MICHELIN Market Growth Deterioration of This Extent Has Not Been Seen in the Auto Vs

INDEPENDENT RESEARCH Automotive

10th May 2017 The perfect time to take a rest? Automotive

FV EUR178 CONTINENTAL SELL vs.174 In this report, we review the positive and negative trends that affected Bloomberg CON GY Reuters CONG.F the automotive sector during the first quarter. While commercial and Price EUR206,4 High/Low 207,6/160,1 operating metrics were above market expectations for most auto stocks Market cap. EUR41,281m Enterprise Val EUR47,383m in Q1, we continue to see the risk of a significant slowdown in sector PE (2017e) 13.1x EV/EBIT (2017e) 10.2x growth over coming quarters especially due to a less favourable base FV EUR50 FAURECIA BUY effect. To play the sector, we favour either defensive stocks with low vs. 48 Bloomberg EO FP Reuters EPED.PA beta or stocks offering EPS growth thanks mainly to self-help measures. Price EUR46,35 High/Low 47,19/27,9955 Market Cap. EUR6,398m Enterprise Val EUR7,480m PE (2017e) 11.6x EV/EBIT (2017e) 7.1x  An impressive first quarter favoured by easy comps: After rising 4% in

FV EUR46 2016, the global auto market grew a further 5-6% in Q1 on the back of a HELLA BUY vs. 45,5 favourable calendar effect and easy comps. However, this healthy growth is Bloomberg HLE GR Reuters HLE.DE Price EUR45,8 High/Low 46,25/27,73 likely to gradually soften in coming quarters, especially in China. We expect Market Cap. EUR5,089m Enterprise Val EUR5,111m PE (2017e) 14.4x EV/EBIT (2017e) 11.5x the market to gain 2.4% over 2017 implying volume growth for the next nine months of just 1-2% with a flat performance over H2. A QoQ and YoY BUY FV EUR137 MICHELIN market growth deterioration of this extent has not been seen in the auto vs. NEUTRAL vs. 121 Bloomberg ML FP Reuters MICP.PA sector since 2014. Price EUR121,2 High/Low 121,2/82,4 Market Cap. EUR21,824m Enterprise Val EUR26,770m  Is China still the automotive Eldorado? While China has been at the origin PE (2017e) 13.0x EV/EBIT (2017e) 9.3x of considerable sales growth for carmakers in recent years, competition with

NEUTRAL FV EUR38 local carmakers is intensifying to the detriment of foreign OEMs. The “new” PLASTIC OMNIUM vs. BUY vs. 36,5 China now offers lower annual growth potential in value and in percentage Bloomberg POM FP Reuters PLOF.PA Price EUR36,245 High/Low 36,49/24,45 terms for traditional players than years ago, except for suppliers raising market Market Cap. EUR5,527m Enterprise Val EUR5,395m PE (2017e) 14.1x EV/EBIT (2017e) 8.3x share with local brands or exposed to SUVs. The rapid market transformation from ICE motorisation to NEV imposed by the government could also FV EUR57 VALEO SELL vs; 56 offer attractive potential for some suppliers while obliging OEMs to fully Bloomberg FR FP Reuters VLOF.PA Price EUR66,68 High/Low 67,12/38,44 revise their local strategy on top of raising capex to adapt industrial footprints. Market Cap. EUR15,946m Enterprise Val EUR19,085m  Not so easy to find further upside: In this report, we have identified the PE (2017e) 15.9x EV/EBIT (2017e) 12.7x leverages we could use to capture additional upside on our stocks and

conclude that only two stocks could offer further attractive growth potential

10/05/17 125 for investors: Faurecia & Michelin. We have downgraded Plastic Omnium 120 to Neutral while upgrading Michelin to Buy. To play the sector, we now 115

110 favour either defensive stocks with low beta and with solid margin growth in

105 H2 2017/2018 or stocks offering EPS growth thanks to self-help measures.

100

95 Analyst: Research Assistant: 90 85 Xavier Caroen Anthony Aimar 33(0) 1.56.68.75.18 Source Thomson Reuters STOXX EUROPE 600 AUTO & PARTS E STOXX EUROPE 600 [email protected]

r r

Automotive

Table of contents

1. An impressive first quarter favoured by easy comps, but can it last? ...... 3 2. Is China still the automotive Eldorado for non-Chinese auto manufacturers? ...... 6

2.1. Are auto industrials mid/long-term expectations for China too optimistic? ...... 6 2.2. SUV or nothing else… ...... 8 2.3. The end of non-Chinese OEMs hegemony in China? ...... 9 2.4. Is the recent push by the Chinese government to promote NEV to the detriment of ICE negative for non-Chinese auto industrials? ...... 11 2.4.1. No choice for foreign carmakers to be present in this market ...... 11 2.4.2. A Chinese government not so easy to follow ...... 11 3. Not so easy to find further upside ...... 13

3.1. Quick update on latest changes in our models ...... 13 3.1.1. Continental (Sell, FV @ €178 vs. €174) ...... 13 3.1.2. Hella (Buy, FV @ €46/sh vs. €45.5/sh) ...... 16 3.1.3. Faurecia (Buy, FV @ €50/sh vs. €48/sh) ...... 18 3.1.4. Michelin (Buy vs. Neutral, FV @ €137/sh vs. €121/sh) ...... 20 3.1.5. Plastic Omnium (Neutral vs. Buy, FV @ €38/sh vs. €37/sh) ...... 23 3.1.6. Valeo (Sell, FV @ €57/sh vs. €56/sh) ...... 25 3.2. To find additional >25% additional upside on our stocks we need to be quite bullish ...... 28 3.2.1. Increasing our estimates on the back of higher market expectations for worldwide automotive market...... 28 3.2.2. Reducing our WACC assumptions ...... 29 3.2.3. A change in multiples ...... 30 4. Conclusion ...... 31 Price Chart and Rating History ...... 33 Bryan Garnier stock rating system ...... 35

Automotive

1. An impressive first quarter favoured by easy comps, but can it last?

After rising 4% in 2016, the global auto market gained a further 5-6% in Q1 helped by a favourable calendar effect (one more working day in Q1 2017 compared with Q1 2016) and easy comps (the majority of volume growth was back-end loaded in 2016 at least in Asia). While the European market was expected to be flat over the first months of 2017, demand and production surged compared with last year, benefiting European carmakers and suppliers, which still have higher exposure to Europe than the market.

During Q1, production volumes grew by 6% in Europe, 2% in the US, 11% in South America and 6% in Asia (with China at +7%) confirming that Asia is no longer the market offering the highest growth potential for carmakers and suppliers. Growth in Europe, South America and Asia was favoured by an easy comparison basis contrary to US auto production, which continued to grow at 2% despite the production peak seen in Q1 2016 at +5% and despite very weak final demand over Q1 (demand down 1% YoY) from US consumers.

Fig. 1: Base effect will become less favourable over coming quarters

Q1-16 auto production growth by region (%) Quarterly growth of worldwide auto production since Q1-15 (%)

12% 10,0% 11% 9% 9,0% 10% 8,0%

7,0% 8% 6,0% 6% 6% 5% 5% 6% 5,0% 5% 4,0% 4% 3,0% 3,0% 2% 2% 2,0% 2% 1,0% 1,0% 1% 1,0% 0,0% 0% 0,0% Total Europe NA Asia Latam Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17

Source: Company Data; Bryan, Garnier & Co ests.

This strong market growth was therefore at the root of the good set of Q1 metrics reported by auto stocks in recent weeks, with higher growth generated by suppliers than OEMs, as usual. During the analyst meetings/conference calls, almost all auto industrials indicated that 2017 sales guidance was confirmed while some indicated that the high-end of their guidance was achievable at this stage. Only two of the large auto players however revised up its sales guidance while almost all carmakers were ahead of budget at end of first quarter, confirming our view that despite a good start of the year that visibility remains quite limited for all professionals.

Automotive

Fig. 2: Summary of carmakers, suppliers & tiremakers Q1- 17 publication

Q1 YoY sales Q1 YoY EBIT Q1-17 EBIT Q1-16 EBIT Company Name Country Publication date 2017 guidance growth growth margin margin

OEMs - Europe Daimler Germany 26-04 Revised up 10,6% - 10.6%* 5.7%* Fiat Italy 26-04 Confirmed 1% 11.3%** 5.5%** 5.2%** BMW Germany 20-04 Confirmed 25% - 9%* 9.4%* Peugeot Germany 26-04 Confirmed 4,2% - - - Volkswagen Germany 18-04 - - 28% >8% 6,8% Renault France 27-04 Confirmed 15,8% - - -

OEMs -North America Ford Motor US 27-04 - -1% - 5.4%* 9.8%* General Motor US 28-04 - 10,6% 26%** 8.2%** 7.1%**

OEMs -Asia Toyota Motor (FY 2017 9 months) Japan 06-02 Revised up 2,3% -32,5% 7,7% 10,8% Hyundai Motor South Korea 18-04 - -3,1% -6,8% 5,4% 6% Nissan Motor (FY 2016 9 months) Japan 09-02 Confirmed -7,6% -14,3% 6,1% 6,6%

Suppliers - Europe Autoneum (FY 2016) Germany 02-03 - 6,8% 11,1% 8,2% 7,6% Brembo (FY 2016) Italy 03-03 - - 30,3% 14,1% 12,1% ElringKlinger (FY 2016) Germany 30-03 - 3,3% 0% 9%** 9.3%** Faurecia France 11-04 Confirmed 9,8% - - - Grammer (FY 2016) Germany 29-03 - - 71% 4,30% 3% Hella (FY 2016/17 9 months) Germany 06-04 Confirmed 3,5% 8,1% 7.1%* 6.5%* Plastic Omnium France 25-04 - 16,4% - - - Sogefi Italy 26-04 Confirmed 11% 67,5% 6,1% 4,1% Valeo France 26-04 Confirmed 13% - - - Suppliers -North America

Autoliv US 28-04 Confirmed 7,3% 6% 8,3% 8,4% BorgWarner US 28-04 Confirmed 6,1% 10,8% 12,2% 11,6% Johnson Controls Inc. US 27-04 Confirmed 2% 7% 9,8% 9,6% Lear US 26-04 Confirmed 12% - - - Tenneco US 01-05 Confirmed 9% 10,9% 6.7%** 6.5%** Visteon US 27-04 Confirmed 1% - - - Suppliers -Asia Aisin Seiki Japan 28-04 - 9,8% 18,7% - - Denso Japan 28-04 Sales revised up 0,1% 4,7% - - Profit revised down Tiremakers - Europe

Continental Germany 28-04 Revised up 9,5% 9.6%** 10.7%** 11.1%** Michelin France 20-04 Confirmed 9,9% - - - Tiremakers - North America

Cooper Tire & Rubber Co. US 27-04 - -1% -46,6% 7,6% 14% Goodyear US 28-04 Confirmed 0% -8,1% 10,4% 11,3%

Source: Company Data; Bryan, Garnier & Co ests. (* Auto segment only; ** adjusted EBIT)

On average OEMs (identified in the table above) reported Q1 sales growth of 6% YoY and flat EBIT margin growth while suppliers respectively posted +8% YoY sales growth and 20% EBIT growth. Tyre-makers also posted sales growth of 6%.

Automotive

We nevertheless consider that these healthy growth levels will gradually soften over coming quarters, especially in Asia and in China where comparison with the year-earlier period is set to become increasingly less beneficial. For Q2, we already assume automotive production growth will soften from the 5% observed in Q1 to a +1-2% implying a decline of 3-4pp in growth generated compared with Q1 assuming no change in the outperformance generated by the automotive suppliers we cover.

This is set to represent the first significant slowdown in growth trends in the sector since Q2 2015. We are not sure investors will appreciate the trend, especially since the sector is currently trading close to its highest level.

Fig. 3: We believe investors will not appreciate the slowdown expected for the rest of the year

An important slowdown to expect over coming quarters… …While SXAP Index is not far from its 2015 top level of 689 points

10,0% 152 9,0% 142 8,0%

7,0% 132 6,0% 122 5,0% 112 4,0% 102 3,0%

2,0% 92

1,0% 82 0,0%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17e

Jul-14 Jul-15 Jul-16

Jan-14 Jan-15 Jan-16 Jan-17

Sep-14 Sep-15 Sep-16

Nov-14 Nov-15 Nov-16

Mar-14 Mar-15 Mar-16 Mar-17

May-15 May-16 May-17 May-14

SXAP Index rebased 100

Source: Datastream; Bryan, Garnier & Co ests.

Automotive

2. Is China still the automotive Eldorado for non-Chinese auto manufacturers? We try to answer this question by examining recent trends that are affecting the first worldwide automotive market:

 A slowdown of new demand compared with previous cycle

 A rise in demand for SUV models to the detriment of sedans and MPV segments

 An impressive market share gain of Chinese carmakers to the detriment of foreign brands

 A strong push of Chinese government to favour NEV to the detriment of ICE 2.1. Are auto industrials mid/long-term expectations for China too optimistic? While the old Chinese automotive market grew by an average annual 2.3m units between 2007 and 2016, prompting a massive market share gain within the global automotive market (a 21pp increase over the period from 9% of the global auto market in 2007 to 30%), implying a 17% CAGR, the new Chinese auto market is only expected to grow by less than 1m units annually over the next 10 years, implying a CAGR of just 2.5%.

Whereas in recent years, demand in China was driven mainly by the rapid increase in the equipment rate for Tier 1 cities where purchasing power was higher, to the benefit of non-Chinese brands, new demand is now coming from Tier 3-6 cities, less addressed by dealerships and where purchasing power has not increased as fast as in Tiers 1 cities.

Fig. 4: In less than 10 years China became the number one automotive market to the detriment of Europe & U.S.

Worldwide automotive market split by region (2007) – 68.5m units Worldwide automotive market split by region (2007) – 91.3m units

Others Others 2% 2%

USA Europe USA Europe 19% 19% 24% 26% Eurasia-Euromed 6%

Latam Row Asia 6% Eurasia-Euromed 18% Row Asia 7% Latam China 24% 8% China 30% 9%

Source: Renault; Bryan, Garnier & Co ests.

Automotive

Fig. 5: We now foresee a 2.5% CAGR for Chinese auto market over coming years

40 50% 34 34 45% 35 32 33 30 31 29 30 40% 30 27 28 35% 23 24 25 22 30% 19 20 18 19 25%

15 12 20% 15% 10 9 6 10% 5 5% 0 0%

New demand in China (m units) YoY growth

Source: CAAM; Bryan, Garnier & Co ests.

Recent official communication made by China Industry ministry indicates this slowdown in new demand is also well anticipated by Chinese government. China is indeed targeting around 35m of vehicles sales by 2025 compared with 28m vehicles in 2016, reflecting a 2.5% CAGR over the period, in line with our estimates. We assume upcoming development of Chinese automotive market will then come from Tier 3-6 cities for which ownership rate is still quite low compared with big cities. The market saturation of Tier 1-2 cities should led to lower growth in demand on short term but to interesting demand for replacement market in coming years.

Fig. 6: Upcoming growth in China should come from Tier 3-6 cities

China city level Tier 1 cities Tier 2 cities Tier 3 cities Tier 4 cities Tier 5/6 cities

Car/1,000 inhabitants 135 136 94 47 39

Number of cities 9 26 68 109 135

Average number of inhabitants (m) 17 8,5 4,9 4 1

Implied total inhabitants 153 221 333,2 436 135

% of total Chinese population 11,2% 16,1% 24,3% 31,8% 9,8%

Source: Faurecia; World Bank; Bryan, Garnier & Co ests.

Interestingly, when comparing our estimates and the Chinese government estimates with major industrial players present in the Chinese automotive market, which base their forecasts on LMC or IHS figures, we see a risk of disappointment over the mid-term assuming our view is correct as our 2.5% CAGR needs to be compared with a 4-5% CAGR.

Given current volume growth observed so far in the market (+4.2% YTD in China) we assume this risk is more a mid-term risk than a short-term risk. 2017 volumes should remain driven by windfall effects linked to the gradual increase in tax on small engines (from 5% in 2016 to 7.5% in 2017 and to 10% in 2018) as Chinese consumers anticipate their car purchases. We consider this disappointment risk is greater for carmakers than for suppliers present in China given the latter should benefit from market share gains linked to increasing exposure to local OEMs.

Automotive

2.2. SUV or nothing else… Whereas some years ago, Chinese consumers only purchased large saloon cars to carry the entire family, the interest from Tier 3/Tier 6 city consumers is progressively shifting toward SUV models as in Europe, to the profit of local OEMs, which have invested heavily in this segment in recent years.

The stronger than anticipated demand for this segment in less than 10 years stems from the change in the geographical mix of new demand as well as the similar rise in market share of these models in Europe and in North America, two markets with which Chinese consumers aim to identify.

This segment now represents around 40% of the market and we expect it to continue to grow as all carmakers are increasing their exposure to SUVs by launching a multitude of new models. All brands, local or non-local, aim at raising direct exposure to this market by launching new SUV models in the A, B and C segments. French carmaker PSA, which has suffered in China for almost two years, notably due to a poor product mix, is set to launch the Citröen C5 Aircross this year, as well as the DS 7 Crossback and the Peugeot 4008 and 5008 models, while its French competitor Renault entered the market in 2016 with its Kadjar and Koleos models, both SUVs.

However, to be successful in this market, carmakers not only need to have the right product but also the right pricing since, despite still being an emerging market, the Chinese automotive market is already affected by hefty price wars as in mature markets in Europe or North America to the benefit of local carmakers that offer similar products to foreign brands yet at cheaper prices.

When looking at the top 10 SUV sales in March in China, it appears that only two models are marketed by non-Chinese brands (VW and GM) while the remaining eight models are built and sold by Chinese brands (Geely, Haval, GAC, Geely, Dongfeng Sokon, Baojun and Roewe) at prices on average twice cheaper (at around EUR15,000/vehicle for a Chinese model vs. EUR25,000/EUR40,000 for a non-Chinese model).

Fig. 7: In less than 10 years SUV models became the new trend in China

SUV share among new PC registrations in China strongly surged And represent today around 40% of the market vs. 7% in 2010

60,0%

50,0% MPV & Others; 40,0% 12,0%

30,0% SUV; 39%

20,0% Sedans ; 49% 10,0%

0,0% 2010 2011 2012 2013 2014 2015 2016 2017 YTD

MPV & Others Sedans SUV

Source: CAAM; Bryan, Garnier & Co ests.

To be present in this market, OEMs need complete SUVs offers, to the benefit of suppliers and tyre- makers, which generate more profit in these segments. Within the BG auto coverage, we assume this mix effect is positive for all suppliers we cover as well as for all tyre-makers. None of the companies we cover communicate on their exposure to SUV models in China.

Automotive

2.3. The end of non-Chinese OEMs hegemony in China? This mix effect combined with the geographical mix affecting Chinese auto demand in recent years is benefiting local carmakers in view of their smart positioning but also the knowledge transfer the Chinese government imposed within the automotive industry between foreign brands and local brands given some of these Chinese brands are now able to offer well equipped and well-designed vehicles to Chinese consumers.

Whereas in 2010 less than a third of all PCs sold in China were Chinese, today this figure stands at almost 45% of the market which is controlled by Chinese brands such as SAIC, FAW, Changan, Geely, and DongFeng. This trend explains the recent market share decline observed at non-Chinese carmakers such as PSA, GM or Ford in coming years as these OEMs are either not fully present in the SUV segment or are offering overly expensive products. Out of the top 20 models sold in March this year, Chinese carmakers represented only 9% of new registrations of top saloon models yet accounted for around 53.5% of new registrations in top SUV models.

This negative trend is affecting more mass carmakers like PSA, Ford, GM or even Japanese and South Korean carmakers given their positioning is in direct competition with Chinese brands, while premium OEMs (BMW, Daimler, Audi for instance) and luxury brands remain quite immune to this more intense competition. When looking at the change in volumes for major non-Chinese brands in China over the past five years, market share growth confirms our thoughts. Between 2009 and 2016, PSA, Toyota, and VW (excl. Audi) volumes sold in China multiplied by respectively 2.7x, 1.9x and 2.7x while volumes sold by Audi, BMW and Daimler multiplied by 3.7x, 5.8x and 6.8x over the same period.

Fig. 8: Premium OEMs gained more market share than mass makers in China

Volumes comparison sold by carmakers in China 2009-16 Volumes evolution by carmakers in China 2009-16

4 000 8,0x 6,8x 3 500 7,0x 3 000 6,0x 5,7x 2 500 5,0x 2 000 4,2x 4,0x 3,7x 1 500 2,7x 2,7x 1 000 3,0x 1,9x 500 2,0x

0 1,0x Daimler PSA BMW Audi VW Group Toyota Ford (exc. Audi) 0,0x Toyota PSA VW Group Audi Ford BMW Daimler 2009 2016 (exc. Audi)

Source: Company data; CAAM; Bryan, Garnier & Co ests.

The gradual rise in tax on small vehicles (below 1.6L) from 5% to 7.5% in 2017 before returning to 10% in 2018, should benefit Chinese carmakers this year given their stronger exposure to this segment than foreign competitors. By 2018, the impact on Chinese brands will certainly be more negative than for other brands though, to the profit of foreign carmakers, which are more exposed to bigger engine segments.

Automotive

As for the automotive stocks we cover at Bryan Garnier, it is important to bear in mind that the majority of sales growth over coming years is set to stem from market share with Chinese carmakers whereas historically auto suppliers had poor direct exposure.

Valeo has the biggest sales exposure to China given that the country represents 16% of the group’s sales, ahead of Continental (15%), Faurecia (13%) and Hella (9%).

Automotive

2.4. Is the recent push by the Chinese government to promote NEV to the detriment of ICE negative for non-Chinese auto industrials?

2.4.1. No choice for foreign carmakers to be present in this market Despite generating little consumer interest in China (last year electric cars represented less than 2% of China’s overall auto sales), this market is crucial for carmakers as it remains the no. 1 market in the world (28m vehicles o/w 560k electric cars). The market gained more than 50% last year (vs. +15% for total market) confirming market share gains by these models to the detriment of traditional Internal Combustion Engine (ICE) vehicles. The Chinese government's strong aim to reduce pollution by reducing the share of ICE in new registrations will oblige all carmakers to accelerate local investments and industrial development in this field over coming years or risk being penalised.

Industry executives expect Beijing to ask OEMs operating in China to ultimately generate green car credits equivalent to 12% of annual sales volumes in the country with NEVs (New Energy Vehicles: electric vehicles and plug-in-hybrid vehicles) by around 2020, with each green vehicle getting a different number of credits depending on the level of electrification and driving range. The latest draft policy released in September by the government proposed a requirement of 8% in 2017, 10% in 2019 and finally 12% in 2020. OEMs will therefore have no choice but to buy credits or to produce clean vehicles locally. As a reminder, the Chinese government targets five million clean vehicles sold annually by this date, a target we see as very ambitious. We assume by this date that around 1-2m NEVs could be sold annually, which still implies an impressive sales CAGR for this segment over coming years (20% to 40% CAGR rate assuming 1m or 2m units).

2.4.2. A Chinese government not so easy to follow Yet despite this strong push to favour registrations of clean vehicles, the Chinese government announced a cut in subsidies on Chinese green cars by a fifth this year (to a maximum amount of EUR9k per car) while local subsidies will now be capped at 50% of the government grant. The main objective is to further reduce these grants gradually by 2020, to reduce cash-out (around EUR5bn spent in 2015) but also to reduce fraud. Interestingly, despite this negative change in the subsidies programme implemented as soon as January 2017, global NEV sales sold in China over the first quarter continued to surge (except in January when NEV sales plunged >70% compared with last year) confirming that consumer appetite for these vehicles remains intact.

We assume government strategy is to have this transition from ICE to NEV financed by OEMs themselves through the credit system which should force carmakers to invest in China on new industrials capacities especially dedicated to NEVs

Given Chinese brands (BYD, Chery, JAC & Geely) dominate the green car market in China (Top 10 of NEVs sold in China over 2011-15 are only composed of Chinese brands vehicles), foreign group have no choice but to produce and commercialize locally BEV/fuel cell/PHEV vehicles to comply with upcoming rules.

Automotive

Below is a summary of recent announcements from the main foreign OEMs confirming that the strategic shift in China is being implemented by the main non-Chinese brands to make the most of the market growth potential:

o Ford is set to launch a plug-in hybrid saloon car by 2018, the Mondeo Energi.

o GM aims to launch at least 10 BEV/BHEVs by 2020. The group just built a battery assembly plant in Shanghai to deliver battery packs from 2018.

o PSA group unveiled at the Shanghai auto show its new e-concept, the DS E-tense model, a PHEV model dedicated to this market.

o Renault wants to launch a low-cost BEV vehicle to address this market in coming years, based on its experience in low cost vehicles (Dacia Logan and Renault Kwid) and in BEV (Nissan Leaf and Renault Zoe).

o Porsche will launch an E-concept in 2019 and an entire BEV sport car. Hybrid versions of current models are also in the pipeline.

o Toyota has also announced that it will invest in BEV after focusing too much on fuel cell technology with the Toyota Mirai. The Japanese carmaker indicated it will launch this model in China, but in the meantime will locally build plug-in hybrids in China from 2018.

o Volvo Cars will produce its first electric vehicle in China, with a compact car going on sale in 2019 set to be the first of an all-new line of battery-powered autos.

o VW plans to have 13 additional BEV/BHEVs by 2020 and an additional 10 electric vehicles between 2020 and 2025. The recent JV signed with Chinese carmaker Anhui Jianghuai Automobile Group (JAC) dedicated only to developing and producing BEVs under the new brand should help the German carmaker to boost its production locally.

What is important for us today is the potential impact of this massive change for auto suppliers we cover. In our coverage, Michelin is obviously the least exposed to motorization change even if tyres for NEV are a bit different from tyres for ICE vehicles, as well as Continental given that more than 65% of its net profit is generated through its Tyre business despite representing less than 40% of the group’s sales. We assume this gradual shift could be favourable for suppliers like Plastic Omnium and Faurecia as for innovations linked to vehicle weight, yet could be negative for their units exposed only to ICE motorisations: Clean Mobility business (exhaust systems) for Faurecia and Inergy (fuel tanks and SCR systems) for Plastic Omnium. Valeo and Hella could be positively impacted by a further electrification of vehicles yet could suffer at some point due to their exposure to powertrain applications from lower demand for traditional equipment only found on ICE engines.

Automotive

3. Not so easy to find further upside 3.1. Quick update on latest changes in our models We have taken the opportunity in writing this report to update our models and FVs following the first quarter publication. We now discount all six stocks on eight months over 2017 vs. 12 months previously. We have maintained our market growth expectations for 2017-18 (respectively +2.4% and +1.9%). Below are the specific adjustments we have made to our six stocks.

Following these adjustments, we have decided to downgrade our recommendation on Plastic Omnium from Buy to Neutral while upgrading Michelin from Neutral to Buy. Given that we are entering a less favourable period for the auto sector, we prefer to adopt a more cautious tone on most cyclical stocks while favouring less cyclical stocks like Michelin, which still offer attractive upside to investors especially during H2 2017 and beyond.

3.1.1. Continental (Sell, FV @ €178 vs. €174) Following group’s Q1 preliminary figures unveiled back in April and official figures unveiled yesterday (May 9th), we kept our 2017/18 estimates unchanged. The group started quite well the year as the entire automotive sector and revised up its 2017 sales target by >1% to get closer to consensus estimates. No adjustments were made on EBIT margin and EPS growth however.

As a reminder, the group recently unveiled a strategic update for its Powertrain business unit (25th March – see BG comment: Margin improvement on HEV business unlikely in near term) given that this segment is currently suffering from low profitability in the HEV segment but also from a sales deterioration due to the market decline in diesel motorisations in Europe for new vehicles. The group revised up its 2025 sales target for this segment and also indicated it will invest more capex and expenses in boosting HEV sales over coming years, delaying the EBIT margin recovery in the business by one or two years. Given that we were already more cautious than management concerning this business we had no reason to change our estimates. We currently remain 9% below the group’s 2019 sales target and 14% below its EBIT target for the Powertrain segment.

At this stage we confirm our Sell rating despite a EUR4/sh surge in our FV to EUR178 on the back of lower discount factor for 2017. We still find 14% downside.

Automotive

Fig. 9: Continental – P&L table in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Revenues 33 331 34 506 39 232 40 550 43 434 45 397 47 359 49 424

Change (%) 1,8% 3,5% 13,7% 3,4% 7,1% 4,5% 4,3% 4,4%

EBITDA 5 095 5 134 6 001 6 057 6 846 7 454 7 883 8 325

% of sales 15,3% 14,9% 15,3% 14,9% 15,8% 16,4% 16,6% 16,8%

Operating margin with restructuring 3 226 3 419 4 054 4 026 4 563 5 037 5 327 5 632

% of sales 9,7% 9,9% 10,3% 9,9% 10,5% 11,1% 11,2% 11,4%

Change (%) 7,2% 6,0% 18,6% -0,7% 13,3% 10,4% 5,8% 5,7%

Operating margin* with ass. Excl. rest. 3 734 3 643 4 369 4 341 4 903 5 302 5 592 5 897

% of sales 11,2% 10,6% 11,1% 10,7% 11,3% 11,7% 11,8% 11,9%

Financial results (804) (265) (246) (117) (199) (196) (193) (191)

Tax (450) (622) (1 090) (1 097) (1 264) (1 399) (1 483) (1 571)

Tax rate 18,3% 20,2% 28,2% 27,6% 28,5% 28,5% 28,5% 28,5%

Profits from associates 0 0 0 0 0 0 0 0

Minority interests (87) (82) (52) (80) (84) (87) (91) (95)

Net profit 1 923 2 375 2 789 2 882 3 156 3 493 3 699 3 915

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 10: Continental – Cash flow statement in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Operating cash flows 3 722 4 168 4 915 4 938 5 036 5 890 6 288 6 455

Change in working capital 64 (124) 134 80 (262) 103 153 (35)

Capex, net (2 024) (2 110) (2 265) (2 708) (2 983) (3 142) (3 282) (3 430)

Financial investments, net (154) (129) (1 257) (463) 0 0 0 0

Dividends (513) (546) (713) (806) (850) (927) (1 026) (1 086)

Other (1 384) (185) (2 304) (476) 42 44 46 48

Net debt 4 289 2 824 3 542 2 798 1 554 (311) (2 337) (4 323)

Free Cash flow 1 698 2 058 2 651 2 230 2 052 2 748 3 006 3 024

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 11: Continental – Balance sheet in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Tangible fixed assets 7 728 8 446 9 539 10 538 11 178 11 837 12 491 13 150

Intangibles assets 558 443 1 923 2 071 2 224 2 381 2 543 2 710

Cash & equivalents 2 045 3 244 1 622 2 107 1 861 2 097 2 407 2 587

current assets 11 251 13 318 13 169 14 854 15 743 16 504 17 364 18 122

Other assets 5 239 4 790 6 584 6 605 6 959 6 791 6 549 6 445

Total assets 26 821 30 241 32 836 36 175 37 965 39 609 41 355 43 014

L & ST Debt 6 638 6 432 5 245 4 952 4 952 4 952 4 952 4 952

Others liabilities 10 861 12 785 14 377 16 488 17 443 18 126 18 884 19 486

Shareholders' funds 9 011 10 672 12 786 14 270 15 063 15 981 16 923 17 932

Total Liabilities 26 821 30 241 32 836 36 175 37 965 39 609 41 355 43 014

Capital employed 18 663 18 663 19 985 23 331 25 200 26 462 27 310 28 110

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

Fig. 12: Continental – Ratios, Data per share & Valuation

Continental - Ratios 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Operating margin 9,8% 9,7% 10,5% 10,1% 10,7% 11,2% 11,4% 11,5%

Tax rate 18,3% 20,2% 28,2% 27,6% 28,5% 28,5% 28,5% 28,5%

Net margin 5,8% 6,9% 7,1% 7,1% 7,2% 7,7% 7,8% 7,9%

ROE (after tax) 21,3% 22,3% 21,8% 20,2% 20,9% 21,8% 21,8% 21,7%

ROCE (after tax) 25,6% 23,9% 24,7% 22,5% 23,8% 25,1% 25,5% 25,8%

Gearing 46,0% 25,6% 26,8% 19,3% 19,9% 17,3% 14,5% 12,7%

Pay-out ratio 26,0% 27,4% 26,9% 29,5% 29,5% 29,5% 29,5% 29,5%

Number of shares, diluted 200 200 200 200 200 200 200 200

Continental - Data per share 2013 2014 2015 2016 2017e 2018e 2019e 2020e

EPS 3,21 3,96 4,65 14,41 15,78 17,47 18,50 19,57

Restated EPS 3,21 3,96 4,65 14,41 15,78 17,47 18,50 19,57

% change 2,1% 23,5% 17,4% 210,0% 9,5% 10,7% 5,9% 5,8%

EPS bef. GDW 3,21 3,96 4,65 14,41 15,78 17,47 18,50 19,57

BVPS 15,02 17,79 21,31 71,35 75,31 79,90 84,61 89,66

Operating cash flows 18,61 20,84 24,58 24,69 25,18 29,45 31,44 32,27

FCF 2,83 3,43 4,42 11,15 10,26 13,74 15,03 15,12

Net dividend 0,83 1,08 1,25 4,25 4,65 5,15 5,46 5,77

Continental - Valuation 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Market capitalization 22 390 32 923 41 859 37 101 40 301 40 301 40 301 40 301

Net debt 4 289 2 824 3 542 2 798 1 540 (336) (2 375) (4 375) Pensions 2 391 3 484 3 533 4 392 4 392 4 392 4 392 4 392 Minorities 1 040 986 626 954 1 005 1 048 1 094 1 141 Financial assets 451 (886) 737 836 836 836 836 836 EV 29 660 41 102 48 823 44 409 46 416 44 594 42 614 40 676 EV/Sales 89,0% 119,1% 124,4% 109,5% 106,9% 98,2% 90,0% 82,3% EV/EBITDA 5,8x 8,0x 8,1x 7,3x 6,8x 6,0x 5,4x 4,9x EV/EBIT 9,1x 12,3x 11,9x 11,0x 10,2x 8,9x 8,0x 7,2x P/E 11,6x 13,9x 15,0x 14,0x 12,8x 11,6x 10,9x 10,3x Dividend Yield (%) 2,2% 2,0% 1,8% 2,1% 2,3% 2,5% 2,7% 2,9%

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

3.1.2. Hella (Buy, FV @ €46/sh vs. €45.5/sh) As for Continental, we have made no change to our 2017-20 for Hella. We continue to assume the group will raise its 2016-17 sales by 3.4% and EBIT by 21%. Next year the group should benefit from stronger sales growth thanks to the solid order book generated over recent years in lighting. We bet on 5.7% sales growth and 11% EBIT growth.

We have raised our FV by EUR0.5 to EUR46 by lowering our discount factor for 2017. Despite little upside to the latest share price (around 1%), we maintain our Buy recommendation on the stock as we continue to appreciate group’s equity story, which offers attractive exposure to sector megatrends for an attractive valuation compared with peers (Valeo, Continental, Koito Manufacturing and Ichikoh) and as we assume the group’s investor day scheduled for 29th June at Lippstadt should drive the group’s rerating.

At the current share price the stock is trading at 71% its 2018e sales and at 12.7x its 2018e EPS vs. respectively 87% and 13.75x for Valeo despite comparable EBIT margin. Assuming Hella would trade at Valeo’s multiples would imply a FV of EUR52, reflecting around 14% upside.

Fig. 13: Hella – P&L table in EURm

31/05/13 31/05/14 31/05/15 31/05/16 31/05/17e 31/05/18e 31/05/19e

Revenues 4 999 5 343 5 835 6 352 6 570 6 942 7 305 Change (%) 3,9% 6,9% 9,2% 8,9% 3,4% 5,7% 5,2% EBITDA 576 656 766 816 872 956 1 037 % of sales 11,5% 12,3% 13,1% 12,8% 13,3% 13,8% 14,2% Operating margin with restructuring 295 306 374 367 443 493 539 % of sales 5,9% 5,7% 6,4% 5,8% 6,7% 7,1% 7,4% Change (%) -11,4% 3,8% 22,1% -2,0% 21,0% 11,1% 9,5% Operating margin* with ass. Excl. rest. 310 396 444 475 529 561 610 % of sales 6,2% 7,4% 7,6% 7,5% 8,1% 8,1% 8,3% Financial results (44) (36) (36) (39) (37) (32) (27) Tax (60) (79) (98) (108) (106) (120) (133) Tax rate 22,4% 25,7% 24,9% 26,0% 26,0% 26,0% 26,0% Profits from associates 15 38 55 53 56 58 61 Minority interests (5) (7) (8) (3) (3) (3) (4) Net profit 201 223 287 269 353 396 436

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 14: Hella – CFS table in EURm

31/05/13 31/05/14 31/05/15 31/05/16 31/05/17e 31/05/18e 31/05/19e Operating cash flows 463 535 560 602 728 801 872 Change in working capital 26 (71) (97) (28) (50) (54) (59) Capex, net (541) (516) (498) (561) (585) (619) (651) Financial investments, net 0 (0) (0) 0 0 0 0 Dividends (61) (55) (59) (87) (86) (106) (119) Other 186 218 (37) 27 2 2 2 Net debt 415 425 131 238 179 101 (3) Free Cash flow (78) 19 62 42 143 182 221

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

Fig. 15: Hella – Balance sheet table in EURm

31/05/13 31/05/14 31/05/15 31/05/16 31/05/17e 31/05/18e 31/05/19e

Tangible fixed assets 1 324 1 430 1 612 1 698 1 797 1 897 1 996 Intangibles assets 242 127 393 447 499 550 600 Cash & equivalents 477 637 603 585 644 722 826 current assets 2 059 2 412 2 636 2 635 2 765 2 935 3 134 Other assets -179 -148 -327 -370 -419 -486 -578 Total assets 3 922 4 459 4 917 4 995 5 287 5 619 5 979 L & ST Debt 1 100 1 418 1 139 1 152 1 152 1 152 1 152 Others liabilities 1 614 1 699 1 868 1 865 1 887 1 928 1 968 Shareholders' funds 1 179 1 312 1 880 1 973 2 240 2 530 2 848 Total Liabilities 3 922 4 459 4 917 4 995 5 287 5 619 5 979 Capital employed 2 759 2 759 3 121 3 622 3 653 3 860 4 070

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 16: Hella – Ratios, Data per share & Valuation

Hella - Ratios 31/05/13 31/05/14 31/05/15 31/05/16 31/05/17e 31/05/18e 31/05/19e

Operating margin 5,9% 5,7% 6,4% 5,8% 6,7% 7,1% 7,4% Tax rate 22,4% 25,7% 24,9% 26,0% 26,0% 26,0% 26,0% Net margin 4,0% 4,2% 4,9% 4,2% 5,4% 5,7% 6,0% ROE (after tax) 17,1% 17,0% 15,3% 13,6% 15,8% 15,6% 15,3% ROCE (after tax) 8,7% 8,2% 8,9% 8,5% 9,6% 10,0% 10,4% Gearing 51,6% 58,2% 28,1% 28,6% 22,6% 16,9% 11,4% Pay-out ratio 50,2% 24,7% 29,8% 31,9% 30,0% 30,0% 30,0% Number of shares, diluted 100 100 111 111 111 111 111

Hella - Data per share 31/05/13 31/05/14 31/05/15 31/05/16 31/05/17e 31/05/18e 31/05/19e EPS 2,01 2,23 2,58 2,42 3,18 3,56 3,93 Restated EPS 2,01 2,23 2,58 2,42 3,18 3,56 3,93 % change -9,5% 10,5% 16,1% -6,4% 31,5% 12,0% 10,3% EPS bef. GDW 2,01 2,23 2,58 2,42 3,18 3,56 3,93 BVPS 11,79 13,12 16,92 17,76 20,16 22,77 25,63 Operating cash flows 4,63 5,35 5,04 5,42 6,56 7,21 7,85 FCF (0,78) 0,19 0,56 0,37 1,29 1,64 1,99 Net dividend 1,01 0,55 0,77 0,77 0,95 1,07 1,18

Hella - Valuation 31/05/13 31/05/14 31/05/15 31/05/16 31/05/17e 31/05/18e 31/05/19e Market capitalization - 3 185 4 497 3 838 5 044 5 044 5 044 Net debt - 425 131 238 179 101 (3) Pensions - 197 242 243 243 243 243 Minorities - 94 118 47 48 49 50 Financial assets - 200 445 412 447 489 521 EV - 3 701 4 544 3 954 5 067 4 948 4 813 EV/Sales - 69,3% 77,9% 62,3% 77,1% 71,3% 65,9% EV/EBITDA - 5,6x 5,9x 4,8x 5,8x 5,2x 4,6x EV/EBIT - 12,1x 12,1x 10,8x 11,4x 10,0x 8,9x P/E - 20,4x 17,6x 18,8x 14,3x 12,8x 11,6x Dividend Yield (%) - 1,2% 1,7% 1,7% 2,1% 2,4% 2,6%

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

3.1.3. Faurecia (Buy, FV @ €50/sh vs. €48/sh) We have made no changes to our 2017-18 estimates for Faurecia after the good set of Q1 numbers reported by the group in April. We still bet on 4.7% sales growth and 15% EBIT growth for 2017. At this stage, given the uncertainties concerning the global automotive market and more specifically, on prospects for the US market where the group is well positioned, we are still 5.8% below the group’s EUR5 EPS target for 2018, ahead of consensus estimates (>6.5% discount).

We continue to assume a rerating effect will occur progressively as it will be the first time the group will post >6% EBIT margin this year. We assume investors still need to see concrete proof of the viability of the group’s strategy to deliver strong margin when growth is lower than anticipated.

We have raised our FV by EUR2 to EUR50 by lowering our discount factor for 2017 and raising our EV/sales multiples from 45% to 50% to reflect the share's gradual rerating. As a reminder, on average, all auto suppliers generating around 7-7.5% EBIT margin (Faurecia's target for 2018) are valued at around 60% of sales, 8.5x of EBIT and 12x of EPS for N+1, vs. respectively 40% (based on the recent sales adjustment), 6.3x and 9.7x for Faurecia. Assuming Faurecia trades at these multiples would imply a FV at EUR54/55 for the stock leading to >20% upside.

We maintain our Buy recommendation on the stock despite upside of only 10% as we still foresee a rerating effect over coming quarters and as we assume the group’s investor day scheduled for 27th June in London on the Clean Mobility business should drive the group’s rerating.

Fig. 17: Faurecia – P&L table in EURm

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Revenues 16 190 17 365 18 029 18 829 18 770 18 711 16 446 17 245 18 091 Change (%) 17,4% 7,3% 3,8% 4,4% -0,3% -0,3% -12,1% 4,9% 4,9% EBITDA 1 105 1 009 1 070 1 232 1 442 1 630 1 751 1 941 2 091 % of sales 6,8% 5,8% 5,9% 6,5% 7,7% 8,7% 10,6% 11,3% 11,6% Operating margin with restructuring 593 427 432 587 765 864 996 1 108 1 227 % of sales 3,7% 2,5% 2,4% 3,1% 4,1% 4,6% 6,1% 6,4% 6,8% Change (%) 41,3% -28,1% 1,2% 36,0% 30,3% 13,0% 15,2% 11,2% 10,8% Operating margin* with ass. Excl. rest. 697 548 552 674 843 990 1 074 1 187 1 307 % of sales 4,3% 3,2% 3,1% 3,6% 4,5% 5,3% 6,5% 6,9% 7,2% Financial results (118) (196) (234) (244) (207) (162) (144) (126) (124) Tax (108) (78) (65) (115) (186) (189) (230) (265) (298) Tax rate 20,7% 29,4% 30,6% 33,5% 32,5% 27,0% 27,0% 27,0% 27,0% Profits from associates 46 34 14 1 13 20 18 19 20 Minority interests (42) (42) (56) (63) (74) (83) (87) (89) (92) Net profit 371 142 88 166 372 638 553 646 734

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

Fig. 18: Faurecia – Cash Flow table in EURm

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Operating cash flows 726 25 927 1 037 1 249 1 297 1 310 1 470 1 592 Change in working capital (184) (387) 364 263 (932) 163 69 64 68 Capex, net (632) (824) (788) (932) (932) (1 045) (1 019) (1 042) (1 088) Financial investments, net (66) (71) (12) (33) (31) 0 0 0 0 Dividends (54) (66) (48) (57) (77) (89) (124) (154) (180) Other 51 688 (6) 300 (294) 467 (21) 5 6 Net debt 1 226 1 807 1 519 1 388 946 344 197 (82) (412) Free Cash flow 94 (799) 140 197 318 252 292 428 504

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 19: Faurecia – Balance sheet in EURm

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Tangible fixed assets 1 733 1 972 2 028 2 230 2 247 2 468 2 661 2 795 2 932 Intangibles assets 464 588 686 851 935 1 108 1 263 1 399 1 546 Cash & equivalents 630 629 711 1 025 939 1 562 1 709 1 987 2 317 current assets 3 566 3 935 3 987 4 284 4 312 5 177 5 438 5 869 6 361 Other assets 871 937 919 712 719 229 0 0 0 Total assets 7 265 8 062 8 331 9 100 9 153 10 544 11 122 11 834 12 621 L & ST Debt 1 856 2 436 2 230 2 412 1 885 1 906 1 906 1 906 1 906 Others liabilities 4 142 4 150 4 459 4 812 4 896 5 481 5 626 5 842 6 071 Shareholders' funds 1 154 1 306 1 502 1 717 2 398 2 942 3 331 3 783 4 295 Total Liabilities 7 265 8 024 8 331 9 100 9 390 10 544 11 122 11 834 12 621 Capital employed 3 794 4 584 4 405 4 543 4 548 4 983 5 315 5 570 5 839

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 20: Faurecia – Ratios & Data per share

Faurecia - Ratios 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Operating margin 4,0% 3,0% 3,0% 3,6% 4,4% 5,2% 6,4% 6,8% 7,1% Tax rate 20,7% 29,4% 30,6% 33,5% 32,5% 27,0% 27,0% 27,0% 27,0% Net margin 2,3% 0,8% 0,5% 0,9% 2,0% 2,3% 3,4% 3,7% 4,1% ROE (after tax) 29,3% 9,9% 5,3% 8,8% 14,2% 20,2% 15,4% 15,8% 15,8% ROCE (after tax) 14,8% 8,7% 8,8% 9,9% 12,6% 14,6% 14,8% 15,6% 16,4% Gearing 96,7% 125,7% 92,5% 73,9% 36,2% 10,9% 5,5% -2,0% -8,9% Pay-out ratio 10,4% 0,0% 42,0% 26,2% 24,0% 27,6% 28,0% 28,0% 28,0% Number of shares, diluted 126 120 132 133 146 137 137 137 137

Faurecia - Data per share 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

EPS 3,00 1,24 0,73 1,31 2,60 4,65 4,03 4,71 5,34 Restated EPS 3,00 1,24 0,73 1,31 2,60 3,26 4,00 4,68 5,31 % change 65,0% -58,8% -40,6% 78,8% 98,1% 25,1% 22,9% 16,9% 13,6% EPS bef. GDW 3,00 1,24 0,73 1,31 2,60 4,65 4,03 4,71 5,34 BVPS 9,17 10,87 11,39 12,89 16,37 21,43 24,27 27,55 31,29 Operating cash flows 5,77 0,20 7,04 7,79 8,53 9,45 9,55 10,71 11,60 FCF 0,75 (6,66) 1,06 1,48 2,17 1,84 2,13 3,11 3,67 Net dividend 0,35 0,00 0,30 0,35 0,65 0,90 1,12 1,31 1,49

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

Fig. 21: Faurecia – Valuation

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Market capitalization 2 526 1 675 2 225 3 546 5 046 4 624 6 237 6 237 6 237 Net debt 1 226 1 807 1 519 1 388 946 344 197 (82) (412) Pensions 162 172 150 200 188 228 217 206 196 Minorities 286 496 1 417 1 352 1 006 859 990 868 783 Financial assets 162 171 171 199 233 308 308 308 308 EV 4 037 3 979 5 140 6 287 6 952 5 748 7 333 6 922 6 497 EV/Sales 24,9% 22,9% 28,5% 33,4% 37,0% 30,7% 44,6% 40,1% 35,9% EV/EBITDA 3,7x 3,9x 4,8x 5,1x 4,8x 3,5x 4,2x 3,6x 3,1x EV/EBIT 6,8x 9,3x 11,9x 10,7x 9,1x 6,6x 7,4x 6,2x 5,3x P/E 7,6x 36,8x 61,9x 34,6x 17,5x 14,0x 11,3x 9,7x 8,5x Dividend Yield (%) 0,8% 0,0% 0,7% 0,8% 1,4% 2,0% 2,5% 2,9% 3,3%

Source: Company Data; Bryan, Garnier & Co ests.

3.1.4. Michelin (Buy vs. Neutral, FV @ €137/sh vs. €121/sh) As a reminder, in February 2017 we initiated coverage of Michelin with a Neutral recommendation and a FV of EUR118, which implied 15% upside at the time. Since our initiation, the stock has surged by 17% to EUR119. On 23rd March, we raised our FV on the stock by EUR2 to EUR121 following the 2016 publication.

On the back of stronger than expected sales growth generated by the group during Q1, notably on volumes (+7.3% posted by the group vs. +4.7% expected), we upgraded our 2017-18 sales estimates, an upgrade which was however partially offset by a cut in our favourable FX contribution due to the EUR appreciation vs. USD over recent months. This favourable sales adjustment combined with the positive change we modelled in operating profit on the back of a higher contribution from the accretive Specialty business and as we lowered our net negative impact from raw materials for 2017 (natural rubber prices started to decline at the beginning of the year, offset partially by higher butadiene prices) prompts us to raise our 2017/18 EPS by respectively 2.6% and 3.1%.

This change combined with a lower discount factor for 2017 and a rise in the multiples we use to value the group (EV/sales at 105% vs. 100% and P/E at 13 vs. 12.5x previously) since we consider investors will start to value the strong margin growth we forecast for 2018 (13.9% EBIT margin modelled for 2018e, a record high for the group) lead use to raise our FV to EUR137 and to upgrade our recommendation from Neutral to Buy.

While we previously advised investors to wait until the Michelin share price falls closer to EUR100 to play this 2018 margin improvement story, we now consider it will be hard to find this entry price despite potential pressure on the auto sector in coming quarters due to a less favourable comparison base than in the first quarter. Our new EUR137 FV (raised from EUR121) implies sufficient upside (>15%) to upgrade our recommendation on Michelin from Neutral to Buy. We now estimate the group should limit margin deterioration during H1 to 50-60bp compared with last year, by reporting at least flat EBIT despite a negative net raw materials/price contribution. Over H2, the group will start fully benefiting from the price increases it implemented in Q1-Q2 with the most favourable net effect have a positive impact on the group’s margin in 2018.

We also believe it makes sense to raise exposure to low beta auto stocks and with lower direct exposure to auto demand when entering a less favourable cycle.

Automotive

Fig. 22: Michelin – P&L table in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Revenues 20 247 19 553 21 199 20 907 22 670 23 659 24 244 24 789

Change (%) -5,7% -3,4% 8,4% -1,4% 8,4% 4,4% 2,5% 2,2%

EBITDA 3 285 3 286 3 934 4 084 4 270 4 736 4 964 5 130

% of sales 16,2% 16,8% 18,6% 19,5% 18,8% 20,0% 20,5% 20,7%

Operating margin with restructuring 1 974 1 991 2 207 2 791 2 861 3 261 3 436 3 554

% of sales 9,7% 10,2% 10,4% 13,3% 12,6% 13,8% 14,2% 14,3%

Change (%) -21,5% 0,9% 10,8% 26,5% 2,5% 14,0% 5,4% 3,4%

Operating margin* with ass. Excl. rest. 2 233 2 157 2 594 2 687 2 904 3 307 3 484 3 605

% of sales 11,0% 11,0% 12,2% 12,9% 12,8% 14,0% 14,4% 14,5%

Financial results (271) (327) (355) (322) (323) (313) (298) (287)

Tax (575) (620) (706) (797) (812) (943) (1 004) (1 046)

Tax rate 33,8% 37,6% 37,8% 32,3% 32,0% 32,0% 32,0% 32,0%

Profits from associates (1) (13) 17 (5) 20 22 24 27

Minority interests 0 0 5 9 9 11 12 12

Net profit 1 127 1 031 1 168 1 676 1 755 2 037 2 170 2 261

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 23: Michelin – Cash Flow statement in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Operating cash flows 3 089 2 522 2 695 2 765 2 799 3 245 3 749 3 539

Change in working capital 726 182 24 (202) (82) (114) 181 (172)

Capex, net (1 966) (1 839) (1 774) (1 973) (1 940) (1 882) (1 880) (1 923)

Financial investments, net (265) (248) (168) (211) 0 0 0 0

Dividends (189) (464) (463) (515) (587) (614) (713) (759)

Other (1 088) (367) 95 (284) (9) (11) (12) (12)

Net debt 142 707 1 008 944 681 (57) (1 201) (2 046)

Free Cash flow 1 123 683 921 792 859 1 363 1 869 1 617

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

Fig. 24: Michelin – Balance sheet in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Tangible fixed assets 8 955 10 081 10 532 11 053 11 384 11 608 11 796 11 998

Intangibles assets 839 1 437 1 424 1 593 1 815 2 022 2 211 2 380

Cash & equivalents 1 563 1 167 1 552 1 496 1 759 2 497 3 641 4 486

current assets 9 330 9 284 9 959 10 853 11 628 12 721 13 827 14 977

Other assets 11 352 13 139 13 934 14 469 15 192 15 682 16 093 16 497

Total assets 20 682 22 423 23 893 25 322 26 819 28 402 29 921 31 474

L & ST Debt 2 303 2 347 2 992 3 093 3 093 3 093 3 093 3 093

Others liabilities 9 123 10 553 11 359 11 583 11 942 12 112 12 186 12 250

Shareholders' funds 9 256 9 523 9 542 10 646 11 805 13 217 14 662 16 151

Total Liabilities 20 682 22 423 23 893 25 322 26 839 28 422 29 941 31 494

Capital employed 14 824 16 600 17 353 18 097 18 779 19 351 19 563 20 120

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 25: Michelin – Ratios, Data per share & Valuation

Michelin - Ratios 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Operating margin 11,0% 11,1% 12,2% 12,9% 12,7% 13,9% 14,3% 14,4%

Tax rate 33,8% 37,6% 37,8% 32,3% 32,0% 32,0% 32,0% 32,0%

Net margin 5,6% 5,3% 5,5% 8,0% 7,7% 8,6% 8,9% 9,1%

ROE (after tax) 57,8% 61,3% 66,3% 63,4% 67,6% 67,0% 63,7% 60,3%

ROCE (after tax) 10,0% 8,1% 9,3% 10,0% 10,5% 11,6% 12,1% 12,2%

Gearing 1,5% 7,4% 10,6% 8,9% 5,8% -0,4% -8,2% -12,7%

Pay-out ratio 41,0% 45,1% 45,4% 35,0% 35,0% 35,0% 35,0% 35,0%

Number of shares, diluted 192 193 193 188 188 188 188 188

Michelin- Data per share 2013 2014 2015 2016 2017e 2018e 2019e 2020e

EPS 5,86 5,34 6,04 8,92 9,34 10,85 11,55 12,03

Restated EPS 5,86 5,34 6,04 8,92 9,34 10,85 11,55 12,03

% change -33,7% -9,0% 13,3% 47,6% 4,7% 16,1% 6,5% 4,2%

EPS bef. GDW 5,86 5,34 6,04 8,92 9,34 10,85 11,55 12,03

BVPS 50,03 51,15 51,03 58,69 65,16 73,04 81,11 89,42

Operating cash flows 16,07 13,05 13,95 14,72 14,90 17,27 19,96 18,84

FCF 5,84 3,53 4,77 4,22 4,57 7,25 9,95 8,61

Net dividend 2,50 2,50 2,85 3,25 3,40 3,95 4,21 4,38

Michelin - Valuation 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Market capitalization 13 370 15 253 16 784 16 611 21 606 21 606 21 606 21 606

Net debt 142 707 1 008 944 681 (57) (1 201) (2 046)

Pensions 3 895 4 612 4 888 4 763 4 692 4 621 4 552 4 484

Minorities 0 0 (72) (89) (116) (116) (116) (116)

Financial assets 195 189 309 309 309 309 309 309

EV 17 212 20 383 22 299 21 920 26 554 25 746 24 532 23 618

EV/Sales 85,0% 104,2% 105,2% 104,8% 117,1% 108,8% 101,2% 95,3%

EV/EBITDA 5,2x 6,2x 5,7x 5,4x 6,2x 5,4x 4,9x 4,6x

EV/EBIT 8,7x 10,2x 10,1x 7,9x 9,3x 7,9x 7,1x 6,6x

P/E 20,3x 22,3x 19,7x 13,4x 12,8x 11,0x 10,3x 9,9x

Dividend Yield (%) 2,1% 2,1% 2,4% 2,7% 2,8% 3,3% 3,5% 3,7%

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

3.1.5. Plastic Omnium (Neutral vs. Buy, FV @ €38/sh vs. €37/sh) Although it posted a record performance in Q1 with total organic sales growth more than 10pp above market growth, the group indicated this strong performance will be difficult to reiterate during Q2 and H2. While it was previously guiding for an outperformance of around 5pp vs. global auto production in 2017 it appears today quite obvious the group will be more in the range of 5-7pp than at 5pp. The strong growth in North America (explained notably by a favourable company-specific base effect since the group suffered in Q1 2016 from unexpected stoppages from US clients causing it to outperform US market) is set to stop during coming quarters but in our view, should allow the group to easily exceed its initial budget.

As such, we have upgraded our 2017/18 EPS by respectively 5% and 2%, which combined with a lower discount factor for 2017 leads to us to revise up our FV from EUR36.5 to EUR38, thereby implying less than 8% upside vs. latest share price.

Despite this upgrade in FV, we have decided to downgrade our recommendation from Buy to Neutral after the healthy share price performance since our initiation back in September 2016. On top of struggling to find additional upside for the stock in the short term, we also assume the group will now enter a more complex period linked to the full integration of FAE, which will have a dilutive impact on its margin over coming quarters, at least until end 2018. We do not see any catalysts for the short term, contrary to other stocks we cover (no Investor Day organised by the group unlike Faurecia and Hella).

Besides this, valuation-wise we believe Plastic Omnium is no longer attractive with the stock currently trading at 67% its 2018e sales and at 13x its 20108e EPS reflects no further discount to historical multiples, unlike Faurecia.

Fig. 26: Plastic Omnium – P&L table in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Revenues 4 335 4 437 5 010 5 857 6 934 7 393 7 940 8 501

Change (%) -9,8% 2,4% 12,9% 16,9% 18,4% 6,6% 7,4% 7,1%

EBITDA 531 610 691 810 954 988 1 073 1 167

% of sales 12,2% 13,7% 13,8% 13,8% 13,8% 13,4% 13,5% 13,7%

Operating margin with restructuring 251 319 360 421 508 532 595 652

% of sales 5,8% 7,2% 7,2% 7,2% 7,3% 7,2% 7,5% 7,7%

Change (%) -13,1% 27,2% 12,8% 16,9% 20,9% 4,6% 11,8% 9,7%

Operating margin* with ass. Excl. rest. 339 393 470 558 648 680 738 802

% of sales 7,8% 8,9% 9,4% 9,5% 9,3% 9,2% 9,3% 9,4%

Financial results (64) (56) (68) (56) (54) (53) (51) (48)

Tax (57) (64) (75) (86) (109) (116) (130) (143)

Tax rate 22,4% 21,8% 22,2% 21,3% 21,5% 21,5% 21,5% 21,5%

Profits from associates 31 39 35 52 56 60 64 65

Minority interests (4) (5) (4) (6) (7) (8) (8) (9)

Net profit 193 225 259 312 392 414 467 514

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

Fig. 27: Plastic Omnium – Cash Flow statement in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Operating cash flows 404 409 525 643 668 711 789 865

Change in working capital 28 (17) 34 60 (5) 6 7 8

Capex, net (314) (346) (378) (372) (485) (518) (556) (595)

Financial investments, net 11 12 13 (714) 240 0 0 0

Dividends (37) (51) (57) (63) (72) (91) (96) (108)

Other 150 24 14 182 4 4 4 4

Net debt 410 390 268 800 445 339 199 33

Free Cash flow 97 100 203 265 183 193 233 270

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 28: Plastic Omnium – Balance sheet in EURm

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Tangible fixed assets 891 1 008 1 149 1 354 1 271 1 450 1 629 1 810

Intangibles assets 330 352 381 484 506 537 578 628

Cash & equivalents 489 535 663 334 689 795 935 1 101

current assets 1 443 1 584 1 867 2 219 2 756 2 956 3 208 3 488

Other assets 366 419 356 659 65 65 25 (32)

Total assets 1 809 2 003 2 224 2 878 2 821 3 021 3 233 3 455

L & ST Debt 990 995 1 031 1 298 1 298 1 298 1 298 1 298

Others liabilities 1 376 1 521 1 772 2 295 2 478 2 578 2 698 2 821

Shareholders' funds 870 1 054 1 266 1 480 1 774 2 069 2 409 2 784

Total Liabilities 3 252 3 588 4 091 5 097 5 578 5 977 6 441 6 943

Capital employed 1 517 1 696 1 826 2 712 2 653 2 843 3 044 3 254

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 29: Plastic Omnium – Ratios, Data per share & Valuation

2013 2014 2015 2016 2017e 2018e 2019e 2020e

Operating margin 7,8% 8,9% 9,4% 9,5% 9,3% 9,2% 9,3% 9,4%

Tax rate 22,4% 21,8% 22,2% 21,3% 21,5% 21,5% 21,5% 21,5%

Net margin 4,5% 5,1% 5,2% 5,3% 5,7% 5,6% 5,9% 6,0%

ROE (after tax) 22,2% 21,3% 20,4% 21,1% 22,1% 20,0% 19,4% 18,5%

ROCE (after tax) 17,3% 18,1% 20,0% 16,2% 19,2% 18,8% 19,0% 19,4%

Gearing 46,3% 36,4% 20,8% 53,2% 24,7% 16,2% 8,1% 1,2%

Pay-out ratio 26,5% 25,4% 24,3% 24,0% 24,0% 24,0% 24,0% 24,0%

Number of shares, diluted 147 148 148 148 148 148 148 148

Plastic Omnium- Data per share 2013 2014 2015 2016 2017e 2018e 2019e 2020e

EPS 1,25 1,45 1,68 2,04 2,57 2,71 3,06 3,36

Restated EPS 1,25 1,45 1,68 2,04 2,57 2,71 3,06 3,36

% change 11,4% 16,6% 15,8% 21,3% 25,5% 5,7% 12,8% 10,1%

EPS bef. GDW 1,25 1,45 1,68 2,04 2,57 2,71 3,06 3,36

BVPS 5,76 7,00 8,41 9,92 11,89 13,87 16,15 18,66

Operating cash flows 2,76 2,77 3,55 4,35 4,52 4,81 5,33 5,85

FCF 0,66 0,68 1,37 1,79 1,24 1,31 1,57 1,82

Net dividend 0,33 0,37 0,41 0,49 0,62 0,65 0,73 0,81

Automotive

Plastic Omnium - Valuation 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Market capitalization 2 231 3 213 4 269 4 266 5 241 5 241 5 241 5 241

Net debt 410 390 268 800 445 339 199 33

Pensions 65 93 102 110 107 104 102 99

Minorities 60 69 63 86 102 109 117 125

Financial assets 436 550 486 725 787 836 889 908

EV 2 330 3 214 4 215 4 537 5 109 4 958 4 770 4 591

EV/Sales 53,7% 72,4% 84,1% 77,5% 73,7% 67,1% 60,1% 54,0%

EV/EBITDA 4,4x 5,3x 6,1x 5,6x 5,4x 5,0x 4,4x 3,9x

EV/EBIT 9,3x 10,1x 11,7x 10,8x 10,0x 9,3x 8,0x 7,0x

P/E 28,4x 24,4x 21,0x 17,3x 13,8x 13,1x 11,6x 10,5x

Dividend Yield (%) 0,9% 1,0% 1,2% 1,4% 1,7% 1,8% 2,1% 2,3%

Source: Company Data; Bryan, Garnier & Co ests.

3.1.6. Valeo (Sell, FV @ €57/sh vs. €56/sh) Right after the Q1 2017 sales publication released by the group on 27th April, we lifted our 2017/18 EPS estimates by around 2% due to the group’s advance over its 2017 sales guidance (+7% LfL sales growth over the year vs. +13% posted in Q1) prompting us to lift our FV by EUR1 to EUR56.

By modelling a lower discount factor for 2017, we are now raising our FV on Valeo by an additional EUR1 to EUR57. Despite this slight FV change, we confirm our Sell recommendation notably for valuation reasons, but also because we believe we are gradually entering a less favourable environment for the auto sector in coming quarters and believe the stock’s unattractive valuation will at some point affect investor appetite for Valeo.

Fig. 30: Valeo – P&L table in EURm

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Revenues 10 868 11 759 12 110 12 725 14 544 16 519 19 267 21 364 23 049

Change (%) 12,8% 8,2% 3,0% 5,1% 14,3% 13,6% 16,6% 10,9% 7,9%

EBITDA 1 212 1 260 1 356 1 526 1 847 2 144 2 369 2 902 3 210

% of sales 11,2% 10,7% 11,2% 12,0% 12,7% 13,0% 12,3% 13,6% 13,9%

Operating margin with restructuring 704 672 728 808 943 1 240 1 421 1 621 1 797

% of sales 6,5% 5,7% 6,0% 6,3% 6,5% 7,5% 7,4% 7,6% 7,8%

Change (%) 19,3% -4,5% 8,3% 11,0% 16,7% 31,5% 14,6% 14,1% 10,8%

Operating margin* with ass. Excl. rest. 706 739 802 913 1 116 1 334 1 543 1 755 1 941

% of sales 6,5% 6,3% 6,6% 7,2% 7,7% 8,1% 8,0% 8,2% 8,4%

Financial results (106) (133) (147) (137) (119) (129) (124) (122) (120)

Tax (148) (146) (119) (129) (106) (189) (268) (309) (346)

Tax rate 24,7% 26,4% 20,2% 17,9% 12,0% 16,1% 20,0% 20,0% 20,0%

Profits from associates 2 14 7 51 56 61 45 49 52

Minority interests (24) (25) (30) (31) (45) (58) (79) (93) (98)

Net profit 427 380 439 562 729 925 994 1 144 1 285

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

Fig. 31: Valeo – Cash Flow statement in EURm

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Operating cash flows 842 869 1 236 1 242 1 659 1 832 1 770 2 378 2 633

Change in working capital (29) (49) 232 40 111 56 14 126 103

Capex, net (683) (872) (914) (958) (1 119) (1 300) (1 503) (1 773) (2 028)

Financial investments, net (269) (19) (5) (104) (8) (630) (1 127) 0 0

Dividends (110) (124) (129) (144) (201) (236) (295) (317) (366)

Other 201 162 (164) (25) 26 554 40 47 49

Net debt 523 763 366 342 124 526 1 642 1 308 1 020

Free Cash flow 159 (3) 322 284 540 532 267 605 605

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 32: Valeo – Balance sheet in EURm

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Tangible fixed assets 1 956 2 075 2 181 2 497 2 744 3 065 4 542 4 809 5 182

Intangibles assets 641 736 850 1 012 2 309 2 646 2 990 3 334 3 629

Cash & equivalents 1 295 1 334 1 510 1 497 1 725 2 359 1 243 1 577 1 865

current assets 4 110 4 428 4 342 4 551 5 324 6 699 6 474 7 373 8 114

Other assets 560 347 159 462 -662 -391 767 479 293

Total assets 8 562 8 920 9 042 10 019 11 440 14 378 16 016 17 573 19 084

L & ST Debt 1 876 2 077 1 876 1 839 1 745 2 612 2 612 2 612 2 612

Others liabilities 4 606 4 648 4 633 5 231 6 003 7 413 8 319 9 010 9 565

Shareholders' funds 1 936 2 052 2 380 2 740 3 473 4 117 4 810 5 629 6 536

Total Liabilities 8 562 8 920 9 042 10 019 11 440 14 378 16 016 17 573 19 084

Capital employed 3 522 4 146 3 872 3 872 3 911 4 267 4 826 6 726 7 296

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 33: Valeo – Ratios, Data per share & Valuation

Valeo - Ratios 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Operating margin 6,5% 6,2% 6,6% 6,8% 7,3% 7,7% 7,8% 8,0% 8,2%

Tax rate 24,7% 26,4% 20,2% 17,9% 12,0% 16,1% 20,0% 20,0% 20,0%

Net margin 3,9% 3,2% 3,6% 4,4% 5,0% 5,6% 5,2% 5,4% 5,6%

ROE (after tax) 22,1% 18,5% 18,4% 20,5% 21,0% 22,5% 20,7% 20,3% 19,7%

ROCE (after tax) 22,9% 17,8% 20,7% 23,3% 26,2% 27,6% 22,9% 24,1% 24,3%

Gearing 25,1% 33,8% 14,4% 11,6% 0,5% 5,8% 26,9% 17,4% 10,8%

Pay-out ratio 24,6% 29,7% 29,1% 30,4% 32,1% 31,9% 31,9% 31,9% 31,9%

Number of shares, diluted 75 75 75 78 78 239 239 239 239

Valeo - Data per share 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

EPS 1,89 1,68 1,95 2,41 3,11 3,91 4,20 4,84 5,44

Restated EPS 1,89 1,68 1,95 2,41 3,11 3,91 4,20 4,84 5,44

% change 17,0% -11,1% 15,6% 23,8% 29,0% 25,8% 7,4% 15,2% 12,3%

EPS bef. GDW 1,89 1,68 1,95 2,41 3,11 3,91 4,20 4,84 5,44

BVPS 8,59 9,09 10,55 11,75 14,81 17,20 20,10 23,51 27,30

Operating cash flows 11,20 11,54 16,43 15,97 21,23 7,65 7,39 9,93 11,00

FCF 0,71 (0,01) 1,43 1,22 2,30 2,22 1,11 2,53 2,53

Net dividend 0,47 0,50 0,57 0,73 1,00 1,25 1,34 1,55 1,74

Automotive

Valeo - Valuation 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

Market capitalization 2 927 2 728 4 138 7 293 10 373 10 915 15 734 15 734 15 734

Net debt 523 763 366 342 124 526 1 642 1 308 1 020 Pensions 776 916 791 1 059 1 001 1 072 1 072 1 072 1 072 Minorities 312 325 390 403 585 754 1 033 1 214 1 275 Financial assets 28 196 98 714 784 824 608 656 709 EV 4 510 4 536 5 587 8 383 11 299 12 443 18 873 18 672 18 392 EV/Sales 41,5% 38,6% 46,1% 65,9% 77,7% 75,3% 98,0% 87,4% 79,8% EV/EBITDA 3,7x 3,6x 4,1x 5,5x 6,1x 5,8x 8,0x 6,4x 5,7x EV/EBIT 6,4x 6,8x 7,7x 10,4x 12,0x 10,0x 13,3x 11,5x 10,2x P/E 6,9x 7,2x 9,4x 13,0x 14,2x 17,0x 15,8x 13,7x 12,2x Dividend Yield (%) 3,6% 4,1% 3,1% 2,3% 2,3% 1,9% 2,0% 2,3% 2,6%

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

3.2. To find additional >25% additional upside on our stocks we need to be quite bullish At this stage, it is clearly becoming tougher to find further upside in the auto & parts sector and on stocks we cover at Bryan Garnier given that out of the six stocks we follow, three are currently trading at their highest levels ever (Valeo, Michelin and Plastic Omnium), and one is only 5.5% below (Hella). Only Faurecia and Continental are still >10% below (Faurecia at -13% and Continental at -19%).

Since our sector coverage initiation back in September 2016 the SXAP index has gained 20% vs. only 13% for the Stoxx 600 with all four auto supplier stocks outperforming the auto index on average by 6pp. It is important to bear in mind that we started covering the sector after an already impressive rally, which was driven by a rerating effect on valuation multiples and by favourable earnings adjustments due to the market recovery in mature markets and to impressive volume growth in China. As a reminder, between 2010 and 2016, new auto demand grew by 28.5% leading to a 144% increase in the SXAP index whereas the Stoxx 600 only grew by 53% over the same period.

To find further upside we identified three potential leverages:

 Increasing our market estimates (demand & production)

 Reducing our WACC assumptions

 A change in how we value our six stocks (rerating effect)

3.2.1. Increasing our estimates on the back of higher market expectations for worldwide automotive market. We calculate that to find a minimum of 25% additional upside on average for our six stocks (based on recent share prices), we need to increase our 2017 global auto demand assumption from 2.4% in 2017 and 1.9% in 2018 to respectively 5.6% and 4.9% which implies a >200bp premium compared with the CAGR in volumes observed on the auto market between 2010 and 2016 when the European and US markets were in a recovery phase and when the Chinese market grew by 50%. We have obviously made no change to our assumptions for market outperformance for all the stocks.

Fig. 34: Sum-up of our first analysis to find 25% upside on share price by increasing market growth

2017e implied market 2018e implied market Implied LT market Implied FV with Company FV Price growth to achieve new growth to achieve new growth to achieve 25% upside FV FV new FV Plastic Omium 38 35 44 5,0% 4,0% 3,5%

Faurecia 50 45 56 4,0% 3,0% 3,0%

Valeo 57 66 82 7,0% 6,5% 5,0%

Michelin 138 119 148 - - -

Continental 178 201 251 7,5% 7,0% 6,0%

Hella 46 45 56 4,5% 4,0% 4,0%

Average - - - 5,6% 4,9% 4,3%

Source: Company Data; Bryan, Garnier & Co ests.

Automotive

Based on our analysis, market growth of 4% would be necessary in 2017 and 3% in 2018 to sufficiently increase our earnings assumptions for Faurecia and thereby generate 25% upside for the share price. On the contrary, to find 25% upside for Valeo or Continental we need the global market to grow by 7-7.5% in 2017 and in 2018.

3.2.2. Reducing our WACC assumptions To find further upside on the six stocks we cover we can reduce our WACC assumptions through either a cut in market risk premium or a cut in respective beta to reflect lower market risk and/or lower volatility of the auto sector compared with the market given the sector is now seen as less cyclical. Our analysis implies that to catch further 25% upside on latest share price would imply an average cut of 190bp which seems quite unlikely for this sector. Our analysis also indicates Michelin is the stock the most sensitive to any WACC change, as a cut of 100bp on its WACC results in 11.6% favourable change on our FV while only a 170bp cut delivers further 25% upside.

Fig. 35: Sum-up of our second analysis on WACC assumptions to find 25% upside on share price

Implied WACC to FV with have additional Company WACC down % change Current WACC WACC change implied in bp 25% upside on our 100bp FV Plastic Omium 42 10,5% 7,20% 8,60% -140

Faurecia 54 8,0% 8,20% 9,30% -110

Valeo 62 8,8% 5,90% 8,70% -280

Michelin 154 11,6% 6,00% 6,70% -70

Continental 192 7,9% 4,80% 8,40% -360

Hella 51 10,9% 5,8% 7,60% -180

Average - 9,6% 6,3% 8,2% -190

Source: Company Data; Bryan, Garnier & Co ests.

It is worth noticing that to find 25% upside on Valeo we need to cut our WACC assumption by 280bp to 5.9% while for Faurecia we only need to cut it by 110bp.

Automotive

3.2.3. A change in multiples Applying premium on historical multiples for stocks which offer today different sales growth potential or profitability level compared with their historical profile could lead us to revise up our FVs. Yet, given we already made this exercise when we initiated the coverage on the sector to evaluate correctly our six auto stocks, we see very limited upside potential. We however identified two stocks that could benefit from further rerating effect given investors are still reluctant to apply a premium compared with historical multiples despite a change in companies’ profile: Faurecia and Michelin.

Fig. 36: Comparison table between historical multiples and metrics, and today’s

Average 2011-2017 Today Comparison

EPS growth Implied Implied EV/sales P/E EBIT EPS growth EV/Sales P/E EBIT margin Average Margin EPS CAGR (2016- premium on premium on FY2 FY2 margin CAGR 2018e 2018e 2018e premium diff. in bp CAGR diff. 18e) EV/sales P/E Plastic Omium 59% 9,9x 6,8% 15,5% 67% 13,1x 7,2% 15% 13,6% 32,3% 22,9% 0,4% -0,5%

Faurecia 29% 8,5x 4,8% 7,0% 39% 9,5x 6,4% 21% 34,5% 11,8% 23,1% 1,6% 14,0%

Valeo 52% 10,2x 6,6% 15,0% 87% 10,9x 7,6% 11% 67,3% 7,4% 37,3% 1,0% -4,0%

Michelin 80% 9,0x 11,1% 3,0% 108% 10,9x 13,8% 10% 35,0% 21,1% 28,1% 2,7% 7,0%

Continental 84% 10,4x 9,7% 16,7% 98% 11,6x 11,1% 9,8% 16,7% 11,1% 13,9% 1,4% -6,9%

Hella 67% 11,4x 6,2% 14,8% 71% 12,7x 7,1% 21% 6,0% 11,4% 8,7% 0,9% 6,2%

Average 62% 9,9x 7,5% 12,0% 78% 11,5x 8,9% 15% 28,8% 15,9% 22,3% 1,4% 2,6%

Source: Company Data; Bryan, Garnier & Co ests.

We can see in the table above that Michelin and Faurecia are the only two stocks we cover to offer a higher than average margin improvement over the 2016-18 and 2011-17 periods as well as an above- average EPS CAGR difference between both periods despite a rerating on multiples in line with peers.

As a reminder, we continue to expect Faurecia to trade closer to peer multiples that are generating 6- 7% EBIT margin (around 60% EV/sales ratio) even if its growth profile could still be more at risk than other auto suppliers. Yet the recent partnership signature with German auto supplier ZF announced last week is clearly a positive signal sent to investors as it confirms that the group’s strategy to transform its product positioning towards more innovative products is well on track.

As for Michelin, as already mentioned above, we assume investors will gradually start looking at solid growth potential stemming from price increases during H1 and 2018 to the benefit of the group’s margin. We estimate the group should be able to post EBIT margin of 14.2% next year, its highest level. A rerating to multiples can therefore not be ruled out.

In contrast, we assume the rerating for Valeo is now over especially as the current share price implies an average 37% premium to historical multiples despite limited upside to margin in the short term and potential sales growth at risk due to a slowdown in the cycle. At this stage, we remain Negative.

Automotive

4. Conclusion In this report we came back on the potential risks of volumes slowdown that could affect auto sector over coming quarters, as well as on the transformations that are currently affecting the Chinese automotive market. We continue to assume foreign suppliers are less at risks than foreign carmakers there given the first are increasingly working with Chinese brands and given they do not have to invest massively in fresh infrastructures to develop electric vehicles.

We also took the opportunity to update our models following Q1-17 publications while lowering our discount factor for 2017 (we now discount all six stocks on 8 months over 2017 vs. 12 months previously). We also decided to downgrade our rating on Plastic Omnium from Buy to Neutral, while raising our rating on Michelin from Neutral to Buy. Below is a summary of our changes in FVs and ratings.

Fig. 37: Change in our FVs & ratings – BG Auto & Parts coverage

Old New

Company Price FV Upside Rating FV Upside Rating

Continental 206,4 174 -15,7% Sell 178 --11.7% Sell

Faurecia 46,4 48 3,6% Buy 50 7,9% Buy

Hella 45,7 45,5 -0,5% Buy 46 0,6% Buy

Michelin 121,2 121 -0,2% Neutral 137 13,0% Buy

Plastic Omnium 36,2 37 2,1% Buy 38 4,8% Neutral

Valeo 66,7 56 -16,0% Sell 57 -14,5% Sell

Source: Company Data; Bryan, Garnier & Co ests.

And finally we identified three leverages we should use to find +25% upside on latest share price, making us realizing how bullish we would need to be to remain positive on the sector. On average we either need to increase our 2017 and 2018 volumes growth expectations for the sector from respectively +2.4% and +1.9% to 5.6% and 4.9% which implies a >200bp premium compared with the volumes growth CAGR observed between 2010 and 2016 or we need to reduce our WACC assumption by 190bp on our stocks, which seems quite unrealistic given we are set to enter into a more volatile environment for the sector. According to us, the only leverage that looks credible to find further upside is the change in market perception on valuation multiples, leading to rerating effect on some stocks which offer different margin or growth profile compared with years ago. Faurecia and Michelin are the two stocks still offering upside in our view based on this latest criterion. Below is a summary of the three leverages we can use to find 25% upside on latest share price.

Automotive

Intentionally left blank

Automotive

Price Chart and Rating History

Michelin

125.0

120.0

115.0

110.0

105.0

100.0

95.0

90.0

85.0

80.0

75.0 09/11/15 09/02/16 09/05/16 09/08/16 09/11/16 09/02/17 09/05/17

MICHELIN Fair Value Achat Neutre Vente

Ratings Date Ratings Price

10/05/17 BUY EUR12

08/02/17 NEUTRAL EUR102.2

Target Price

Date Target price

10/05/17 EUR137

08/03/17 EUR121 08/02/17 EUR118

Automotive

Plastic Omnium

38.0

36.0

34.0

32.0

30.0

28.0

26.0

24.0

22.0

20.0 09/11/15 09/02/16 09/05/16 09/08/16 09/11/16 09/02/17 09/05/17

PLASTIC OMNIUM Fair Value Achat Neutre Vente

Ratings

Date Ratings Price 10/05/17 NEUTRAL EUR35

14/09/16 BUY EUR28.605

Target Price

Date Target price 10/05/17 EUR38

25/01/17 EUR36.5

14/09/16 EUR36

Automotive

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a BUY recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to NEUTRAL be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a SELL recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings

BUY ratings 47.9% NEUTRAL ratings 36.8% SELL ratings 15.3% Research Disclosure Legend 1 Bryan Garnier shareholding Bryan Garnier & Co Limited or another company in its group (together, the “Bryan Garnier Group”) has a No in Issuer shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the “Issuer”). 2 Issuer shareholding in Bryan The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members No Garnier of the Bryan Garnier Group. 3 Financial interest A member of the Bryan Garnier Group holds one or more financial interests in relation to the Issuer which are No significant in relation to this report 4 Market maker or liquidity A member of the Bryan Garnier Group is a market maker or liquidity provider in the securities of the Issuer or No provider in any related derivatives. 5 Lead/co-lead manager In the past twelve months, a member of the Bryan Garnier Group has been lead manager or co-lead manager No of one or more publicly disclosed offers of securities of the Issuer or in any related derivatives. 6 Investment banking A member of the Bryan Garnier Group is or has in the past twelve months been party to an agreement with the No agreement Issuer relating to the provision of investment banking services, or has in that period received payment or been promised payment in respect of such services. 7 Research agreement A member of the Bryan Garnier Group is party to an agreement with the Issuer relating to the production of No this Report. 8 Analyst receipt or purchase The investment analyst or another person involved in the preparation of this Report has received or purchased No of shares in Issuer shares of the Issuer prior to a public offering of those shares. 9 Remuneration of analyst The remuneration of the investment analyst or other persons involved in the preparation of this Report is tied No to investment banking transactions performed by the Bryan Garnier Group. 10 Corporate finance client In the past twelve months a member of the Bryan Garnier Group has been remunerated for providing No corporate finance services to the issuer or may expect to receive or intend to seek remuneration for corporate finance services from the Issuer in the next six months. 11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the No securities or derivatives of the Issuer. 12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the No securities or derivatives of the Issuer. 13 Bryan Garnier executive is A partner, director, officer, employee or agent of the Bryan Garnier Group, or a member of such person’s No an officer household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of its parents or subsidiaries. The name of such person or persons is disclosed above. 14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of Yes the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. 15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, No price target/spread and summary of conclusions removed).

A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at www.bryangarnier.com

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Important information This document is classified under the FCA Handbook as being investment research (independent research). Bryan Garnier & Co Limited has in place the measures and arrangements required for investment research as set out in the FCA’s Conduct of Business Sourcebook. This report is prepared by Bryan Garnier & Co Limited, registered in England Number 03034095 and its MIFID branch registered in France Number 452 605 512. Bryan Garnier & Co Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 178733) and is a member of the London Stock Exchange. Registered address: Beaufort House 15 St. Botolph Street, London EC3A 7BB, United Kingdom This Report is provided for information purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell relevant securities, including securities mentioned in this Report and options, warrants or rights to or interests in any such securities. This Report is for general circulation to clients of the Firm and as such is not, and should not be construed as, investment advice or a personal recommendation. No account is taken of the investment objectives, financial situation or particular needs of any person. The information and opinions contained in this Report have been compiled from and are based upon generally available information which the Firm believes to be reliable but the accuracy of which cannot be guaranteed. All components and estimates given are statements of the Firm, or an associated company’s, opinion only and no express representation or warranty is given or should be implied from such statements. All opinions expressed in this Report are subject to change without notice. To the fullest extent permitted by law neither the Firm nor any associated company accept any liability whatsoever for any direct or consequential loss arising from the use of this Report. Information may be available to the Firm and/or associated companies which are not reflected in this Report. The Firm or an associated company may have a consulting relationship with a company which is the subject of this Report. This Report may not be reproduced, distributed or published by you for any purpose except with the Firm’s prior written permission. The Firm reserves all rights in relation to this Report. Past performance information contained in this Report is not an indication of future performance. The information in this report has not been audited or verified by an independent party and should not be seen as an indication of returns which might be received by investors. Similarly, where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given (“Forward Looking Information”) they should not be regarded as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to the risk factors stated in this Report, could cause actual results to differ materially from those in any Forward Looking Information. Disclosures specific to clients in the United Kingdom This Report has not been approved by Bryan Garnier & Co Limited for the purposes of section 21 of the Financial Services and Markets Act 2000 because it is being distributed in the United Kingdom only to persons who have been classified by Bryan Garnier & Co Limited as professional clients or eligible counterparties. Any recipient who is not such a person should return the Report to Bryan Garnier & Co Limited immediately and should not rely on it for any purposes whatsoever. Notice to US investors This research report (the “Report”) was prepared by Bryan Garnier & Co Limited for information purposes only. The Report is intended for distribution in the United States to “Major US Institutional Investors” as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY 10022. Telephone: 1-212-337-7000. This Report is based on information obtained from sources that Bryan Garnier & Co Limited believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co Limited and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security. Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co Limited may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies). Bryan Garnier Securities, LLC and/or Bryan Garnier & Co Limited are unaware of any actual, material conflict of interest of the research analyst who prepared this Report and are also not aware that the research analyst knew or had reason to know of any actual, material conflict of interest at the time this Report is distributed or made available..