Automobiles & components / Korea & Japan 5 January 2012

Job swap: in Hakomori’s shoes

• One week in Japan trading places with Daiwa’s Japan auto analyst • From SY’s time on the ground, Japan automakers appear to be actively considering ways to improve their fundamentals… • …though doubts remain as to whether this will be successful 1

Sung Yop Chung (82) 2 787 9157 [email protected]

During the week of 21 November 2011, I stepped into the shoes of Daiwa’s Eiji Hakomori and worked as a Japan auto analyst.

As part of my brief, I met with management of Toyota Motor and Nissan Motor, spoke with clients, and interviewed sales people and sales traders at our HQ in Japan. I also went to the headquarters of Nissan and conducted a factory tour in Toyota city near Nagoya. And with Hakomori I discussed emerging themes in the Japan auto market and his assumptions for the sector.

This report outlines Hakomori’s existing view of the Japan auto sector and then details my experience in Japan. Contrary to what I expected, the Japan automakers’ long-term strategies seem viable and appear to be focusing vigorously on improving cost structures, especially given the current environment of a stronger Yen and hangovers from production disruptions.

See Trading Places 3 for the key takeaways from our Japan experience and what these mean for our view of the Korea auto stocks.

Important disclosures, including any required research certifications, are provided on the last three pages of this report. Trading Places 1 5 January 2012

Table of contents

Hakomori’s pre-job-swap view ...... 4 Toyota Motor (7203 JP, ¥2,496, Outperform) ...... 4 Hakomori’s pre-job-swap view ...... 7 Honda Motor (7267 JP, ¥2,325, Buy) ...... 7 Hakomori’s pre-job-swap view ...... 9 Nissan Motor (7201 JP, ¥692, Buy) ...... 9 Japan Auto Sector in a global context ...... 12 Global comparison ...... 12 SY: pre-job-swap thoughts ...... 13 Where do they stand in the global auto industry? ...... 13 Why have they not fared well? ...... 13 Can they improve? ...... 15 SY: Japan itinerary ...... 17 Who we met on the ground ...... 17 SY: on the ground in Japan ...... 18 Trading Places in Japan ...... 18 Hakomori’s view ...... 19 What management said ...... 22 Sales traders ...... 25 Sales ...... 26 What’s next? ...... 26

Please also see:

Trading Places 2: Trading Places 3: Trading Places 4: Job swap: in SY’s shoes Bringing our Japan experience home Bringing our Korea experience home 5 January 2012 5 January 2012 5 January 2012 Eiji Hakomori (81) 3 5555 7072 Sung Yop Chung (82) 2 787 9157 Eiji Hakomori (81) 3 5555 7072 ([email protected]) ([email protected]) ([email protected])

- 2 - Trading Places 1 5 January 2012

How Hakomori justifies his Positive view of the Japan Auto Sector

Growth outlook Big 3 Japan automakers: global sales volumes

We forecast a global sales volume CAGR of 7.2% for (m units) Global Sales Volume of Japan's Big3 Japan’s Big 3 automakers (Toyota, Honda and Nissan) 25 for FY10-13. Sales volumes have slumped since FY08 due to the collapse of Lehman Brothers, Toyota’s recall 20 issues, and Japan’s double-whammy of natural disasters in 2011; but we see no need for pessimism going 15 forward. We expect market growth, as well as successive 10 launches of the companies’ major models: the Toyota CAGR (FY07-10) CAGR (FY10-13) Camry, followed by Honda’s CR-V and Accord, and 5 -2.0% +7.2% Nissan’s Altima. The companies are entering a favourable phase in the model cycle following a lull in 0 FY07 08 09 10 11E 12E 13E launches in recent years. We think Honda will recapture its advantage in fuel efficiency, backed by upgraded Source: Companies and Daiwa forecasts powertrains.

Valuation Auto stocks globally: PBR and ROE correlation

The Big 3 Japan automakers’ anticipated profit recovery (PBR, 2012E, x ) (higher ROE) onwards from FY12 makes them seem 2.2 Dongfeng significantly less overvalued on prospective FY12 PERs than some might think. Moreover, taking into account 1.8 the negative impact on earnings of recent extreme Yen Overvalued Kia appreciation, Honda and Nissan appear considerably 1.4 SAIC undervalued to us. Guangzhou BMW 1.0 Honda Undervalued We also think that PBR is a useful metric from the Toyota Daimler HMC Nissan VW perspective of assessing downside risk amid poor 0.6 visibility for the global economy. We believe downside is 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 (ROE, 2012E, % ) limited, with Toyota trading at a PBR of about 0.7x for FY12E, and Honda and Nissan both at about 0.9x. Source: Bloomberg, Daiwa forecasts Note: Share prices are as at 22 December 2011

Earnings revisions Big 3 Japan automakers: aggregate operating profit

We forecast the combined FY12 operating profit of the (¥bn) Big 3 to grow by 76% YoY, partly on the back of a likely 5,000 10% decrease in FY11 earnings reflecting a drop in production due to earthquake-related issues in Japan 4,000 8% and Thai flooding. Even though our aggregate FY12 3,000 6% operating-profit margin forecast of 5.5% is well below 2,000 4% the pre-global financial crisis mark of more than 8%, we believe the companies will secure steady profits. Our 1,000 2% operating profit forecasts for FY12 are in line with those 0 0% of the Bloomberg consensus for Toyota and Nissan, and (1,000) (2%) about 10% above for Honda. FY07 08 09 10 11E 12E 13E Operating Profit (LHS) OP Margin (RHS)

Source: Companies and Daiwa forecasts

- 3 - Trading Places 1 5 January 2012

Hakomori’s pre-job-swap view

Toyota Motor (7203 JP, ¥2,496, Outperform) Cost cuts to fuel FY12 earnings Share price performance (Y ) Relative to T OPIX 4,400 160 What we recommend We reiterate our Outperform (2) rating for Toyota. We have a 12-month 3,800 140 target price of ¥3,200, as we believe the shares should trade at around book 3,200 120 value (¥3,194 at end-September 2011). Toyota’s profit margins and ROE are 2,600 100 lacking compared with those of its rivals, and we do not think the shares 2,000 80 deserve to trade at a premium to their peers using a PER-based approach. 12/08 7/09 3/10 10/10 5/11 12/11

Still, we believe the shares look considerably undervalued, trading at about 0.8x end-1H FY11 book value, in light of Toyota’s strong position in the Market data (consolidated) industry and the fact that its measures to improve productivity and its cost 12-month range (Y) 2,330-3,955 structure have been improving earnings. Market cap (¥m; 22 Dec) 7,826,671 Shares outstanding (’000; 11 Dec) 3,135,686 We think investors will expect a rebound in profits as more evidence Foreign ownership (%; 11 Sep) 24.8 emerges of the healthiness of the US auto market. Risks to our target price include: 1) Yen appreciation, and 2) slowing US auto demand. Investment indicators (consolidated) FY10 FY11E FY12E Earnings trends PER (x) 19.2 18.6 10.7 FY11 outlook. On 9 December, the company announced disappointing EV/EBITDA (x) 13.1 15.2 10.6 operating profit guidance of ¥200bn for FY11 (versus a ¥450bn projection in PBR (x) 0.76 0.76 0.72 its 1Q FY11 earnings announcement, and our forecast of ¥390bn). However, Dividend yield (%) 2.00 2.00 2.40 this figure incorporates a potential catch-up in production of 30,000 ROE (%) 3.9 4.1 6.9 vehicles in 4Q FY11, versus the 3Q decline of 260,000 vehicles due to the Thai flooding. We therefore think the guidance represents the minimum Income summary (consolidated) level management expects to achieve. While we may need to lower our FY11 (¥m) FY10 FY11E FY12E forecasts, we do not see a need to change our outlook for FY12. Sales 18,993,688 18,300,000 19,800,000 Op profit 468,279 390,000 840,000 FY12 outlook. We forecast consolidated sales volume of 8.31m vehicles for Pre-tax income 563,290 460,000 930,000 FY12 (up 12% YoY) as production normalises. We forecast an operating profit of Net income 408,183 420,000 730,000 ¥840bn (up 115% YoY), not only on the benefits of expanded production, but EPS (¥) 130.2 133.9 232.8 also on accelerated cost-cutting initiatives. We expect lost sales from a decrease DPS (¥) 50.00 50.00 60.00 in production to keep Toyota’s US market share at 13.7% in FY11. However, we Source: Company, Daiwa forecasts believe new model launches will heat up, with the Prius V and others. We think FY12 will see a recovery to a 15.0% market share.

Key points In the short term, we will focus on whether the company can retake market share and improve its profitability. Over the long term, our focus is likely to shift to whether the company can translate its more efficient (than its parent) development and cost structure into margin improvements, while getting its domestic operations into the black.

- 4 - Trading Places 1 5 January 2012

Toyota: income summary (¥m, YoY %) Year to Sales Op profit Pre-tax income Net income EPS (¥) CFPS (¥) DPS (¥) Consolidated 03/09 20,529,570 (-22) -461,011 (loss) -560,381 (loss) -436,937 (loss) -139.1 202.3 100.00 03/10 18,950,973 (-8) 147,516 (profit) 291,468 (profit) 209,456 (profit) 66.8 395.9 45.00 03/11 18,993,688 (0) 468,279 (217) 563,290 (93) 408,183 (95) 130.2 389.2 50.00 03/12E 18,300,000 (-4) 390,000 (-17) 460,000 (-18) 420,000 (3) 133.9 369.9 50.00 03/13E 19,800,000 (8) 840,000 (115) 930,000 (102) 730,000 (74) 232.8 475.2 60.00 03/14E 21,100,000 (7) 1,200,000 (43) 1,520,000 (63) 970,000 (33) 309.3 564.5 90.00 03/12 CP 18,200,000 (-4) 200,000 (-57) 170,000 (-70) 180,000 (-56) - - - Source: Company, Daiwa forecasts Note: E: Daiwa forecasts, CP: company projections

Toyota: cash flow (¥bn) FY08 FY09 FY10 FY11E FY12E FY13E Cash flow from operating activity 1,476.9 2,558.5 2,024.0 1,427.9 1,890.0 2,170.0 Automobile business 568.3 1,842.3 1,467.0 914.4 1,220.3 1,528.7

Net income -368.6 116.2 241.4 213.3 535.1 787.5

Depreciation 1,105.2 1,065.7 844.7 772.4 792.4 832.4

Increase/decrease in working capital 127.5 115.1 86.7 -54.6 -107.1 -91.2

Other -295.9 545.3 294.1 -16.6 0.0 0.0

Financial business 717.1 814.8 556.9 513.5 669.7 641.3

Eliminations -191.5 98.6 -0.1 0.0 0.0 0.0

Cash flow from investing activity -1,230.2 -2,850.2 -2,116.3 -860.9 -962.6 -1,175.2 Automobile business -336.7 -2,139.0 -877.1 -747.7 -947.9 -953.2

Capex -1,317.2 -553.1 -570.6 -702.0 -792.0 -842.0

Other 980.5 -1,585.9 -306.6 -45.7 -155.9 -111.3

Financial business -715.7 -626.7 -1,004.7 -113.2 -14.7 -222.0

Eliminations 177.8 84.5 234.5 0.0 0.0 0.0

Cash flow from financing activity 698.8 -278.0 434.3 -152.0 -500.0 -442.0 Automobile business 23.7 -16.7 -551.2 16.8 -155.9 -111.3

Increase/decrease in short-term debt 138.4 -249.2 -86.9 10.5 0.0 0.0

Increase/decrease in long-term debt 395.9 415.3 -294.5 6.3 -155.9 -111.3

Dividend payment -440.0 -172.5 -141.1 -156.8 -188.1 -219.5

Other -70.6 -10.3 -28.6 156.8 188.1 219.5

Financial business 688.9 -444.4 751.1 -168.7 -344.1 -330.8

Eliminations 13.7 -183.1 -234.4 0.0 0.0 0.0 Forex translation adjustments -129.8 -8.9 -127.0 0.0 0.0 0.0 Free cash flow 246.7 -291.7 -92.3 567.0 927.4 994.8 Free cash flows from automobile business 231.6 -296.7 589.9 166.7 272.4 575.4 Source: Company, Daiwa forecasts

- 5 - Trading Places 1 5 January 2012

Toyota: balance sheet (¥bn) FY08 FY09 FY10 FY11E FY12E FY13E Total assets 29,062.0 30,349.3 29,818.2 29,389.6 29,799.5 30,506.6 Current assets 11,298.9 13,073.6 11,829.8 11,221.1 11,497.8 11,668.4

Cash and cash equivalents 2,984.8 4,051.6 3,510.0 3,049.0 3,038.8 2,882.2

Accounts receivable 1,392.7 1,886.3 1,449.2 1,396.2 1,510.7 1,609.9

Net financial receivables 3,891.4 4,209.5 4,136.8 3,921.0 3,990.4 4,129.2

Inventories 1,459.4 1,422.4 1,304.2 1,256.6 1,359.6 1,448.9

Other 1,570.6 1,503.8 1,429.5 1598.3 1,598.3 1,598.3

Net long-term financial receivables 5,655.5 5,630.7 5,556.7 5,266.8 5,360.0 5,546.5

Investments and other assets 4,705.9 4,934.1 6,122.5 6,622.5 6,622.5 6,922.5

Tangible fixed assets 7,401.7 6,710.9 6,309.2 6,279.2 6,319.2 6,369.2

Total liabilities 18,461.3 19,418.8 18,898.1 18,509.7 18,316.5 18,196.9 Current liabilities 10,589.3 10,686.2 10,791.0 9,527.0 9,333.8 8,814.1

Short- and long-term debt due within one year 6,317.2 5,498.0 5,951.8 5,034.6 4,722.7 4,100.1

Accounts payable 1,299.5 1,956.5 1,503.1 1,448.2 1,566.9 1,669.8

Other 2,972.7 3,231.7 3,336.1 3044.2 3,044.2 3,044.2

Long-term liabilities 7,872.0 8,732.6 8,107.2 8,982.7 8,982.7 9,382.7

Long-term debt 6,301.5 7,015.4 6,449.2 7,400.0 7,400.0 7,800.0

Other 1,570.5 1,717.2 1,657.9 1,582.7 1,582.7 1,582.7

Non-controlling interests 539.5 570.7 587.7 587.7 649.0 725.2 Total shareholders’ equity 10,061.2 10,359.7 10,332.4 10,292.1 10,834.0 11,584.5 Book value per share (Y) 3,208.4 3,303.5 3,295.1 3,282.3 3,455.1 3,694.4

FY08 FY09 FY10 11 E 12 E 13 E Automobile business: total assets 16,299.1 17,793.3 16,942.7 16,852.6 17,085.0 17,485.1 Current assets 6,540.4 8,247.3 6,508.4 5,948.3 6,140.8 6,190.8

Cash and cash equivalents 2,142.6 3,122.5 2,337.1 1,875.1 1,836.1 1,689.1

Accounts receivable 1,404.3 1,908.9 1,483.6 1,431.4 1,554.5 1,659.4

Inventories 1,459.4 1,422.4 1,304.1 1,258.3 1,366.5 1,458.7

Other 1,534.1 1,793.6 1,383.6 1383.6 1,383.6 1,383.6

Investments and other assets 4,254.1 4,549.7 5,826.0 6,326.0 6,326.0 6,626.0

Tangible fixed assets 5,504.6 4,996.3 4,608.3 4,578.3 4,618.3 4,668.3

Automobile business: total liabilities 6,590.1 7,891.7 7,070.4 7,020.5 6,844.8 6,600.6 Current liabilities 4,665.4 5,518.6 5,015.5 4,980.4 5,004.7 5,010.5

Short- and long-term debt due within one year 941.0 865.3 722.5 740.0 640.0 540.0

Accounts payable 1,299.5 1,954.1 1,497.3 1,444.6 1,568.9 1,674.7

Other 2,424.9 2,699.2 2,795.8 2,795.8 2,795.8 2,795.8

Long-term liabilities 1,924.6 2,373.1 2,054.9 2,040.1 1,840.1 1,590.1

Long-term debt 850.2 1,095.3 839.6 900.0 700.0 450.0

Other 1,074.4 1,277.8 1,215.3 1,140.1 1,140.1 1,140.1 Source: Company, Daiwa forecasts

- 6 - Trading Places 1 5 January 2012

Hakomori’s pre-job-swap view

Honda Motor (7267 JP, ¥2,325, Buy) Our top pick in the sector over the medium term Share price performance (Y ) Relative to T OPIX 3,900 200 We reiterate our Buy (1) rating for Honda and PER-based 12-month target price of ¥3,300. The company is our top pick in our pan-Asia auto universe 3,300 170 over the medium term (about one year). 2,700 140

2,100 110 Investor expectations for the company seem to have fallen significantly since 1,500 80 the beginning of 2011, due to: 1) market-share gains by non-Japan 12/08 7/09 3/10 10/10 5/11 12/11 carmakers in the US, 2) the lukewarm media reception to the new Civic model launched in April 2011, and 3) a greater production setback than its Market data (consolidated) peers from the earthquake in Japan and floods in Thailand. Nonetheless, we 12-month range (¥) 2,127-3,745 believe the company has a rich product line-up for 2012 and should be able Market cap (¥m; 22 Dec) 4,190,349 to regain investor interest once sales volume picks up. Shares outstanding (’000; 11 Dec) 1,802,301 Foreign ownership (%; 11 Sep) 34.7 The risks to our target price include: 1) Yen appreciation, and 2) a slowdown in US auto demand. Investment indicators (consolidated) FY10 FY11E FY12E Earnings trends PER (X) 7.9 13.5 7.6 FY11 outlook. We forecast an operating profit of ¥305bn for FY11 (down EV/EBITDA (X) 7.8 11.4 7.1 46% YoY), but we see downside risk to this from a delayed recovery in PBR (X) 0.94 0.94 0.86 production. That said, we think FY11 profit will be dragged down by one-off Dividend yield (%) 2.32 2.58 3.87 factors (including the Japan earthquake), and the stock does not seem to be ROE (%) 12.2 7.0 11.8 moving based on the recent earnings. Income summary (consolidated) FY12 outlook. With production returning to normal levels, we forecast (¥m) FY10 FY11E FY12E consolidated sales volume of 3.87m vehicles for FY12 (up 19% YoY). The Sales 8,936,867 8,110,000 9,240,000 company has been the most affected of the Big 3 by the Japan earthquake Op profit 569,775 305,000 640,000 and Thailand floods, and its production and sales volume are likely to rise Pre-tax income 630,548 345,000 670,000 sharply in FY12. We forecast an FY12 operating profit of ¥640bn (up 110% Net income 534,088 310,000 550,000 YoY). In the US, Honda’s main market, we forecast a 9.1% market share for EPS (¥) 295.7 172.0 305.2 FY11 and 10.7% for FY12 (10.6% for FY10). DPS (¥) 54.00 60.00 90.00 Source: Company, Daiwa forecasts

Key points

We believe the company is set to enter a favourable part of the cycle with its model changes, given its plans to launch its new CR-V model in January 2012 and a new Accord in the autumn. This, together with the new Civic models launched in April 2011 (they account for about 60% of US sales and about 50% of its global sales), indicates to us that Honda is set on revamping its models.

We think the stock’s appeal as a long-term investment is marred by clouded visibility over its revenue-growth prospects following the recovery in the US auto market.

- 7 - Trading Places 1 5 January 2012

Honda: (¥m, YoY %) Year to Sales Op profit Pre-tax income Net income EPS (¥) CFPS (¥) DPS (¥) Consolidated 3/09 10,011,241 (-17) 189,643 (-80) 161,734 (-82) 137,005 (-77) 75.5 300.5 63.00 3/10 8,579,174 (-14) 363,775 (92) 336,198 (108) 268,400 (96) 147.9 349.9 38.00 3/11 8,936,867 (4) 569,775 (57) 630,548 (88) 534,088 (99) 295.7 475.7 54.00 3/12 E 8,110,000 (-9) 305,000 (-46) 345,000 (-45) 310,000 (-42) 172.0 344.0 60.00 3/13 E 9,240,000 (14) 640,000 (110) 670,000 (94) 550,000 (77) 305.2 488.3 90.00 3/14 E 10,020,000 (8) 780,000 (22) 810,000 (21) 650,000 (18) 360.7 560.4 105.00 3/12 CP - (-) - (-) - (-) - (-) - - 60.00 Source: Company, Daiwa Note: E: Daiwa forecasts, CP: company projections

Honda: cash flow (¥bn) FY08 FY09 FY10 FY11 E FY12E FY13E Cash flow from operating activity 383.6 1,544.2 1,070.8 882.5 1,009.5 1,191.6 Automobile business (excl. financials) -29.1 1,099.6 634.8 612.9 729.9 896.7

Net income 89.8 176.4 456.2 207.3 451.4 557.2

Depreciation 438.3 399.2 349.8 346.7 363.3 396.7

Change in working capital -451.4 438.5 -57.5 58.9 -84.8 -57.1

Other -105.8 85.6 -113.8 0.0 0.0 0.0

Financial business 401.1 437.1 440.7 269.6 279.6 294.9

Intersegment eliminations -11.6 -7.5 4.6 0.0 0.0 0.0

Cash flow from investing activity -1,133.4 -595.8 -731.4 -655.8 -495.3 -649.7 Automobile business (excl. financials) -537.9 -259.1 -263.0 -381.2 -417.9 -457.9

Capex -613.7 -365.6 -292.4 -397.9 -417.9 -457.9

Other -5.5 106.6 29.3 16.8 0.0 0.0

Financial business -525.2 -219.2 -477.5 61.9 -135.3 -189.7

Intersegment eliminations 70.3 117.5 -9.1 336.6 -57.9 2.1

Cash flow from financing activity 530.9 -559.2 -100.4 -263.3 -269.4 -190.8 Automotive business (excl. financials) 342.0 -446.8 -141.3 -178.5 -197.8 -185.5

Change in short-term debt 452.4 -458.6 11.3 -59.7 -40.0 -7.5

Change in long-term debt 40.0 89.8 -9.4 -10.6 -31.6 2.2

Dividend payment -139.7 -61.7 -92.2 -108.1 -126.2 -180.2

Financial services 130.2 -222.5 45.4 -84.8 -71.6 -5.3

Intersegment eliminations -58.7 -110.0 4.5 0.0 0.0 0.0 Forex translation adjustments -141.7 40.3 -79.9 0.0 0.0 0.0 Free cash flow -749.7 948.5 339.4 226.6 514.2 541.9 Automotive business (excl. financials) free cash flow -567.0 840.6 371.7 231.7 312.0 438.8 Source: Company, Daiwa forecasts

Honda: balance sheet (¥bn) FY08 FY09 FY10 FY11E FY12E FY13E Total assets 11,818.9 11,629.1 11,570.9 11,276.2 11,678.3 12,237.8 Current assets 4,621.2 4,613.7 4,690.0 4,319.9 4,567.1 4,864.4

Cash and cash equivalents 690.4 1,119.9 1,279.0 1,141.6 1,165.1 1,287.5

Accounts receivable 854.2 883.5 787.7 714.8 814.4 883.2

Finance subsidiaries’ short-term receivables 1,172.0 1,100.2 1,131.1 1,089.4 1,099.8 1,127.3

Inventories 1,244.0 935.6 899.8 816.6 930.3 1,008.9

Other 660.6 574.6 592.5 557.5 557.5 557.5

Finance subsidiaries’ long-term receivables 2,400.3 2,361.3 2,348.9 2,338.6 2,360.8 2,432.9

Operating lease assets 1,287.7 1,308.1 1,357.6 1,347.6 1,390.4 1,480.5

Investments and loans 639.1 642.7 639.9 623.2 623.2 623.2

Tangible fixed assets 2,147.7 2,086.7 1,939.4 2,029.4 2,119.4 2,219.4

Other 722.9 616.6 595.0 617.5 617.5 617.5

Total liabilities 7,688.6 7,172.7 6,988.0 6,660.0 6,607.4 6,659.4 Current liabilities 4,237.4 3,419.1 3,568.2 3,271.0 3,263.7 3,310.9

Short-term debt and long-term debt due within one year 2,684.3 1,788.6 2,057.2 1,926.8 1,828.8 1,813.5

Accounts payable 706.3 827.2 716.7 650.4 741.0 803.6

Other 846.7 803.3 794.3 693.8 693.8 693.8

Long-term debt 1,932.6 2,313.0 2,043.2 2,033.0 1,987.7 1,992.5

Other 1,518.6 1,440.5 1,376.5 1,356.0 1,356.0 1,356.0 Non-controlling interests 123.1 127.8 132.9 155.2 186.1 223.8 Total shareholders' equity and net assets 4,007.3 4,328.6 4,450.0 4,461.0 4,884.8 5,354.6 Book value per share (Y) 2,208.4 2,385.4 2,469.1 2,475.2 2,710.3 2,971.0 Source: Company, Daiwa forecasts

- 8 - Trading Places 1 5 January 2012

Hakomori’s pre-job-swap view

Nissan Motor (7201 JP, ¥692, Buy) A long-term favourite Share price performance (Y ) Relative to T OPIX 930 290 What we recommend We reaffirm our Buy (1) rating for Nissan, with a PER-based 12-month 750 240 target price of ¥1,000. Among our pan-Asia auto universe, we view the stock 570 190 as an attractive investment, particularly over the long term (over one year). 390 140

210 90 In our view, Nissan’s recent fundamentals and sales trends have been the 12/08 7/09 3/10 10/10 5/11 12/11 best among the three Japan majors. We also applaud its clear-cut and aggressive medium-term business plan. Still, such facts are well known and, Market data (consolidated) as such, we may not see further positive surprises over the short term. Risks 12-month range (¥) 614-894 to our target price would include: 1) further Yen appreciation, and 2) a Market cap (¥m; 22 Dec) 2,885,732 slowdown in auto demand in the US and Europe (sales in Europe account Shares outstanding (’000; 11 Dec) 4,170,133 for around 16% of the total, but this is a high proportion compared with the Foreign ownership (%; 11 Sep) 67.4 company’s Japan peers). Investment indicators (consolidated) Earnings trends FY10 FY11E FY12E FY11 outlook. We forecast a FY11 operating profit of ¥510bn (down 5% PER (X) 9.1 9.3 7.2 YoY), on a par with the company’s guidance. In 1H FY11, Nissan expanded EV/EBITDA (X) 6.2 6.6 5.4 its market share in each region (particularly Europe and China), achieving a PBR (X) 0.98 0.97 0.88 global share of 6.0%, versus a year-earlier figure of 5.6%. The Thai floods Dividend yield (%) 1.45 2.89 3.61 appear to have had a limited impact on the company’s bottom line. With ROE (%) 11.3 10.4 12.7 recent sales remaining solid, we expect Nissan to maintain robust earnings. Income summary (consolidated) FY12 outlook. We forecast an FY12 operating profit of ¥640bn (up 25% (¥m) FY10 FY11E FY12E YoY). Given the quick recovery from the Japan earthquake and the Thai Sales 8,773,093 9,110,000 9,540,000 Op profit 537,467 510,000 640,000 floods in FY11, we forecast more moderate earnings growth for Nissan Rec profit 537,814 500,000 640,000 compared with its peers, which are likely to have a lower YoY base of Net income 319,221 310,000 400,000 comparison. Still, we assume an operating margin of 6.7% (5.6% in FY11). EPS (¥) 76.4 74.1 95.6 We forecast the FY12 sales volume to rise by 6.2% YoY. This would mark a DPS (¥) 10.00 20.00 25.00 slowdown from our FY11 forecast of a 9.8% YoY increase (due to a one-off Source: Company, Daiwa forecasts increase in FY11, stemming from supply shortages at its peers. We envisage the sales volume climbing by 10.1% YoY in FY13).

Key points In the short term, our focus is on Nissan’s sales trends in China and Europe. Longer term, we believe progress in its business plan, notably: 1) attaining a global market share of 8% by FY16 (5.8% in FY10), and 2) an operating profit margin of 8% (5.1% in FY11), will be key – Nissan guides for a global sales volume of over 7m vehicles in FY16, and 4.75m for FY11).

- 9 - Trading Places 1 5 January 2012

Nissan: income summary (¥m; YoY %) Year to Sales Op profit Rec profit Net income EPS (¥) CFPS (¥) DPS (¥) Consol 3/09 8,436,974 (-22) -137,921 (loss) -172,740 (loss) -233,709 (loss) -57.4 46.0 11.00 3/10 7,517,277 (-11) 311,609 (profit) 207,747 (profit) 42,390 (profit) 10.4 99.5 0.00 3/11 8,773,093 (17) 537,467 (72) 537,814 (159) 319,221 (653) 76.4 165.5 10.00 3/12 E 9,110,000 (4) 510,000 (-5) 500,000 (-7) 310,000 (-3) 74.1 160.2 20.00 3/13 E 9,540,000 (5) 640,000 (25) 640,000 (28) 400,000 (29) 95.6 184.1 25.00 3/14 E 10,550,000 (11) 820,000 (28) 830,000 (30) 524,000 (31) 125.3 218.5 32.00 3/12 CP 9,450,000 (8) 510,000 (-5) 480,000 (-11) 290,000 (-9) 69.3 - 20.00 3/12 PCP 9,400,000 (7) 460,000 (-14) 441,000 (-18) 270,000 (-15) 64.5 - 20.00 Note: E: Daiwa forecasts, CP: company projections, PCP: previous company projections

Nissan: cash flow (¥bn) FY08 FY09 FY10 FY11 E FY12E FY13E Cash flow from operating activity 890.7 1,177.2 667.5 674.9 794.5 803.1 Automobile business 40.0 707.5 614.5 643.0 659.0 1,168.0

Pre-tax income -248.6 61.5 382.7 393.0 549.0 738.0

Depreciation 450.4 402.0 411.2 400.0 410.0 430.0

Change in working capital -140.8 248.7 -10.1 -20.7 -26.5 -62.1

Equity-method income 1.4 50.6 -43.0 -25.0 -25.0 -30.0

Other -22.4 -55.3 -126.2 -104.3 -248.5 92.1

Financial business 850.8 469.7 53.0 31.9 135.5 -364.9

Cash flow from investing activity -573.6 -496.5 -331.1 -587.3 -676.0 -716.0 Automobile business -291.7 -332.0 -155.3 -433.9 -510.0 -450.0

Fixed-asset purchases -376.6 -272.9 -263.7 -410.0 -410.0 -450.0

Other 85.0 -59.1 108.5 -23.9 -100.0 0.0

Financial business -281.9 -164.5 -175.9 -153.3 -166.0 -266.0

Cash flow from financing activity -135.0 -664.0 110.6 -312.9 -398.7 -356.2 Automobile business 423.9 -351.4 -19.5 -22.6 -290.0 -329.0

Change in short-term debt 225.6 -507.8 153.4 -237.7 -240.0 -229.0

Change in long-term debt/bonds 378.0 189.5 -114.6 215.1 -50.0 -100.0

Dividend payment -130.9 -2.8 -24.0 -65.9 -95.2 -124.4

Other -48.9 -30.3 -34.2 65.9 95.2 124.4

Financial business -558.9 -312.6 130.1 -290.4 -108.7 -27.2 Forex translation adjustments -27.8 -2.2 -60.3 0.0 0.0 0.0 Free cash flow 317.1 680.7 336.4 87.6 118.6 87.1 Free cash flow from automobile business -251.7 375.5 459.3 209.1 149.0 718.0 Source: Company, Daiwa forecasts

- 10 - Trading Places 1 5 January 2012

Nissan: balance sheet (¥bn) FY08 FY09 FY10 FY11 E FY12E FY13E Total assets 10,239.5 10,214.8 10,736.7 10,394.4 10,496.9 10,854.9 Current assets 5,279.4 5,580.4 6,345.8 5,975.3 6,037.8 6,335.9

Cash and cash equivalents 632.7 802.4 998.8 739.1 732.1 734.1

Accounts receivable 429.1 641.2 739.0 767.3 803.5 888.6

Finance receivables 2,710.3 2,645.9 2,746.8 2,646.0 2,631.2 2,729.1

Inventories 760.1 802.3 982.2 1,020.0 1,068.1 1,181.2

Other 747.3 688.7 879.0 802.9 802.9 802.9

Fixed assets 4,960.2 4,634.4 4,390.9 4,419.1 4,459.1 4,519.1

Tangible fixed assets 4,110.0 3,858.1 3,637.0 3,687.0 3,727.0 3,787.0

Investments and other assets 850.1 776.3 753.8 732.0 732.0 732.0

Total liabilities 7,313.5 7,199.7 7,462.9 7,041.8 6,796.1 6,700.4 Current liabilities 3,988.7 3,856.9 4,380.5 3,811.6 3,565.9 3,420.1

Accounts payable 621.9 1,001.3 1,181.5 1,226.8 1,284.7 1,420.8

Short-term borrowings 2,291.5 349.4 593.1 1,437.2 1,133.6 851.9

Lease obligations 71.4 65.0 77.6 58.5 58.5 58.5

Other 1,003.9 2,441.2 2,528.4 1,089.0 1,089.0 1,089.0

Long-term liabilities 3,324.8 3,342.9 3,082.4 3,230.2 3,230.2 3,280.2

Bonds 595.3 507.1 640.9 600.0 600.0 600.0

Long-term borrowings 1,700.0 1,792.0 1,422.5 1,650.0 1,650.0 1,700.0

Lease obligations 105.5 86.6 67.1 67.1 67.1 67.1

Other 923.9 957.2 951.9 913.1 913.1 913.1 Total shareholders' equity and net assets 2,926.1 3,015.1 3,273.8 3,352.6 3,700.8 4,154.6 Shareholders’ equity 3,556.5 3,599.0 3,981.5 4,031.9 4,339.9 4,742.6

Valuation and translation adjustments -930.8 -891.6 -1,040.1 -1,040.1 -1,040.1 -1,040.1

Non-controlling interests 298.3 305.4 330.0 360.8 401.0 452.1 Book value per share (Y) 644.6 663.9 703.2 715.2 788.8 885.1

FY08 09 10 11 E 12 E 13 E Automobile business: total assets 5,600.7 5,858.9 6,322.4 6,168.2 6,283.6 6,541.8 Current assets 2,189.8 2,572.9 3,197.5 3,009.8 3,085.2 3,283.4

Cash and cash equivalents 621.8 795.4 977.6 719.7 710.8 712.4

Accounts receivable 428.9 640.8 738.7 766.8 802.1 886.8

Finance receivables -89.9 -72.4 -45.7 -44.0 -43.8 -45.4

Inventories 734.4 782.1 964.3 1,004.8 1,053.5 1,167.1

Other 494.7 426.9 562.5 562.5 562.5 562.5

Fixed assets 3,410.9 3,286.0 3,124.9 3,158.4 3,198.4 3,258.4

Tangible fixed assets 2,770.0 2,641.7 2,487.1 2,537.1 2,577.1 2,637.1

Investments and other assets 640.9 644.4 637.8 621.3 621.3 621.3

Automobile business: total liabilities 3,097.9 3,275.8 3,468.2 3,246.9 3,014.1 2,818.6 Current liabilities 1,693.2 1,830.6 2,216.1 1,846.1 1,663.3 1,567.7

Accounts payable 597.0 974.9 1,133.3 1,180.9 1,238.1 1,371.5

Short-term borrowings 126.9 -240.0 -122.3 -360.0 -600.0 -829.0

Lease obligations 71.2 64.8 77.5 58.4 58.4 58.4

Other 898.2 1,031.0 1,127.7 966.8 966.8 966.8

Long-term liabilities 1,404.7 1,445.2 1,252.1 1,400.9 1,350.9 1,250.9

Bonds 298.0 270.0 370.0 340.0 340.0 340.0

Long-term borrowings 507.9 587.4 304.9 550.0 500.0 400.0

Lease obligations 105.3 86.2 66.9 45.3 45.3 45.3

Other 493.6 501.5 510.3 465.6 465.6 465.6 Source: Company, Daiwa forecasts

- 11 - Trading Places 1 5 January 2012

Japan Auto Sector in a global context

Global comparison

Auto companies globally: valuation comparison Company Bloomberg Share price) Daiwa Mkt. cap Price change (%) EV/ EBITDA (x) PER (x) PBR (x) P/CF (x) ROE (%) code (Local curr.) rating (US$m) 1M 3M 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E US

FORD MOTOR (F US) 10.7 Hold 40,509 5.6 10.8 9.2 8.1 5.8 6.8 5.0 2.3 4.7 4.9 89.6 33.5 GENERAL MOTORS (GM US) 20.3 Hold 31,792 (2.0) 0.4 1.8 1.7 5.2 5.2 0.8 0.7 94.5 7.2 21.2 17.0 Europe

DAIMLER AG (DAI GR) 33.6 Not rated 46,877 11.7 3.4 7.0 7.3 6.5 7.0 0.9 0.8 4.3 4.0 14.2 12.5 BMW AG (BMW GR) 52.6 Not rated 43,897 2.9 (0.2) 6.4 7.0 6.9 7.6 1.2 1.1 3.7 3.9 19.8 15.5 VOLKSWAGEN (VOW GR) 104.5 Not rated 66,710 (1.4) 12.1 5.6 5.7 5.4 5.8 0.8 0.7 2.4 2.9 22.6 13.7 Japan

HONDA MOTOR* (7267 JP) 2,325 Buy 53,946 4.7 2.2 11.4 7.1 13.5 7.6 0.9 0.9 6.8 4.8 7.0 11.8 NISSAN MOTOR* (7201 JP) 692 Buy 40,071 5.5 7.6 6.6 5.4 9.3 7.2 1.0 0.9 4.3 3.8 10.4 12.7 TOYOTA MOTOR* (7203 JP) 2,496 Outperform 110,236 3.4 (5.0) 15.2 10.6 18.6 10.7 0.8 0.7 6.8 5.3 4.1 6.9 China

SAIC (600104 CH) 13.7 Not rated 19,914 (7.8) (13.4) 3.6 3.1 7.3 6.3 1.6 1.3 4.9 3.8 22.1 21.4 DONGFENG MG (489 HK) 13.4 Buy 14,771 16.6 17.4 4.3 3.9 10.6 9.7 2.4 2.0 7.1 6.1 25.3 22.2 GUANGZHOU AG (2238 HK) 6.5 Underperform 5,096 (6.5) (8.9) 3.3 2.7 9.8 8.2 1.4 1.2 6.5 5.2 14.8 15.6 Korea

KIA MOTORS* (000270 KS) 68,100 Buy 23,633 (5.9) (4.9) 5.9 4.7 6.7 5.3 1.9 1.5 7.1 7.7 33.2 31.8 HYUNDAI MOTOR* (005380 KS) 213,500 Buy 40,757 (3.2) 3.1 5.4 5.1 7.2 6.6 1.2 1.0 4.7 4.6 23.2 20.5 Industry average 40,257 1.4 1.1 6.9 5.9 8.7 7.3 1.6 1.2 12.9 5.7 24.0 18.5

Source: Bloomberg, * Daiwa forecasts Note: share prices are as at 22 December 2011, except for US automakers (as at 21 December 2011)

PBR and ROE: Japan and Korea automakers vs. peers globally

(PBR, 2012E, x ) 2.2 Dongfeng

1.8 Overvalued

Kia 1.4 SAIC Guangzhou

BMW Undervalued 1.0 Honda Toyota Daimler HMC Nissan VW 0.6 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 (ROE, 2012E, % ) Source: Bloomberg, Daiwa forecasts Note: Share prices are as at 22 December 2011.

- 12 - Trading Places 1 5 January 2012

Automakers globally: Japan and Korea automakers: Global market share trend

(%) 12 11.7 11.5 11 10.6 10 10.0 SY: pre-job-swap 9 8.8 8 8.1 7.7 7 thoughts 6.7 6.3 6 5.9 5.6 5.55.6 5 5.4 5.0 Can Japan’s Big 3 reclaim their glory? 4 4.3 2008 2009 2010 2011E Toyoya Honda Nissan HMC/Kia

Where do they stand in the global Source: JD Power, Automotive News, Daiwa auto industry?

For an industry that makes more than 70m cars and Why have they not fared well? trucks globally, employs millions of people, whose products are responsible for almost half of the world’s Setting aside the obvious negative impact of the tragic oil consumption, and the manufacturing of which uses March earthquake in Japan and the Thai floods in 2011 nearly half of the world’s annual output of rubber, 30% on the Japan automakers, what have been the main of its glass and 20% of its steel, the competitive reasons for the Big 3’s declining global market shares landscape is not just fierce, but could change in the and weaker earnings over FY07-10. blink of an eye. Over the past three years, the combined global For the automakers that have aligned their internal shipments of the Big 3 Japan automakers declined by competencies, or key activities, in their value chain 2.0% on a cumulative-average-growth-rate (CAGR) (R&D, design, parts procurement, manufacturing and basis. sales) with what I regard as the key industry drivers – stronger business growth in emerging markets, the The main factor for this was undoubtedly the sharp emergence of more safety features, flexible cost appreciation of the Yen, which resulted in weaker price structures (module assembly, platform integration etc) competitiveness, and was also fuelled by a relatively and fuel-efficient power trains (engines) – the past weak new model cycle for volume cars (cars that sell decade has been successful. well) for volume segments as well.

The Big 3 Japan automakers have certainly been at the Yen against major currencies forefront of aligning their internal competencies with 20% the key industry drivers over the past two decades, 10% striving to deliver the best products and setting Depreciation of Yen 0% standards with their ‘Kaizen’ (continuous product- Appreciation of Yen quality improvement) and ‘just in time’ (JIT) (10% ) approaches. (20% ) (30% ) Although the past two years have been devastating for (40% ) the Japan automakers amid a stronger Yen against all (50% ) the major currencies, product-quality issues, and (60% ) catastrophic events such as Japan’s earthquake and the 1/12/2007 1/12/2008 1/12/2009 1/12/2010 1/12/2011 Thai floods, the Big 3 Japan automakers combined are W US$ € still set to command a 20% global market share for Source: Bloomberg FY11, based on our FY11 global auto industry sales forecast of 75.7m units (+4.3% YoY). We forecast: Toyota (+1.8% YoY), Honda (-7.6% YoY) and Nissan (+9.8% YoY) FY11 worldwide unit sales of 7.44m units, 3.25m units and 4.27m units, respectively.

- 13 - Trading Places 1 5 January 2012

Japan’s Big 3 automakers: new model launches (FY07-10) and implementing Toyota’s ‘perfectionist approach’ on (’000 vehicles) 2007 models 2008 models 2009 models 2010 models a worldwide basis. Toyota

Passenger Toyota Yaris Toyota Corolla/Matrix Prius(HEV) vehicles (Small) (Small) Ultimately, the shortage of skilled labour to transfer the Lexus LS Lexus HS250h Scion xB (Small) knowledge-base at its overseas plants, together with (Luxury) (HEV) Scion xD (Small) what I believe was an element of weaker integration

Tundra Toyota Highlander Toyota 4Runner technology for assembling parts in a systematic way at Light trucks Lexus RX (CUV) (Pickup) (CUV) (SUV) its overseas plants, led to Toyota’s perceived fall from Toyota Sequoia Toyota Venza Lexus RX (CUV) grace. (SUV) Toyota Land Cruiser Lexus GX (SUV) (SUV) Following the woes from the recall crisis in the US, Toyota Lexus LX (SUV) Toyota’s global-market share and profitability fell Sienna(VAN) Honda significantly over the past three years.

Passenger Honda Fit Honda Accord Honda Fit (Small) vehicles (Small) (Middle) Toyota’s global market share declined to 10.6% in FY10 Insight(HEV) from a peak of 12.7% in FY07, while its operating profit Acura TSX (Luxury) margin declined to 2.5% from 8.6% during the Honda CR-V Light trucks Honda Pilot(CUV) Acura ZDX (CUV) corresponding period. Also, the company’s market cap (CUV) has declined by 61% to about ¥7.8tn currently from Acura MDX Accord CrossTour (CUV) (CUV) ¥21.6tn as at the end of 2007. Acura RDX (CUV) Although Honda has fared much better than Toyota as: Nissan

Passenger 1) it has a strong market presence in volume cars (cars Altima (Middle) Maxima (Middle) Cube (Small) vehicles that sell well) for volume segments (compact cars: Nissan Sentra Nissan GTR Nissan 370Z Civic/mid-sized cars: the Accord/entry-size SUV: the (Small) (Speciality) (Speciality) CRV, for which its combined shipments equated to Infiniti G35 (Luxury) 50% of its FY10 global shipments of 3.51m units), 2) it Nissan Versa has the lowest proportion of vehicles produced in (Small) Japan (26% for Honda versus 41% for Toyota and 28% Light trucks Nissan Murano (CUV) Infiniti FX(CUV)

Nissan Rogue (CUV) for Nissan), partially offsetting the negative impact of a

Infiniti EX(CUV) stronger Yen, and 3) it puts more emphasis on platform

Source: Daiwa integration, it also bore the brunt of having the highest sales exposure to the US market (42% of its FY10 global Of the Big 3, Toyota suffered the most with its recall shipments of 3.5m units) during the global financial crisis in 1Q10, putting a big dent in its brand equity. crisis and recorded a decline in its US market share, due to less competitive products (eg, the Civic) in 2011. For an automaker that stood out the most, led the pack and set higher standards in the global auto industry Japan automakers: forex sensitivity analysis with its Kaizen and JIT approaches, the past three OP forecasts Impact on op profit of ¥1 change years have indeed been devastating. (FY12E) $ € C$ A$ Nissan Motor 640.0 18.0 0.0 1.6 2.0 Isuzu Motors 114.0 0.5 - - 0.3 The CEO of Toyota Motor, Mr. Akio Toyoda, the Toyota Motor 840.0 35.0 6.0 1.0 3.0 grandson of the founder, acknowledged that the root- Hino Motors 47.0 0.7 - - 0.2 cause of the recall crisis stemmed from the company Mitsubishi Motors 67.0 2.0 1.0 0.2 1.3 Mazda Motor 26.0 2.5 1.5 0.8 1.2 not being able to keep its product-quality standards up Daihatsu Motor 121.0 0.7 0.0 - - in line with its rapid production growth worldwide – Honda Motor 640.0 15.0 0.8 0.2 0.2 the company had aimed to increase its global Suzuki Motor 135.0 0.8 0.8 0.1 0.1 production capacity to nearly 10m units; however, this Fuji Heavy Industries 55.0 5.5 0.3 0.3 - plateaued at 8.2m units in FY10. Yamaha Motor 65.0 2.0 0.4 0.2 0.1 Total (excl. Hino, 2517.0 79.3 10.4 4.2 8.1 Daihatsu, Yahama) In my opinion, Toyota’s ‘perfectionist approach’ fell Our currency assumptions (¥) 76.0 106.0 76.0 79.0 apart because the company had been relying heavily on Source: Companies, Daiwa forecasts; note: OP forecasts are in ¥bn a skilled labour force rather than adopting modularisation. With an aging population in Japan, On the other hand, once regarded as the weakest Toyota was not able to secure and dispatch a sufficient automaker of the Big 3 Japan automakers and after number of skilled employees, who had been presiding being acquired by Renault Motors when on the verge of bankruptcy, Nissan has been shifting up a gear with its: - 14 - Trading Places 1 5 January 2012

1) strong presence in China, 2) more competitive Automakers’ globally: relative share-price performance (2007- products, 3) continuous efforts to improve its cost- 2011 YTD) structure, and 4) strong management leadership by (% ) 360 CEO Carlos Ghosn. 320 280 240 This is clearly evident in its share-price performance as 200 160 well, given that its market cap has grown the most out 120 80 of the Big 3 Japan automakers over the past three years. 40 0 (40) Japan and Korea automakers: global market share (FY08- (80) 11E) Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 (%) Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 11.7 11.5 12 HMC Kia Toyota Honda 10.6 Nissan Ford Daimler BMW 11 10.0 VW SAIC 10 Toyota Source: Bloomberg 8.1 8.8 9 7.7 HMC/Kia 8 6.7 7 6.3 5.6 5.9 6 5.6 Nissan Can they improve? 4.3 5 5.4 5.5 5.0 Honda 4 The prevailing question here obviously is whether the 2008 2009 2010 2011E Japan automakers can improve structurally and Toyota Honda Nissan HMC/Kia reclaim their past glory. Source: JD Power, Automotive News, Companies, Daiwa While I agree with the market view that the worst for Japan and Korea automakers: ROE and operating-profit the Japan automakers is largely behind them, and that margin (FY07-10) from such a low base they can only do better in terms (%) Return On Equity (%) of their shipment outlooks globally, especially taking 40 into account the Big 3 Japan automakers’ brisk new

30 Kia model cycle from 2012, I’ve had doubts (from a structural perspective) as to whether they can reclaim 20 Hyundai Honda their former ‘crowns’. 10 Nissan Toyota 0 Big 3 Japan automakers: new model launch schedule 4Q11 2012 (10) Plug-in Prius / Prius c / FR-S / Lexus ES / Lexus IS / Scion 2007 2008 2009 2010 Toyota Yaris /Lexus GS xD / Highlander / RAV4 EV CR-V / Fit EV / Accord / Acura MDX / Acura TL / Acura Nissan Toyota Honda Honda RDX Hyundai Kia Nissan Versa Sentra / Altima / Infiniti JX / Pathfinder / NV200

Total 3 models 19 models Sources: Automotive News and others; complied by Daiwa (%) Operating Profit Margin (%) 10 Setting aside the critical nature of a stronger Yen for Hyundai 8 Kia the Japan automakers, I had been asking myself, before 6 Honda the Trading Places project, whether they could improve 4 Nissan their cost structures, to the extent that Hyundai Motor Toyota 2 Group has achieved, within the next 2-3 years. 0 (2) Assuming they already have the brands and dealerships, (4) the old cliché is that for any automaker in the world to 2007 2008 2009 2010 become profitable, it has to sell many cars. And Nissan Toyota Honda ‘platform integration’ plays an integral role in this part. Hyundai Kia Source: Companies, Daiwa

- 15 - Trading Places 1 5 January 2012

Automakers globally: platform-integration schedules HMC: 2013 platform (number of models per type of platform)

# of platforms 25 25 23 20 20 18 20 17 Mass Production 14 15 15 9 10 8 6 6 10 5 5 5 Niche Mar ket 0 Toyota GM Volkswagen Honda Hyundai Motor 0 Group 2005 2013E Small Mid-size Large Coupe Frame SUV LCV

Source: Companies Source: Company, Daiwa forecasts

‘Platform integration’ is certainly not a new concept in My initial thoughts as to whether Toyota can the global auto industry and, bearing in mind that implement this type of successful ‘platform integration’ companies like General Motors (GM)(GM US, US$20.3, are that it cannot at this juncture, as it has not adopted Hold [3]) nearly went bankrupt partly because they a modularisation policy and has kept module assembly didn’t do it very well, has been an area of particular in house amid fears that its technological secrets will be interest for many automakers over the past decade. leaked and the potential it will lose pricing power.

Platform integration can be defined as manufacturing As a result, Toyota does not have an in house module- various models with an integrated body that have assembler or Tier-I suppliers, like Mobis for HMG and similar frames and modules (front, chassis and cockpit Faurecia (Not rated) for front-end modules, Brose and modules) and essentially differentiating products by Magna International (Not rated) for door modules and through the use of engines and transmissions. Johnson Controls (Not rated) for cockpit modules, all Apart from Volkswagen Group (VW), which produces of which supply VW. This is also due, in our view, to nearly 5m units (63% of its 2011 global shipment target Toyota’s rigid and conservative corporate culture. of 8m units) from its Golf platform, Hyundai Motor Group (HMG) has been on the forefront of this from To gauge whether the Japan automakers, especially 2006 and, as a result, I estimate that the group saves Toyota, could stage a fully-fledged structural recovery, nearly US$2bn per annum through platform I focused on the following areas during my job swap. integration – which consists of modularisation through 1. Are the Japan automakers considering ways to Hyundai Mobis (Mobis) (012330 KS, W301,000, improve their cost structures through platform Outperform [2]) and using similar parts for each integration, module assembly and increasing the module. parts commonly used within each platform?

HMG, unlike any other automaker in the world, has 2. If so, when would the positive impact from an succeeded in platform integration due to a combination improved cost structure feed through to its P&L? of: 1) members of the R&D division participating in 3. I assess whether the new products from the Japan nearly all the primary activities within the value chain automakers have been upgraded to the extent of (design, sourcing and manufacturing, 2) scale was those of HMC/Kia, in terms of design and fuel- relatively manageable, with combined global sales of efficiency, to gauge whether their market shares HMC and Kia of only 3.5m units when it started out in could increase over the long term. 2006, and 3) successfully sharing a proportion of automobile parts between each model, with the 4. What are the competitive advantages of each of the percentage of parts shared between cars in each Big 3 Japan automakers that I could have potentially platform already reaching the maximum benchmark missed so far and whether these could help them (generally speaking) of 60-65%. reclaim their former glory? 5. Do they each have a viable and executable long-term strategy to increase the proportion of their overseas production and parts and reduce the number of domestic models, especially Toyota, and do they have the resources to implement this strategy successfully?

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Also, I agree that Honda would be my preferred pick on a 12-18-month view, considering its planned launch of global volume-sellers in the volume segments over the next six months, and given that Honda may upgrade its engines to a new gasoline-direct-injection (GDI) engine, which has proven to be more fuel-efficient with a better SY: Japan itinerary compression ratio.

I also met Daiwa’s Japan sales and sales trader teams, Who we met on the ground as well as clients. The goal was for me to gain a firsthand insight into how the Japan automakers are The Trading Places project started with our Japan auto perceived. I was surprised to hear about a mixed bag of analyst, Eiji Hakomori, coming to Korea in July and market perceptions regarding the Japan auto stocks. again in early October. Despite long funds selling out their positions on the I then spent five working days on the ground in Japan Japan automakers, I equally sensed that speculative from 21-25 November, during which I went to the buying was becoming more popular among the funds headquarters of both Toyota and Nissan, as well seeking short absolute returns. Honda’s main dealership. As described in the following table, I and Hakomori During my experiences with the Big 3 Japan spent five days in the following sequence for each automakers’ headquarters, I felt that Nissan had more destination. of a dynamic atmosphere and that its corporate culture bore the most resemblance (of the Big 3) to HMC’s Itinerary (quick decision-making and great execution capability). Date Schedule Counterparts 21 November (Monday) Nissan headquarters in Yokohama city IR team 22 November (Tuesday) Denso in Kariya city, near Nagoya city IR team As I expected, given my previous experience with Toyota factory tour in the morning and 23 November (Wednesday) IR team Honda Motor America in California, US, all the Japan headquarters, both in Toyota city automakers that I encountered during my week stay Internal brain-storming session with Hakomori in the morning and meeting with Japan sales and 24 November (Thursday) Colleagues were keen to learn as much as they could about HMC, sales traders at Daiwa's headquarters, near Tokyo especially its cost-competitiveness and the rapid station Spent a day at Daiwa's headquarters, near Tokyo improvements it has made in design and key product 25 November (Friday) Colleagues station features. Source: Daiwa

Meanwhile, I also had the opportunity to spend time with Hakomori at Daiwa’s headquarters in Tokyo, covering a broad spectrum of topics, including our top picks on a pan-Asia basis (allowing for different investment horizons), to discussions on investor views of the Japan and Korea automakers.

I agree that HMC remains our preferred pick over the next 3-6 months, given its stronger earnings prospects – a further acceleration in its global retail sales, rising ASP with continuous improvements in its product mix, as well as the positive impact of platform integration.

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Some of Toyota’s efforts to enhance productivity at its domestic factories are in evidence at the company’s new Miyagi plant.

Cars are placed on the production line side by side rather than the conventional tip-to-tail approach, so SY: on the ground in workers have much less ground to cover between cars. In addition, the assembly line uses quiet friction rollers Japan rather than chain-pulled conveyor belts to move pallets carrying cars, meaning that workers have to do less Contrary to my pre-job-swap perceptions, back-stepping. the Japan automakers appear to be Moreover, the facility uses raised platforms that are focusing vigorously on structural changes, 40-50% cheaper to install than the conventional though the outcome remains to be seen approach, whereby car chassis hang from the ceiling; the elevated platforms allow for lower ceilings, which also keep heating and cooling costs in check. Trading Places in Japan Toyota: enhancing productivity through raised platforms

The double-whammy of the March earthquake in Japan and the Thai floods may have put a dent in the Japan automakers’ profitability, as has a strong Yen.

However, throughout my experience in Japan, I learned that they are mulling ways to improve their cost structures by streamlining their manufacturing processes and putting more emphasis on overseas production to mitigate a more negative impact of a stronger Yen than I had previously expected.

Big 3 Japan automakers: will Toyota follow the other two auto plays in terms of reducing home-market production? Toyota Nissan Honda 70% 80% 80% 60% 70% 70% 50% 60% 60% 50% 50% 40% Source: Daiwa 40% 40% 30% 30% 30% 20% 20% 20% 10% 10% 10% 0% 0% 0% 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 Overseas Overseas Overseas Japan Japan Japan Source: Companies

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While I agree that green cars could emerge as long- term revenue-growth drivers for the Japan automakers, Hakomori’s view I think it would take a long time to penetrate this market, and do not expect any meaningful market- Meeting former Denso engineer raises share gains over the next five years. flags about Toyota’s product quality This mainly stems from a combination of: 1) fuel- During my stay in Tokyo, I met a former Denso engineer. efficiency measures by various governments until 2015 The engineer, who wished to remain anonymous, said can be met by the existing gasoline and diesel-based Toyota’s supply chain was very solid, but he had doubts power trains, 2) a lack of infrastructure for green-cars, about the company’s ability to integrate its parts and 3) above all, a very tough market in which to make technology to build a high-quality vehicle. money, making it less attractive for global players to

penetrate this business. According to the former engineer, Toyota’s strong perceived quality, which has been continuously praised Fuel-efficiency regulations in various markets during the past decade or two, is really the result of a good Country / Effective sourcing strategy, rather than its integration technology. Region Regulation year Requires automakers to raise the average fuel economy to 35.5 2016 miles per gallon. (15.0km/l) (Impose fines) US Furthermore, he was concerned about the company’s Requires automakers to raise the average fuel economy to 54.5 2025 recent moves to improve its cost structure by ‘de- miles per gallon. (23.4km/l) (Impose fines) 65% of each automaker's sales has to meet the CO2 emission contenting’. For example, for the new redesigned Lexus 2012 GS350, which is expected to arrive in US showrooms in allowance level of 130g/km. (Impose fines) EU Raise the bar to 75% 2013 February 2012, Lexus is using asphalt spray instead of Raise the bar to 85% 2014 laminate sheeting on the underbody to suppress noise Raise the bar to 100% 2015 Impose fines against the cars which fuel economies are below and recycled plastic instead of new for the protective 2020 20.3km/l. Japan cover beneath the engine. Expect to improve the average fuel economy in Japan by 24.1% from 16.3km/l in 2009. Impose fines against the cars which fuel economies are below But Toyota’s green-car strategy still Korea 2015 17.0km/l or CO2 emission over 140g/km. impresses Source: Various sources, complied by Daiwa Both Hakomori and I were surprised by these comments, but remained optimistic on the company’s Honda: highly geared up for a recovery in long-term earnings growth outlook, given its strong the US auto industry: our pan-Asia competitive advantage in ‘green cars’ – it has the preferred pick over the next 12-18 months highest number of patents on hybrid vehicles among From a stock recommendation standpoint, Hakomori the Big 3. and I agree that Honda could be our 12-18-month

preferred pick, given the launch of global volume Hakomori forecasts green-car demand (hybrid cars, sellers in volume segments, and especially for the US plug-in hybrid cars and electric vehicles) to reach 9.1m market over the next 12-18 months, such as the CR-V vehicles in 2020 (8.6% of our 2020 global auto (cross-over-vehicle, scheduled to be launched in industry demand forecast of 105.8m units from 72.2m January 2012) and the Accord (mid-sized sedan, vehicles in 2010) and looks for the Japan automakers scheduled to be launched in 3Q12). to lead the pack over the long term. This takes into consideration: 1) our positive outlook

Green-car demand outlook for US auto demand in 2012 and: 2) the fact that 42% of Honda’s FY10 global shipments of 3.5m units ('000 units) derived from the US market. 10,000

8,000 According to our US auto analyst, Takuo Katayama, the US auto market has an inherent demand of more than 6,000 15m units under normal conditions, since about 5.5% 4,000 of the 235m registered vehicles are scrapped annually

2,000 (12.9m units) and the US driving-age population (aged to 16-75) is growing at just under 1% per annum and 0 these people are likely to need cars (2.3m units). 97 98 99 00 01 02 03 04 05 06 07 08 09 10E11E12E13E14E15E 20E HEV PHEV EV

Source: Various materials, Daiwa forecasts

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As I see a very strong possibility of Honda upgrading Nissan: sales by region (FY10) its engines to the new GDI format, which has proven to Nissan 2010 sales be more fuel-efficient with a better compression ratio, this could bolster its US market share outlook for 2012. Japan 15.0%

US light vehicle demand outlook (SAAR basis) Others (’000 units) US light vehicle demand YoY (%) 35.0% 2005 16,948 0.5% 2006 16,504 -2.6% 2007 16,089 -2.5% 2008 13,195 -18.0% N.America 2009 10,402 -21.2% 33.0% 2010 11,555 11.1% 2011E 12,654 9.5% Europe 2012E 13,614 7.6% 17.0% 2013E 14,603 7.3% Source: Company Source: Ward's Auto, Daiwa forecasts Note: Light vehicles = Passenger cars + SUVs + Minivans + Pickups VW: sales by region (FY10) VW 2010 sales Honda has the highest sales exposure to the US auto market (of the major global Others Germany 16.4% 14.4% auto makers) N. America 7.6% Honda: sales by region (FY10) Honda 2010 sales

Others 7.6% Japan Asia 16.6% 29.8% Europe 31.8% Asia

28.7% Source: Company

Hyundai: sales by region (FY10) HMC 2010 sales N.America Europe 41.5% 5.6% Others Korea 20.1% 17.4% Source: Company Toyota: sales by region (FY10) Toyota 2010 sales

Others N. America 17.4% 17.9% Japan 26.2%

Asia 32.3% Europe 12.8% Asia 17.2% Source: Company

Europe N.America 10.9% 27.8%

Source: Company

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Where Hakomori and I differ in terms of As the Japan market appears to be a low-profitability analysing stocks one, with a mature car sector and customers’ preferences for mini and small-sized cars, one could Given that the Japan Auto Sector is a developed and imagine that this wouldn’t help the Japan automakers’ mature industry, and that the country has an ageing profitability outlook, especially considering the current population, the sales growth rate in the home auto strong Yen environment. market remains stagnant, and a market for small vehicles. For example, according to Hakomori, a young As a result, what I noticed having spent a few days in professional in Japan would like to drive a BMW-5 the office with Hakomori is that Japanese auto analysts series, but would rather purchase a BMW-3 series as tend to focus more on the cost side, and conduct the former is seen as a ‘corporate’ car. various scenario analyses rather than on the narrative

side of things and how to justify the valuation premium/ discount.

Projected impact of material-price fluctuations FY10 (¥86/US$)

Avg. quantity used Price (US$/t) Price change Impact Materials Assumptions (kg/unit) FY09 FY10 (¥/t) (¥/unit) Carbon steel 800 - - 9,750 -7,800 To decline ¥15,000/tonne YoY in 1Q, but rise ¥18,000/t YoY from 2Q Specialty steel 240 - - 9,750 -2,340 Aluminium 90 1,665 2,171 43,344 -3,901 Copper 11 5,148 7,539 204,813 -2,253 Avg. quantity used Price (US$/t) Price change Impact Precious metals Assumptions (g/unit) FY09 FY10 (¥/t) (¥/units) Rhodium 0.5 1,658 2,442 2,159 -1,080 Platinum 1.9 1,207 1,609 1,107 -2,104 Total impact from key materials -19,477 * 1 troy oz =31.1g FY11 (¥76/US$ from 3Q)

Avg. quantity used Price (US$/ t) Price change Impact Materials Assumptions (kg/unit) FY10 FY11E (¥/t) (¥/unit) Carbon steel 800 - - 14,250 -11,400 To rise ¥18,000/t YoY in 1Q, and rise ¥13,000/t YoY from 2Q Specialty steel 240 - - 14,250 -3,420 Aluminium 90 2,171 2,427 19,968 -1,797 Assume US$2,200/t from October 2011, to be reflected in prices with three-month lag Copper 11 7,539 8,819 99,840 -1,098 Assume US$7,500/t from October 2011, to be reflected in prices with three-month lag Avg. quantity used Price (US$/t) Price change Impact Precious metals Assumptions (g/unit) FY10 FY11E (¥/t) (¥/unit) Rhodium 0.5 2,442 2,071 -930 465 Assume US$1,800/t from October 2010, to be reflected in prices with three-month lag Platinum 1.9 1,609 1,738 324 -615 Assume $1,600/t from October 2010, to be reflected in prices with three-month lag Total impact from key materials -17,865 * 1 troy oz =31.1g FY12 (¥76/US$)

Avg. quantity used Price (US$/t) Price change Impact Materials Assumptions (kg/unit) FY10 FY11E (¥/t) (¥/unit) Carbon steel 800 - - -4,250 3,400 To rise ¥13,000/t YoY in 1Q, and decline ¥10,000/t YoY from 2Q Specialty steel 240 - - -4,250 1,020 Aluminium 90 2,427 2,200 -17,252 1,553 US$2,200/t Copper 11 8,819 7,500 -100,244 1,103 US$7,500/t Avg. quantity used Price (US$/t) Price change Impact Precious metals Assumptions (g/unit) FY10 FY11E (¥/t) (¥/unit) Rhodium 0.5 2,071 1,800 -662 331 US$1,800/troy oz Platinum 1.9 1,738 1,600 -337 641 US$1,600/troy oz Total impact from key materials -8,047 * 1 troy oz =31.1g Source: Daiwa forecasts

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Given that the business-growth profiles of Asia ex- I met the investor relations team at Nissan, and spoke Japan companies are more exciting, I believe Asia ex- about the following: Japan analysts tend to focus more on the key drivers of revenue growth, such as unit shipments, ASPs and 1. Mid-term plan ‘Nissan Power 88’ capacity-expansion plans. • In June 2011, Nissan’s CEO, Mr. Ghosn, unveiled the

company’s plan of capturing a global market share of The other thing that struck me was the number of 8% by FY16, (around 7.5m vehicles/year based on pages in Hakomori’s presentation material (more than Nissan’s market assumption, from 5.8% and 4.18m 100 pages just on the OEMs), which I think is a good vehicles in FY10) and an operating profit margin of example of Japanese analysts’ detail-orientated nature 8% by FY16, from 6.1% in FY10. compared with us, Asia ex-Japan, analysts, who tend to focus more on the bigger picture. • Nissan plans to achieve these targets by: 1) reinforcing its brand and sales prowess, 2) launching 51 new models in the next six years, and 3) What management said enhancing its global market coverage rate from 80% in FY10 to 92% in FY16 by boosting its presence in Nissan headquarters the emerging markets, among others. On the first day of my Trading Places assignment in • The company reiterated its strategy of expanding its Japan, I went to Nissan’s headquarters, in Yokohama city, electric vehicle and V-platform lines, and said it on the outskirts of Tokyo. would streamline its existing models, similar to the measures taken by other major global auto makers. Nissan’s headquarters in Yokohama city 2. Platform strategy • The company has reduced the number of platforms to seven from 14 over the past five years. • Currently, Nissan has a V-platform, B-platform, C- platform, D-platform, FR-platform, a platform for commercial vehicles, and an EV-platform, and will maintain these platforms for now. • The V-platform is a new global platform, specifically targeted at penetrating both the developed markets and emerging markets with small cars such as the Micra and Sunny. • With its new platform strategy, Nissan aims to increase average unit sales per vehicle to 110,000 by FY16 from 55,000 units in FY07.

3. Geographical sales mix • 1.35m units in the US, 1.25m units in China, 600,000 each for Japan and Europe currently. • The profitability of the China and US businesses are better than average, while earnings from the Europe business are lower as it focuses on smaller cars that are generally less profitable.

4. Value-chain integration between Nissan and Renault

Source: Daiwa • It’s been 12 years since the companies merged.

• Common-parts ratio is still very low, but should improve due to further improvements in its cost structure.

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• Nissan sources 80% of its auto parts from Japan This would indeed be a viable strategy, given that the parts manufacturers and the remainder from non- component prices of the Korea automakers, on Japan parts companies. average, are 15-20% cheaper than those of the Japan auto-parts makers. 5. Sourcing strategy Toyota city • Nissan aims to increase the amount of parts it sources from non-Japan auto-parts makers. On the third day of my job swap, Hakomori, Shiro Sakamaki, Daiwa Japan’s auto-parts analyst, and I • It aims to reduce its current net exposure to the went to Toyota city, near Nagoya, to go on a factory Japan auto-parts companies (¥1.59tn currently). tour and meet the investor relations team.

6. How does Nissan plan to achieve an Exhibition hall at Toyota’s headquarters: SY and Hakomori operating profit margin of 8% by FY16? • Nissan aims to increase its global retail sales by 600,000 each year for about the next five years. By FY16, it aims to sell 7.6m units, from 4.75m units in FY10. • Nissan aims to reduce its net exposure to the US Dollar, which would mitigate the negative impact on its earnings from a stronger Yen. • By improving its cost structure through sourcing more parts from non-Japan vendors.

7. What is Nissan’s competitive advantage? • Compared with the other Japan automakers, Nissan’s management is more diverse: of nine board members, four are not Japanese. Source: Daiwa

• Nissan’s corporate culture used to be very Exhibition hall at Toyota’s headquarters: SY and a tour guide bureaucratic, but this has changed dramatically into more of a silo organisation. • Well-diversified geographical sales mix and stronger competitive advantage in smaller cars.

8. Who are Nissan’s global competitors? • Volkswagen, Honda and Hyundai Motor.

My initial impression from my experience at Nissan is that its corporate culture is different to that of a typical Japanese company. I came away feeling that Nissan is less bureaucratic than its peers, as well as being a very decisive company with good execution capabilities.

Meanwhile, although I think Nissan’s ‘Power 88’ strategy is a bit bullish, I believe the company is on Source: Daiwa track to achieve similar targets (to those in Power 88) with its aim to focus more aggressively on emerging During the factory tour, I noticed one thing that markets, which is the main driver for global auto differentiated Toyota’s manufacturing methods to the demand, with its new V-platform, and also given its likes of HMC. Although I was aware of this before my strategy to increase its number of non-Japan auto- job swap, I did not realise how much the company parts makers, particularly in Korea. relies on skilled workers to assemble parts.

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For example, every one of Toyota’s workers manually • As part of Toyota’s strategy to regain market share assembles more parts than relying on modularisation. (after the product recalls, from 2009), it has lowered While I acknowledge that Toyota has aimed to achieve the manufacturer’s suggested retail price for the zero defects, the fact that so much work is done in Camry by 6%, although this depends on the trim the house seems peculiar to me; most of the company’s customer chooses. The LE-grade with four cylinders modules are assembled in sub-assembly lines after the retails at US$22,500. stamping, welding and painting processes, unlike most of the other automakers in the world. 3. Following the Japan earthquake and Thailand floods, what is Toyota’s current Although Toyota is keen to keep its core technologies in production status? house, having seen the production process and the reliance on skilled labour, I can’t help thinking the • Toyota restarted production at its Thailand plant on company might find it hard to maintain its reputation 21 November 2011. for quality products. • Domestic production is back at normal levels.

It also occurred to me that this might not be the right 4. What is Toyota’s strategy for each market, strategy to pursue when your global production has globally? already reached the 8m unit mark. In fact, no other major mass-market global automaker has pursued such • Toyota aims to recover its US market share to 15% in a strategy. 2012, from 13% in 2011, through the redesigned Camry (although this is well below the 17% in 2009 Bearing this mind, I met the investor relations team at when its market share plateaued, before the recall Toyota and asked the following questions. crisis). The company is looking for average monthly unit sales of the Camry to increase by 35% to 31,000 1. Why is Toyota not focusing on units in 2012, from 23,000 units in 2011. modularisation to the same extent as its • It is reassuring that the Camry has received major competitors globally? favourable reviews in US consumer reports in terms • To improve Toyota’s technology and maintain its of its interior fit and quality of the materials used, cost leadership. improved fuel economy and, above all, the 6% price cut to US$22,500 compared to the previous price of • This is also part of Toyota’s philosophy that ‘multi- US$23,965. These reviews are encouraging as the tasking’ is a priority to ensuring its workers become press has been critical of other Toyota and Honda more skilled. The company wants its workers to models lately. become more efficient and improve their skills. Only

highly motivated people can produce better quality The redesigned Camry’s specification vs. peers in the US work. Maker Toyota Honda Ford Model Camry 2012 Accord 2012 Fusion • Modules are mostly assembled in plants because the MSRP From $21,955 to $24,725 From $21,380 to $29,630 From $20,200 to $25,350 company doesn’t want to transfer its technology to Fuel 25 city/35 hwy mpg 23 city/34 hwy mpg 22 city/32 hwy mpg its vendors. The company believes this could work economy (L sedan, Basic model) (LX sedan, Basic model) (S sedan, Basic model) against it in terms of bargaining power over vendors. Measurements Measurements Measurements Width: 71.7 in. Width: 72.7 in. Width: 72.2 in. • That said, Toyota is considering ways to increase the Height: 57.9 in. Height: 58.1 in. Height: 56.9 in. parts commonly used between cars, increase the Length: 189.2 in. Length: 194.9 in. Length: 190.6 in. content used in modularisation and find innovative Engine & Performance Engine & Performance Engine & Performance ways to improve its cost structure. Base engine size: 2.5 L Base engine size: 2.4 L Base engine size: 2.5 L Cam type: DOHC Cam type: DOHC Cam type: DOHC Torque: 170 ft-lbs. @ Torque: 161 ft-lbs. @ Torque: 172 ft-lbs. @ 2. How is Toyota’s new Camry faring in the US 4,100 rpm 4,300 rpm 4,500 rpm Horsepower: 178 hp @ Horsepower: 177 hp @ Horsepower: 175 hp @ market and what is the sales target? Spec. 6,000 rpm 6,500 rpm 6,000 rpm DriveTrain Drivetrain Drivetrain • Currently, Toyota has an annual production capacity Drive type: front wheel Drive type: front-wheel Drive type: front-wheel for the Camry of 360,000 units per year in the US. drive drive drive Transmission: 6-speed Transmission: 5-speed Transmission: 6-speed • Toyota sold 230,000 units for 10M11, which automatic manual manual translates into an average of 23,000 units per month. Warranty Warranty Warranty Basic: 3 yr./36,000 mi. Basic: 3 yr./36,000 mi. Basic: 3 yr./36,000 mi. For 2012, Toyota is planning to increase this to Drivetrain: 5 yr./ 60,000 mi. Drivetrain: 5 yr./60,000 mi. Drivetrain: 5 yr./60,000 mi. 30,000-35,000 units per month. Free Maintenance: 2 Roadside: 5 yr./ 60,000 yr/25,000 mi. mi. Roadside: 2 yr./25,000 mi.

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Maker Hyundai Kia • It is also planning to introduce more fuel-efficient Model Sonata 2012 Optima (K5) 2012 MSRP From $19,695 to $26,345 From $19,500 to $26,500 petrol engines, but can’t provide further details at Fuel economy 24 city/35 hwy mpg 24 city/35 hwy mpg the moment. (GLS sedan, Basic model) (LX sedan, Basic model) Measurements Measurements While the benefits of a GDI engine are fuel-efficiency Width: 72.2 in. Width: 72.1 in. Height: 57.9 in. Height: 57.3 in. and more horse and torque power, the disadvantages Length: 189.8 in. Length: 190.7 in. are that they are very hard to make at a competitive Engine & Performance Engine & Performance cost. Thus, I am under the impression that Toyota is Base engine size: 2.4 L Base engine size: 2.4 L Cam type: DOHC Cam type: DOHC finding it difficult to make GDI engines under a Torque: 184 ft-lbs. @ 4,250 rpm Torque: 186 ft-lbs. @4,250 rpm Spec. competitive cost structure. Horsepower: 198 hp @ 6,300 rpm Horsepower: 200 hp @6,300 rpm Drivetrain Drivetrain Drive type: front-wheel drive Drive type: front-wheel drive Transmission: 6-speed manual Transmission: 6-speed manual Sales traders Warranty Warranty Basic: 5 yr./60,000 mi. Basic: 5 yr./60,000 mi. Drivetrain: 10 yr./100,000 mi. Drivetrain: 10 yr./100,000 mi. Global funds exposure to the Big 3 Japan Roadside: 5 yr./60,000 mi. automakers is low Rust: 5 yr./100,000 mi.

Source: Edmunds; Note: mi = miles On the fourth day of my job swap to Japan, I met our sales traders at the Japan desk. • For India, it believes that the positive impact of its strategic model in terms of pricing for the Etios will Both sales traders are very experienced, with more than feed through to sales in the country (3.5% market 15 years’ experience in the Japan market, and they share and 87,000 units in 2012, based on company mainly deal with global hedge and long-only funds. guidance). Toyota’s market share could expand further to 4.5%. The Etios diesel was launched in In the short term, the traders said clients are still September 2011. negative on the Japan auto stocks due to a combination • In China, Toyota’s market share has increased due to of a stronger Yen and because the car companies’ the recovery, and solid sales, of compact cars such as utilisation rates are not at full capacity because of the the Corolla and the Camry. For the 9M11, 124,000 Japan earthquake and Thailand floods. Corollas and 102,000 Camrys were sold. Combined 9M11 China sales were 612,000 units, compared In this context, they said the global hedge funds are with lower for 9M10. short on the Big 3 Japan auto names and that the trading flow has been very thin. • Toyota is trying to expand its dealerships to China’s second and third-tier cities. However, they also said that the negative impact of • For the 9M11, 96,000 units were sold in Russia production disruptions (earthquake and floods) (+153% YoY). The SUV Highlander was the largest appears to have been priced in, which could possibly contributor to 9M11 Russia sales. limit the downside potential over the short term.

5. Please elaborate on Toyota’s platform strategy They also said that the global funds, by and large, sold out on the Japan automakers a few months ago. • Toyota aims to reduce the number of platforms to 14 by 2015, from the current 16. Nissan is the least preferred of the three, • Its R&D-expense-to-revenue ratio is currently 4%, given that it has the highest sales exposure but Toyota may be able to reduce this if it to Europe implements a successful platform-integration In terms of client preference, the traders said that of strategy – such a strategy would reduce overall the Big 3, Honda is their top pick (strongly geared to a development time and expenses as well. recovery in the US auto market and long-term revenue- growth as a result of competitive advantage in the 6. Does Toyota have any plans to install GDI emerging markets), followed by Toyota (for its strong engines like HMC ? competitive advantage in hybrid cars), and then Nissan. • The company will continue to focus more on its hybrid electric vehicles (HEV), given its competitive advantage and because it believes its HEV could be a better way (than GDI) to improve fuel efficiency.

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To my surprise, the least preferred stock among 4. What are clients’ views on the auto-parts global funds, according to their view, was Nissan makers in Japan? Motor as it has the highest exposure in the troubled • In the short term, the Japan auto-parts makers European market and given that it is also part of could face problems in terms of gaining market Renault-Nissan Group. share, as the other auto-parts makers globally have caught up with them in terms of product Sales competiveness but lower prices. • In the long term, the Japan auto-parts makers will After meeting the sales traders, I met six salespeople recoup market share on the back of the high quality from our Japan desk, who deal mostly with global of their products. and top-tier Japanese investors, to ask them the following questions: 5. What do the salespeople think about the current Yen strength? 1. What is the current status of Daiwa clients’ • Flight to quality. Low-cost borrowing compared to exposure to the Japan auto names? other currencies. • Most Japan investors tend to buy auto, electronic • Government intervention will be limited, in our view. and commodity stocks, as they are the key sectors within the TOPIX. • The consensus view is that the Yen is a safer place to hide than other currencies, given the ongoing jitters • Despite concerns about the global economic from Europe. But it may take a while for the yen to downturn, most investors are more overweight on weaken. commodities/trading companies compared with autos/electronics, as the former have more exposure • Many Japan companies are interested in buying to the emerging markets compared with the latter. assets overseas. Bridgestone Corp (5108 JP, ¥1,700, Outperform [2]) has a strong track record in • The Pan-Asia accounts are more bearish on the acquiring overseas assets. Japan auto names, despite their cheaper valuations, as the Korea automakers tend to record stronger profitability (in general) than the Japan automakers. What’s next?

2. What do the Japan automakers need to do to During my experience in Japan, I looked into four areas increase their competitive advantage? to determine whether the Japan automakers would be • The Japan automakers are still superior in terms of able to reclaim their glory from a structural perspective: fuel efficiency, and they need to monetise this. 1) whether they have a viable and clear platform- integration strategy, 2) the competitiveness of new • The Japan automakers’ marketing capability is very models, in terms of design and fuel efficiency, 3) any poor, and a client, who works for a global Tier-I long-term competitive advantages that I could have long-only fund as a buy-side auto analyst, wants to missed, and 4) whether they have a viable and learn more about Samsung Electronics (005930 KS, executable long-term strategy of increasing the W1,052,000, Outperform [2]), which has better proportion of overseas production and parts, especially marketing. Toyota Motor (Toyota) (7203 JP, ¥2,496, Outperform

[2]). 3. Which of the Big 3 Japan auto plays are the

long-term funds interested in accumulating See Trading Places 3 for the key takeaways from my over the next five years? Japan experience, together with the implications for my • Toyota is client’s No.1’s long-term top pick, due to its view of the Korea auto stocks. competitive advantage in green energy (the HEV, EV markets). • Nissan is client No.2’s top pick due to its solid revenue growth, which stems from its competitive advantage in China, Brazil and India. • Nissan is client No.3’s top pick due to its stronger cost advantage (than its peers) from giving more orders to the non-Japan OEMs.

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HMC: share price and Daiwa recommendation trend Date 22/12/2011 28/07/2011 26/04/2011 15/11/2010 19/10/2010 13/05/2010 23/04/2010 Target price 300,000 330,000 300,000 230,000 200,000 180,000 160,000 Rating 1 1 1 2 2 2 2

Date 19/04/2010 21/01/2010 Target price 150,000 145,000 Rating 2 2

360,000 330,000 330,000 300,000 300,000 300,000 270,000 230,000 240,000 200,000 210,000 180,000 160,000 180,000 145,000 150,000 150,000 120,000 90,000 60,000 30,000 0 Jul-10 Jul-11 Oct-10 Apr-10 Oct-11 Apr-11 Jan-10 Jan-11 Jun-10 Jun-11 Mar-10 Mar-11 Feb-10 Feb-11 Dec-09 Aug-10 Sep-10 Nov-10 Dec-10 Aug-11 Sep-11 Nov-11 May-10 May-11

Target price (W) Closing price (W) Source: Daiwa

Kia: share price and Daiwa recommendation trend Date 22/12/2011 05/09/2011 29/07/2011 26/04/2011 28/03/2011 06/01/2011 15/11/2010 Target price 90,000 100,000 100,000 95,000 78,000 66,000 58,000 Rating 1 1 2 2 2 2 2

Date 29/10/2010 25/10/2010 24/09/2010 23/07/2010 25/05/2010 23/03/2010 29/01/2010 Target price 52,000 47,000 41,000 37,000 33,000 30,000 26,000 Rating 2 2 2 2 2 2 2

Date 29/12/2009 Target price 25,000 Rating 2 120,000 100,000 95,000 100,000 90,000 78,000 80,000 66,000 58,000 60,000 52,000 47,000 37,000 41,000 40,000 30,000 33,000 25,000 26,000

20,000

0 Jul-10 Jul-11 Apr-10 Apr-11 Oct-10 Oct-11 Jan-10 Jun-10 Jan-11 Jun-11 Feb-10 Mar-10 Feb-11 Mar-11 Dec-09 Nov-10 Dec-10 Nov-11 Aug-10 Sep-10 Aug-11 Sep-11 May-10 May-11 Target price (W) Closing price (W) Source: Daiwa

- 27 - Trading Places 1 5 January 2012

Mobis: share price and Daiwa recommendation trend Date 28/10/2011 26/04/2011 15/11/2010 28/10/2010 28/06/2010 28/04/2010 22/04/2010 Target price 400,000 450,000 270,000 235,000 200,000 180,000 165,000 Rating 2 2 3 3 3 3 3

Date 28/01/2010 Target price 155,000 Rating 3 480,000 450,000 400,000 420,000

360,000

300,000 270,000

240,000 200,000 180,000 235,000 180,000 155,000

120,000 165,000

60,000

0 Jul-10 Jul-11 Apr-10 Apr-11 Oct-10 Oct-11 Jan-10 Jan-11 Jun-10 Jun-11 Feb-10 Mar-10 Feb-11 Mar-11 Dec-09 Aug-10 Sep-10 Nov-10 Dec-10 Aug-11 Sep-11 Nov-11 May-10 May-11

Target price (W) Closing price (W)

Source: Daiwa

Samsung Electronics: share price and Daiwa recommendation trend Date 06/12/2011 28/10/2011 27/09/2011 07/07/2011 28/01/2011 22/12/2010 06/10/2010 Target price 1,200,000 1,100,000 1,000,000 1,100,000 1,200,000 1,100,000 970,000 Rating 2 2 2 2 2 2 2

Date 30/04/2010 07/04/2010 29/01/10 Target price 1,080,000 1,040,000 970,000 Rating 2 2 2 1,400,000 1,200,000 1,200,000 1,200,000 1,080,000 1,100,000 1,100,000 1,100,000 1,040,000 970,000 970,000 1,000,000 1,000,000

800,000

600,000

400,000

200,000

0 Jul-10 Jul-11 Apr-10 Oct-10 Apr-11 Oct-11 Jan-10 Jun-10 Jan-11 Jun-11 Mar-10 Mar-11 Feb-10 Feb-11 Dec-09 Aug-10 Sep-10 Nov-10 Dec-10 Aug-11 Sep-11 Nov-11 May-10 May-11

Target price (W) Closing price (W) Source: Daiwa

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Daiwa’s Asia Pacific Research Directory Hong Kong Regional Research Head Nagahisa MIYABE (852) 2848 4971 [email protected] Regional Research Co-head Christopher LOBELLO (852) 2848 4916 [email protected] Head of Product Management John HETHERINGTON (852) 2773 8787 [email protected] Head of Thematic Research; Product Management Tathagata Guha ROY (852) 2773 8731 [email protected] Head of China Research, Chief Economist (Regional) Mingchun SUN (852) 2773 8751 [email protected] Macro Economics (Regional) Kevin LAI (852) 2848 4926 [email protected] Regional Chief Strategist; Strategy (Regional) Colin BRADBURY (852) 2848 4983 [email protected] Head of Hong Kong Research; Regional Property Coordinator; Jonas KAN (852) 2848 4439 [email protected] Co-head of Hong Kong and China Property; Property Developers (Hong Kong) Automobiles and Components (China) Jeff CHUNG (852) 2773 8783 [email protected] Head of Greater China FIG; Banking (Hong Kong, China) Grace WU (852) 2532 4383 [email protected] Banking (Hong Kong, China) Queenie POON (852) 2532 4381 [email protected] Insurance Jennifer LAW (852) 2773 8745 [email protected] Capital Goods –Electronics Equipments and Machinery (Hong Kong, China) Joseph HO (852) 2848 4443 [email protected] Consumer, Pharmaceuticals and Healthcare (China) Hongxia ZHU (852) 2848 4460 [email protected] Conglomerate (Hong Kong, China) Peter CHU (852) 2848 4430 [email protected] Consumer/Retail (Hong Kong, China) Matthew MARSDEN (852) 2848 4963 [email protected] Head of HK and China Gaming and Leisure; Hotels, Restaurants and Leisure – Casinos Gavin HO (852) 2532 4384 [email protected] and Gaming (Hong Kong); Capital Goods – Conglomerate (Hong Kong) Internet (Hong Kong, China) Alicia HU (852) 2532 4180 [email protected] Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Eric CHEN (852) 2773 8702 [email protected] IT/Electronics - Semiconductor/IC Design (Taiwan) Ashley CHUNG (852) 2848 4431 [email protected] Regional Head of Materials; Materials/Energy (Regional) Alexander LATZER (852) 2848 4463 [email protected] Materials (China) Felix LAM (852) 2532 4341 [email protected] Head of Hong Kong and China Property; Property Developers (Hong Kong, China) Danny BAO (852) 2773 8715 [email protected] Property (Hong Kong, China) Yannis KUO (852) 2773 8735 [email protected] Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Mark CHANG (852) 2773 8729 [email protected] Small/Medium Cap (Regional) John CHOI (852) 2773 8730 [email protected] Head of Solar Pranab Kumar SARMAH (852) 2848 4441 [email protected] Telecommunications (Greater China) Alan KAM (852) 2848 4978 [email protected] Transportation – Aviation, Land and Transportation Infrastructure (Regional) Kelvin LAU (852) 2848 4467 [email protected] Transportation –Transportation Infrastructure; Capital Goods – Construction and Edwin LEE (852) 2532 4349 [email protected] Engineering (China) Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Dave DAI (852) 2848 4068 [email protected] Renewables (Hong Kong, China) Head of Custom Products Group; Custom Products Group Justin LAU (852) 2773 8741 [email protected] Custom Products Group Philip LO (852) 2773 8714 [email protected] Custom Products Group Jibo MA (852) 2848 4489 [email protected] Custom Products Group Kenji SERIZAWA (852) 2532 4159 [email protected]

South Korea Head of Research; Strategy; Banking/Finance Chang H LEE (82) 2 787 9177 [email protected] Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Sung Yop CHUNG (82) 2 787 9157 [email protected] Banking/Finance Anderson CHA (82) 2 787 9185 [email protected] Capital Goods (Construction and Machinery) Mike OH (82) 2 787 9179 [email protected] Consumer/Retail Sang Hee PARK (82) 2 787 9165 [email protected] Insurance Yumi KIM (82) 2 787 9838 [email protected] IT/Electronics (Tech Hardware and Memory Chips) Jae H LEE (82) 2 787 9173 [email protected] Materials (Chemicals); Oil and Gas Jihye CHOI (82) 2 787 9121 [email protected] Telecommunications; Software (Internet/Online Games) Thomas Y KWON (82) 2 787 9181 [email protected] Custom Products Group Shannen PARK (82) 2 787 9184 [email protected]

- 31 - Trading Places 1 5 January 2012

Taiwan Head of Taiwan Research; Strategy Alex YANG (886) 2 2345 3660 [email protected] Banking/Diversified Financials Jerry YANG (886) 2 8788 1696 [email protected] Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8780 5987 [email protected] IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps Christine WANG (886) 2 8788 1531 [email protected] IT/Technology Hardware (Handsets and Components) Alex CHANG (886) 2 8788 1584 [email protected] IT/Technology Hardware (PC Hardware - Panels) Chris LIN (886) 2 8788 1614 [email protected] IT/Technology Hardware (PC Components) Jenny SHIH (886) 2 8780 1326 [email protected] Materials; Conglomerates Albert HSU (886) 2 8786 2212 [email protected]

India Head of Research; Pharmaceuticals and Healthcare Kartik A. MEHTA (91) 22 6622 1012 [email protected] Deputy Head of Research; Strategy; Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 [email protected] All Industries Fumio YOKOMICHI (91) 22 6622 1003 [email protected] Automobiles and Components Ambrish MISHRA (91) 22 6622 1060 [email protected] FMCG; Consumer Percy PANTHAKI (91) 22 6622 1063 [email protected]

Singapore Head of Singapore Research Tony DARWELL (65) 6321 3050 [email protected] Quantitative Research Josh CHERIAN (65) 6499 6549 [email protected] Quantitative Research Suzanne HO (65) 6499 6545 [email protected] Banking (ASEAN) Srikanth VADLAMANI (65) 6499 6570 [email protected] Consumer; Food and Beverage; Small/Medium Cap (ASEAN) Pyari MENON (65) 6499 6566 [email protected] Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Adrian LOH (65) 6499 6548 [email protected] Property and REITs David LUM (65) 6329 2102 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Thematic Research Amy CHEW (65) 6321 3085 [email protected]

Australia Resources/Mining/Petroleum David BRENNAN (61) 3 9916 1323 [email protected]

The Philippines Head of the Philippines Research; Strategy; Capital Goods; Materials Rommel RODRIGO (63) 2 813 7344 ext 302 [email protected] Economy; Consumer; Power and Utilities; Transportation – Aviation Alvin AROGO (63) 2 813 7344 ext 301 [email protected] Property; Banking; Transportation – Port Danielo PICACHE (63) 2 813 7344 ext 293 [email protected]

- 32 - Trading Places 1 5 January 2012

Daiwa’s Office Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Securities Trust and Banking (Europe) PLC (Dublin Branch) Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

DAIWA CAPITAL MARKETS LIMITED HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, (03) 5555 3111 (03) 5555 0661 Tokyo, 100-6753 Daiwa Capital Markets America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, (49) 69 717 080 (49) 69 723 340 Federal Republic of Germany Daiwa Capital Markets Europe Limited, Paris Branch 127, Avenue des Champs-Elysées, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Milan Branch Via Senato 14/16, 20121 Milan, Italy (39) 02 763 271 (39) 02 763 27250 Daiwa Capital Markets Europe Limited, 25/9, build. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation (7) 495 617 1960 (7) 495 244 1977 Moscow Representative Office Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Europe Limited, Dubai Branch The Gate village Building 1, 1st floor, Unit-6, DIFC, P.O.Box-506657, (971) 47 090 401 (971) 43 230 332 Dubai, UAE. Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, (65) 6220 3666 (65) 6223 6198 Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, 150-876, Korea Daiwa Securities Capital Markets Co Ltd, Room 3503/3504, SK Tower, (86) 10 6500 6688 (86) 10 6500 3594 Beijing Representative Office No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower,1000 Lujiazui Ring Road, (86) 21 3858 2000 (86) 21 3858 2111 Pudong, Shanghai 200120, People’s Republic of China Daiwa Securities Capital Markets Co. Ltd, Level 8 Zuellig House, 1 Sliom Road, (66) 2 231 8381 (66) 2 231 8121 Bangkok Representative Office Bangkok 10500, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Capital Markets Co. Ltd, Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hanoi Representative Office Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

- 33 - Trading Places 1 5 January 2012

Disclaimer This publication is produced by Daiwa Securities Capital Markets Co. Ltd. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Capital Markets Co. Ltd. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Capital Markets Co. Ltd. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Capital Markets Co. Ltd., its parent, holding, subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Japan Daiwa Securities Capital Markets Co. Ltd and Daiwa Securities Group Daiwa Securities Capital Markets Co. Ltd and Daiwa Securities Group: Daiwa Securities Capital Markets Co. Ltd is a subsidiary of Daiwa Securities Group. Investment Banking Relationship Within the preceding 12 months, The Affiliates of Daiwa Securities Capital Markets Co. Ltd.* has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Patel Engineering (PEC IN); International Taifeng Holdings Limited (873 HK); Sihuan Pharmaceutical Holdings Group Limited (460 HK); Strides Arcolab Limited (STR IN); China Metal Resources Holding Limited (8071 HK); China 33 Media Group Limited (8087 HK); Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (SSREIT SP); SBI Holdings Inc. (6488 HK); Shunfeng Photovoltaic International Limited (1165 HK); Rexlot Holdings Limited (555 HK). *Affiliates of Daiwa Securities Capital Markets Co. Ltd. for the purposes of this section shall mean any one or more of: • Daiwa Capital Markets Hong Kong Limited • Daiwa Capital Markets Singapore Limited • Daiwa Capital Markets Australia Limited • Daiwa Capital Markets India Private Limited • Daiwa-Cathay Capital Markets Co., Ltd. • Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst: Sung Yop Chung

Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to:

1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets.

Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report:

1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity.

Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release.

The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next six months. "2": the security is expected to outperform the KOSPI by 5-15% over the next six months. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months. "4": the security is expected to underperform the KOSPI by 5-15% over the next six months. "5": the security could underperform the KOSPI by more than 15% over the next six months.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next six months. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next six months “Negative” means that the analyst expects the sector to underperform the KOSPI over the next six months

Additional information may be available upon request.

- 34 - Trading Places 1 5 January 2012

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

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United Kingdom This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Dubai This document has been distributed by Daiwa Capital Markets Europe Limited, Dubai Branch. Related financial products or services are intended only for professional clients and no other person should act upon it. Daiwa Capital Markets Europe Limited is duly licensed and regulated by the Dubai Financial Services Authority.

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Capital Markets Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Capital Markets Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.109 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association