Sector Update Utilization in China to Rebound Gradually

2015. 9. 16

Autos (OVERWEIGHT) Sector Update Utilization in China to rebound gradually

* We visited China’s top automaker Shanghai Automotive Industry Corporation (SAIC) and its parts-making affiliate Huayu Automotive Systems over Sep 1-2. * SAIC says inventory corrections in the Chinese auto market are winding down, retail sales recovered somewhat in August, and utilization will gradually recover from September. It predicts that China’s auto demand will grow 3-5% pa in coming years and that JV brands will struggle over the next couple of years as local brands excel in inland cities and the SUV segment. Although we believe Hyundai Motor (HMC) and Kia Motors will see utilization recover from September on price policy changes and car launches, they need to revise their longer-term strategies in light of the shifting competitive landscape. * With utilization at HMC and Kia’s Chinese plants bottoming, parts makers oversold due to concerns over China warrant attention. We like Mando and Hyundai Wia.

WHAT’S THE STORY? Utilization bottoming out on inventory adjustments: Wholesale auto sales in

China fell 2.6% y-y in June, the first such decline since the market opened up in the early 2000s. They fell again in July (6.4%) and August (3%) as carmakers adjusted inventories. With dealership inventories have fallen from 1.9 months in June to 1.6 months in August (vs normal levels of 1.5 months), further price and utilization cuts aimed at inventory adjustments look unlikely. Retail sales rebounded to grow 0.6% y-y in August and demand should gradually recover from September as seasonal strength kicks in. Takeaways from SAIC Group visit: China’s top automaker Shanghai Automotive Industry Corporation (SAIC) predicts that Chinese auto demand will grow 3-5% pa in coming years and plans to defend its number-one position by launching models tailored to local tastes. SAIC’s parts-making affiliate Huayu Automotive Systems has gained expertise supplying SAIC-GM and SAIC-VW, and pursued M&As to acquire technology and expand its global reach. The parts maker, which generates 65% of its sales from SAIC, plans to reduce its dependence on the carmaker via M&A activity. HMC and Kia need to shake things up: With their models aging and utilization falling, Hyundai Motor (HMC) and Kia Motors have sought a breakthrough by price cuts. We believe HMC needs to alter its China strategy before its fourth and fifth China plants go online in 2017 by: 1) expanding the number of exclusive models it offers there; and 2) actively introducing new technology. Offering new models alongside older ones has so far boosted the automaker’s sales and profitability, but we believe the strategy needs modifying lest it hurts the carmaker’s brand image. Outlook for Korean parts makers: Mando, Pyeong Hwa Automotive, and S&T Motiv supply both local and global automakers in China. Global automakers’ development of China-only models in response to local brands’ value-for-money strategy may provide growth opportunities to Korean parts makers that boast competitive prices and quality.

Autos

2015. 9. 16

Contents

Automakers in China to see utilization recover

Utilization bottoming out on inventory adjustments Wholesale auto sales in China fell 2.6% y-y in June, the first such decline since the market opened up in the early 2000s. With consumer sentiment dampened by an economic slowdown and stock market crash, automakers became wary of high inventories. To address this, they slashed prices by more than 10% and adjusted utilization rates. With dealership inventories standing at 1.6 months at end-August (slightly above normal levels of 1.5 months), further price and utilization cuts aimed at inventory adjustments look unlikely given that retail sales rebounded to grow 0.8% y-y in that month. The Chinese auto market is seasonally strongest in 4Q because of the Mid-Autumn Festival holidays in 4Q and Lunar New Year holidays in 1Q. As the holidays fall in late September and late February this time around, utilization at automakers should gradually recover. Although the Chinese economy remains a concern, the worst looks over for auto demand given that real-estate transactions (a measure of consumption) are still recovering and the government has announced massive fiscal stimulus measures.

China: Auto inventory China: Recent cuts to vehicle ASPs

('000 vehicles) Automaker Details Announced price cuts of CNY10,000-54,000 700 GM Shanghai (KRW1.8m-9.5m) covering 40 models 600 Cut prices on select models (including mid-sized sedans) VW Shanghai 500 by up to CNY10,000 Bolstered promotional efforts, cut prices 400 Honda/Ford and covered excise taxes 300 Cut prices for H2 and H6 models by a respective 200 Great Wall CNY5,000 and CNY6,000 100 Cut price for main sedan (C30) by over 10% HMC Cut prices for Santa Fe and ix35 models by about 10% 0 Cut prices for Sportage (KM) and Sportage (SL) models (100) Kia by a respective CNY50,000 and CNY20,000 (200) Source: Local media, Samsung Securities Jan 11 Jan 12 Jan 13 Jan 14 Jan 15

Note: Excludes commercial vehicles Source: Auto Data Bowl, Samsung Securities

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2015. 9. 16

China: Dealer-level automobile inventory index China: 2015 growth in wholesale and retail sales

(Months) (% y-y) 2.5 15

2.3 10 2.1 5 1.9 1.7 0 1.5 (5) 1.3 (10) 1.1 (15) 0.9 Jan Feb Mar Apr May Jun Jul Aug 0.7 2012 2013 2014 2015 Retail sales Wholesale

Source: China Automobile Dealers Association, Samsung Securities Source: Auto Data Bowl, Samsung Securities

China: Housing transaction volume growth vs auto demand growth

(% y-y) 70 60 50 40 30 20 10 0 (10) (20) (30) Jan 11 Jan 12 Jan 13 Jan 14 Jan 15

Housing transaction volume Auto demand

Source: National Bureau of Statistics of China, KARI, Samsung Securities

High-growth phase ends; competition to intensify We expect China’s auto demand to grow moderately at 3-5% pa in coming years. After seeing demand shrink 3.2% y-y in June, the China Association of Automobile Manufacturers has slashed its full-year demand growth forecast from 7% to 3%. Even though vehicle ownership per thousand people remains near 50, China’s top automaker SAIC also predicts that demand will grow 3-5% pa because: 1) annual demand has reached 20m units: 2) car penetration is significantly higher in eastern coastal cities than in inland/western cities; and 3) eight large cities limit new car registrations. We expect the Chinese auto industry to consolidate around 5-10 players as slowing demand whips up competition and tighter environmental regulations drive up R&D costs. Indeed, the top-10 firms already control 86.2% of the Chinese market. In China, some 100 automakers have a combined annual capacity of 40m vehicles—double that of current demand. Smaller players that manufacture 20,000-30,000 vehicles pa have so far survived on government subsidies, but may no longer be able to compete now that top players are cutting prices.

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2015. 9. 16

Global automakers: China capacity forecasts (‘000 vehicles) 2012 2013 2014 2015E 2016E 2017E 2014-17E CAGR (%) Shanghai-VW 1,175 1,417 1,600 1,850 2,000 2,000 7.7 FAW-VW 1,010 1,275 1,560 1,560 1,560 2,280 13.5 VW 2,185 2,692 3,160 3,410 3,560 4,280 10.6 Dongfeng-PSA 450 525 600 750 750 1,290 29.1 Brilliance-BMW 150 200 300 300 500 500 18.6 Mercedes-Benz 100 100 154 328 400 400 37.5 Fiat 50 140 175 210 210 370 28.3 Renault 150 150 150 European OEMs 2,935 3,657 4,389 5,148 5,570 6,990 16.8 Growth (% y-y) 24.6 20.0 17.3 8.2 25.5 Shanghai-GM 1,000 1,160 1,235 1,610 1,610 1,830 14.0 Changan-Ford 325 550 579 1,088 1,350 1,350 32.6 US OEMs 1,325 1,710 1,814 2,698 2,960 3,180 20.6 Growth (% y-y) 29.1 6.1 48.7 9.7 7.4 BAIC-HMC 750 900 1,050 1,050 1,250 1,550 13.9 Dongfeng Yueda Kia 430 430 680 740 890 890 9.4 Korean OEMs 1,180 1,330 1,730 1,790 2,140 2,440 12.1 Growth (% y-y) 12.7 30.1 3.5 19.6 14.0 Dongfeng-Honda 360 360 420 480 480 480 4.6 GAC-Honda 480 480 480 600 720 840 20.5 Honda 840 840 900 1,080 1,200 1,320 13.6 GAC-Toyota 380 380 380 380 380 480 8.1 FAW-Toyota 520 560 560 630 680 680 6.7 Toyota 900 940 940 1,010 1,060 1,160 7.3 Changan-Suzuki 300 350 380 380 400 400 1.7 Dongfeng-Nissan 677 1,000 1,038 1,150 1,150 1,150 3.5 Mazda 340 340 400 400 400 400 0.0 Japanese OEMs 3,057 3,470 3,658 4,020 4,210 4,430 6.6 Growth (% y-y) 13.5 5.4 9.9 4.7 5.2 JLR (Jaguar Land Rover) 130 130 130 Indian OEMs 130 130 130 Growth (% y-y) 0.0 0.0 Great Wall 900 1,150 1,150 1,400 1,400 1,400 6.8 Geely 800 800 700 700 700 (4.4) Volvo 31 165 205 205 205 7.5 Chinese OEMs 900 1,981 2,115 2,305 2,305 2,305 2.9 Growth (% y-y) 6.8 9.0 0.0 0.0 Total 9,397 12,148 13,706 16,091 17,315 19,475 12.4 Growth (% y-y) 29.3 12.8 17.4 7.6 12.5 Source: Industry data, Samsung Securities

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2015. 9. 16

Top-10 Chinese automakers: Market share trends (%) Company JVs 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 1 SAIC GM and VW 17.0 17.7 18.7 19.8 20.4 21.8 23.1 23.1 23.5 23.3 2 Dongfeng Nissan, Honda, PSA, and Kia 12.9 12.9 12.9 13.9 13.8 15.1 14.4 14.6 14.9 14.1 3 Changan Ford, Mazda, Suzuki, and PSA 9.8 9.8 9.8 13.7 13.1 10.8 10.1 10.0 10.8 11.9 4 FAW VW, Toyota, Mazda, and GM (commercial vehicles) 16.2 16.3 16.3 14.3 12.4 12.4 12.3 11.9 12.0 11.3 5 BAIC HMC and Daimler 9.5 7.9 7.9 9.1 8.0 7.9 8.3 9.1 9.5 9.4 6 GAC Honda, Toyota, Fiat, and Mitsubishi 4.9 5.8 5.8 4.4 4.4 4.0 3.5 4.4 4.9 4.7 7 Great Wall 1.2 1.4 1.4 1.7 2.3 2.7 3.3 3.4 3.1 3.4 8 Brilliance BMW 2.9 3.4 3.4 2.6 2.9 3.1 3.3 3.5 3.4 3.4 9 Geely Volvo (subsidiary) 2.8 2.5 2.5 2.4 2.4 2.4 2.6 2.5 1.9 2.4 10 JAC 2.4 2.4 2.4 2.4 2.3 2.4 2.2 2.1 1.7 2.2 Total 79.6 80.1 81.1 84.3 82.1 82.6 83.1 84.6 85.6 86.2 Note: * January-July Source: Auto Data Bowl, Samsung Securities Of the firms in the top-10 list, local automakers Great Wall, Geely, and Changan should continue to grow briskly, inevitably eating into the growth and profitability of JV brands. Following the global financial crisis, local automakers Geely and Chery benefited from the government’s subsidizing small-car purchases. Consumers, however, soon shied away from the brands amid quality complaints and JV brands’ price cuts. Local automakers doing well this year appear to be in line to enjoy structural growth because they have employed a value-for-money strategy and boosted their quality via M&As with global carmakers and strategic partnerships with global parts makers. Around the world, most governments support local automakers bulking up, because they are aware of the vast ramifications the auto sector has for employment and related value chains. When the Chinese auto market was in a fledgling state, JV brands enjoyed rapid growth thanks to their strong global brand equity. Now, however, the landscape is shifting, with auto demand dividing into two distinct groups—premium and lower-end—as smaller, inland cities are replacing larger, coastal metropolises as the drivers of demand growth. Also driving growth at local automakers is explosive demand for SUVs, which offer a better view of the road ahead, perform better in adverse inland road conditions, and come in big sizes (which Chinese consumers favor). To compete with local players, JV automakers are cutting prices and developing China-only models. As it generally takes two to three years to develop a new model, local automakers should enjoy another few years of remarkable growth (relative to that of JVs).

China: Vehicle ownership and disposable income, by province

(Vehicles) Eastern Central Western (CNY'000) 300 45 240 40 35 180 30 120 25 60 20 0 15 Jilin Tibet Hebei Anhui Hubei Tianjin Henan Beijing Shanxi Jiangxi Hainan Hunan Fujian Ningxia Yunnan Qinghai Jiangsu Gansu Xinjiang Shaanxi Guizhou Liaoning Sichuan Guangxi Zhejiang Shanghai Shandong Chongqing Guangdong Heilongjiang Inner Mongolia Inner

Vehicles per thousand people (LHS) Disposable income (RHS)

Source: CEIC, Samsung Securities

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2015. 9. 16

China: Double peaks projected for income and consumption

Second- to fourth-tier cities First-tier: city (Mil people) 300 Games Housing Premium cars

250 Education Cafés Luxury housing Childrens’ Fashion Luxury items Home /cosmetics 200 appliances products Movies Tourism Premium home Food Small-and /leisure appliances 150 mid-sized cars Shoes Sports Golf Household 100 Mid-low price goods clothing Culture 50 2015 2020 0 1,500 3,000 5,000 8,000 10,000 12,000 15,000 (USD per capita) Source: National Bureau of Statistics of China, Samsung Securities

China: Light-vehicle market breakdown China: SUV market breakdown

(%) (%) 100 100 90 90 80 80 48.4 52.5 53.4 55.3 54.9 70 58.3 56.1 70 62.3 66.8 71.0 66.3 66.6 60 60 50 50 40 40 30 30 51.6 47.5 46.6 44.7 43.9 45.1 20 41.7 20 37.7 33.2 29.0 33.7 33.4 10 10 0 0 2010 2011 2012 2013 2014 2015* 2010 2011 2012 2013 2014 2015*

Local automakers JVs Local automakers JVs

Note: * January-July Note: * January-July Source: Auto Data Bowl, Samsung Securities Source: Auto Data Bowl, Samsung Securities

China: Auto sales growth, Jan-Jul 2015

(% y -y) Local makers JV makers 50 44.3 40 26.9 30 17.0 20 11.3 14.1 6.0 10 3.3 2.0 (1.3) (2.8) (10.3) 0 (10) (20) JAC GAC FAW BAIC SAIC Geely Brilliance Dongfeng Great Wall Great Changan (JV) Changan Changan (local) Changan

Source: Auto Data Bowl, Samsung Securities

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2015. 9. 16

Korean automakers need to adjust their longer-term strategies Hyundai Motor’s (HMC) and Kia Motors’ Chinese sales since May have fallen more sharply than overall demand has, due to model aging and delayed price cuts—sending shockwaves through the stock market. To counter intensifying competition from local automakers, HMC/Kia have now announced price cuts and are likely to focus on restoring utilization. In early August, HMC cut its Santa Fe and Tucson prices by 10%, and began offering incentives worth 10% on other models. The move lifted August retail sales to 80,000 vehicles and slowed the decline in factory shipments to 16% y-y (from 30% y-y in July). HMC plans to roll out its new Tucson (TL) in September and new Avante (AD) early next year. Kia’s factory shipments tumbled 44.7% y-y in August (more than in July), as it announced a 10% price cut for the Sportage later than HMC’s price-cut announcements and its incentive programs for its other models were less aggressive. The firm plans to restore utilization by providing incentives comparable to those of HMC and releasing a new K5 in December and new Sportage (QL) next year.

HMC: China JV (KRWb) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 2014 2015E Chg (%, %pts y-y) Utilization rate (%) 108 102 99 117 107 88 76 91 107 90 (16.2) Sales volume (‘000 units) 284 269 259 308 280 230 200 240 1,120 950 (15.2) Sales 5,250 4,544 4,250 5,711 4,823 3,985 3,462 4,152 19,756 16,422 (16.9) ASP (KRWm) 18.5 16.9 16.4 18.6 17.2 17.3 17.3 17.3 17.6 17.3 (2.0) Net profit 509 451 441 524 418 186 69 220 1,925 892 (53.6) Net margin (%) 9.7 9.9 10.4 9.2 8.7 4.7 2.0 5.3 9.7 5.4 (4.3) Equity-method income* 255 224 221 262 205 93 35 110 963 443 (54.0) Note: * Income reflected by HMC Source: Company data, Samsung Securities estimates

Kia: China JV (KRWb) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 2014 2015E Chg (%, %pts y-y) Utilization rate (%) 84 84 81 101 87 77 65 85 101 78 (22.6) Sales volume (‘000 units) 156 155 149 186 161 143 120 157 646 580 (10.2) Sales 2,452 2,304 2,218 2,997 2,547 2,259 1,902 2,486 9,971 9,195 (7.8) ASP (KRWm) 15.7 14.9 14.9 16.1 15.9 15.9 15.9 15.9 15.4 15.9 2.7 Operating profit 259 228 187 326 223 106 6 160 999 496 (50.4) Operating margin (%) 10.6 9.9 8.4 10.9 8.8 4.7 0.3 6.5 10.0 5.4 (4.6) Net profit 194 171 141 244 166 51 (40) 100 750 278 (63.0) Net margin (%) 7.9 7.4 6.4 8.1 6.5 2.3 (2.1) 4.0 7.5 3.0 (4.5) Equity-method income* 96 86 71 121 84.5 25.6 (20.0) 50 374 140 (62.5) Note: * Income reflected by Kia Source: Company data, Samsung Securities estimates HMC/Kia’s utilization is likely to recover in the near term, but their longer-term China strategy requires modification. Ranking below German and other global automakers in terms of brand loyalty, the Korean carmakers are vulnerable to growth of local Chinese players. There is a growing consensus that HMC ought to delay opening its fourth and fifth China plants. Bringing the fourth and fifth China plants online would increase the Hyundai Motor Group’s (HMG) annual output by 0.6m-0.8m vehicles, the selling of which, we believe, would require three strategic changes. First, HMG would need to expand its China-only model lineup. Indeed, HMC and Kia’s China-only models vastly outsell their other offerings, accounting for 48% and 10% of their total China sales—cf , 90% of SAIC’s domestic sales are China-only models. HMC’s four China-only models—compact sedans Yuedong and Langdong, mid-sized sedan Mistra, and small SUV ix25— have enjoyed steady sales growth since debuting, and account for 57.2% of the firm’s China sales ytd.

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2015. 9. 16

The company made the Yuedong 40mm longer and 10mm taller than the Avante to appeal to Chinese consumers, who prefer larger vehicles. Meanwhile, the Mistra has a bigger front grill and head lamps than the LF Sonata has. Still, the firm’s Santa Fe has fared poorly despite China’s SUV boom, selling fewer than 1,000 vehicles/month ytd, vs sales of 74,000 units the year the vehicle debuted in China. Sales of the Tucson are also on a decline, and only the small ix25 SUV is selling well.

Chinese market sales volume: YF Sonata vs Mistra Chinese market sales volume: Santa Fe vs ix25

('000 vehicles) ('000 vehicles) 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 Jan 12 Jan 13 Jan 14 Jan 15 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15

YF Sonata Mistra Santa Fe ix25

Source: Auto Data Bowl, Samsung Securities Source: Auto Data Bowl, Samsung Securities

China-only model portion of total sales volume (2014)

(%) 98 100 90 76 80 72 70 58 56 60 51 48 43 50 36 40 31 30 24 22 20 12 10 8 10 0 DY-Kia DF-PSA FAW-VW SAIC-GM SAIC-VW FAW-Audi DF-Honda DF-Nissan BAIC-Benz BAIC-HMC GAC-Honda GAC-Toyota FAW-Toyota Changan-Ford BMW-Brilliance

Source: Industry data, Samsung Securities

Second, HMG needs to be more active in introducing new technology in China, which has witnessed other global automakers regularly unveil new models and new technology. Amid an SUV boom in China, upwards of 100 models are set to debut this year, while only one of the nation’s top 10 engines last year wasn’t a turbo—on par with the US and indicative of the rapid adoption of advanced technology. Such engines are needed if automakers want to qualify for subsidies given for small, fuel- efficient vehicles. Hyundai Wia late last year built a plant in China that began assembling turbochargers for the LF Sonata last month. It should soon start supplying HMC and Kia for other models, too. The plant currently imports BorgWarner and Honeywell engines, but should soon begin acquiring engines from the Wia-IHI JV in Seosan (Korea).

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2015. 9. 16

US: Top-10 rated engines (2014) Maker Size Engine Model Chrysler 6.2L Supercharged OHV V-8 Challenger SRT Hellcat GM 6.2L OHV V-8 Corvette Stingray Chrysler 3.0L Turbo-diesel DOHC V-6 Ram 1500 EcoDiesel Volvo 2.0L Turbocharged DOHC 4-cyl. S60 Subaru 2.0L Turbocharged DOHC H-4 WRX VW 1.8L Turbocharged DOHC 4-cyl. Golf BMW 1.5L Turbocharged DOHC 3-cyl. Mini Cooper Ford 1.0L Turbocharged DOHC 3-cyl. Fiesta BMW 127kW Electric Motor i3 (EV) HMC 100kW Fuel Cell Tucson FCEV Source: WardsAuto, Samsung Securities

China: Top-10 rated engines (2014) Maker Size Engine Model Mazda 2.5L SkyActiv-G Atenza Volvo 2.0T VEP4 XC60 Kia 2.0T Theta II K5 Citroen 1.6T EP6CDT C5 Qoros 1.6T SQRE4T16 Qoros 3 Suzuki 1.6L G-InnoTec 1.6L S-Cross GM 1.4T EcoTec 1.4T Cruze Geely 1.3T JLβ-4G13T EC7 Ford 1.0T EcoBoost 1.0T EcoSport BYD 1.5T BYD Qin Source: Auto Sports EVO, Samsung Securities

HMC/Kia: Turbo models sold in China Maker Model Engine HMC LF Sonata 1.6L Gamma Turbo-GDi Kia K5 2.0L Theta II Turbo-GDi K4 1.6L Gamma Turbo-GDi KX3 1.6L Gamma Turbo-GDi Source: Company data, Samsung Securities Third, HMG needs to reconsider its strategy of selling both new and old models in China. HMG currently unloads (fully depreciated) older models in 2nd- and 3rd-tier inland cities marked by low incomes—eg , the Sonata EF, YF, and LF are all available, while the firm offers three versions of the Elantra and two of the Tucson. Over the past 4-5 years, this strategy has boosted sales and profitability, as local consumers were dubious about homegrown quality. However, top local firms have now partnered with global players to enhance quality, and they are offering models featuring new technology for prices just 50-60% of JV models. Thus, HMC/Kia runs the risk of devaluing its brand if it continues to offer older models.

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2015. 9. 16

HMC’s main aged models*: Sales volume and portion of total China sales

(Vehicles) (%) 30,000 50

25,000 40 20,000 30 15,000 20 10,000

5,000 10

0 0 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15

Aged models (LHS) Portion of total sales (RHS)

Note: * Sonata (EF), Avante (XD), Tucson (JM) Source: Auto Data Bowl, Samsung Securities

Korean parts makers to shed China-related risk With HMC/Kia’s utilization bottoming out, it is time to pay attention to parts makers that have been oversold due to China worries—notably, Mando and Hyundai Wia. Mando, SL Corporation, and S&T Motiv are among Korean parts makers that should benefit from partnering with China’s leading local automakers or component affiliates of JVs. Although China sales at key client HMC may decline over the next two years (due to limited capacity expansions and growth in competition), local auto JVs look set for structural growth—as do the parts makers that supply them. Among Korean parts vendors, Mando enjoys the most amicable relationship with local Chinese automakers, and supplies brakes, steering parts, and modules via its JV with Geely—the Chinese firm uses Mando’s products for larger models to ensure quality, and plans to launch three new models in each of the next three years via an integrated platform with Volvo. Mando has contracted to supply Volvo with KRW560b worth of parts over 2016-2025, in addition to a deal to supply Great Wall with brakes.

Mando Ningbo: Mando-Geely JV Mando Ningbo sales and as portion of total Mando sales Name Mando Ningbo Automotive Parts (KRWb) (%) Ownership Mando 65%, Geely 35% 400 6 Capital USD85m 350 5 Products CBS, ABS, EPS, suspension and brake modules 300 (covering more than 60% of Geely’s production) 4 250 Source: Company data, Samsung Securities 200 3 150 2 100 1 50 0 0 2011 2012 2013 2014 2015E 2016E 2017E

Sales (LHS) Portion of Mando sales (RHS)

Source: Company data, Samsung Securities

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2015. 9. 16

Mando Ningbo: Capacity expansion plans (‘000 units) Parts 2013 2017E 2013-17E CAGR (%) M/Buster 412 1,220 31.2 Caliper 2,016 1,267 (11.0) Brakes Drum brake 400 2,324 55.3 Brake corner module 2,611 3,844 10.2 Steering C-EPS 706 Shock absorber 1,220 2,441 18.9 Suspension Shock strut 1,267 2,534 18.9 Damper string system 2,324 3,765 12.8 Source: Company data, Samsung Securities SL Corporation, S&T Motiv, and Pyeong Hwa Automotive supply Huayu Automotive Systems, which is the primary parts vendor for the SAIC JV Shanghai GM. All three Korean parts makers are set to benefit as GM enjoys sales growth in China and Huayu expands overseas. GM faces slowing growth in demand at home and weak sales in Europe, so sales in China are critical if its global sales volume is to stay above 10m vehicles. This may result in the aggressive rollout of new models and capacity expansions.

Mando: Sales, by customer (2014) SL Corporation: Sales, by customer (2014)

Other: 13% Other: 7%

Chinese automakers: 10% GM: 28% HMC/Kia: 58% HMC/Kia: 65% GM: 19%

Source: Company data, Samsung Securities Source: Company data, Samsung Securities

PHA: Sales, by customer (2014) S&T Motiv: Sales, by customer (2014)

Other: 12% GM Korea: 25% Other: 36% GM: 13%

HMC/Kia: 75% GM Global: 17%

Government agency: Mobis: 11% 10% Source: Company data, Samsung Securities Source: Company data, Samsung Securities

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Contents

Takeaways from SAIC Group visit

SAIC plans to launch China-only models to protect market share Boasting a leading 23% market share in China ytd, SAIC is a familiar name to Korean investors. SAIC’s partners VW and GM each shipped more than 10m vehicles last year, and as the two foreign carmakers occupy the top two spots in China’s car market, SAIC should easily maintain its dominance. VW enjoys strong customer loyalty in China for its being the first global player to enter that market. GM’s partnership with the Chinese automaker is its sole venture there. SAIC’s sales have slipped 1.3% y-y ytd amid slowing growth in auto demand and intensifying competition. SAIC believes auto demand has halted its decline and will grow 3-5% pa in coming years. As the first of the JV automakers to announce price cuts (in April), it says it will not need to make further cuts, as its inventory adjustments are largely complete. Despite price cuts, SAIC-GM’s profitability improved q-q in 2Q thanks to increasing sales of SUVs. SAIC-GM and SAIC-VW launched the Verano, Excelle, and Lavida in July, while SAIC-GM-Wuling expects its first SUV—the Baojun 560—to drive a recovery in sales in 2H.

GM: Equity-method income from China JVs and as portion of total net profit (USDm) (% y-y) 700 300

600 250 500 200 400 150 300 100 200 100 50 0 0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

Equity method income from China JVs (LHS) Portion of net profit (RHS)

Source: Company data, Samsung Securities

In the longer term, SAIC plans to roll out China-only models and develop cheap SUVs to defend its market share. It expects the JVs to claw back market share from local firms, noting Chinese consumers’ sensitivity to brand. The firm noted, however, that local automakers should enjoy high growth for the time being given that it typically takes two or three years to develop a low-end vehicle.

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As growth in Chinese demand slows, JVs will need to seek new growth via exports or own brands, but we see little likelihood of them succeeding overseas—especially if the collaborators have differing interests. The foreign partners in Chinese JVs are wary about exports lest they cannibalize their own sales overseas. Meanwhile, workers at overseas plants are adamantly opposed to the importing of China-made cars. After GM announced that it would import its China-made compact SUV Envision to the US, it was blasted by its union and subsequently clarified that no other models would be imported. Own brands are still far from profitable. The Chinese partners in the JVs have failed to acquire technology for their own brands, benefiting only from sales growth and profitability. Although this started to change in 2012 amid government pressure (with the launch of China-branded models), only Changan has turned profitable thus far. SAIC does not foresee its own brand turning profitable within the next five years. Consensus has SAIC generating a free cash flow of CNY20b this year and the firm retaining its dominance in China—although capacity expansions are likely to be minimal as the firm will seek to protect its profitability. We therefore expect the company’s dividend payout ratio to remain at 50% (for a yield of 7-8% following share price corrections since June). Still, its substantial cash assets could be put towards diversification via M&As. The firm has vertically integrated its auto parts, transportation, and financials businesses, so diversification via such activities remains an unknown for now.

SAIC: Business areas

Source: Company data, Samsung Securities

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2015. 9. 16

SAIC: Subsidiaries and affiliates Business Consolidated subsidiaries Affiliates subject to equity-method accounting SAIC-VW Sales (60%) SAIC-VW (50%) SAIC-GM Sales (51%) SAIC-GM (50%) SAIC-GM-Wuling (50.1%) Pan Asia Technical Centre (50%) Automobile SAIC Motor PV (100%) SAIC-Iveco CV (50%) production SAIC Motor CV (100%) Nanjing-Iveco (50%) and sales SAIC Motor UK Holding (100%) Sunwin Bus (50%) SAIC Tangshan Bus (51%) Nanjing Auto (100%) SAIC CP (51%) SAIC Transmission (100%) United Automotive Electronic (49%) Shanghai Diesel Engine (48.05%) VW Transmission (20%) Auto parts Shanghai Huizhong Automotive (100%) SAIC-VW Powertrain (40%) China United Automotive (53%) Jiexin Power Battery (51%) Huayu Auto (60.1%) Anji Automotive Logistics (100%) Trading SAIC Industrial HK Limited (100%) SAIC North America (100%) SAIC Financing (100%) SAIC-GMAC (50%) Financing SAIC Venture Capital (100%) Source: Company data, Samsung Securities

SAIC: Capacity and expansion (‘000 vehicles) 2014 2017E Growth (%) SAIC-GM-Wuling Liuzhou 700 700 - Qingdao 510 510 - Liudong 400 400 - Chongqing 400 Subtotal 1,610 2,010 24.8 SAIC-GM Shanghai 320 320 - Cadillac (SH) 150 Yantai 480 480 - Shenyang 500 500 - Wuhan 300 Subtotal 1,300 1,750 34.6 SAIC-VW Shanghai 800 800 - Nanjing 300 300 - Yizheng 300 300 - Xinjiang 50 50 - Ningbo 300 300 - Changsha 300 Subtotal 1,750 2,050 17.1 SAIC Motor Lingang 150 150 - Nanjing 200 200 - Subtotal 350 350 - Total 5,010 6,160 23.0 Source: Company data, Samsung Securities

Autos

2015. 9. 16

SAIC: Net cash and as ratio to market cap SAIC: Dividend payout ratio

(CNYb) (%) (%) 35 25 60 30 20 50 25 40 20 15

15 10 30 10 5 20 5 0 0 10 2010 2011 2012 2013 2014 0 Net cash (LHS) Net cash-to-market cap ratio (RHS) 2010 2011 2012 2013 2014

Source: Bloomberg, Samsung Securities Source: Bloomberg, Samsung Securities

SAIC: Financial statement (CNYm) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E Sales 6,370 19,484 103,680 104,615 138,170 357,291 423,750 473,004 562,368 626,244 647,401 695,629 Gross profit 1,161 2,419 14,074 11,064 16,868 62,080 71,879 71,867 71,379 77,008 78,336 84,289 Operating profit 194 (152) (142) (1,318) 1,965 24,174 29,419 25,280 16,557 15,265 24,234 26,377 Pre-tax income 1,160 1,335 5,850 (480) 8,597 33,164 42,028 40,156 41,493 42,689 44,368 47,925 Net profit 1,105 1,356 4,635 656 6,592 16,390 20,222 20,752 24,804 27,973 28,201 29,954 Margins (%) Operating profit 3.1 (0.8) (0.1) (1.3) 1.4 6.8 6.9 5.3 2.9 2.4 3.7 3.8 Net profit 17.3 7.0 4.5 0.6 4.8 4.6 4.8 4.4 4.4 4.5 4.4 4.3 Total assets 14,595 83,924 101,815 107,857 138,158 285,045 318,633 317,203 373,641 414,871 Current assets 6,513 40,201 54,575 55,972 74,492 175,947 191,233 189,155 232,184 237,043 Non-current assets 8,081 43,723 47,241 51,885 63,666 109,098 127,400 128,048 141,456 177,828 Cash and cash equivalent 2,791 14,719 17,057 22,612 31,002 77,024 77,687 68,369 89,262 88,128 Total liabilities 2,861 46,223 58,809 69,320 91,394 171,532 185,517 172,197 211,909 229,872 Current liabilities 2,661 39,975 48,691 55,120 79,757 148,932 162,513 156,352 186,340 199,932 Non-current liabilities 200 6,248 10,118 14,200 11,637 22,599 23,004 15,845 25,569 29,940 Borrowings 1,046 8,306 15,336 14,441 46,630 44,689 43,833 53,780 64,659 67,431 Cash flow from operations 1,840 7,311 4,018 14,343 25,181 33,921 26,111 27,256 35,833 38,393 Cash flow from investments (301) (2,675) (9,824) (7,990) (15,894) (13,886) (13,256) (28,493) 1,789 (28,557) Capex (835) (1,436) (4,991) (7,359) (3,759) (10,366) (16,165) (16,009) (15,659) (14,320) Cash flow from financing (583) 5,731 7,925 4 (4,148) 8,469 (13,887) (11,492) (10,143) (12,042) Free cash flow 1,005 5,875 (973) 6,984 21,422 23,555 9,946 11,247 20,174 24,073 Valuation (x) P/E 9.8 23.0 37.1 53.6 26.0 9.2 7.7 9.4 6.3 8.5 6.6 6.2 P/B 0.9 1.7 4.6 1.0 4.0 1.6 1.5 1.6 1.1 1.5 1.1 1.0 Source: Bloomberg, Samsung Securities

Autos

2015. 9. 16

SAIC: Rollout schedule Segment 1H14 2H14 1H15 2H15 2016 SUV/MPV Buick Envision, VW Touran, Chevrolet Captiva, Baojun SUV Baojun 630, Baojun 730 Wuling Hong Guang S, MG GS VW CrossBlue, VW Tiguan Sedan Baojun 610, Cadillac ATS-L VW Lamando, VW Lavida, Skoda Fabia, Buick Excelle, VW Passat, Chevrolet Aveo, VW511 Skoda Octavia Chevrolet Sail, MG GT, Roewe 350, Roewe 950 Cadillac CT6 Van Wuling Sunshine, Wuling Hong Guang V Source: Company data, Samsung Securities

SAIC-VW: Tiguan SAIC–VW: Passat

Source: Company image, Samsung Securities Source: Company image, Samsung Securities

SAIC–GM: Malibu SAIC–GM: Cadillac ATS-L

Source: Company image, Samsung Securities Source: Company image, Samsung Securities

SAIC–GM: Buick GL8 SAIC-GM-Wuling: Hong Guang V

Source: Company image, Samsung Securities Source: Company image, Samsung Securities

Autos

2015. 9. 16

Huayu undertaking M&As to become global parts maker SAIC has five subsidiaries and four JVs involved in parts manufacturing. Listed holding company Huayu Automotive Systems, which owns 30 parts suppliers, was the leading player in China last year with sales of CNY74b (placing it 18th globally). China’s JV carmakers source core parts from subsidiaries or via tie-ups with global firms. The carmakers’ standard business model is to sell products produced by their overseas partners locally for royalties. Thus, traditional cost-cutting measures used by global carmakers (eg , joint purchases and platform integration) are impracticable. Instead, the JVs seek to cut costs by raising utilization rates and sourcing parts locally. After launching new models developed by VW and GM, SAIC aims to source most of the parts (ranging from 52-85%) for those models locally within two years. Given this and SAIC’s dominant domestic position, we believe Huayu boasts greater growth potential than SAIC does. SAIC partners VW and GM lack parts-making subsidiaries; rather, the Chinese firm’s own parts-making affiliates supply the major parts, and we believe they could easily diversify by striking deals with other carmakers (unlike parts maker subsidiaries of global automakers). SAIC-bound sales accounted for 66% of Huayu’s total in 2014, down from 82% in 2009, evidence that it is seeking customer diversification via M&As and equity investments in global parts makers. Huayu fully acquired Shanghai Sandmann Foundry in 2011 in a push for vertical integration. It then bought Shanghai Xingfu Motorcycle in a bid to diversify. In 2013, the company set up a 50:50 JV with Visteon to expand its interior parts business, then this year agreed to a 70:30 interior parts JV with Johnson Controls in order to go global. Such activities reveal Huayu’s ambitions of achieving customer diversification and growing into a global player. Huayu plans to acquire SAIC’s chassis systems subsidiary Shanghai Huizhong Automotive for CNY4.5b (which values the target at 11.2x 2014 P/E). To fund the purchase, it plans to issue new shares (equivalent to 18% of shares outstanding) in a private equity placement. As of 2014, it had CNY7b in net cash, equal to 20% of its market cap, and an annual free cash flow exceeding CNY3b. Moreover, Huayu has a payout ratio of roughly 30% which implies a yield of 4% (based on the current share price).

Huayu Auto: Subsidiaries and affiliates Business Products Consolidated subsidiaries Affiliates subject to equity-method accounting Interior and exterior trim Dashboards, seats, Yangfeng Auto Trim Shanghai TRW Automotive Safety bumpers, lamps Shanghai Union Automobile & Tractor Shanghai Koito Automotive Lamp Shanghai Superior Die Technology Huayu-Cooper Standard Sealing Functional parts Springs, wipers, suspensions, China spring corporation ZF Shanghai Steering brake calipers, Shanghai Union Automobile & Tractor Industry Trade Kolbenschmidt Shanghai Piston vacuum booster pumps, Shanghai Xingfu Motorcycle Shanghai Valeo Automotive A/C compressors, Shanghai SIIC Transportation Electric Shanghai GKN Drive Shaft steering systems, Huayu Automotive Electric Drive System Shanghai Sachs Powertrain starters, motors SAIC-Continental Auto Braking System Shanghai Sanden Behr Auto A/C Sanden Behr Automotive A/C Federal-Mogul Shanghai Bearing YAPP Automotive Parts Hot working parts Cylinder heads, engine blocks, Shanghai Sandmann Foundry Kolbenschmidt Pierburg Shanghai pistons, fuel tanks Shanghai Cosmopolitan Automobile Accessory Hua Dong Teksid Automotive Foundry Source: Company data, Samsung Securities

Autos

2015. 9. 16

Huayu Auto: Sales, by business Huayu Auto: Sales, by client

Functional parts: 26% Electronic SAIC-GM: parts: 12% 25% Other: 34% Metal forming and molds: 5%

Hot working parts: 5%

Interior/ SAIC-VW: exterior: 27% 52% Other SAIC affiliates: 14%

Source: Company data, Samsung Securities Source: Company data, Samsung Securities

Huayu Auto: M&A and capital tie-up activities Year Activity Established Huayu Electric System JV with Guizhou Aerospace Industry to develop new-energy vehicle components, mainly drive 2010 motors for new-energy vehicles Fully acquired Shanghai Sandmann Foundry and Shanghai Xingfu Motorcycle 2011 Acquired 50% stake in Shanghai Sachs Powertrain System 2012 Raised stake in Shanghai GKN Drive Shafts (SDS) from 35% to 45% 2013 Acquired Visteon’s 50% stake in Yanfeng-Visteon interior trim JV Sold 47.5% stake in Huayu-Cooper Standard Sealing System to Cooper 2014 Established 50:50 JV KS Aluminium-Technologie by acquiring KSPG’s global aluminum cast business 2015 To establish 70:30 interior trim JV with Johnson Controls Source: Company data, local media, Samsung Securities

Huayu Auto: SAIC-bound sales Sales growth: Huayu Auto vs SAIC

(%) (%) 85 25

80 20 75 15 70 10 65

60 5

55 0 2011 2012 2013 2014 2015E 2016E 50 2009 2010 2011 2012 2013 Huayu Auto SAIC

Source: Company data, Samsung Securities Source: Company data, Samsung Securities

Autos

2015. 9. 16

Huayu Auto: Overview of private equity placement (Mil shares) Price of new shares (CNY) 16.2 Closing price on last trading day (CNY) 20.0 Discount (%) (19.1) Existing shares (A) 2,583 New shares (B) 555 New total shares (C) 3,138 New shares as portion of new total shares (B/C) 17.7 New shares issued to… …SAIC 279 Proceeds (CNYm) 4,511 …other institutional investors 276 Proceeds (CNYm) 4,462 Total proceeds (CNYm) 8,973 Huayu’s ownership structure before private equity placement SAIC (%) 60.1 Free floating (%) 39.9 Huayu’s ownership structure after private equity placement SAIC (%) 58.4 Free floating (%) 41.6 Source: Company data, Samsung Securities

Shanghai Huizhong Automotive Co: 2014 results (CNYm) Amount Sales 14,700 Operating profit 411 Net profit 403 Margins (%) Operating profit 2.8 Net profit 2.7 Total assets 9,949 Total liabilities 7,048 Total equity 2,901 ROE (%) 13.9 Source: Company data, Samsung Securities

Autos

2015. 9. 16

Huayu Auto: Financial statement (CNYm) 2010 2011 2012 2013 2014 2015E 2016E Sales 44,778 52,176 57,733 69,558 73,756 90,763 108,313 Gross profit 6,986 8,326 9,277 10,698 11,199 14,007 16,824 Operating profit 3,412 3,932 4,182 4,427 4,091 6,684 7,815 Pre-tax income 5,023 5,943 6,222 7,170 6,982 8,093 9,394 Net profit 2,554 2,990 3,104 3,448 4,456 5,064 5,817 Margins (%) Operating profit 7.6 7.5 7.2 6.4 5.5 7.4 7.2 Net profit 5.7 5.7 5.4 5.0 6.0 5.6 5.4 Total assets 36,726 42,185 48,240 54,271 63,242 Current assets 23,869 27,428 30,354 33,380 36,796 Non-current assets 12,857 14,757 17,886 20,890 26,446 Cash and cash equivalent 10,364 12,355 12,928 13,472 15,659 Total liabilities 17,300 19,103 21,634 30,919 34,724 Current liabilities 15,589 17,453 19,946 24,038 28,520 Non-current liabilities 1,711 1,650 1,688 6,881 6,204 Borrowings 2,564 2,641 2,513 8,295 8,640 Cash flow from operations 4,939 4,759 5,263 7,503 6,580 Cash flow from investments (1,190) (1,816) (3,194) (10,204) (2,049) Capex (1,481) (1,582) (2,488) (3,520) (3,415) Cash flow from financing (697) (1,079) (1,566) 3,090 (2,312) Free cash flow 3,458 3,178 2,775 3,983 3,166 Valuation (x) P/E 10.3 8.0 9.3 7.6 9.0 7.3 6.4 P/B 1.8 1.4 1.5 1.4 1.7 1.4 1.2 Source: Bloomberg, Samsung Securities

Autos

2015. 9. 16

Q&A

SAIC Q. When will demand recover and at what rate will it grow? A. SAIC’s wholesale sales slipped 0.4% y-y over January-July, while retail sales rebounded somewhat in August. Production should recover from September, delayed because of high inventories at dealerships. Guidance earlier in the year had Chinese sales growing 7-8% y-y, but consumer sentiment was hit by wide swings in the stock market. Real demand has not declined but is pent up. Auto demand is greatly affected by changes in capital markets. Pessimists expect auto demand over the next decade to grow around 1-2% pa , optimists estimate 5-6%, while those in between forecast 4%. Q. As auto demand is expected to be strongest in third- and fourth-tier cities, how is SAIC’s dealer network in smaller cities? A. In 1H, auto demand shrank 11.3% y-y in first-tier cities but grew briskly in second-tier cities. As SAIC expect auto demand to be strong in third- and fourth-tier cities, it plans to establish two or three new dealerships there. Fierce competition in the Chinese auto market makes it difficult for any brand to set itself apart. SAIC is working to build brand loyalty. SAIC boasts the most dealerships, and launches products tailored to local tastes. It is also strong in auto financing and after-sale services. Q. What are the possibilities of sector restructuring? A. SAIC considers this year’s slowdown in demand to be exceptional. Demand seems to have become pent up due to stock market volatility. It should recover from next year. As the Chinese auto market is bound to grow over the next 10 years, sector restructuring is unlikely. China’s current economic situation is similar to that of 2008, when provincial authorities implemented stimulus measures to keep marginal companies afloat. SAIC will not pursue M&A activities, as they are costly and make it difficult to restructure. Q. What are the possibilities of government stimulus in the near term? A. There is no government stimulus in sight—nor does SAIC want it. Whilst government stimulus in 2008 did revive demand, it ruined the normal industry cycle. Carmakers struggled to adjust capacity to cope with an abrupt surge in demand. The current stimulus program focused on electric vehicles (EVs) is not having positive effects. Eco-friendly cars (like EVs) ought to improve as technology does, but it is brands lacking technology that are benefiting most from subsidies. The stimulus program also covers auto financing companies. The reserve requirement ratio such firms was introduced at 13.5% on Apr 7 by the China Banking Regulatory Commission, but has since been lowered to 8.5%. Q. Different growth strategies will be needed as the market matures. Has SAIC changed strategy at all? A. The Chinese auto market is a long way from maturity—around 70% of auto purchases are made by first-time buyers vs 20% in the developed world; and manufacturing margin accounts for 90% of automakers’ profits vs less than 50% in the developed world. SAIC plans to strengthen its after- sale services and auto financing, thereby lowering its manufacturing margin portion of profit to 50%.

Autos

2015. 9. 16

Q. What are SAIC’s plans to restore operating margin? What is a normal level? A. As SAIC has many JVs, it is more concerned with its net and gross margins, which have typically come in at 10-11% and 30%, respectively. The Chinese market still offers automakers the fattest margin, but they will eventually be squeezed. Q. What is SAIC’s auto financing penetration? A. The auto financing penetration rate for SAIC cars is 25% (vs a national average of 15-17%). Auto financing terms are 30% down payment plus interest rates of 12-14%. SAIC’s auto-financing service is funded by: 1) capital deposited with group affiliates; 2) shareholder equity; 3) ABS issuance; and 4) bank loans. The first and fourth of these combined account for 70% of funding. Consumers not sensitive to interest rates typically use auto financing, which can be conveniently obtained through dealerships. Auto financing interest rates should decline as auto financing penetration rises. Q. What are the possibilities of exports given news reports of GM exporting China- made models to the US? A. Although SAIC wants to export, this is a matter that needs consent from its JV partners and foreign governments because jobs in their home countries could be on the line. SAIC-GM is only considering exporting small, low-end cars. Q. What are SAIC’s plans to counter intensifying competition from local brands? A. Local brands have gained market share amid an explosion in demand for compact SUVs (CNY80,000-120,000), a segment JVs have yet to enter. Once they do, however, local brands should lose market share. SAIC is also investing in SUVs. Over 2005-2006, JVs sold cars only in first-tier cities. Then they began selling cheap models in second- and third-tier cities, taking market share from local players. We believe history will repeat itself in the SUV segment. As JVs launch low-end SUVs over the next two-three years, local brands should see their market shares whittled down. SAIC is somewhat conflicted, because it has both JVs and local brands. While cars priced around CNY200,000 sold well in first- and second-tier cities, those priced near CNY100,000 are likely to sell well in third-, fourth-, and fifth-tier cities. JV brands are actually doing rather well in third- and fourth-tier cities. For local brands, enhancing their brand image and expanding their lineups should be critical. Q. Car prices in China look lofty. How far will they fall? A. Not all cars in China are more expensive than in other countries. Luxury models tend to be twice as expensive, but some low-end models are cheaper. VW’s Polo, for example, is cheaper in China than in Germany. Overall, car prices in China are on par with those in Europe and slightly above those in the US. Q. What are the possibilities of a Dongfeng-FAW merger? A. There is no possibility. A Dongfeng-FAW merger would only benefit other automakers (including SAIC), as the merged entity would need 5-10 years to manage the complexity of integrating two automakers each with 50 years of history. China’s rail companies CSR and CNR merged because there were only two of them in China. Q. What impact does SAIC expect to see from China’s anti-corruption policies? A. Luxury cars priced CNY0.6m-1m represent 9% of the market. Anti-corruption policies should have only a marginal impact on the segment, as the government accounts for a mere 0.15% of demand.

Autos

2015. 9. 16

Q. How much of the technology used in SAIC’s own-brand cars comes from SAIC-VW and SAIC-GW? A. SAIC wants technology transfers from its JVs, but its foreign partners rarely permit them. SAIC has built technology through its own R&D investments and a technology partnership with GM. Q. Does SAIC view HMC/Kia’s weak sales as a blip or the start of a trend? A. HMC/Kia are SAIC’s key rivals. The Korean automakers did well in the past, but they seem to have faltered recently due to: 1) weakening brand loyalty—ranking behind German, US, and Japanese brands, they are thus vulnerable to growth of local automakers; and 2) aging models. Q. What are the possibilities of changes to current business model as VW and GM’s partner? A. SAIC is likely to maintain its current business model, which has proved successful over the past 20-30 years. Foreign automakers are unlikely to change their stakes in the JVs, as they are not allowed to set up wholly-owned subsidiaries. Even if government policy changes were to make it possible, SAIC would not split with its foreign partners given the win-win relationship they enjoy.

Autos

2015. 9. 16

Huayu Automotive Systems IR team Q. What is Huayu’s strategy? A. Huayu began formulating a global strategy in 2009. Over the past two years, there was a growing sense that without a global strategy, the firm would be reduced to the role of foundry for overseas parts makers or carmakers. The business environment deteriorated in 1H15 as domestic demand declined. Huayu is pursuing a platform strategy—ie , designing a set of components before finding customers for them—which is the global trend. It is also seeking strategic M&As. Its takeover of Johnson Controls’ (JCI) automotive interior business is progressing smoothly and should be wrapped up before year-end. The deal was announced as a JV in which JCI will have a 30% stake (and Huayu 70%) but is effectively an acquisition. Hearing that JCI was looking to sell off its automotive interior business, Huayu proposed buying the unit through subsidiary Yanfeng Automotive Trim Systems. The takeover should allow Huayu to cover the entire global market. With JCI serving Mercedes and BMW and Huayu supplying GM and VW, the two are likely to complement each other well. Given that Huayu and JCI are the world’s number-three and -four players in automotive interiors, the deal will create the world’s largest automotive interior company with annual sales of USD7.5b. Huayu continues to explore M&A opportunities. Timings and targets are not yet decided, and decisions will be made based on the degree to which the M&A will help the firm upgrade its technology and broaden its global reach. Q. What is Huayu’s outlook for auto demand in China? A. The rapid growth phase of the Chinese passenger car market has ended. It should continue to grow, but more slowly. Huayu is focused on passenger cars and does not consider the SUV segment given that its accounts for just a small portion of the total market. Q. How will Huayu’s export percentage of sales change after it acquires JCI’s automotive interior unit? A. Concrete figures are unavailable as the takeover is ongoing. JCI’s automotive interior unit has generated annual sales of CNY22b-24b in recent years. Q. What are the chances of Huayu diversifying into engines, transmissions, or other growth products? A. Huayu has no plans to develop engines or transmissions. Its goal is to add clients beyond SAIC affiliates. Components that hold promising growth outlooks over the next five years are: 1) interior parts; 2) chassis systems; 3) infotainment and ADAS; and 4) EV parts. In relation to the second of these, Huayu plans to acquire SAIC’s chassis systems subsidiary Shanghai Huizhong Automotive, funding the purchase through a private equity placement of new shares worth CNY5b. In relation to EV parts, Huayu has a JV (Huayu Automotive Electric System) with Guizhou Guihang Automotive Components, which makes motors for hybrid vehicles and EVs. Q. Trends towards EVs and smart cars should bring significant changes to automotive interiors—which may be why JCI is trying to sell its interior unit. Will the takeover cause Huayu to fall behind the trends? A. The market for EVs and smart cars appears certain to grow, but nobody knows how quickly. There will always be demand for automotive interiors. Electronic parts are becoming an important of automotive interiors, but Huayu can accommodate such changes. Exactly when the interior-use electronic parts market will explode is hard to predict.

Autos

2015. 9. 16

Q. There are worries that Huayu will face price pressure from SAIC as auto demand slows in China. Does SAIC ensure Huayu a reasonable margin? A. Contract prices for 2015 have been unaffected as they were set at end-2014. Prices for 2016, however, may fall if auto demand growth continues to slow. Q. Does Huayu supply all of SAIC’s models? A. Huayu supplies to both SAIC-VW and SAIC-GM. Q. What are Huayu’s target financial ratios, dividend policy, and possibility of further rights offerings? A. The firm targets a dividend payout ratio of over 30%, but has no target debt ratio. Thanks to low debt, it can afford to borrow more. Q. What contracts does Huayu have with Korean parts makers? A. Huayu has contracts with a few Korean parts makers. It sources more components from Japanese vendors than it does from Korean firms, though most of its parts vendors are European and American. Q. Huayu’s average operating margin is 6%. Can you break that down by product? A. Interior parts—which make up the lion’s share of profits—offer margins of less than 6%, while functional parts offer margins of greater than 6%. Hot-working parts represent a tiny portion of operating profit. Q. Which is more important, the domestic or overseas market? A. As Huayu is pursuing a global strategy, it puts greater emphasis on exports. Domestically, market share expansion is key and sales should continue to grow this year thanks to growth at Changan Automobile.

Autos

2015. 9. 16

Valuations of Chinese automakers and parts makers

(x) Local Share Performance (%) Market cap P/E (x) P/B (x) ROE (x) currency Price 1M 3M YTD Local currency (bil) (USDb) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E A-share automakers SAIC CNY 17.2 (14.4) (34.3) (20.1) 189 30 6.6 6.2 5.9 1.1 1.0 0.9 17.2 17.0 16.9 Great Wall CNY 28.5 (15.1) (40.5) (31.3) 77 12 8.6 7.4 6.3 2.1 1.7 1.4 25.5 24.3 22.3 Changan-A CNY 13.7 (19.6) (40.1) (16.4) 62 10 6.3 5.2 4.6 1.8 1.4 1.1 32.8 30.4 28.2 Changan-B HKD 13.3 (7.4) (32.8) (24.1) 75 10 5.0 4.2 3.6 1.5 1.1 0.9 32.8 30.4 28.2 BYD CNY 52.9 (17.2) (29.4) 38.5 108 17 53.5 42.1 33.0 4.5 3.9 3.7 9.4 9.3 10.4 GAC CNY 18.4 (1.9) 24.3 111.6 87 14 31.0 24.8 19.1 3.1 2.8 2.7 9.4 11.1 12.9 Yutong Bus CNY 18.4 (14.5) (19.3) 23.5 41 6 12.8 10.9 9.9 3.2 2.7 2.4 26.1 26.3 24.2 Jiangling HKD 23.5 (13.0) (35.5) (23.5) 24 3 6.9 5.0 3.8 1.3 1.1 0.9 20.2 23.0 25.3 FAW CNY 16.0 (23.9) (43.3) 5.7 26 4 24.4 19.4 17.4 2.7 2.4 2.2 9.3 11.7 11.6 Beiqi Foton CNY 6.1 (19.0) (48.1) (2.2) 20 3 n/a n/a n/a n/a n/a n/a n/a n/a n/a JAC CNY 12.3 (14.2) (36.7) 1.7 18 3 14.1 10.1 8.1 2.0 1.7 1.4 14.8 18.4 19.7 Lifan CNY 10.3 (37.1) (60.7) 15.8 13 2 n/a 15.3 n/a n/a n/a n/a n/a n/a n/a Haima CNY 5.9 (25.1) (44.2) 12.0 10 2 n/a n/a n/a n/a n/a n/a n/a n/a n/a A-share parts makers Huayu CNY 14.1 (22.4) (44.2) (9.0) 36 6 7.3 6.4 5.5 1.4 1.2 1.0 20.0 19.9 19.3 Weifu HKD 20.6 (23.5) (41.4) (22.5) 27 3 9.2 7.7 6.7 1.4 1.3 1.1 16.4 16.9 16.2 FuYao Glass CNY 12.2 (10.7) (28.6) 0.3 31 5 11.8 10.2 9.0 2.0 1.8 1.6 20.7 18.6 19.7 Ningbo Joyson CNY 25.1 (26.6) (51.5) 28.8 17 3 34.9 26.8 20.7 5.0 4.3 3.6 14.8 17.2 19.7 Beijing WKW CNY 11.2 (35.5) (38.5) (7.8) 8 1 12.5 9.7 7.4 1.7 1.5 1.2 13.9 15.3 16.5 Winsan CNY 13.6 (28.8) (62.2) 21.8 5 1 104.8 52.4 37.8 5.7 5.1 4.5 7.5 10.2 12.7 FAWER CNY 8.6 (38.3) (48.1) 2.0 11 2 13.3 10.3 8.1 2.2 1.8 1.5 16.4 17.5 18.2 Songz CNY 13.0 (26.3) (54.9) (7.5) 5 1 15.5 13.0 9.7 2.1 1.9 n/a 14.1 15.3 16.5 Faway CNY 22.2 (23.2) (45.5) (21.0) 5 1 9.4 9.0 n/a 1.2 1.1 n/a 13.1 12.7 n/a Zheziang Asia-Pac CNY 10.5 (34.6) (62.3) 62.7 8 1 31.3 23.9 19.1 2.1 2.7 2.5 9.3 11.4 13.0 Changzhou Xingyu CNY 22.3 (30.0) (58.5) 19.9 5 1 16.6 13.7 10.5 2.5 2.4 2.2 15.1 17.6 20.5 H-share automakers Great Wall HKD 22.8 (1.9) (50.7) (48.4) 93 12 6.0 5.3 5.1 1.4 1.1 1.0 24.9 23.1 20.6 Dongfeng HKD 9.1 0.9 (20.3) (17.6) 78 10 5.3 5.0 4.7 0.8 0.7 0.6 15.3 14.6 13.8 BAIC HKD 6.7 1.2 (31.4) (25.2) 51 7 8.1 6.5 5.8 1.1 1.0 0.9 14.2 15.5 16.9 GAC HKD 5.4 (15.0) (29.3) (23.8) 106 14 7.9 6.5 5.4 0.7 0.7 0.6 9.9 11.1 11.8 Geely HKD 3.2 2.9 (17.5) 29.6 28 4 9.2 7.4 6.3 1.2 1.0 0.9 13.3 14.3 15.0 Brilliance HKD 9.3 (9.5) (17.8) (25.4) 47 6 9.4 7.6 6.5 1.9 1.6 1.3 21.4 22.0 21.7 BYD HKD 33.8 (6.1) (38.7) 11.4 131 17 35.5 30.6 24.0 2.3 2.0 1.9 7.4 6.4 7.0 H-share parts makers Nexteer HKD 7.9 8.3 (11.7) 18.2 20 3 12.7 10.2 8.4 3.0 2.4 1.9 25.3 24.9 25.1 Minth HKD 14.5 (4.0) (20.7) (9.9) 16 2 10.6 9.3 8.1 1.4 1.3 1.1 14.1 14.7 15.5 Xinyi Glass HKD 3.9 0.5 (10.6) (0.3) 15 2 8.2 6.8 5.8 1.1 1.0 1.0 14.4 15.6 16.6 Xinchen China Power HKD 1.8 (24.4) (46.6) (26.2) 2 0 6.2 5.3 4.8 0.7 0.6 0.5 11.0 11.7 11.2 Note: As of Sep 11 close Source: Bloomberg, Samsung Securities

2015. 9. 16

Mando (204320)

CEO’s three promises point to growth

ò Chinese auto demand is appearing more likely to re bound as inventory corrections in that nation wind down. ò Shares in Mando have lost over 30% ytd, mostly since around 55% of its consolidated profit comes from China, but if auto demand recovers in tandem with won weakening, the firm might exceed expectations, which could offset forex- related pricing pressure in that nation. Moreover, the company’s CEO during a recent non-deal roadshow (NDR) promised that affiliates would no longer receive financial support, a dividend payout ratio of 25% for this year, and a strategy of selective order taking.

ò Mando posted an order backlog of KRW28.5t at end-2014, which should translate into sales growth at a CAGR of 9% through 2020. A DPS of KRW4,800 this year ought to limit share-price downside, while the firm is set to enjoy sector-leading profit growth (barring further margin squeeze). We change our valuation basis from the 2015-2016 average to 2016, apply a target P/E of 8x, raise our target price by 18.5% to KRW160,000, and upgrade the stock to BUY.

WHAT’S THE STORY Chinese market worries ease: Concerns surrounding falling auto demand in China— which is behind Mando’s plummeting share prices since it derives 55% of its operating profit in that nation—appear to be easing as inventory corrections there wind down and the government undertakes stimulus programs. • Inventory corrections winding down: China’s wholesale auto sales fell 3% y-y in August, but retail sales rose 0.6% y-y. The nation’s dealership inventory fell to 1.6x months amid adjustments by automakers since April, including price and plant utilization cuts, both of which should end since 1.5x months of inventory is considered normal. • Local automakers seeing structural growth: Local automakers Great Wall and Geely are enjoying dramatic growth thanks to improved quality and value-for-money strategies, with such growth set to continue since it takes 2-3 years for auto JVs to launch low-end local-only models. Mando generates 31% of its sales in China from local automakers, so we would expect it to offset negatives from the sluggish sales of Hyundai Motor and Kia Motors. (Continued on next page)

Mando

2015. 9. 16

• Weak won to offset pricing pressure: We expect ASP cuts by HMC/Kia to translate into pricing pressure on parts makers, but this should be offset by won weakening, with our estimates showing an operating profit effect of 1.3% for every 1% change in the KRW/USD forex rate. CEO’s three promises: Mando’s CEO seeks to restore investor trust—which has been walloped by corporate governance issues and weak results of the past three years—by promising the following. • No support of affiliates: As a holding company, Mando will no longer financially support affiliates, with one measure of transparency being an insider trading committee comprised only of non-executive outside directors. • 2015 DPS set at KRW4,800: The company will set its dividend payout ratio at 25%, second only to Hanon Systems in the autos sector, with its share-price downside is likely to be limited by a DPS of KRW4,800 for this year (which offers a yield of 4% at current prices). • Selective order taking: The firm will avoid low-priced orders thanks to an ample end-2014 order backlog of KRW28.5t. Poised for sector-leading profit growth: With sales set to grow at a CAGR of 9% over 2015- 2020, Mando should enjoy the sector’s strongest profit growth, despite assumption of operating margin staying at 5%. • HMC portion of sales to fall from 55% in 2015 to 40% in 2020: Mando attracted orders worth KRW10.1t in 2014, with the figure again set to surpass KRW10t this year (after hitting KRW7t in 1H), and even if comes in at KRW7.5t next year, we would expect the company’s full- year sales to grow at a CAGR of 9% and reach KRW9t by 2020. The firm boasts every global carmaker except Daimler and Toyota as clients, all of which are increasing orders, with it also expanding contracts with Chinese automakers Geely and Great Wall. • Electronic parts portion in sales to grow from 35% in 2015 to 45% in 2020: Mando makes electronic brake/steering systems as well as advanced driver assistance systems (ADAS), and despite the latter largely being an optional item, the company stands to gain since vehicles with ADAS also come with electronic power steering (EPS) and electronic stability control (ESC). (See our Sep 3 report “Stocks for the next decade.”) • Profitability improvement efforts necessary to ensure R&D funding: To sustain aggressive R&D investments (targeted at 6% of sales) and annual capex KRW250b-300b, we believe Mando requires a minimum operating margin of 5.5%, and while it is striving to boost profitability, systematic changes appear necessary. (See our Sep 7 report “Overseas NDR Takeaways.”)

China: Auto inventory China: Recent cuts to vehicle ASPs

('000 vehicles) Automaker Details Announced price cuts of CNY10,000-54,000 700 GM Shanghai (KRW1.8m-9.5m) covering 40 models 600 Cut prices on select models (including mid-sized sedans) VW Shanghai 500 by up to CNY10,000 Bolstered promotional efforts, cut prices, 400 Honda/Ford and covered excise taxes 300 Cut prices for H2 and H6 models by a respective 200 Great Wall CNY5,000 and CNY6,000 100 Cut price for main sedan (C30) by over 10% HMC Cut prices for Santa Fe and ix35 models by about 10% 0 Cut prices for Sportage (KM) and Sportage (SL) models Kia (100) by a respective CNY50,000 and CNY20,000 (200) Source: Local media, Samsung Securities Jan 11 Jan 12 Jan 13 Jan 14 Jan 15

Note: Excludes commercial vehicles Source: Auto Data Bowl, Samsung Securities

Mando

2015. 9. 16

Mando: Global sales, by customer (2015E) Mando: Global sales, by customer (2020E)

Other: 10% EU Other: 20% automakers : 5% Chinese local automakers : 8% HMC/Kia: 40%

HMC/Kia: Chinese 55% local automakers : 20% GM: 22%

US automakers : 20% Source: Company data, Samsung Securities Source: Company data, Samsung Securities

Mando: Chinese sales, by customer (2015E) Mando: Chinese sales, by customer (2020E)

Chinese local HMC/Kia: automakers Chinese 35% : 31% local automakers HMC/Kia: : 48% 48%

Global Global automakers automakers : 21% : 17%

Source: Company data, Samsung Securities Source: Company data, Samsung Securities

Global parts makers: Sales and R&D expenditures (2014) Mando: New orders

(USDb) (%) 70 10

60 9 50 8 40 7 30 6 20 10 5 0 4 Bosch Denso Delphi Conti- Valeo Mobis Mando nental

Sales (LHS) R&D expenses-to-sales ratio (RHS)

Source: Company data, Samsung Securities Source: Company data, Samsung Securities

Mando

2015. 9. 16

Mando: Results and forecasts (KRWb) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 2013 2014 2015E 2016E KRW/USD rate (average, KRW) 1,070 1,030 1,026 1,087 1,100 1,097 1,170 1,190 1,095 1,053 1,150 1,230 Sales 1,422 1,412 395 1,326 1,269 1,321 1,227 1,353 5,634 4,555 5,169 5,641 Gross profit 210 220 58 177 174 183 160 225 814 665 742 820 Operating profit 85 91 23 56 60 66 57 69 313 255 251 285 Pre-tax profit 83 72 21 39 42 56 46 72 218 216 216 253 Net profit 64 48 15 33 27 39 36 56 178 160 158 190 Attributable to parent company 64 48 15 33 27 38 36 56 178 159 158 190 Margins (%) Gross profit 14.8 15.6 14.6 13.3 13.7 13.9 13.0 16.7 14.4 14.6 14.4 14.5 Operating profit 6.0 6.4 5.8 4.2 4.7 5.0 4.6 5.1 5.6 5.6 4.8 5.0 Net profit 4.5 3.4 3.7 2.5 2.2 2.9 2.9 4.2 3.2 3.5 3.1 3.4 Attributable to parent company 4.5 3.4 3.7 2.5 2.1 2.9 2.9 4.2 3.2 3.5 3.1 3.4 Note: 1Q13-2Q14 figures on pre-split basis; 3Q14 figures for September only Source: Samsung Securities estimates

Mando

2015. 9. 16

Income statement Balance sheet Year-end Dec 31(KRWb) 2013 2014 2015E 2016E 2017E Year-end Dec 31(KRWb) 2013 2014 2015E 2016E 2017E Sales 5,634 1,721 5,169 5,641 6,140 Current assets 2,484 1,765 2,304 2,341 2,419 Cost of goods sold 4,820 1,487 4,427 4,821 5,245 Cash & equivalents 718 160 579 548 544 Gross profit 814 234 742 820 895 Accounts receivable 1,026 999 1,099 1,143 1,200 Gross margin (%) 14.4 13.6 14.4 14.5 14.6 Inventories 417 325 351 372 394 SG&A expenses 501 155 492 535 581 Other current assets 322 280 275 278 281 Operating profit 313 79 251 285 313 Fixed assets 2,593 2,082 2,195 2,365 2,527 Operating margin (%) 5.6 4.6 4.8 5.0 5.1 Investment assets 557 119 120 122 124 Non-operating gains (losses) (95) (19) (34) (32) (24) Tangible assets 1,785 1,710 1,796 1,936 2,067 Financial profit 26 7 3 4 4 Intangible assets 127 128 141 153 164 Financial costs 69 29 14 15 15 Other long-term assets 124 125 138 153 171 Equity-method gains (losses) (3) (6) (8) (4) 2 Total assets 5,077 3,846 4,499 4,705 4,946 Other (48) 8 (15) (17) (15) Current liabilities 1,855 1,892 2,381 2,446 2,520 Pre-tax profit 218 60 216 253 289 Accounts payable 967 891 980 1,070 1,164 Taxes 41 12 58 63 72 Short-term debt 330 360 1,081 1,027 976 Effective tax rate (%) 18.6 20.3 26.8 25.0 25.0 Other current liabilities 557 641 319 348 379 Profit from continuing operations 178 48 158 190 217 Long-term liabilities 1,504 856 881 877 876 Profit from discontinued operations 0 0 0 0 0 Bonds & long-term debt 1,265 603 603 603 603 Net profit 178 48 158 190 217 Other long-term liabilities 238 252 277 274 273 Net margin (%) 3.2 2.8 3.1 3.4 3.5 Total liabilities 3,358 2,748 3,262 3,323 3,396 Net profit (controlling interests) 178 48 158 190 217 Owners of parent equity 1,653 1,058 1,197 1,341 1,510 Net profit (non-controlling interests) (0) 0 1 0 0 Capital stock 91 47 47 47 47 EBITDA 513 151 443 455 463 Capital surplus 240 962 962 962 962 EBITDA margin (%) 9.1 8.8 8.6 8.1 7.5 Retained earnings 1,322 40 179 324 492 EPS (parent-based) (KRW) 9,852 5,062 16,789 20,180 23,114 Other (0) 9 9 9 9 EPS (consolidated) (KRW) 9,833 5,100 16,849 20,180 23,114 Non-controlling interests’ equity 66 40 41 41 41 Adjusted EPS (KRW)* 9,852 5,062 16,789 20,180 23,114 Total equity 1,719 1,098 1,238 1,382 1,551 Net debt 975 1,011 970 948 901

Cash flow statement Financial ratios Year-end Dec 31(KRWb) 2013 2014 2015E 2016E 2017E Year-end Dec 31 2013 2014 2015E 2016E 2017E Cash flow from operations 554 167 343 380 377 Growth (%) Net profit 178 48 158 190 217 Sales 11.4 (69.4) 200.3 9.1 8.8 Non-cash profit and expenses 335 119 238 217 202 Operating profit 22.3 (74.7) 216.1 13.6 10.1 Depreciation 180 64 184 160 139 Net profit 9.7 (73.0) 230.4 19.8 14.5 Amortization 20 7 9 10 11 Adjusted EPS** 10.0 (48.6) 231.7 20.2 14.5 Other 135 47 45 47 52 Per-share data (KRW) Changes in A/L from operating activities 95 22 15 47 41 EPS (parent-based) 9,852 5,062 16,789 20,180 23,114 Cash flow from investments (851) (189) (268) (308) (284) EPS (consolidated) 9,833 5,100 16,849 20,180 23,114 Change in tangible assets (313) (127) (270) (300) (270) Adjusted EPS** 9,852 5,062 16,789 20,180 23,114 Change in financial assets (452) 446 5 (2) (2) BVPS 92,876 112,955 127,791 143,227 161,207 Other (86) (509) (4) (6) (12) DPS (common) 1,200 2,000 4,800 5,200 5,500 Cash flow from financing 802 2 352 (99) (100) Valuations (x) Change in debt 817 (568) 371 (54) (51) P/E*** 12.5 24.3 7.3 6.1 5.3 Change in equity 0 678 0 0 0 P/B*** 1.3 1.1 1.0 0.9 0.8 Dividends (18) 0 (19) (45) (49) EV/EBITDA 4.3 14.6 4.9 4.7 4.5 Other 3 (107) 0 0 0 Ratios (%) Change in cash 504 (13) 419 (31) (4) ROE 11.3 3.5 14.0 14.9 15.2 Cash at beginning of year 215 173 160 579 548 ROA 3.9 1.1 3.8 4.1 4.5 Cash at end of year 718 160 579 548 544 ROIC 11.0 2.8 8.2 9.1 9.6 Gross cash flow 512 167 397 406 419 Payout ratio 12.0 39.4 28.5 25.7 23.7 Free cash flow 234 36 73 80 107 Dividend yield (common) 1.0 1.6 3.9 4.2 4.5 Note: * Excluding one-off items Net debt to equity 56.7 92.1 78.4 68.6 58.1 ** Fully diluted, excluding one-off items Interest coverage (x) 6.3 5.4 18.2 18.7 21.2 *** From companies subject to equity-method valuation Source: Company data, Samsung Securities estimates

Autos

2015. 9. 16

Compliance notice - As of Sep 15, 2015, Samsung Securities' holdings of shares and debt instruments convertible into shares of Mando would, if such debt instruments were converted, exceed 1% of the outstanding shares. - As of Sep 15, 2015, the covering analyst(s) did not own any shares, or debt instruments convertible into shares, of any company covered in this report. - This report has been prepared without any undue external influence or interference, and accurately reflects the views of the analyst(s) covering the company or companies herein. - All material presented in this report, unless specifically indicated otherwise, is under copyright to Samsung Securities. - Neither the material nor its content (including copies) may be altered in any form, or by any means transmitted, copied, or distributed to a nother party, without prior express written permission from Samsung Securities. - This memorandum is based upon information available to the public. While we have taken all reasonable care to ensure its reliability, we do not guarantee its accuracy or comp leteness. This memorandum is not intended to be an offer, or a solicitation of any offer, to buy or sell the securities mentioned h erein. Samsung Securities shall not be liable whatsoever for any loss, direct or consequential, arising from the use of this memorandum or its contents. Statements made regarding affiliates of Samsung Securities are also based upon publicly available information and do not necessarily represent the views of management at such affiliates. - This material has not been distributed to institutional investors or other third parties prior to its publication.

Target price changes in past two years

Hyundai Motor Kia Motors (KRW) (KRW) 350,000 90,000 300,000 80,000 70,000 250,000 60,000 200,000 50,000 150,000 40,000 30,000 100,000 20,000 50,000 10,000 0 0 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15

Hyundai Wia Mando (KRW) (KRW) 300,000 300,000

250,000 250,000

200,000 200,000

150,000 150,000

100,000 100,000

50,000 50,000

0 0 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15

Autos

2015. 9. 16

Rating changes in past two years Hyundai Motor Date 2014/1/15 3/25 5/12 5/19 7/7 9/28 2015/1/22 6/4 Recommendation BUY ★★★ BUY BUY BUY BUY BUY BUY BUY Target price (KRW) 290,000 290,000 300,000 290,000 280,000 250,000 230,000 190,000 Kia Motors Date 2014/1/15 3/18 5/12 5/19 7/7 8/3 9/28 2015/1/25 5/11 6/4 Recommendation BUY BUY BUY BUY BUY BUY ★★★ BUY BUY BUY BUY Target price (KRW) 65,000 69,000 80,000 69,000 70,000 77,000 70,000 60,000 65,000 60,000 Hyundai Wia Date 2014/1/26 7/27 8/20 9/15 10/26 2015/1/25 6/4 7/26 Recommendation BUY BUY BUY BUY ★★★ BUY ★★★ BUY BUY BUY Target price (KRW) 190,000 220,000 260,000 280,000 260,000 220,000 170,000 150,000 Mando Date 2014/10/22 11/19 2015/2/5 6/23 7/26 9/15 Recommendation BUY BUY BUY HOLD HOLD BUY Target price (KRW) 250,000 230,000 190,000 145,000 135,000 160,000 Samsung Securities uses the following investment ratings. Company Industry BUY ★★★ Expected to increase in value by 30% or more within 12 months and OVERWEIGHT Expected to outperform market by 5% or more within 12 months is highly attractive within sector NEUTRAL Expected to outperform/underperform market by less than 5% BUY Expected to increase in value by 10% or more within 12 months within 12 months UNDERWEIGHT Expected to underperform market by 5% or more within 12 months HOLD Expected to increase/decrease in value by less than 10% within 12 months SELL Expected to decrease in value by 10% or more within 12 months SELL ★★★ Expected to decrease in value by 30% or more within 12 months

Percentage of ratings in 12 months prior to Jun 30, 2015 BUY (68.9%) | HOLD (31.1%) | SELL (0%)

Autos

2015. 9. 16

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