8 10% 3.5 3 10.6% 11.6% 3.0 11% 2.6 12% 2

1.8 13%

1 14% 2010 2011 2012 2013E 2014E 2015E Average age (LHS) Auto EBIT Margin (RHS)

Source: IHS, Credit Suisse estimates As noted, BMW's positive model momentum started in 2010 with the launch of the new 5- Series. This was quickly followed by incremental models such as the X1 and subsequently a new 3-Series in 2011. This drove a reduction in its average model fleet age from 3.8 years in 2010 to 1.8 years in 2011. As BMW's average model age declined in 2011 and then rose again, so its EBIT margins have closely tracked the changes (Figure 13). It peaked at 11.6% as the average age bottomed to 1.8 years, and we expect a fall to 9.2% as the average model age rises again to 3.8 in 2015E before the next generation 5-series is launched in 2016.

BMW (BMWG.DE) 11 06 February 2014

Figure 14: Current average BMW model age is 3.0 years Figure 15: By end-2014, average age will rise to 3.5 years Years since start of production, at end-2013 Years since start of production, at end-2014

AVERAGE BMW 3.0 AVERAGE BMW 3.5 AVERAGE GROUP 3.4 AVERAGE GROUP 3.2 RR Phantom 10.9 RR Phantom 11.9 Mini 7.4 RR Phantom Drophead 7.8 Mini Clubman 7.4 RR Phantom Drophead 6.8 7 Series 6.3 Mini Clubman 6.4 Z4 6.0 X6 6.1 X1 5.3 7 Series 5.3 5 Series GT 5.3 Z4 5.0 RR Ghost 5.1 X1 4.3 5 Series 5.0 5 Series GT 4.3 Mini Countryman 4.4 RR Ghost 4.1 X3/X4 4.3 5 Series 4.0 6 Series 4.1 Mini Countryman 3.4 1/2 Series 3.5 X3 3.3 Mini Coupe 3.5 6 Series 3.1 3/4 Series 3.2 1/2 Series 2.5 Mini Roadster 3.1 6 Series Gran Coupé 2.8 Mini Coupe 2.5 Mini Clubvan 2.2 3/4 Series 2.2 3 Series GT 1.8 Mini Roadster 2.1 X5 1.4 6 Series Gran Coupé 1.8 RR Wraith 1.4 Mini Clubvan 1.2 i3 1.3 3 Series GT 0.8 Mini 1.1 X5 0.4 i8 1.0 RR Wraith 0.4 1 Series GT 0.5 i3 0.3 X6 0.4 2002 2004 2006 2008 2010 2012 2014 2002 2004 2006 2008 2010 2012 2014

Source: IHS, Credit Suisse estimates Source: IHS, Credit Suisse estimates

FX Rates: €/$ may provide some upside BMW has one of the highest exposures to the US$ of the European OEMs. The overall US$ exposure is over $20bn of which more than one-third is finance-related and sourced locally. We estimate that the US Spartanburg plant provides some $6bn of natural hedging which gets us to US$7bn net exposure. With FX rates falling back in 2013H1, we assume that 2014E is 75% hedged and 50% in 2015E. This leaves around $2bn of unhedged net exposure in the coming year with BMW's projected P&L at risk impact shown below. Figure 16: FX principal exposures for the year ahead and projected P&L impact on unhedged position (EUR millions) Year ahead exposure at end of: Projected P&L Impact for year following: 2012 2011 2012 2011 EURCNY 8,429 7,114 246 180 EURUSD 5,311 4,281 163 121 EURGBP 3,206 3,266 65 182 EURJPY 1,585 1,334 15 23 EURRUB 1,638 1,330 69 97 Source: Company data Therefore our Credit Suisse prediction of a weaker €/$ into 2014 is unlikely to have a material impact in the next 18 months unless the company's sales are significantly above budget. Spartanburg US plant expands further in 2014E Given the strength of the Euro during the noughties, BMW made a huge effort to increase production in the NAFTA region and this has been enhanced by adding the X3 and Z4 models to the X5 production facility in North Carolina. US production, as a percentage of total production, has risen from 8% in 2008 to 16% anticipated in 2014E. The new capacity of the US Spartanburg plant is 350k units.

BMW (BMWG.DE) 12 06 February 2014

Figure 17: BMW NAFTA production forecasts 2008 2009 2010 2011 2012 2013E 2014E 2015E BMW Z4 9,771 ------BMW X3 - - 16,078 121,561 150,143 165,000 150,000 125,000 BMW X4 ------7,000 35,000 BMW X5 123,271 79,015 98,245 110,605 106,439 95,000 125,000 125,000 BMW X6 37,697 42,651 43,380 43,899 44,937 40,000 40,000 40,000 Spartanburg 170,739 121,666 157,703 276,065 301,519 300,000 322,000 325,000 11.86% 9.67% 10.65% 15.88% 16.19% 15.25% 16.48% 17.28% Total production 1,439,918 1,258,417 1,481,253 1,738,160 1,861,826 1,967,500 1,954,100 1,880,780 Source: WardsAuto, Credit Suisse estimates

Figure 18: €/$ exchange rate 10Y Figure 19: €/Renminbi exchange rate 10Y

Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service

Figure 20: €/$ exchange rate 5Y Figure 21: Renminbi / $ exchange rate 5Y

Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service

BMW (BMWG.DE) 13 06 February 2014

China: BMW JV with Brilliance It is no secret that BMW's sharp share price move in 2010 was largely down to China. Indeed, the continued growth here has pushed the company to an all-time high of €86 this year. When BMW has underperformed on a short-term basis, it has usually been on negative newsflow regarding China and there has been a clear correlation between the share price of BMW and its Chinese JV partner, Brilliance. The BMW Brilliance venture currently produces three models out of two plants in Shenyang – the 3 and 5 Series sedans, and the X1 SUV. BMW holds a 50% stake in the venture, with Brilliance holding 40.5% and Shenyang's municipal government the other 9.5%. Following the introduction of the Tiexi plant in 2012, the total capacity was expected to reach 300,000 by year-end 2013. BMW does not specifically give profitability for China and there are a variety of revenue streams. Our own estimates indicate that China is responsible for around one-third of earnings. We discuss BMW's position in China and the Chinese auto market later in the report.

Figure 22: BMW and BMW share price relative to Figure 23: BMW and Brilliance Brilliance (bottom line) BMW EUR/share (LHS); Brilliance HKD/share (RHS) 100 15

80 10

60

5 40

20 0 2009 2010 2011 2012 2013 2014 BMW (LHS) Brilliance RHS)

Source: the BLOOMBERG PROFESSIONAL™ service Source: Thomson Reuters

BMW (BMWG.DE) 14 06 February 2014

Valuation and risks

BMW has re-rated since 2010 given the surge in China luxury sales and positive model momentum and it now has a much broader geographical sales base. This valuation also reflects the sustainability of a high single digit margin (albeit falling), positive FCF and sustainable dividend payout ratio, more in tune with its DAX peers. In our view, BMW's profile is now more akin to a defensive stock with a beta of 1.1. This may explain part of the reason for the underperformance in 2013 as the market sought beta and was focusing on European recovery plays. The stock only really came into its own in September when it bounced 12% in the first half of that month on the back of being a laggard and broker upgrades. The SXAP also enjoyed 9% growth during that short period. We see BMW as being fully valued, reflecting the positives of the past 4 years but not the risks from higher R&D costs, increased competition in its key profit driving model segments, an aging model range and risks from China. Our target price of €80 is based on a 10% fall in consensus EPS but we recognise that with 45% exposure to Europe, if macro stability continues and Eurozone auto demand recovers, then BMW will also be a major beneficiary but will underperform versus its peers as it did in 2013. Share performance BMW shares have performed strongly since the beginning of the 2010 and are up 268% to the end of 2013, having outperformed the sector by 64% and the market by 140%. Indeed, it has been the second best performing SXAP OEM behind Volkswagen since 2010. This is despite underperforming the SXAP by 20% in 2013 as investors moved in favour of higher beta investments and names deemed to be more leveraged to a European recovery. That said, Europe is still BMW's biggest region with 45% of sales although premium segment sales have remained more robust then volume sales.

Figure 24: European OEM YoY share price return Year SXAP BMW DCX FIAT RNO PSA POR3 VOW3 2010 44.5% 85.1% 36.3% 50.5% 20.2% 20.1% 36.4% 85.8% 2011 -24.1% -12.0% -33.1% -47.0% -38.4% -57.4% -18.9% -4.7% 2012 35.5% 40.9% 21.8% 6.8% 51.8% -48.2% 49.2% 48.7% 2013 37.3% 16.9% 52.2% 56.9% 43.7% 72.5% 22.6% 18.6% Source: the BLOOMBERG PROFESSIONAL™ service As we have explained in this report, we see few catalysts to help push the BMW share price higher in 2014 and anticipate a second year of SXAP underperformance. As we can see in Figure 25, BMW marginally underperformed the Stoxx Europe 600 index (SXXP) in 2013, and the stock is a consensual buy as per Bloomberg.

Figure 25: Global auto share price performance 2013

+150% +114%

+100%

+82%

+79%

+73%

+73%

+63%

+60%

+57%

+57%

+52%

+45%

+44%

+42%

+38% +37%

+50% +36%

+32%

+30%

+26%

+23%

+19%

+19%

+17%

+17% +16%

0%

GM VW

Fiat

Ford

GKN

Pirelli

Valeo

BMW

SXAP

SXXP

Nikkei

Suzuki

Autoliv

Honda

Toyota

Nokian

Renault

Daimler

Porsche

Peugeot

Brilliance

S&P 500 S&P

Goodyear Continental Bridgestone Source: the BLOOMBERG PROFESSIONAL™ service

BMW (BMWG.DE) 15 06 February 2014

We can see from Figure 26 how BMW has performed relative to its 50-, 100- and 200-day average price. We view this as a good indicator along with the RSI indicator of whether the stock is overbought or oversold. At the moment it is trading at the bottom of its RSI range which should provide some short-term support.

Figure 26: BMW share price and moving average line and RSI (bottom graph)

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Valuation BMW now looks reasonably valued versus its peer group and our concern is that consensus EPS looks too high. BMW trades on 10.5x our 2015E earnings which is 20% above its 10-year average excluding the distorted multiples during the financial crisis. This is a 40% premium to the sector and is at an all-time high relative to the European market ex-financials. On an EV/EBITDA basis, BMW trades on 3.1x which is a 20% premium to the sector. Using consensus 2015E EPS of €8.6, BMW trades on 10x P/E (9.4x as at 31 January) or a 22% premium to the sector. As per Figure 31 we can see that BMW is close to its all-time high, in terms of rolling forward year plus one P/E, last seen after the stock doubled in 2010 following the surge in Chinese demand. Given our expectation of future EPS downgrades, we think the current valuation provides little support for the share price.

Figure 27: BMW SP and consensus EPS expectations Figure 28: BMW 12m forward cons PE relative to SXXP

FY2013E EPS FY2014E EPS BMW share price 3.0 9 90 2.5 8.5 80 2.0 8 70

7.5 60 1.5

7 50 1.0 6.5 40 0.5 6 30 0.0 2000 2002 2004 2006 2008 2010 2012 2014 BMW

Source: the BLOOMBERG PROFESSIONAL™ service Source: Thomson Reuters

BMW (BMWG.DE) 16 06 February 2014

Our target price is €80 BMW trades on 2015E 10.5x P/E and 3.1x EV/EBITDA, which is a significant premium to the sector average. We value BMW on our lower than consensus earnings expectations and use its 35% premium to the average European OEM 2015E P/E of 7.6x to reach a valuation roughly in line with the current share price. Combined with our sum-of-the-parts valuation of €81, the average of the two gives us our target price of €80. Figure 29: 2014E sum-of-the-parts valuation €m unless stated Sales EV/Sales EV (I) EBITDA EV/EBIT EV (II) EBIT EV/EBIT EV (III) EV EBIT DA (Average) margin BMW Automobiles 71,265 0.55x 39,196 10,518 3.50x 36,815 6718 6.00x 40,311 38,774 9.4% BMW Motorcycles 1,550 0.35x 543 145 2.50x 363 50 5.00x 250 385 3.2% Eliminations (500) 3.0x (1,500) (1,500) SOTP Industrial Business 37,659

Financial Services 8,317 (book value) SOTP Operating Business 45,976

Net debt Industrial 10,910 Business (- net debt / + net cash) Pension provisions (3,875) Industrial Business Market Value Group 53,010

Number of shares 656

"Fair" value per share, € 81 Source: Company data, Credit Suisse estimates

Figure 30: European Auto OEM valuation ratios summary Price Mkt Industrial EV/Sales Industrial EV/EBITDA P/E Cap 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E BMW 80.72 51,282 43% 52% 52% 52% 2.7x 3.6x 3.4x 3.3x 8.4x 10.2x 10.5x 10.5x Daimler 60.70 64,561 28% 48% 46% 44% 2.6x 4.6x 3.9x 3.5x 7.4x 11.6x 10.5x 9.1x Fiat (Bloomberg) 7.14 8,924 23% 30% 29% 28% 2.5x 3.2x 2.9x 2.7x 16.2x NM 13.0x 7.7x Peugeot 11.17 3,962 3% 11% 10% 10% 0.3x 3.7x 2.4x 1.9x NM NM NM 6.8x Porsche 70.96 10,684 NM NM NM NM NM NM NM NM NM NM NM NM Renault 62.71 18,545 -14% 10% 10% 9% NM 1.0x 1.1x 1.0x 5.0x 15.0x 6.7x 5.3x Volkswagen Pref 185.50 83,529 35% 37% 36% 33% 3.0x 3.0x 2.6x 2.2x 2.9x 9.9x 8.2x 6.6x Average 27% 37% 36% 35% 2.2x 3.7x 3.1x 2.7x 5.9x 10.7x 9.1x 7.6x Source: Company data; Credit Suisse estimates; Bloomberg consensus estimates for Fiat

BMW (BMWG.DE) 17 06 February 2014

Figure 31: BMW consensus forward P/E Figure 32: DAI SP and consensus EPS expectations

12.00 FY2013E EPS FY2014E EPS DAI Share Price 11.00 7.5 65 10.00 7 60 9.00 6.5 55 8.00 6 50 7.00 5.5 45 6.00 5 40 5.00 4.5 35 4.00 4 30 3.00 3.5 25 2.00 3 20

Source: BLOOMBERG PROFESSIONAL™ service Source: BLOOMBERG PROFESSIONAL™ service

Is BMW a "Quality Trap"? Given less macro uncertainty, our strategists recommend avoiding expensive quality stocks with poor momentum or catalysts: although BMW is a well-managed company with innovative products, a strong balance sheet and a good long-term outlook, we think this may create a "quality trap" for investors, as was the case in 2013. As we can see below in Figure 33, European perceived "quality" companies with solid growth, strong balance sheets and strong RoE have underperformed in 2013 and continue to do so in 2014. We would include BMW within this bracket.

Figure 33: European Quality continues to underperform Figure 34: MSCI sector relative performance

115 MSCI quality price relative to respective market, 5 yrs ago = 100 5% YTD Transport Div fin Hlthcare eqpt US Construction EM 3% Real Estate Banks 110 Food prod. Europe Cap gds Autos 1% Utilities Retail Pharma Cons. svs Paper

105 Coml/Prof Svs Telecom -1% Mining Insur H'hold/prs Chemicals Energy Media -3% Food retail 100 Software

Cons dur Bev -5% Tech h'ware Tob. 95 -7% Semis

90 -9% Q4 13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service Cash is cash We are not concerned by the loan to Finco. This is an inter-company transaction that is making the best use of the treasury function, in our view. Inter-company dividends allow BMW's cash to be held in the most efficient manner with the least risk. An example would be through moving balances to more stable environments. Our overall issue with cash is that it should not be used in valuation. It is often quoted that BMW has €20 per share in cash and valuation should be adjusted accordingly. While this is true, we think the likelihood of investors receiving this cash is slim and should be discounted (although we note there is a possibility of a special dividend in 2016 to mark the 100-year anniversary of BMW).

BMW (BMWG.DE) 18 06 February 2014

Credit Suisse HOLT valuation Credit Suisse's HOLT® valuation tool derives a fair value of EUR 95 per share for BMW compared with our target price of EUR 80, suggesting upside potential of c17%.

Figure 35: HOLT valuation – warranted price EUR 95

BME - BI (BMWG)

Current Price: EUR 80.82 Warranted Price: EUR 95.03 Valuation date: 31-Jan-14 Sales Growth (parallel % point change to forecasts) Dec-11A Dec-12A Dec-13E Dec-14E Dec-15E -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 13.8 11.7 -1.1 3.1 0.5 EBITDA Mgn, % 14.9 14.5 15.8 15.7 16.1 -2.0% -33% -25% -16% -5% 6% Asset Turns, x 0.48 0.51 0.47 0.47 0.45

-1.0% -19% -9% 1% 13% 25% CFROI®, % 4.6 4.2 4.0 3.6 3.6 (parallel % point point % (parallel Disc Rate, % 6.9 6.5 4.5 4.5 4.5 0.0% -4% 6% 17% 31% 44% Asset Grth, % 8.6 4.0 4.3 3.4 3.0

change to forecasts) to change 1.0% 11% 22% 34% 48% 63% Value/Cost, x 0.9 1.0 0.6 0.6 0.6 Economic PE, x 19.0 22.7 15.3 16.5 16.0 EBITDA Margin 2.0% 25% 37% 51% 66% 82% Leverage, % 65.8 64.7 0.0 0.0 0.0

Sales Growth (in %) More than More than 25.00 10% Within 10% 10% upside downside 20.00

CFROI & Discount Rate (in %) 15.00 10.00 9.00 5.00 8.00 0.00 Historical 7.00 CFROI -5.00 6.00 Historical -10.00 Transaction 5.00 CFROI 2008 2010 2012 2014 2016

4.00 Forecast CFROI Operating Margin and EBITDA (in %) - see note* 3.00 25.00 Forecast 2.00 Transaction CFROI 20.00 1.00 Discount Rate 0.00 15.00 2008 2010 2012 2014 2016 10.00

HOLT HOLT - Credit Suisse Analyst Scenario Data Asset Growth (in %) 5.00

10.00 0.00 9.00 Historical Asset 2008 2010 2012 2014 2016 Growth Rate 8.00

7.00 Historical Asset Turns (x) Growth Incl 6.00 Intang 0.60 5.00 Forecast Growth 0.50 4.00 0.40 3.00 Forecast Growth Incl 2.00 Intang 0.30 1.00 Normalised Growth Rate 0.20 0.00 0.10 -1.00 2008 2010 2012 2014 2016 0.00 2008 2010 2012 2014 2016

Source: Credit Suisse HOLT®. CFROI, HOLT, and ValueSearch are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. * Operating margin (yellow) is EBITDA (grey) plus rental expense and R&D expense

Source: Company data, Credit Suisse HOLT

BMW (BMWG.DE) 19 06 February 2014

The CFROI® chart at the top of Figure 35 is a reflection of our forecasts for sales, margins and turns. Our assumptions result in a 2013E CFROI of 4.0% decreasing to 3.5% over the explicit period. Real asset growth is expected to decrease from 4.3% in 2013E to 2.6% by 2017E. Beyond the five-year window, HOLT assumes the CFROI and discount rate fade to 6.0%, while the asset growth fades to 2.5%—incorporating the economic reality of competition and causing high returns and growth to regress to the mean. HOLT uses the company- specific discount rate of 4.5% in this analysis (note: our DCF uses a WACC of 8.5%). Relative to other OEMs in the sector, BMW (and Daimler) from a HOLT perspective are lower risk and thus are awarded a lower Discount Rate. Thus, due to the perceived quality of BMW according to HOLT valuation metrics, a higher target price is derived than what our fundamental analysis expects. A more normalised Discount Rate of 8.0% results in a valuation closer to our target price. Risks Where could we be wrong? Given the contrarian nature of this call, we have to discuss where we could be wrong in our negative recommendation:

■ Chinese growth could continue on its strong path: Indeed, IHS forecasts to 2018 are expecting another 15m units of global light vehicle growth to bring annual sales to 100m. Half of this growth is expected to come from China and BMW remains well positioned to take advantage of this.

■ Electric cars: BMW could beat initial expectations for its i3 Electric Vehicle as first- mover demand plays its part. Management We think BMW's management is well regarded, with CEO Reithofer being credited with the introduction of common architecture and modularisation strategy to help push margins close to 10%. CFO Eichiner has also made a positive impact on the investment community.

BMW (BMWG.DE) 20 06 February 2014

Valuation

Figure 36: Group valuation 2010 2011 2012 2013E 2014E 2015E 2016E 10-Yr Avg. Price (Ord) (average), € 28.65 58.60 63.39 82.6 80.82 80.82 80.82 Price (Pref) (year-end), € 38.50 36.55 50.40 62.2 59.61 59.61 59.61 Number of shares (Total), m 655.2 655.6 655.6 655.6 655.6 655.6 655.6 No. of shares (Ordinary), m 602.0 602.0 602.0 602.0 602.0 602.0 602.0 No. of shares (Pref), m 53.2 53.6 54.0 54.0 54.0 54.0 54.0 Market capitalisation 19,294 37,234 40,884 53,083 51,872 51,872 51,872 Free float 53.7% 53.7% 53.7% 53.7% 53.7% 53.7% 53.7%

P/E 5.8x 7.9x 8.2x 10.4x 10.5x 10.6x 10.3x 9.3x P/E (year end price) 12.0x 7.0x 9.4x 10.4x 10.5x 10.6x 10.3x 9.3x Sector P/E 6.1x 6.9x 6.7x 11.5x 9.7x 7.6x 6.5x Market P/E 11.1x 12.8x 14.6x 15.9x 14.4x 13.0x 13.0x 12.7x P/E market relative 108% 54% 64% 65% 73% 81% 79% 0.7x P/E sector relative 95% 114% 121% 91% 108% 139% 1.2x EPS, € 4.91 7.45 7.77 7.93 7.69 7.66 7.82 chg, % 1474.3% 51.6% 4.4% 2.0% -3.1% -0.4% 2.1% DPS (Ordinary), € 1.30 2.30 2.50 2.78 2.92 3.06 3.13 chg, % 333.3% 76.9% 8.7% 11.0% 5.2% 4.8% 2.1% DPS (Preference), € 1.32 2.32 2.52 2.80 2.94 3.08 3.15 chg, % 312.5% 75.8% 8.6% 10.9% 5.2% 4.8% 2.1% Dividend Yield % 4.5% 3.9% 3.9% 3.4% 3.6% 3.8% 3.9% Payout ratio, % 26.4% 30.7% 32% 35% 38% 40% 40% Dividend declared 853 1,509 1,641 1,822 1,917 2,010 2,053 Cover, % 377.8% 323.7% 310.9% 285.7% 263.2% 250.0% 250.0% Source: Company data, Credit Suisse estimates

Figure 37: RoCE – Industrial business 2010 2011 2012 2013E 2014E 2015E 2016E 10-Yr Avg. Fixed assets (PPE) 11,408 11,646 13,295 15,337 16,865 17,966 18,548 Intangible fixed assets 4,934 4,738 4,720 4,720 4,720 4,720 4,720 Inventories 7,758 9,627 9,714 11,009 11,119 11,121 11,344 Trade receivables 2,097 3,142 2,419 2,482 2,527 2,629 2,681 Total assets 26,197 29,153 30,148 33,547 35,230 36,436 37,293

Trade payables 3,912 4,844 5,946 5,955 5,747 5,755 5,872 Capital Employed 22,285 24,309 24,202 27,592 29,483 30,681 31,421

Operating profit 4,426 7,522 7,633 6,895 6,765 6,699 6,824 35% tax 1,549 2,633 2,672 2,413 2,368 2,345 2,388 NOPAT Industrial Business 2,877 4,889 4,961 4,482 4,397 4,354 4,436 RoCE Industrial Business 12.9% 20.1% 20.5% 16.2% 14.9% 14.2% 14.1% WACC 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% Source: Company data, Credit Suisse estimates

BMW (BMWG.DE) 21 06 February 2014

Figure 38: Industrial business valuation 2010 2011 2012 2013E 2014E 2015E 2016E 10-Yr Avg. Market capitalisation 19,294 37,234 40,884 53,083 51,872 51,872 51,872 Financial Services 1x Bk 5,216 7,169 7,631 8,231 8,317 8,635 8,627 Net cash (debt) I 11,065 11,253 13,028 10,910 11,272 11,991 13,460 Pension provisions 367 855 3,875 3,875 3,875 3,875 3,875 Enterprise Value 3,380 19,667 24,100 37,818 36,157 35,120 33,660

EBITDA margin, % 14.8% 17.1% 15.8% 14.7% 15.2% 15.7% 16.2% EBIT margin, % 8.0% 11.6% 10.6% 9.6% 9.3% 9.2% 9.2% EBT margin, % 7.1% 10.6% 10.0% 9.6% 9.3% 9.2% 9.2% Net income margin, % 4.8% 7.8% 6.6% 6.5% 6.2% 6.2% 6.2% EV/Sales 0.06x 0.30x 0.34x 0.52x 0.50x 0.48x 0.45x 0.40x EV/EBITDA 0.41x 1.77x 2.13x 3.56x 3.27x 3.08x 2.80x 2.87x EV/EBIT 0.76x 2.61x 3.16x 5.48x 5.34x 5.24x 4.93x 5.16x P/E relative to market 108% 54% 64% 65% 73% 81% 79% 67% P/E 5.83x 7.87x 8.16x 10.42x 10.52x 10.56x 10.34x 9.24x

Balance Sheet Equity 23,993 26,154 28,105 30,986 33,615 36,107 38,639 Working capital 5,943 7,925 6,187 7,535 7,899 7,995 8,154 Change in working capital 388 1,982 -1,738 1,348 363 96 158 Net debt (cash) -11,065 -11,253 -13,028 -10,910 -11,272 -11,991 -13,460 Capital employed 22,285 24,309 24,202 27,592 29,483 30,681 31,421 NOPAT 2,970 5,501 5,004 4,689 4,533 4,488 4,572 Tax rate, % 32.9% 26.9% 34.4% 32.0% 33.0% 33.0% 33.0% BVPS 36.62 39.90 42.87 47.27 51.28 55.08 58.94 RoE (pre tax) 17.1% 27.4% 26.5% 23.4% 21.0% 19.3% 18.3% RoE (post tax) 11.5% 20.0% 17.4% 15.9% 14.1% 12.9% 12.3% RoCE 11.9% 21.5% 19.5% 18.2% 15.9% 15.0% 14.8% EV/CE 0.15x 0.81x 1.00x 1.37x 1.23x 1.14x 1.07x Price/Book 1.61x 1.30x 1.70x 1.75x 1.58x 1.47x 1.37x Net debt (incl pensions) -10,698 -10,398 -9,153 -7,035 -7,397 -8,116 -9,585

Cash Flow Operating cash flow 8,149 8,110 9,167 6,777 8,177 8,827 9,337 Investing cash flow -5,541 -5,725 -5,530 -6,211 -5,897 -6,099 -5,817 Financing cash flow -1,376 -2,131 -1,983 -1,822 -1,917 -2,010 -2,053 FCF 2,608 2,385 3,637 565 2,280 2,729 3,521 FCFPS 3.98 3.64 5.55 0.86 3.48 4.16 5.37 FCF Yield 6.8% 7.0% 7.6% 1.0% 4.3% 5.2% 6.6% Source: Company data, Credit Suisse estimates

BMW (BMWG.DE) 22 06 February 2014

Financials

Figure 39: Group income statement & cash flow Income statement 2010 2011 2012 2013E 2014E 2015E 2016E Revenue 60,477 68,821 76,848 76,005 78,386 78,800 80,376 Cost of Sales -49,562 -54,276 -61,354 -60,453 -62,588 -63,039 -64,308 Gross profit 10,915 14,545 15,494 15,551 15,798 15,760 16,068 Sales and administrative costs -5,529 -6,177 -7,007 -6,926 -7,367 -7,385 -7,533 Net other operating income -292 -350 -187 -375 -425 -440 -440 Other operating income 766 782 829 725 725 730 730 Other operating expense -1,058 -1,132 -1,016 -1,100 -1,150 -1,170 -1,170 EBIT 5,094 8,018 8,300 8,250 8,005 7,935 8,095 Margin, % 8.4% 11.7% 10.8% 10.9% 10.2% 10.1% 10.1% Financial result -258 -635 -481 -450 -440 -400 -400 Result from equity accounted investments 98 162 271 300 300 300 300 Other financial result -75 -617 -592 -750 -740 -700 -700 EBT 4,836 7,383 7,819 7,800 7,565 7,535 7,695 Income tax (expense) -1,602 -2,476 -2,697 -2,574 -2,497 -2,487 -2,539 Tax rate, % 33.1% 33.5% 34.5% 33.0% 33.0% 33.0% 33.0% Net profit 3,234 4,907 5,122 5,226 5,069 5,049 5,156 Minority interest -16 -26 -26 -28 -30 -30 -30 Profit attributable to shareholders 3,218 4,881 5,096 5,198 5,039 5,019 5,126 Number of shares (m) 655.2 655.6 655.6 655.6 655.6 655.6 655.6 EPS 4.91 7.45 7.77 7.93 7.69 7.66 7.82 DPS (Ordinary) 1.30 2.30 2.50 2.78 2.92 3.06 3.13

Cash flow Net profit 3,234 4,907 5,122 5,226 5,069 5,049 5,156 Current tax 1,430 2,868 2,908 Depreciation & Amortisation 9,242 3,654 3,716 3,723 4,294 4,722 5,210 Change in provisions 911 779 446 -30 0 0 0 Change in deferred taxes 340 -338 -211 691 0 0 0 Other non-cash income and expense items -454 -231 -1,014 -500 -1,000 -1,000 -1,000 Change in current assets and liabilities -403 -1,615 1,755 -1,315 -371 -88 -150 Change in inventories -1,170 -1,715 -108 -1,290 -110 -3 -222 Change in receivables -427 -800 744 -128 -40 -105 -56 Change in liabilities 1,194 900 1,119 102 -222 20 128 Income taxes paid -1,318 -2,701 -2,462 Others 762 -1,448 -4,897 14 0 0 0 Operating cash flow 13,651 5,713 5,076 7,808 7,992 8,683 9,215 Investment in intangible assets and PPE -3,263 -3,679 -5,236 -5,765 -5,822 -5,824 -5,792 Expenditure for investments -80 -543 -171 -36 -25 -25 -25 Addns to receivables from sales financing -61,120 -1,395 -691 -650 0 Investment in marketable securities -2,723 -2,073 -1,265 Proceeds from marketable securities 798 1,317 1,090 Investing cash flow -14,522 -5,499 -5,433 -7,196 -6,538 -6,499 -5,817 Buy-back of treasury shares 18 16 19 -64 0 0 0 Dividend payment -197 -852 -1,516 -1,822 -1,917 -2,010 -2,053 Interest Paid -223 -82 -102 Proceeds from the issue of bonds 4,578 5,899 7,977 6,000 6,000 6,000 6,000 Repayment of bonds -3,406 -5,333 -6,727 -5,400 -5,400 -5,400 -5,400 Change in other financial liabilities -292 191 2,159 1,000 1,000 1,000 1,000 Financing cash flow 510 87 952 -286 -317 -410 -453 Net change in cash -335 344 594 327 1,137 1,774 2,946 FCF from operating & investing cash flow -871 214 -357 613 1,454 2,184 3,399 Source: Company data, Credit Suisse estimates

BMW (BMWG.DE) 23 06 February 2014

Figure 40: Group balance sheet 2010 2011 2012 2013E 2014E 2015E 2016E Intangible assets 5,031 5,238 5,207 5,207 5,207 5,207 5,207 Property, plant and equipment 11,427 11,685 13,341 15,383 16,911 18,012 18,594 Leased products 19,088 23,112 24,468 24,968 25,968 26,968 27,968 Investments accounted at equity 212 302 514 550 575 600 625 Other investments 177 561 548 548 548 548 548 Receivables from sales financing 27,126 29,331 32,309 32,309 32,500 32,650 32,650 Financial assets 1,867 1,702 2,148 2,148 2,148 2,148 2,148 Deferred taxes 1,393 1,926 2,001 1,498 1,498 1,498 1,498 Other assets 692 568 800 800 800 800 800 Total Non-current assets 67,013 74,425 81,336 83,411 86,155 88,431 90,038 Inventories 7,766 9,638 9,725 11,015 11,125 11,127 11,350 Trade receivables 2,329 3,286 2,543 2,671 2,710 2,816 2,872 Receivables from sales financing 18,239 20,014 20,605 22,000 22,500 23,000 23,000 Financial assets 3,262 3,751 4,612 4,612 4,612 4,612 4,612 Current tax 1,166 1,194 966 907 907 907 907 Other assets 2,957 3,345 3,693 3,693 3,693 3,693 3,693 Cash and cash equivalents 7,432 7,776 8,370 8,697 9,834 11,608 14,554 Total Current assets 43,151 49,004 50,514 53,595 55,381 57,764 60,988 Total Assets 110,164 123,429 131,850 137,006 141,536 146,195 151,026 Subscribed capital 655 655 656 654 654 654 654 Capital reserves 1,939 1,955 1,973 1,911 1,911 1,911 1,911 Revenue reserves 22,492 26,102 28,340 31,717 34,838 37,847 40,920 Accumulated other equity -1,182 -1,674 -674 -674 -674 -674 -674 Equity to shareholders 23,904 27,038 30,295 33,608 36,729 39,738 42,811 Minority interests 26 65 107 135 165 195 225 Total Equity 23,930 27,103 30,402 33,743 36,894 39,933 43,036 Pension provisions 1,563 2,183 3,965 3,965 3,965 3,965 3,965 Other provisions 2,721 3,149 3,513 3,483 3,483 3,483 3,483 Deferred tax 3,400 3,273 3,040 3,228 3,228 3,228 3,228 Financing liabilities 35,833 37,597 39,095 39,695 40,295 40,895 41,495 Other liabilities 2,583 2,911 3,404 3,404 3,404 3,404 3,404 Total Non-current liabilities 46,100 49,113 53,017 53,775 54,375 54,975 55,575 Other provisions 2,826 3,104 3,282 3,282 3,282 3,282 3,282 Current tax 1,198 1,363 1,482 1,437 1,437 1,437 1,437 Financing liabilities 26,520 30,380 30,412 31,412 32,412 33,412 34,412 Trade payables 4,351 5,340 6,433 6,535 6,313 6,334 6,462 Other liabilities 5,239 7,026 6,822 6,822 6,822 6,822 6,822 Total Current liabilities 40,134 47,213 48,431 49,488 50,266 51,287 52,415 Total Equity and Liabilities 110,164 123,429 131,850 137,006 141,536 146,195 151,026 Net Industrial debt (cash) -11,065 -11,253 -13,028 -10,910 -11,272 -11,991 -13,460 Change in working capital -343 441 -1,197 1,315 371 88 150 Net debt (cash) 20,651 24,787 26,007 26,680 26,543 25,769 23,823 Source: Company data, Credit Suisse estimates

BMW (BMWG.DE) 24 06 February 2014 Pareto's 80/20 Law How this explains BMW's model momentum story

Theme: Pareto's Law states that within any population, some variables are more important than others. Italian economist Vilfredo Pareto, in the early 20th century, created a mathematical formula to understand the unequal distribution of wealth in his country. He observed that roughly 20% of his compatriots were responsible for or controlled 80% of the domestic wealth. In the late 1940s, this was taken further by Dr Joseph Juran, who used this to explain how a relatively large proportion of production defects stemmed from a small percentage of causes. Variant view: Using Pareto's 80/20 law we highlight how a relatively small volume of production can have a disproportionate impact on earnings. Indeed, analysts appear to have taken model momentum for granted as having simply a short-term impact on sentiment, ignoring the earnings impact of key models. However, our calculations shows the age profile of key models continues to drive margins and should be a focus for investment decisions. For BMW, we estimate the 5/6/7 suffix models account for 80% of BMW industrial profits in 2013E but only 30% of volume. Margins will be squeezed as the average age of these models increases, demand tapers off and incentives increase. Moreover, we see increased competition from Mercedes, JLR, Porsche and Maserati in these key BMW model segments. We do not see a significant pick-up in its model cycle until 2016. Pareto's Law can be used to identify the areas where you are making very high returns and to concentrate on these areas. The key is to direct a great proportion of your effort or focus on the strategy that generates the largest proportion of profits. Clearly we are not suggesting that car makers should focus only on their highest margin products. Moreover, a full complement of models is often desirable. Indeed, volume and scale are important, with new emission legislation requiring a lower average level of CO2 per km per fleet. This was a large part of the rationale or necessity for Porsche to acquire Volkswagen back in 2007. Higher R&D costs also need to spread over a wider production base. Overall, from an investor perspective, Pareto's Law reminds us how important certain models are within a range and how their life-cycle is a key driver of profitability and margin trajectory.

Figure 41: Gross contribution as % of total gross profit estimated per model 2012 2013E 2014E 2015E 2016E 1 Series 2.2% 2.1% 1.9% 1.9% 1.7% 3 Series 8.0% 10.3% 10.0% 9.9% 9.5% 4 Series 0.0% 0.4% 1.0% 0.9% 0.7% 5 Series 32.3% 34.7% 31.2% 28.4% 25.5% 5 Series GT 2.5% 2.6% 2.2% 2.0% 1.9% 6 Series 4.9% 6.1% 5.4% 5.2% 4.7% 7 Series 13.1% 12.9% 11.3% 11.3% 15.5% X1 2.5% 2.8% 2.6% 2.2% 2.5% X3 4.3% 4.7% 4.4% 3.7% 2.9% X4 0.0% 0.0% 0.0% 0.0% 0.0% X5 17.2% 17.8% 19.4% 19.5% 19.1% X6 6.9% 6.0% 4.8% 5.6% 5.5% Z3/Z4 0.6% 0.6% 0.5% 0.5% 0.6% i3 0.0% 0.0% 0.1% 0.3% 0.3% Mini 2.5% 2.7% 2.7% 2.8% 2.8% Rolls Royce 2.8% 2.9% 2.9% 3.0% 3.1% 5 / 6 / 7 suffix % 76.9% 80.1% 74.3% 72.0% 72.3% Source: Company data, Credit Suisse estimates

BMW (BMWG.DE) 25 06 February 2014

Our contribution analysis per model above highlights the importance of just a few models within each brand as being the key drivers of earnings. Our example with BMW below is more like an 80/30 split: we estimate that 80% of automotive gross contribution is derived from just 3 platforms, the 5 series (including GT and 6-series), 7-series and the X5 (including X6), or just 30% of the units sold.

Figure 42: BMW overall model age vs. margin Figure 43: Mercedes overall model age vs. margin 5 7% 5 4% 8.0% 8% 4.2 9.2% 3.9 3.9 4 9.3% 4 3.8 6% 9.6% 9% 3.8 6.3% 3.8 10% 7.1% 3.5 2.9 3 10.6% 3 8% 8.7% 2.6 11.6% 3.0 11% 2.6 9.0% 12% 9.0% 2 2 10% 9.8% 1.8 13%

1 14% 1 12% 2010 2011 2012 2013E 2014E 2015E 2010 2011 2012 2013E 2014E 2015E Average age (LHS) Auto EBIT Margin (RHS) Average age (LHS) Auto EBIT Margin (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Daimler's model momentum versus BMW Daimler's model momentum was probably the only pure automotive fundamental story in 2013 and compares favourably with BMW which had a similar phenomenon back at the start of this decade. In March 2010, a surge in Chinese demand also coincided with a sharp upswing in BMW's model profile beginning with the relaunch of the well-received 5- Series. This was the first vehicle to take advantage of a more standardised architecture and modularisation which has also been a key part of the 2010 to 2012 restructuring plan of achieving 8-10% margins and selling 1.5m cars for the first time in its history. European car makers have long looked enviously at the margins generated by the US "Big 3" and looking back this was a key reason why Daimler bought Chrysler back in 1998 although ignoring the cyclicality of NAFTA demand. With BMW it was the start of a European OEM consistently generating close to double-digit margins.

Figure 44: BMW's 5/6/7 series drive EBIT margins Figure 45: Mercedes' E/S/M/G-classes drive margins

5 7% 5 4.7 4% 8.0% 8% 4.0 4.0 3.9 4 9.3% 3.8 4 6% 9.6% 9% 3.5 3.4 9.2% 6.3% 10% 3.5 7.1% 2.7 3 3.4 3 8% 3.1 10.6% 11% 2.2 8.7% 9.0% 12% 9.0% 2 11.6% 2 10% 9.8% 13%

1 14% 1 12% 2010 2011 2012 2013E 2014E 2015E 2010 2011 2012 2013E 2014E 2015E Average age 5/6/7 Series (LHS) Auto EBIT Margin (RHS) Average age E/S/M/G-Class (LHS) Auto EBIT Margin (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

BMW (BMWG.DE) 26 06 February 2014

Figure 46: BMW contribution by model estimates, 2013E Factory Cost Ex-extras 2013E Effect retail Ex-sales tax Ex-dealer Contrib % Ex-extras Extras Total contrib % Gross Ind % Units sold price margin vehicle contrib profit contrib 19% 12% 13,320 1,963,798 1 Series 27,650 23,235 20,447 4% 175 m 109 m 284 m 2.1% 10.9% 3 Series 35,313 29,674 26,113 6% 784 m 327 m 1,111 m 8.3% 25.5% 4 Series 43,488 36,544 32,159 10% 47 m 12 m 59 m 0.4% 0.8% 5 Series 55,440 46,588 40,998 25% 3,553 m 1,066 m 4,619 m 34.7% 17.7% 5 Series GT 60,415 50,769 44,677 30% 272 m 68 m 340 m 2.6% 1.0% 6 Series 83,700 70,336 61,896 40% 685 m 129 m 814 m 6.1% 1.4% 7 Series 92,400 77,647 68,329 40% 1,531 m 191 m 1,722 m 12.9% 2.9% X1 31,725 26,660 23,461 5% 189 m 189 m 379 m 2.8% 8.2% X3 41,325 34,727 30,560 8% 385 m 240 m 625 m 4.7% 8.0% X5 70,320 59,092 52,001 35% 1,952 m 418 m 2,370 m 17.8% 5.5% X6 69,760 58,622 51,587 35% 662 m 142 m 804 m 6.0% 1.9% Z3/Z4 39,863 33,498 29,478 15% 57 m 19 m 76 m 0.6% 0.7% i3 36,075 30,315 26,677 2% ------Mini 20,975 17,626 15,511 5% 237 m 118 m 355 m 2.7% 15.5% Rolls Royce 309,671 260,227 229,000 30% 249 m 100 m 349 m 2.6% 0.2%

5 / 6 / 7 10,670 m 80.1% 30.3% Source: Company data, Credit Suisse estimates

Figure 47: Mercedes contribution by model estimates, 2014E 2014E Contribution analysis Effective Ex-sales Ex-dealer Contrib % Ex-extras Extras Total % Gross % Units retail price tax margin vehicle contrib contrib profit sold contrib 10% 19% 12% 15,777 1,651,908 A-Class 25,311 21,270 18,718 7% 206 m 147 m 353 m 2.2% 9.5% B-Class 28,051 23,573 20,744 7% 155 m 110 m 265 m 1.7% 6.4% CLA 30,529 25,655 22,576 10% 224 m 112 m 336 m 2.1% 6.0% GLA/GLC 31,790 26,714 23,509 15% 321 m 107 m 428 m 2.7% 5.5% Viano 42,309 35,554 31,288 20% 124 m 31 m 154 m 1.0% 1.2% C-Class 35,013 29,423 25,892 10% 807 m 404 m 1,211 m 7.7% 18.9% SLK 42,584 35,785 31,491 15% 127 m 42 m 170 m 1.1% 1.6% C-Class Coupe 35,414 29,760 26,188 15% 94 m 31 m 125 m 0.8% 1.4% E-Class 43,988 36,965 32,529 33% 2,882 m 437 m 3,318 m 21.0% 16.3% CLS 62,368 52,410 46,121 23% 351 m 76 m 428 m 2.7% 2.0% S-Class 82,651 69,455 61,120 40% 2,688 m 504 m 3,191 m 20.2% 6.7% CL 125,051 105,085 92,475 45% 62 m 7 m 69 m 0.4% 0.1% SL 109,260 91,815 80,797 30% 208 m 35 m 243 m 1.5% 0.5% SLS/SLC 188,615 158,500 139,480 45% 63 m 7 m 70 m 0.4% 0.1% ML-/MLC-Class 57,965 48,710 42,865 35% 2,038 m 291 m 2,329 m 14.8% 8.2% G-Class 104,055 87,441 76,948 50% 578 m 58 m 635 m 4.0% 0.9% GL 78,945 66,340 58,379 40% 1,221 m 153 m 1,374 m 8.7% 3.2% GLK 38,145 32,055 28,208 20% 395 m 99 m 494 m 3.1% 4.2% Smart 11,645 9,785 8,611 2% 18 m 46 m 64 m 0.4% 6.5%

E / S / M / G 11,342 m 71.9% 39.4% Source: Company data, Credit Suisse estimates

BMW (BMWG.DE) 27 06 February 2014 China Why China is so important to BMW

Theme: It is no secret that BMW's historic share price move in 2010 was largely down to China. Indeed, the continued growth here has pushed the company to an all-time high of €86. When BMW has underperformed in the short term, it has usually been when there has been some negative newsflow regarding China. There has also been a close correlation between the share price of BMW and its Chinese partner, Brilliance. Variant view: We have curbed our enthusiasm on China and highlight significant risks in 2014, not least on a macro perspective but also on auto-specific issues.

Figure 48: Estimated BMW China profitability Figure 49: China sales and % of Group PBT in EUR millions (LHS), % of group (RHS) Unit sales in thousands (LHS), % of group (RHS) 3,000 40% 400 k 30% China PBT China PBT as % of Group 35% 2,500 23.6% 300 k 30% 21.2% 20% 2,000 25% 200 k 16.9% 1,500 20% 13.8% 10% 15% 8.5% 1,000 100 k 10% 5.5% 500 5% 0 0% 2008 2009 2010 2011 2012 2013 0 0% BMW China Sales % of Total 2010 2011 2012 2013E 2014E 2015E Source: Company data, Credit Suisse estimates Source: Company data China continues to be a key market for BMW and was a major factor in the share price outperformance of the past four years. Although BMW does not specifically give profitability from China and there are a variety of revenue streams, our estimates indicate that China is responsible for around one-third of earnings. BMW still benefits from strong premium growth

Figure 50: Strong premium segment for Europeans Figure 51: Premium growth outpaces market Share of sales for BMW, Mercedes-Benz, Audi YoY sales growth 8% 80%

6.3% 6.1% 6% 5.1% 60% 2.8% 4.1% 2.6% 4% 3.4% 2.2% Euro Premium 3.1% 1.7% 40% 37.4% CAGR 1.8% 2.2% 1.5% 1.6% 2.1% 2% 1.3% 1.0% 0.9% 20% Market 1.1% 1.4% 1.3% 1.3% 0.6% 0.7% 21.2% CAGR 0% 2008 2009 2010 2011 2012 2013 0% Mercedes-Benz BMW Audi 2008 2009 2010 2011 2012 2013

Source: Company data, CAAM Source: Company data, CAAM

BMW (BMWG.DE) 28 06 February 2014

Figure 52: Premium segment slowed since 2010, Figure 53: Audi leads on local production, gets pricing Mercedes-Benz momentum dropped sharply advantage, but BMW, Mercedes catching up Annual growth in sales volume % of locally produced vehicles

120% Mercedes 100% 40.7% CAGR Audi 100% 83.5% 80%

80% 60% 54.0% Mercedes-Benz 60% 53.1% BMW 42.8% CAGR 40% BMW 40% Audi 30.7% CAGR 20% 20%

0% 0% 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013

Source: Company data, CAAM Source: Company data, CAAM

Similarly, sales of SUVs, seen as more luxurious, spacious and safe, have grown the fastest compared to other vehicle types, at 41.1% CAGR over the last five years (Figure 54). Like the higher-than average increase in premium segment sales, this is another manifestation of the demand derived from a combination of improving income prosperity, and societal image consciousness. Demand for luxury SUVs has been picked up on by Audi, BMW and Mercedes-Benz, which have all begun domestic production of such vehicles in the last three years in order to access this growing market more effectively. Audi has so far given the most attention to this segment, being the first to begin domestic production of its model, the Q5, in 2010. Of its Chinese production volume, 26.8% is the Q5 SUV, compared with 25.1% for Mercedes- Benz and its GLK-Class SUV (launched 2011), and only 14.1% for BMW and its X1 SUV (launched 2011) (Figure 55). Audi also has a significant lead over BMW and Mercedes- Benz in absolute volume of SUV production. Figure 54: SUV sales outperform market Figure 55: BMW SUV production could be improved 5-year CAGR of sales by vehicle type Units of SUVs produced & as percentage 50% 120,000 26.8% 41.1% 100,000 40% 90,157

80,000 30% 60,000 19.7% 20% 16.9% 17.9% 18.0% 25.1% 40,000 14.1% 25,929 10% 20,641 20,000

0% 0 MPV Sedans Crossovers Overall SUV BMW Mercedes-Benz Audi

Source: CAAM Source: Marklines Government curtails luxury spend Demand in the luxury sector could yet face a more testing consumer environment. A government clampdown on luxury spending began with restraining extravagant banquet- style events and lavish gift-giving for officials. Gifts of luxury vehicles do not appear to have been as typical as luxury watches, but we would expect them to also face some political pressure. Watches and jewellery sales took the hardest hit, with sales growth declining from near 50% to zero in mid-2012. However, since then, growth has rebounded to around 30% with private demand filling the gap.

BMW (BMWG.DE) 29 06 February 2014

Luxury cars have been relatively unfazed so far, with steady growth around 20% but for a small drop in early 2013 (which could be attributed to seasonal effects). However, longer- term, advertising restrictions could impact brand value and put more prolonged pressure on sales of luxury cars. Political pressure is also likely to originate from the top down, with government officials being the first to dial down their use of premium cars. The tier I cities, most influential and most exposed to media scrutiny, will also likely see the sharpest effects, increasing the importance of carmakers' expansion into lower-tier cities.

Figure 56: Watches, jewellery sales growth drops acutely, Figure 57: Luxury cars relatively unfazed but recovers Hong Kong YoY change in watches, jewellery sales National YoY change in sales of Audi, BMW, Mercedes-Benz 80% 100%

80% Crackdown 60% Crackdown

60% 40% 40% 20% 20%

0% 0%

-20% -20% Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 YoY Change in Sales 6m Moving Average YoY Change in Sales 6m Moving Average

Source: Hong Kong Census and Statistics Bureau Source: CAAM

The European position BMW JV with Brilliance BMW's activities in China consist of a joint venture with Brilliance Auto as well as an import business. The BMW Brilliance venture begun in 2003 currently produces three models out of two plants in Shenyang in North-east China – the 3 Series and 5 Series sedans, and the X1 SUV. BMW holds a 50% stake in the venture, with Brilliance holding 40.5% and Shenyang's municipal government holding the other 9.5%. Following the introduction of the Tiexi plant in 2012, the total capacity is expected to reach 300,000 by year-end 2013.

Figure 58: Sales volume growth since 2008 Figure 59: Sales growth peaked in 2010, now near 40% Total sales volume (LHS), annual growth rate (RHS) YoY sales growth 500 k 38% CAGR 150%

400 k 326,400 326,400 100% 300 k 232,600 50% 200 k 169,000

90,500 100 k 65,800 0% 2008 2009 2010 2011 2012 2013 0 2008 2009 2010 2011 2012 2013 -50% Local Imports BMW Market

Source: Company data, CAAM Source: Company data, CAAM Relative to Volkswagen's production presence in China, BMW's is small – roughly a tenth of the capacity. The Munich-based carmaker instead imports a large proportion of its sales, leveraging demand for the less price-sensitive premium segment. Growth in sales volume

BMW (BMWG.DE) 30 06 February 2014 has been significant in the last five years, nearly 50% CAGR (Figure 58). Monthly sales growth peaked at over 100% year-on-year in 2010 following government incentives to stimulate demand, but has since steadied to around 20% (Figure 59). Revenue growth from China has slightly outpaced volume growth, signalling improving pricing environments (Figure 60), and notably, BMW Brilliance has outperformed the import business, growing at a compounded annual rate of 64.3% since 2008 while delivering a profit margin increase of 6.3% in the period to 10.1% (Figure 61).

Figure 60: China revenues growing over 50% a year Figure 61: JV rev growth even faster, margins improving Revenue from China, EUR millions (LHS), % of total (RHS) Profit from BMW Brilliance, EUR millions (LHS), profit margin (RHS)

20,000 51.2% CAGR 50% 5,000 12% 10.1% 40% 4,000 10% 15,000 14,448 11,591 2,962 8% 30% 3,000 10,000 8,444 64.3% 6% CAGR 1,729 20% 2,000 3.8% 18.8% 4% 5,000 4,039 1,046 2,763 10% 1,000 532 2% 406 280 25 42 102 175 0 0% 0 0% 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 China Revnue (LHS) As % of Total (RHS) Revenue (LHS) Equity result (LHS) Margin (RHS)

Source: Company data Source: Company data BMW's mix of car sales is weighted to its luxury sedans, of which the 3 Series and the 5 Series are locally produced, giving more favourable pricing (Figure 62). To adapt these models to the local market, BMW has implemented wheelbase extensions as per the current industry standard. In terms of segment split, sedans dominate sales in accordance with BMW's area of focus. However, the share of sedan sales has fallen by 10.2% since 2009, while SUVs' share has stayed roughly constant and hatchback/coupe sales have picked up by 8.1%, driven by the Mini (Figure 63). IHS projects that production growth will fall sharply until 2014, before stabilising in mid- single digit numbers. By the end of the decade, total production is expected to reach 352,000 vehicles a year (Figure 64). In 2014, BMW also plans to release the i3 electric vehicle to China.

Figure 62: Locally produced 3 Series, 5 Series and X1 Figure 63: Sedans have majority share, but has fallen contribute majority of sales slightly since 2009 Share of sales by model Share of sales by segment

100% 100% 4.0% 23.0% Hatchback/ 12.1% Others 22.7% coupe 80% 4.0% 80% X3 8.2% 18.0% 8.4% (X1) 60% 7 Series 60% 7.4% 74.0% Sedans 63.8% 18.0% 40% 24.0% 40% 3 Series

20% 35.3% 20% 31.0% 22.0% 24.1% 5 Series SUV 0% 0% 2009 2013 2009 2013

Source: Company data Source: Company data

BMW (BMWG.DE) 31 06 February 2014

Figure 64: Production to slow until 2014 and stabilise Figure 65: Annual increase in dealerships Projected annual vehicle production 400 k 60% 800 347 k 344 k 352 k +c.60 326 k +c.60 +c.90 300 k 266 k 40% 600 620 560 215 k 226 k 201 k 500 200 k 20% 408 152 k 400 357 2.3% 100 k 0% 200

0 k -20%

0

2014E 2015E 2016E 2017E 2018E 2019E 2020E

2013E 2011A 2012A 2013E 2014E 2015E 2012A Production Growth BMW MINI

Source: IHS Source: Company data, Credit Suisse estimates

Figure 66: BMW dealership in China at the end of 2013 Q3 BMW MINI East 127 30 North 106 20 South 91 19 West 78 19 Total 402 88 Source: Company data Currently, 33 models are available for sale, with a large number of wheelbase extended models especially for the Chinese market. New launches in the near future appear to focus on the SUV segment, which has been a source of growth in the overall market.

Figure 67: Product launches 2013-2014 Model Year Type ASP (CNY) Details 3-Series 2013 Sedan 297,000  Model refresh – 316i (released)  Long wheelbase version  1.6 turbo engines, average 6.4 l/100km 3-Series 2013 Estate 480,000  New models – 320i, 328i (released)  2.0 turbo engines, average 6.5 l/100km 4-Series 2013 Coupé 500,000  New models – 428i, 435i (released) 5-Series Li 2013 Sedan 622,000  Model refresh (released)  Long wheelbase version  2.5 or 3.0 turbo engines, average 8.4 l/100km X5 2013 SUV 900,000  Model refresh (released) 1-Series 2014 Hatchback  Model refresh  Long wheelbase version X3 2014 SUV  Model refresh X4 2014 SUV  New model Source: Company data, Credit Suisse research

BMW (BMWG.DE) 32 06 February 2014 Company snapshot Brief history of BMW BMW forms part of the "Big 3" German premium carmakers along with Volkswagen's Audi and Daimler's Mercedes-Benz. A 98-year history has helped BMW develop into a global brand, with substantial exposure to developed markets in Europe and North America as well as developing markets in Asia and, to a lesser extent, South America. Indeed, China is now BMW's largest single market (Figure 68) as sales outside Europe increasingly offset slowing demand in its home continent. Initially an aircraft engine manufacturer, it now produces cars under the BMW, Mini and Rolls-Royce brands, as well as motorbikes under the BMW Motorrad brand.

Figure 68: Distribution of sales by market Thousands of units, January-October 2013 China is BMW's largest market, where it operates a 350 k 318 k joint venture with Brilliance. 300 k 295 k The US market follows in second place. The largest 250 k European markets are 213 k Germany and the UK, 200 k ahead of the BRIKT nations, 160 k 150 k which now form the fourth 105 k largest market overall. 100 k 51 k 51 k 50 k 50 k 36 k 31 k 31 k 0

BMW MINI

Note: BMW's BRIKT definition includes Brazil, Russia, India, Korea and Turkey Source: Company data

Figure 69: Growth fastest in China, slowest in Germany Figure 70: German market share gains supported by end of scrappage scheme, US gains are limited YoY change in 12-month rolling registrations Change in 12-month rolling market share since January 2010 120% 3%

100% Germany 2% 80%

60% China UK 1% 40% China 20% US US 0% 0% UK Germany -20% -1% 2010 2011 2012 2013 2010 2011 2012 2013

Source: National industry bodies, Company data Source: National industry bodies, Company data

BMW (BMWG.DE) 33 06 February 2014

China The largest and fastest growing major market for BMW, China has been where BMW has been able to make the strongest gains relative to its German peers. Although Audi still maintains the leading market position in premium sales due to a historical presence, BMW has increased its market share by 1.3% since 2010, beating Audi and Mercedes-Benz. It has also managed to consistently outperform the overall market, and annual sales growth overtook Audi's and Mercedes' in 2013, helped by a good local production mix and operational headwinds at rival joint ventures. Figure 71: BMW is behind Audi in premium China sales Figure 72: BMW makes biggest market share gains in last four years vs. German premium competitors Rolling 12 month, in thousands of units Change in 12-month rolling market share since January 2010 600 k 1.5% +1.3% 500 k 492 k +1.2% 400 k 391 k 1.0%

300 k 236 k 200 k 0.5% +0.6%

100 k

0 0.0% 2010 2011 2012 2013 2010 2011 2012 2013 BMW Audi Mercedes-Benz BMW Audi Mercedes-Benz

Source: Company data, CAAM Source: Company data, CAAM

Figure 73: BMW generally outperformed market since Figure 74: German premiums: BMW leads growth in 2013 mid-2010, but less strong recently YoY change in 12-month rolling registrations YoY change in 12-month rolling registrations 120% 140% 120% 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% 2010 2011 2012 2013 2010 2011 2012 2013 BMW Market BMW Audi Mercedes-Benz

Source: Company data, CAAM Source: Company data, CAAM

US Small outperformance in 2013 has boosted sales, but compared with its German premium competitors, sales growth is still unspectacular, albeit BMW has a stronger market share to begin with. BMW's sales growth had been trailing competitors' through the majority of 2010-12 and market share in the US has not notably improved for BMW in the last five years, progressively falling further behind against Audi and Mercedes-Benz. A brief scrappage incentive in 2009 helped to support the market, and BMW benefitted somewhat, though its growth subsequently fell behind against the market. BMW is also

BMW (BMWG.DE) 34 06 February 2014 currently supporting sales through cash incentives offered to customers, though in 2013, Autodata reported BMW incentives were USD 3,712, under 5% of MSRP, which is relatively low. BMW's portfolio contains a number of crossover-SUVs, such as the X1 and X3, and helps to support sales in the US market, where compact cars are less preferred and fuel prices are lower. However, despite this mix, market share development has been relatively weak, gaining only 0.1%, slightly lower than 0.2% for Audi and 0.3% for Mercedes-Benz.

Figure 75: BMW leads the German premium brands in US Figure 76: BMW market share almost flat through 2009- present, while German premium competitors' increased Rolling 12 month, in thousands of units Change in 12-month rolling market share since January 2010 400 k 0.4%

334 k +0.3%

300 k 310 k 0.2% +0.2%

200 k 159 k +0.1% 0.0% 100 k

0 -0.2% 2010 2011 2012 2013 2010 2011 2012 2013 BMW Audi Mercedes-Benz BMW Audi Mercedes-Benz

Source: Autodata Source: Autodata

Figure 77: BMW growth has been in line with market, with Figure 78: German premiums: no significant small outperformance since 2013 Q2 differentiation since mid-2011 YoY change in 12-month rolling registrations YoY change in 12-month rolling registrations 30% 30%

20% 20%

10% 10% 0% 0% -10%

-10% -20%

-30% -20% 2010 2011 2012 2013 2010 2011 2012 2013 BMW Market BMW Audi Mercedes-Benz

Source: Autodata Source: Autodata

Germany In BMW's home market, its car sales have been gradually slowing since the summer of 2011. A 5.7% December decline in trailing 12-month sales marks the latest drop in a market which has been contracting for two years. The German government's €5bn scrappage scheme, launched in January 2009, helped to spur the market, but hindered premium brands. However, after the end of the scheme in December 2009, premium sales rebounded quickly and the German premium brands all recovered market share, with BMW and Audi the bigger beneficiaries at year-end 2013.

BMW (BMWG.DE) 35 06 February 2014

Figure 79: BMW sales just behind Mercedes-Benz Figure 80: BMW market share gains level with Audi, better than Mercedes-Benz Rolling 12-month, thousands of units Change in 12-month rolling market share since January 2010 350 k 3% +2.4%

2.4% 300 k 2% 2.0% 277 k

268 k

250 k 252 k 1%

200 k 0% 2010 2011 2012 2013 2010 2011 2012 2013 BMW Audi Mercedes-Benz BMW Audi Mercedes-Benz

Source: KBA Source: KBA

Figure 81: BMW outperformed market in 2010 H2 to 2011 Figure 82: BMW sales growth lagged German premiums but no longer through most of 2013 YoY change in 12-month rolling registrations YoY change in 12-month rolling registrations 30% 20%

20% 10% 10%

0% 0%

-10% -10% -20%

-30% -20% 2010 2011 2012 2013 2010 2011 2012 2013 BMW Market BMW Audi Mercedes-Benz

Source: KBA Source: KBA

UK For the industry, the UK proved to be the most encouraging market in Europe in 2013, but BMW appears to have benefitted the least. Strong outperformance from mid-2010 to late- 2011 helped BMW to briefly beat both Audi and Mercedes-Benz in sales growth. However, its performance since has been less than stellar, underperforming its German rivals in most of the period since late-2011. A £500mn scrappage scheme introduced in May 2009 helped to boost sales until its expiration in March 2010. BMW benefitted a little during this period, more so than during the German scrappage scheme, but failed to keep pace with the market. However, after the end of the scheme, BMW's sales stayed strong while the market declined, due to a weaker effect of the scrappage scheme on premium sales. Market share development in the last five years has been positive for all three premium German brands, as buyers of premium brands showed more resilience while the economy weakened. Nevertheless, in such an environment, BMW has been unable to increase its market share as much as its competitors, gaining 0.7% since 2010 as of year-end 2013 compared to 1.2% by Mercedes-Benz and 1.7% by Audi.

BMW (BMWG.DE) 36 06 February 2014

Figure 83: BMW now falls behind Audi in premium sales Figure 84: BMW market share growth weakest Rolling 12 month, in thousands of units Change in 12-month rolling market share since January 2010 160 k 2.0% +1.7% 142 k 140 k 1.5% +1.2% 136 k 120 k 1.0% +1.1% 109 k

100 k 0.5%

80 k 0.0%

60 k -0.5% 2010 2011 2012 2013 2010 2011 2012 2013 BMW Audi Mercedes-Benz BMW Audi Mercedes-Benz

Source: SMMT Source: SMMT

Figure 85: BMW outperformed market in 2011, but in line Figure 86: German premiums: BMW best performer in with market since 2011, but worst in 2012 and now worst since 2013 Q2 YoY change in 12-month rolling registrations YoY change in 12-month rolling registrations 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% 2010 2011 2012 2013 2010 2011 2012 2013 BMW Market BMW Audi Mercedes-Benz

Source: SMMT Source: SMMT

BMW (BMWG.DE) 37

BMW (BMWG.DE) Figure 87: BMW historical unit sales and forecasts 2009 2010 2011 2012 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 2013 2014E 2015E BMW 1,068,770 1,224,280 1,380,384 1,540,085 107,276 114,908 159,195 130,595 139,161 153,075 1,655,138 1,573,500 1,487,000 1 Series 216,944 196,004 176,418 226,829 14222 16,268 23,414 17,069 18,333 20,391 213,578 200,000 190,000

3 Series 397,103 399,009 384,464 406,752 29053 34,056 46,186 38,497 42,020 47,870 500,695 510,000 500,000 4 Series 14,749 5 series 172,931 211,968 310,050 337,929 23049 24,104 33,620 29,955 28,408 30,450 346,697 310,000 280,000 6 Series 8,648 5,848 9,396 23,193 1354 1,917 2,903 2,200 2,391 3,247 27,687 20,000 24,000 7 Series 52,682 65,814 68,774 59,184 3940 3,242 5,207 4,734 4,931 5,045 56,001 55,000 55,000 X1 8,499 99,990 126,429 147,776 11753 11,365 14562 11,837 14,718 14,826 161,353 150,000 130,000 X3 55,634 46,004 117,944 149,853 10230 10,536 15,422 12,157 14,199 15,414 157,298 150,000 125,000 X5 88,851 102,178 104,827 108,544 8441 8,323 10,510 8,108 7,625 9,643 107,231 120,000 120,000 X6 41,667 46,404 40,822 43,689 3087 2,857 3,825 3,066 3,303 2,826 36,688 30,000 35,000 Z4 22,759 24,575 18,809 15,249 673 817 1,492 1,135 1,593 1,553 12,866 12,500 12,000 5 GT 3,052 26,486 22,451 21,087 1474 1,423 2,054 1,837 1,640 1,810 20,295 16,000 16,000 Mini 216,538 234,175 285,060 301,526 15864 18,527 31,763 24,581 26,955 31,102 305,030 320,282 326,687 RR 1,002 2,711 3,538 3,575 136 195 311 243 281 312 3,630 3,739 3,851 BMW Group 1,286,310 1,461,166 1,668,982 1,845,186 123,276 133,630 191,269 155,419 166,397 184,489 1,963,798 1,897,520 1,817,538

Germany 267,511 263,983 285,202 287,299 16,311 20,848 26,244 21,714 22,688 25,608 UK 138,525 157,312 167,108 174,215 9,567 6,928 29,584 13,506 15,177 19,930 Rest of Europe 356,341 368,746 405,482 403,496 24,716 33,475 39,430 34,737 37,053 39,025 Americas 294,007 329,285 379,332 424,379 25,021 27,906 40,395 36,547 38,771 41,837 China 90,536 169,221 232,586 326,444 30,397 23,449 32,224 30,311 31,938 34,481 Rest of World plus RR 138,388 172,619 199,272 229,353 17,264 21,024 23,392 18,604 20,770 23,608 BMW Group 1,285,308 1,461,166 1,668,982 1,845,186 123,276 133,630 191,269 155,419 166,397 184,489

YoY change (%) Germany -4.8% -1.3% 8.0% 0.7% 12.2% 9.9% -11.1% -7.4% -10.0% -16.0% UK -12.4% 13.6% 6.2% 4.3% 45.7% 44.6% 7.4% 30.6% 15.6% -10.8% Rest of Europe -9.2% 3.5% 10.0% -0.5% -4.0% -0.6% -0.5% 1.3% 0.1% -2.1% Americas -13.6% 12.0% 15.2% 11.9% 2.5% -10.1% 11.5% 11.7% 10.4% 19.1% China 37.5% 86.9% 37.4% 40.4% 14.7% 2.3% 5.3% 11.4% 14.8% 44.1% Rest of World plus RR -29.8% 24.7% 15.4% 15.1% 19.8% 29.3% 5.1% 5.9% 11.4% 13.5% BMW Group -10.4% 13.7% 14.2% 10.6% 9.9% 4.7% 3.0% 6.8% 6.0% 6.9% 6.4% -2.6% -4.2%

Source: Company data, Credit Suisse estimates

06 February 2014 February 06

38

06 February 2014 Credit Suisse PEERs map PEERs is a global database that captures unique information about companies within the Credit Suisse coverage universe based on their relationships with other companies – their customers, suppliers and competitors. The database is built from our research analysts’ insight regarding these relationships. Credit Suisse covers over 3,000 companies globally. These companies form the core of the PEERs database, but it also includes relationships on stocks that are not under coverage.

Figure 88: Credit Suisse PEERs map

Source: Credit Suisse PEERs

BMW (BMWG.DE) 39 06 February 2014

Companies Mentioned (Price as of 03-Feb-2014) BMW (BMWG.DE, €79.99, UNDERPERFORM, TP €80.0) Daimler (DAIGn.DE, €60.69) Fiat (FIA.MI, €7.14) GKN (GKN.L, 393.1p) PSA Peugeot Citroen (PEUP.PA, €11.16) Porsche (PSHG_p.DE, €70.96) Renault (RENA.PA, €62.71) Volkswagen (VOWG_p.DE, €185.5)

Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for BMW (BMWG.DE)

BMWG.DE Closing Price Target Price Date (€) (€) Rating 04-May-11 62.35 80.06 O 09-Sep-11 51.69 72.35 20-Mar-12 68.22 90.00 14-Jun-12 56.29 80.00 20-Jun-13 66.43 NR * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM N O T RAT ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

BMW (BMWG.DE) 40 06 February 2014

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (54% banking clients) Neutral/Hold* 41% (48% banking clients) Underperform/Sell* 14% (43% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for BMW (BMWG.DE) Method: BMW trades on 2015E 10.5x P/E and 3.1x EV/EBITDA which is a significant premium to the sector average. We value BMW on our lower than consensus earnings expectations and use its 35% premium to the average European OEM 2015E P/E of 7.6x. Combined with our sum-of-the-parts valuation of €81, the average of the two valuations gives us our target price price of €80.

Risk: Key risks to our target price include a much weaker €, i3 sales beating expectations and China demand not receding.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (BMWG.DE, VOWG_p.DE, DAIGn.DE, PSHG_p.DE, RENA.PA, PEUP.PA, FIA.MI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (BMWG.DE, VOWG_p.DE, PSHG_p.DE, FIA.MI) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (DAIGn.DE, RENA.PA, PEUP.PA, FIA.MI) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (BMWG.DE, VOWG_p.DE, PSHG_p.DE, FIA.MI) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (BMWG.DE, VOWG_p.DE, PSHG_p.DE, FIA.MI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BMWG.DE, VOWG_p.DE, PSHG_p.DE, FIA.MI, GKN.L) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (DAIGn.DE, RENA.PA, PEUP.PA, FIA.MI) within the past 12 months Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BMWG.DE, VOWG_p.DE, DAIGn.DE, PSHG_p.DE, RENA.PA, PEUP.PA, FIA.MI, GKN.L) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

BMW (BMWG.DE) 41 06 February 2014

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (BMWG.DE, VOWG_p.DE, DAIGn.DE, PSHG_p.DE, RENA.PA, PEUP.PA, FIA.MI, GKN.L). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (BMWG.DE, VOWG_p.DE, PSHG_p.DE, PEUP.PA, FIA.MI) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Europe) Limited...... Mike Dean ; Fei Teng Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

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BMW (BMWG.DE) 42 06 February 2014

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Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. 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Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. 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In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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