Transportation equipment / 4 April 2014 Japanese report: 31 Mar 14

Chinese automobile market to China Research Trip mature; considerable, albeit (automobiles/auto parts) silent, shift confirmed  Chinese automobile sector in transition from growth to maturity; direction of sector to be decided over next five years  Demand to keep growing at annual 10% clip, buzz phrases are “regional small cities” and “automation”; future focus on possible changes in foreign investment rules amid export growth  Automation to progress sharply amid major impact on production costs from rising wages How do we justify our view?

Eiji Hakomori Meanwhile, in inland China, sales While the sales battleground moves to (81) 3 5555-7072 continue to grow due to so-called smaller cities in regional areas, a future [email protected] motorization. That said, Dah Chong slowdown in market growth is also Shiro Sakamaki Hong Holdings (1828.HK; DCH), which worth watching. As companies continue (81) 3 5555-7067 operates dealerships, including for to add capacity, efforts to fill the [email protected] Japanese brands, seems to be stuck supply/demand gap by ramping up

with a gross margin on new car sales of exports likely gain momentum,

just 2-3%. Both Dongfeng and especially among local automakers.  What’s new DCH plan to focus on after-sales service Automobile exports from China We visited China on a research trip and other peripheral businesses. currently total around 1 million 10-14 March. Our trip included also intends to units/year. However, as domestic factory tours and visits to auto parts accelerate development of dealerships demand already exceeds 20 million makers/local dealers. in fourth- to fifth-tier regional cities. In units, once automakers change to

our view, the front in the battle for lifting exports, China could become  What’s the impact higher sales will shift to smaller cities. a major auto exporter. The Chinese automobile market is in transition from being based on While price competition is cut-throat In that event, debate could progress assumptions of continuous growth of and cost-cutting involving auto parts about changing (1) restrictions on production/sales to a market preparing makers is urgent, labor costs are rising foreign investment (Chinese for maturity. We feel that the long-term by around 10% annually. In addition, government states that foreign direction of the Chinese automobile the government could rule that automakers’ equity interest in local sector will be determined during this temporary employees comprise less production is 50% max; generally quiet yet considerable shift. than 10% of a firm’s workforce speaking, joint ventures) and (2) the (increasing proportion of permanent 25% tariff on automobile imports. This We were struck that sector buzz phrases employees and making labor costs more development would stem from have changed to “regional small cities” fixed). In addition, some firms considerations recognized by the WTO for sales and “automation” for commented that securing workers in as posing damage to the domestic production. Given this, China’s unique when ramping up automobile industry, conflicting with foreign investment regulations (joint production is becoming harder China becoming a major automobile ventures have to be formed with local following increased employment exporter. The 50-50 firms for automobile assembly) opportunities in inland China. restriction will probably be reviewed. could be reviewed in the future. The companies we visited are  What we recommend Despite the issue of shadow banking pushing ahead with assembly line This report does not present any and other factors behind volatility, automation. To maintain lean cost revisions to our earnings forecasts many believe the Chinese automobile structures, it seems increasingly or investment ratings for individual market will grow by around 10% a year important that firms adopt firms. Of the Japanese companies for the time being. Although demand is initiatives and intensify their own whose Chinese subsidiaries we currently brisk in coastal regions efforts (not relying on cheap labor). visited, we have a 2 (Outperform) (maturing market), Dongfeng Nissan For auto parts makers, expanding rating on NHK Spring (5991) and a 3 Passenger Vehicle (subsidiary of Nissan sales beyond the group and (Neutral) rating on Nissan Motor Motor [7201]) thinks some customers increasing transactions with local and Keihin (7251). We have no are bringing purchases forward due automakers, amid some local rivals ratings on Unipres (5949), Akebono to fears of restrictions on the gaining momentum, will likely be Brake Industry (7238), or Toyoda number of new vehicle registration necessary for growth. Gosei (7282). plates authorized.

Important disclosures, including any required research certifications, are provided on the last two pages of this report.

China Research Trip (automobiles/auto parts) 4 April 2014

NHK-Uni Spring (Guangzhou) (NHK Spring [5991]) ···························P10 Table of contents, overview Has transactions with wide range of customers, centering on major Japanese automakers. We expect We visited the following Japanese-affiliated firms on further sales growth in the future and think significant our automobile sector research trip to China. (Listed in capacity additions will be necessary at some point. order of visit starting with automakers then auto parts makers.) Akebono Corporation (Guangzhou)

Dongfeng Nissan Passenger Vehicle (Akebono Brake Industry [7238]) ········ P12 (Nissan Motor [7201]) ·························· P3 Company eyes increasing disc brake shipments from 2.9 million units in 2013 to 6.3 million in 2016. In Firm is targeting y/y sales growth of 20% in 2014. addition to current mainstay customer Nissan Motor, Targeting small and mid-sized cities in its regional firm aims to diversity customers. strategy and increasing focus on the brand and SUVs in its product strategy. Unipres Guangzhou /Unipres Precision

Toyoda Gosei () Guangzhou (Unipres [5949])···············P14 (Toyoda Gosei [7282]) ··························P6 Auto body parts business at Unipres Guangzhou to continue expanding with a new base established in Competition is cut-throat, partly due to emergence of . Unipres Precision Guangzhou’s local auto parts supplier Minth Group (425.HK), but transmission parts operations likely to see sales to non- the company has been restructuring since 2011. customers increase through FY16. Pursuing increased sales beyond Motor group.

Jatco (Guangzhou) Automatic Transmission Dongguan Keihin Engine Management (Jatco [unlisted]) ································ P17 System (Keihin [7251]) ·························P8 Makes continuously variable transmissions, mostly for Local procurement rates up compared with our prior Dongfeng Nissan. By improving costs, the company visit in 2011. Coming up with initiatives aimed at aims for a leaner cost structure than at other bases, further localization, including construction of a including those in Japan and Mexico. technical center and increase in staff from Japan.

 Chart 1: Chinese Passenger Car Sales Volume (market has expanded 6-fold over past 10 years on volume basis)

(mil units)

20 50% 18 45% 16 40% 14 35% 12 30% 10 25% 8 20% 6 15% 4 10% 2 5% 0 0% CY04 05 06 07 08 09 10 11 12 13

Sales volume (left; shipment basis) Y/y (right)

Source: Marklines; compiled by Daiwa.

- 2 -

China Research Trip (automobiles/auto parts) 4 April 2014

Motor joined hands with only DFM. The partnership stands out in that it offers a wide range of line-ups Dongfeng Nissan Passenger through a single channel. Vehicle We recently participated in a plant tour hosted by the company. The visit offered us an opportunity to deepen Nissan Motor (7201) our understanding of the firm—it included a tour of the Huadu No.2 plant in Guangzhou (which came online in 1. Company overview, our visit 2012), updates on recent production/sales and Dongfeng Nissan Passenger Vehicle is the passenger strategies for 2014, and a Q&A session with the vehicle arm of Dongfeng Motor Co., Ltd. (DFL), which company president. was jointly established by Nissan Motor and Dongfeng Motor Corporation (DFM) in June 2003—DFM spun 2. Production off and contributed the commercial vehicle and other Dongfeng Nissan Passenger Vehicle’s annual output core businesses, while Nissan Motor invested the capacity for passenger vehicles as of 2013 was 1.07 equivalent value in cash (DFL is a consolidated million units. That year, the firm manufactured 1.24 subsidiary of Nissan Motor, which has a 50% stake in million units overall (up 7% y/y; including light it). commercial vehicles) including 947,000 passenger vehicles (up 25%). The Huadu plant has an output Japanese automakers that form joint ventures in China capacity of 670,000 units (small/mid-sized vehicles), generally do not take over existing businesses of local the Xiangyang plant 220,000 units (luxury ), and makers. DFL stands out in that it was established the Zhengzhou plant 180,000 units (SUVs, local brand based on DFM core businesses. Furthermore, while Venucia). A new plant with an annual output capacity major foreign makers tend to form joint ventures with of 150,000 units is set to be launched by end-2014 in more than one local firm (Shanghai /FAW- Dalian. Volkswagen Automobile; Tianjin FAW Toyota Motor/GAC Toyota Motor; Guangqi Automobile/ Automobile), Nissan

 Chart 2: Dongfeng Nissan Passenger Vehicle Established Jun 2003 Company overview Manufactures/sells Nissan Motor’s passenger vehicles; no. 5 market Business outline share among Chinese manufacturers for 2013, but jumped to no.4 from Ownership Nissan Motor: 50% Sep; top sales among joint ventures with Japanese automakers; actively markets local–brand vehicles Dongfeng Motor Corporation: 50% Position within group Equity-method affiliate of Nissan Motor (50% stake); equity-method Models Teana, Sylphy, Qashqai, others gains from Chinese bases estimated to make up 15-20% of Nissan assembled/marketed Motor’s total FY13 recurring profit Production capacity 1.07 mil vehicles/year (as of 2013) 400,000 at Huadu No. 1 plant, 270,000 at Huadu No. 2 plant Outline of our visit Tour of Huadu No. 2 plant hosted by company, business updates, Q&A Dalian plant due to open in 2014 (150,000 vehicles/year) session with company president No. of dealerships 670 (as of end-2013; does not include 524 second-tier dealerships with limited after-service capability)

Shipments and Market Share of Major Chinese Manufacturers (2013) Nissan Motor: Retail Sales by Region (2013) Company Sales volume (000 units) Market share (%) 1 Shanghai General Motors 1,575 10.0 Other Japan 2 Shanghai Volkswagen 1,525 9.7 18% 13% 3 FAW-Volkswagen Automobile 1,512 9.6 4 Motor 1,031 6.6 5 Dongfeng Nissan Passenger Vehicle 926 5.9 683 4.4 Europe 6 China 7 Great Wall Motor 627 4.0 13% 5,104,000 units 25% 8 FAW Toyota Motor 555 3.5 9 Dongfeng -Citroën Automobile 550 3.5 10 Automobile 549 3.5

North America 31%

Source: Company materials, interviews; compiled by Daiwa.

- 3 -

China Research Trip (automobiles/auto parts) 4 April 2014

he firm has two plants in Huadu, the No.1 plant with Japanese demonstrations. The firm also boosted an annual output capacity of 400,000 units and the profitability and confidence at dealers through No.2 plant with 270,000 units. The No.1 plant has two meticulous inventory management and a better production lines and output per line appears to be 45 method of arriving at sales targets. Furthermore, in units per hour. The No.2 plant, which we visited, has 2013 the firm launched local brand Venucia, only one production line, but its output is 60 units per introducing two models. Sales volume in 2013 slightly hour. Compact cars Sylphy and Tiida are exceeded the target, coming in a little above 100,000 manufactured at the plant. units and ranking top among joint-venture brands.

The No.2 plant achieves low cost, high efficiency  Chart 3: Quarterly Sales Volume of Passenger Vehicles production by combining state-of-the-art technology (000 units) Shipment volume (left) Y/y (right) and locally-procured facilities. Some 53% of the car 400 110% 150% 350 27% 100% body manufacturing (welding) process is automated. -4% 300 -16% 50% -38% -22% Compared to at least 95% in the plants in developed 250 0% economies (Japan, US), the plant is still labor intensive 200 302.4 -50% 223.9 despite the rise in personnel costs. Since 2010, the 150 228.3 -100% 179.8 171.4 Huadu plant appears to consistently be in the running 100 138.4 -150% 50 -200% for top spot in the plant competitiveness ranking 0 -250% within the -Nissan Alliance. The first one to Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec launch the production of Sylphy in Nissan Motor’s global operations, the plant is apparently starting to 2012 2013 support other plants in terms of technology and knowhow. Source: Company materials; compiled by Daiwa.

3. Sales in 2013 4. Future Sales Strategy In 2013, the passenger vehicle market expanded by Assuming 10% expansion of the overall market, the 23% y/y to 16.3 million units (our estimate). Sales in all firm aims to sell 1.1 million passenger vehicles (up inland Chinese provinces rose 20-30% y/y, while sales around 20% y/y) in 2014. It aims for third place in growth in many of the coastal regions returned to terms of market share over the medium term. In order above 10%. Demand growth in inland China continued to achieve sales expansion and a higher market share, to reflect the increasing take-up of automobiles. the company plans to focus on (1) offering attractive Meanwhile, the firm said that strong sales growth in products, (2) sales in small and mid-sized cities, and the maturing coastal areas may have been supported (3) brand power. by purchases brought forward by some consumers who were concerned that the government could impose Firstly, regarding offering attractive products, the firm restrictions on the number of new registration plates, aims to (1) achieve Venucia brand sales of around given that such restrictions were previously suddenly 130,000 units in 2014 and (2) strengthen its offerings effected. of SUVs, for which demand is growing. Among the firm’s SUVs, Qashqai is a hit product with annual sales Amid such a backdrop, the firm’s sales volume jumped of over 120,000 units. Meanwhile, the firm needs to 20% y/y, nearly as much as the overall market. As work on boosting X-Trail, which is slightly larger than shown in Chart 3, sales of Japanese automakers the Qashqai and saw sales volume of only 15,000 units plunged following the Senkaku Islands dispute that in 2013. arose in the Jul-Sep 2012 period. However, the firm’s  Chart 4: New X-Trail sales have been recovering y/y since Jul-Sep 2013. The firm, which ranked fifth in 2013 with a 5.9% market share, appears to have moved up a notch to fourth place since September, the same rank prior to the dispute.

In 2013, the market was solid overall, and demand continued to shift to SUVs. For Japanese makers, 2013 seems to have been a year in which they strove to recover from the impact of the islands dispute. The firm made efforts to regain customer trust by offering free guarantees for cars that were destroyed in anti- Source: Dongfeng Nissan Passenger Vehicle website. - 4 -

China Research Trip (automobiles/auto parts) 4 April 2014

Qashqai and X-Trail are scheduled to be revamped in Meanwhile, second-tier dealerships appear to be 2014. The new X-Trail, launched at end-March, is an mainly developed as branches by owners of first-tier urban SUV, more curved than the previous model, dealerships. Their business scope is smaller and which was more square. Square SUVs are generally maintenance and other functions are limited. However, unpopular in China as they remind consumers of they are easier to develop in areas with limited sales commercial vehicles, and urban curvy SUVs attract a scope. There seem to be few foreign automaker- greater following. affiliated dealerships in counties at present. Going forward, we expect the presence of foreign automobile Secondly, Dongfeng Nissan plans to shift its regional brands to be enhanced. focus to small and mid-sized cities. In 2012 it launched its so-called 100 cities program, through which it is  Chart 6: Dealership Numbers ramping up marketing in mid-tier regional cities. The 2010 462 72 program includes measures like NTSDF (Nissan 1st-tier dealerships 2nd-tier dealerships Technology Safety Driving Forum), whereby a caravan 2011 546 114 of three trucks packed with demonstration models and the like travel all over China to showcase the firm’s 2012 622 390 technology and safety performance using real cars. More than 100 such events are being held each year. 2013 670 524

Meanwhile, Dongfeng Nissan will kick off its 1,000 - 200 400 600 800 1,000 1,200 county project in 2014. In China, counties are administrative Source: Company materials; compiled by Daiwa. units smaller than major metropolitan areas. As Chart 5 shows, counties have outshone major metropolitan areas for Finally, brand power. Here, Dongfeng Nissan aims to average annual growth over the past three years, with improve its weaknesses in terms of name recognition growth sharper in smaller cities (third- to fifth-tier cities) and renown, while establishing outstanding superiority than in major cities (first- and second-tier cities). In other in terms of having a reputation for cutting-edge words, this is a project designed to strengthen marketing technology, one of its strong points. According to activities in small cities with high growth potential. market research, things that most contribute to improving brand power in China are, in order, how In contrast to the NTSDF program, comprising of three famous it is, high quality, advanced technology, safety, trucks travelling in one group, the N-Express program and popularity. for small cities is a small-scale technology and marketing event consisting of just one truck. Since its The company, a late comer, appears to lag rivals in terms of start in 2011, the program has been held with being famous, which has considerable sway on improving increasing frequency, totaling 2,084 times in 2013. consumer recognition and brand power. By such initiatives as casting a Chinese heart-throb actor to help advertise its  Chart 5: 3-year Average Market Share Growth by Area Teana model and signing a sponsorship deal with 30% Counties Major metropolitan areas 27.7% Guangzhou Evergrande, an Asian football tournament champion, the firm aims to become more well-known. 25% 18.0% 20% 15.4% Meanwhile, Dongfeng Nissan’s image of boasting 11.5% 15% cutting-edge technology appears to be producing better 17.7% results than at rivals, particularly helped by its 10% 14.7% 12.1% aggressive use of continuously variable transmissions 10.2% 5% 0.6% (CVT) in its vehicles. The company aims to give its 0% image a further boost through measures including low- -2.7% 1st-tier 2nd-tier 3r d-tier 4th-tier 5th-tier key awareness-building campaigns such as the already -5% Source: Company materials; compiled by Daiwa. mentioned NTSDF and N-Express initiatives. Note: Counties are administrative units smaller than major metropolitan areas. We would add that during our research trip we called On the dealership front, the company has sharply increased in at a Automobile dealership operated second-tier dealerships and, going forward, plans to increase by DCH prior to our visit to Dongfeng Nissan. the network of such dealerships in third- to fifth-tier cities. According to the dealership, transmission type is First-tier dealerships use the so-called 4S format, important when pitching quality to customers. This is which also offers maintenance and after-sales service. because among two-pedal transmissions, consumers Generally, these dealerships have a large business scale believe that CVT is a more advanced technology than and are suitable for mid-sized and big cities. regular automatic and dual-clutch transmissions. - 5 -

China Research Trip (automobiles/auto parts) 4 April 2014

 Chart 7: Toyoda Gosei’s Chinese Bases Est. Bases Products/main operations Toyoda Gosei (Shanghai) Dec 95 Tianjin Toyoda Gosei Functional parts, safety system products, interior & exterior parts Jan 00 Fuzhou Fu-Yue Rubber & Plastic Industrial Automotive sealing products Toyoda Gosei (7282) Nov 00 Tianjin Star Light Rubber & Plastic Automotive sealing products Apr 03 Toyoda Gosei Opto-Electronics (Shanghai) Sales of optoelectronic products Oct 03 Toyoda Gosei (Zhangjiagang) Safety system products 1. Company overview, our visit Nov 03 Toyoda Gosei (Zhangjiagang) Plastic Parts Interior & exterior parts Toyoda Gosei (Shanghai) Co. (hereafter TG Shanghai). Feb 04 Toyoda Gosei (Foshan) Rubber Parts Automotive sealing products, functional parts is a wholly-owned subsidiary of Toyoda Gosei Sep 04 Toyoda Gosei (Tianjin) Precise Plastic General industry products established in January 2006. As Toyoda Gosei’s sales Oct 04 Toyoda Gosei (Foshan) Auto Parts Interior & exterior parts and technology arm in China, TG Shanghai takes Jan 06 Toyoda Gosei (Shanghai) Sales, procurement orders from customers and undertakes design and Source: Company materials, website; compiled by Daiwa. development activities. It also administers operations, personnel, and finance at local production bases, as well as providing them with sales and technical support. TG Shanghai had 67 employees at end-2012, including 15 seconded staff. There are other suppliers with capital structures under which a company invested in by the parent to supervise operations in China in turn invests in local production bases, but TG Shanghai does not have capital relations with any other Chinese units of Toyoda Gosei. However, from an operating perspective, TG Shanghai is engaged in cross-sectional management of Toyoda Gosei’s bases in China like the supervisory companies of other suppliers do.

 Chart 8: Overview of Toyoda Gosei (Shanghai) and Toyoda Gosei’s Sales/profit Breakdown by Region Established Jan 2006 Company overview Takes orders from customers, undertakes design/development, manages other Chinese group firms, provides services Business outline Position within group Consol. subsidiary of Toyoda Gosei, manages other group firms in China; Ownership Toyoda Gosei: 100% also in charge of sales/technology Outline of our visit Visited Shanghai office and met with company president. Subjects Employees 67 (as of end-Dec 2012) discussed included recent performance, future challenges. Main customers Toyoda Gosei group, others

Toyoda Gosei: Sales by Region (based on office location, FY12) Toyoda Gosei: Op Profit by Region (based on office location, FY12) FY12 op profit: Y36.7 bil Other Australia, Asia 3% ex cl. China Other -4% 16% Australia, Asia Japan 52% China 31% Japan 9% Y599.6 bil 54% North America 20%

North America -20% 0% 20% 40% 60% 80% 100% 120% 19%

Source: Company materials; compiled by Daiwa. Notes: 1) FY12 sales by region include intra-group sales. China sales are based on sales by destination. Sales for “Australia, Asia excl. China” are calculated by subtracting China sales from sales for Australia, Asia. 2) Eliminations/unallocated items not shown in op profit by region. “Australia, Asia” operating profit includes China.

- 6 -

China Research Trip (automobiles/auto parts) 4 April 2014

2. Toyoda Gosei’s business expansion in China As at other Toyota Motor-affiliated suppliers, the Chinese operations of Toyoda Gosei have expanded in response to growth in Toyota Motor’s production volumes. However, Toyoda Gosei is facing fiercer competition from the emergence of local makers such as the Minth Group, particularly for interior and exterior parts, compared to suppliers of other types of components. Furthermore, Toyota Motor’s demands on suppliers are more stringent in a number of ways than they were when Toyoda Gosei first moved into China. Under such conditions, Makoto Horie was appointed to the post of TG Shanghai president in 2011. Mr. Horie came from a sales background and had been stationed in North America from the end of 2005 to 2010, and when he came in he accelerated the streamlining process and undertook structural reforms of Toyoda Gosei’s Chinese operations in conjunction with the heads of the local production bases. He also expanded business with Chinese customers including and FAW Tianjin.

Over the longer term, the company could achieve further growth in China business through various means including the development and training of local staff.

- 7 -

China Research Trip (automobiles/auto parts) 4 April 2014

 Chart 9: Main Products Powertrain products Dongguan Keihin Engine Engine devices Electronic control products Management System

Keihin (7251)

1. Company overview, our visit Dongguan Keihin Engine Management System, which we visited on our trip, was established on 1 March 2002 and began production in December that year. The company, which is wholly owned by Keihin and Safety products Air conditioning products capitalized at $43.4 million, is one of four Keihin bases in China and makes and sells a wide spectrum of parts for automobiles.

Source: Company materials. In China, the firm’s main customers are Honda Motor’s local units. The company also has dealings with other 2. Plant Keihin group firms across the globe. Aside from The plant site spans some 70,000 , with buildings Dongguan Keihin, Keihin’s other Chinese sites include comprising roughly 30,000 m2. It currently employs a carburetor base established in Nanjing in almost 1,600 workers. While labor costs continue to April 1997, an R&D center for electronic control units, rise, the company has been stepping up the integration set up in April 2003, and a Dalian subsidiary, which it of production processes and automation, along with swept under its umbrella when acquiring Showa sharply cutting the number of expatriate staff. Denko’s automotive air-conditioner heat exchanger business. Keihin’s overall Chinese operations in FY12 generated sales of Y35.6 billion and operating profit of Y3.0 billion, which accounted for 30% of consolidated operating profit.

 Chart 10: Overview of Dongguan Keihin Engine Management System and Sales/profit Breakdown by Region for Keihin Established Mar 2002 Company overview Manufactures/sells auto parts, incl. engine transmission devices, electronic control products, air-conditioning products Business outline Position within group Mainstay firm for Keihin’s Chinese operations Ownership Keihin: 100% Outline of our visit Visited local plant and met president; subjects discussed included Employees 1,574 recent developments and future challenges Main customers Honda Motor group

Keihin: Sales by Region (based on office location, FY12) Keihin: Op Profit by Region (based on office location, FY12) Europe China FY12 op profit: Y10.0 bil 2% 9%

Japan 4% Europe 1%

Asia Japan Asia 60% China 29% 21% Y294.9 bil 43%

Americas 6%

Americas 0% 20% 40% 60% 80% 100% 25%

Source: Company materials, interviews; compiled by Daiwa. Note: FY12 sales by region based on external sales. Some figures are Daiwa estimates. Eliminations/unallocated items not shown in op profit by region.

- 8 -

China Research Trip (automobiles/auto parts) 4 April 2014

One specific example of improved production processes is the assembly of drive-by-wire throttle bodies, which control the amount of air flowing into an engine. Through integration, assembly work, which originally required five workers, can now be done by two.

Local procurement rates vary by product and the company has tended to procure direct injectors as well as electronic components used in electronic control units from Japan and elsewhere owing to the characteristics of its products. When we visited the company back in 2011, company officials said that on a value basis local procurement stood at roughly 50%. Given that the company has increased local procurement of plastics and the like, it appears that that rate has grown to about 70%. We look forward to a further rise going forward.

3. Outlook and challenges At present, the firm is hammering out strategies to enhance localization, such as building a technical center and adding expatriate staff. Challenges the firm will likely face in the future are changes in Honda Motor’s engine lineup and increasing automation as labor costs rise. We think it will also keep making efforts to expand sales beyond Honda Motor.

- 9 -

China Research Trip (automobiles/auto parts) 4 April 2014

2. Overview of plant NUS has 536 employees, including five expatriates NHK-Uni Spring (Guangzhou) from Japan. Production of coil springs is basically automated, but there are a few processes which, while NHK Spring (5991) automated in Japan, are still done manually at the plant. Both coil springs and stabilizers require shot 1. Company overview, our visit peening (metal durability is strengthened by impacting NHK-Uni Spring (Guangzhou), or NUS, was surfaces with steel shot) after being molded, and are established in May 2002 and started production in then powder coated and tested. Production of coil 2003. It manufactures and sells automotive coil springs and stabilizers has had support from NHK springs and stabilizers. NHK Spring has a 60% stake in Spring’s Yokohama and Shiga plants, respectively. the company and Uni Auto Parts Manufacture a 40% Production processes therefore appear to resemble stake. Uni Auto Parts Manufacture is based in Taiwan those in Japan. and affiliated with NHK Spring, with which it has had a capital relationship since its foundation in 1969. We see room for further automation, as the plant still uses manual labor in some coil spring production NUS has a wide range of customers centering on processes and in the forging process for stabilizers. Japanese automakers, including Honda Motor and Nissan Motor. Competitors apparently include Chuo There are two different types of stabilizers: one using Spring, Steel, Mubea of Germany, and solid bars and the other hollow bars (pipes), with Chinese automotive spring makers. materials being procured from different sources. Almost all materials for hollow-type stabilizers are  Chart 11: NUS Products purchased from Japan. As for coil springs, more than half of the materials are apparently sourced in Japan.

Source: Company website.

 Chart 12: Overview of NHK-Uni Spring (Guangzhou) and Sales/profit Breakdown by Region for NHK Spring Established May 2002 Company overview Manufactures/sells coil springs, stabilizers for automobiles Business outline Position within group Consolidated subsidiary of NHK Spring, Chinese base for suspension Ownership NHK Spring: 60% spring business Uni-Auto Parts Manufacture: 40% Outline of our visit Visited plant and met company president; subjects discussed included Employees 536 recent developments and future challenges Main customers Honda Motor, Nissan Motor, others

NHK Spring: Sales by Region (based on office location, FY12) NHK Spring: Op Profit by Region (based on office location, FY12)

Other FY12 op profit: Y30.0 bil 1% Thailand 16%

China 3% Japan 60% Asia 33%

North America Y508.0 bil 10% North America 7% Japan 70% 0% 20% 40% 60% 80% 100%

Source: Company materials, interviews; compiled by Daiwa. Note: FY12 sales by region based on external sales. Eliminations/unallocated items not shown in op profit by region.

- 10 -

China Research Trip (automobiles/auto parts) 4 April 2014

3. Outlook and challenges The plant is currently operating with three shifts. Given the capex burden, we think profitability would be better if major investment is effected rather than small capacity additions. Plant capacity is being fully utilized and, considering the expanding automobile market in China, we think NUS will need to significantly increase capacity at some point.

When we visited the company in 2011, we got the impression that it was difficult for it to raise the weighting of local procurement compared to other auto parts makers because each model had specific material procurement requirements—NUS customers generally wanted materials of a quality equivalent to those used in Japan. This time around, however, although locally- procured materials are still not on a par with those sourced from Japan in terms of some aspects of quality and performance, the company seems to be moving to increase the use of such materials, partly thanks to its ability to complement any shortfalls with its processing technology. The company might be able to achieve faster sales growth as a result of these efforts.

- 11 -

China Research Trip (automobiles/auto parts) 4 April 2014

able to gain updated information regarding its strategies and put questions to the president. Akebono Corporation (Guangzhou) 2. Overview of plant Since the company started production in November Akebono Brake Industry (7238) 2005, it has gradually been expanding capacity. In particular, rapid capacity increases have been seen 1. Company overview, our visit since 2012, with four production lines added to the previous two. The number of employees is currently Akebono Corporation (Guangzhou) is a consolidated 295, including nine from Japan. The local procurement subsidiary of Akebono Brake Industry established in ratio has increased, reaching 99% for disc brakes. In October 2004. Akebono Brake Industry has a 70% addition, the company purchases all of its brake pads stake in the firm and the rest is held by the from Akebono Corporation (Suzhou). (8001) group. The firm manufactures disc brakes, drum brakes, and parking brakes for passenger cars. However, as some locally-procured parts use materials Main customers include Dongfeng Nissan Passenger sourced in Japan, there is room to further increase the Vehicle, and competitors include Automotive effective local procurement ratio. Similar to other local Systems, , Continental Automotive Chinese units of Japanese auto parts makers, the Systems, TRW Automotive, and Mando. Overall company seems to have a problem procuring cast metal Chinese operations of Akebono Brake Industry, of reliable quality. including those in Suzhou, posted sales of Y6.1 billion and operating profit of Y460 million in FY12, 3. Outlook and challenges accounting for around 10% of consolidated operating profit. We believe Akebono Corporation (Guangzhou) will continue to post earnings growth. In 2013, shipment We participated in a tour of the plant hosted by the volume rose sharply, with that of disc brakes totaling company. This proved to be a good opportunity to 2.9 million units (1.8 mil in 2011) and that of deepen our understanding of the company, as we were drum/parking brakes combined 0.7 million units (0.4 mil).

 Chart 13: Overview of Akebono Corporation (Guangzhou) and Sales/profit Breakdown by Region for Akebono Brake Industry Established Oct 2004 Products Disc brakes, drum brakes, parking brakes for passenger cars Business outline Position within group Consolidated subsidiary of Akebono Brake Industry; overall Chinese Ownership Akebono Brake Industry: 70%; Itochu: 25%, Itochu Hong Kong: 5% ops incl. Suzhou brake pad unit account for 10% of consol. op profit Outline of our visit Plant tour hosted by firm, incl. business update and Q&A with president Employees 295 Main customers Nissan Motor group, others

Akebono Brake Industry: Sales by Region (based on destination, FY12) Akebono Brake Industry: Op Profit by Region (based on office location, FY12)

Other Indonesia FY12 op profit: Y4.3 bil Thailand 6% 6% 2% China 12%

China

3% Japan 57% Japan Indonesia 45% 38% Europe Y206.1 bil 2% Europe -20% North America Thailand 4% North America 2% 43% -20% 0% 20% 40% 60% 80% 100% 120%

Source: Company materials, interviews; compiled by Daiwa. Note: Eliminations/unallocated items not shown in op profit by region.

- 12 -

China Research Trip (automobiles/auto parts) 4 April 2014

 Chart 14: Shipment Volume by Product

(mil units) 7 Disc brakes Drum/parking brakes 6

5

4

3

2

1

0 CY05 06 07 08 09 10 11 12 13 14 15 16

Source: Company materials; compiled by Daiwa. Note: Figures from 2014 are company projections.

 Chart 15: Sales by Customer

Nissan Kokusai Other 3% 6% Magyar 4% GAC 7%

ADVICS Dongfeng Nissan 7% Passenger Vehicle Nissan (China) 55% Investment 18%

Source: Company materials; compiled by Daiwa.

The company aims to expand shipment volume to 6.3 million disc brakes and 1.8 million drum/parking brakes by 2016. As for customers, more than 70% of sales are to the Nissan Motor group, with Dongfeng Nissan Passenger Vehicle accounting for 55% and Nissan (China) Investment 18%. By 2016, however, the company aims to see not only continuing sharp sales growth to the Nissan Motor group but also new customers (incl. Shanghai General Motors) and expanding sales to non-Nissan clients. Expecting such sales increases, the firm plans to introduce its seventh production line in 2015.

- 13 -

China Research Trip (automobiles/auto parts) 4 April 2014

production sites, and a precision parts site in Guangzhou. The two manufacturing bases we visited Unipres Guangzhou/Unipres are both wholly owned by the Chinese headquarters Precision Guangzhou (effectively 100% Unipres subsidiaries). We point out that the Dalian facility, which was established in November 2013, is partly backed by Xiangyang Sunrise Unipres (5949) Machinery, which has teamed up with Unipres to supply parts to Nissan Motor in Zhengzhou. Unipres’ 1. Company overview, our visit stake is just 40%. We participated in a tour of automotive body parts maker Unipres Guangzhou and Unipres Precision The two Guangzhou bases are located side-by-side in a Guangzhou hosted by Unipres. It proved a good supplier park located across a major road from opportunity to deepen our understanding of Unipres in Dongfeng Nissan. In addition to the firm’s press and China as we received strategy updates and interviewed assembly factories, there are other facilities in the park, the presidents. including its tool/die factory, a building which handles small components (owned and operated by joint Unipres is a Nissan Motor-affiliated auto parts maker venture between Unipres Guangzhou [40% stake] and specializing in press technology. Under its wholly Taisei Kogyo [60%; Unipres supplier in Japan]), and a owned Chinese headquarters, the company has -Itochu coil center. established four manufacturing bases in China: auto body parts plants in Guangzhou, Zhenghou, and Dalian, where Dongfeng Nissan Passenger Vehicle has

 Chart 16: Overview of Unipres Guangzhou/Unipres Precision Guangzhou and Sales/profit Breakdown by Region for Unipres Unipres Guangzhou Overview Established Oct 2003 Products Auto body parts, incl. steering members Business outline Position within group Consol. subsidiary of Unipres; mainstay base in China; boasts higher Ownership Unipres: 100% productivity than firm’s other plants worldwide Outline of our visit Plant tour hosted by firm, incl. business update and Q&A with president Employees 1,218 (incl. 477 temporary employees) Main customers Dongfeng Nissan Unipres Precision Guangzhou Overview Established Oct 2009 Products Transmission components such as carrier packs, clutch packs, oil pans, etc. Business outline Position within group Consol. subsidiary of Unipres; transmission parts production limited to Ownership Unipres: 100% Japan and this subsidiary Outline of our visit Plant tour hosted by firm, incl. business update and Q&A with president Employees 368 (incl. 25 temporary employees) Main customers Jatco

Unipres: Sales by Region (based on office location, FY12) Unipres: Op Profit by Region (based on office location, FY12)

FY12 op profit: Y16.0 bil

Asia Europe 13% 22%

Japan Y237.8 bil Japan 49% Asia 36% Europe 49% 12%

North America North America 17% 2%

0% 20% 40% 60% 80% 100%

Source: Company materials, interviews; compiled by Daiwa. Note: Eliminations/unallocated items not shown in op profit by region.

- 14 -

China Research Trip (automobiles/auto parts) 4 April 2014

 Chart 17: Overhead View of Unipres  Chart 18: Equipment At Unipres Guangzhou Unipres Precision Small components Plant Process Type No. (units) Guangzhou joint v enture Unipres Guangzhou Blanking press 800 MT (1), 600 MT (2) Marubeni-Itochu Steel Machine tool plant Press Transfer press 3,000 MT (1), 2,500 MT (1), Assembly plant 2,000 MT (1), 1,500 MT (3) Laser beam welding machine 2 Cafeteria Press plant Auto body plant Portable spot welder 377 Offices Stationary welder 258 Assembly Automatic dotting machine 23 Spot welder robot 54 Arc welding robot 29 NC processing machine 6 Full mold coating machine 1 Machine tool plant 3D laser cutting machine 1 Trial press 1,500 MT (1), 1,100 MT (1) Source: Company materials; compiled by Daiwa.

Source: Company materials; compiled by Daiwa. 4. Unipres Guangzhou: outlook 2. Unipres Guangzhou: overview Production for customer Zhengzhou Nissan, undertaken to date by Unipres Guangzhou, will be Unipres Guangzhou was established in October 2003 transferred to the Zhengzhou production base, which and started production in 2005. It makes side was established in FY13. Some existing employees will members and other body parts that are key for also be sent to the new base. As seen in Chart 19, even automobile rigidity. though Unipres’ overall Chinese auto body operations

are likely to see sales growth in the future, sales are Production kicked off at plants using 1,500MT and likely to drop off at Unipres Guangzhou in FY14. 3,000MT transfer presses. Capacity has since been added in four stages. The company employed 1,218  Chart 19: Unipres’ Auto Body Parts Sales in China workers as of end-2013, including 477 temporary employees. (mil yuan)

Unipres Sunrise 4,000 3. Unipres Guangzhou: plant Unipres Zhengzhou The Guangzhou facility has been given, on back-to- Unipres Guangzhou back occasions, the company’s award recognizing top 3,000 global production bases and boasts the highest productivity of the firm’s plants. Elevated productivity 2,000 owes partly to new equipment. Additionally, during our tour of the press lines we saw evidence of initiatives for thorough preventive maintenance of equipment and 1,000 for manufacturing process visualization, such as installed video screens. Meanwhile, at the assembly 0 plant, the company has installed its own locally FY2013 2014 2015 2016 developed automatic dotting machines. The rate of automation, calculated by the proportion of total spot Source: Company materials; compiled by Daiwa. weld points welded by robots, was stuck at 6.1% for Note: Company projections. 2008-10. However, the company has sharply ramped up automation since 2012 and the rate had soared to That said, capacity utilization at the Guangzhou plant 35.4% in 2013. It suggested automation could continue will not necessary deteriorate sharply as some rising further. operations earmarked for Zhengzhou will be left at the facility and because the company is switching to in- These so-called Unipres Production System initiatives production for some work it has been have proven a success. For instance, productivity has outsourcing for Zhengzhou Nissan. Furthermore, it is nearly doubled in the last five years, with production aiming to lift sales to PSA Peugeot and volume per employee growing from parts for 350 Volkswagen and expand its business for Nissan automobiles in 2008 to 620 in 2013. Motor’s Venucia brand.

The number of dies supplied from China to other plants across the world is on an uptrend and 30-40% of dies used worldwide could be made in China in 2016.

- 15 -

China Research Trip (automobiles/auto parts) 4 April 2014

As such, Chinese production bases will probably be account for just 75% of transmission parts churned out more important going forward. by the Mexican plant, with Honda Motor and others to account for 25%. 5. Unipres Precision Guangzhou: overview Unipres Precision Guangzhou was established in In terms of profitability, focus will probably be on October 2009 and began production in March 2011. improved value added as a result of the in-house Drawing on its strength in precision press technology, production of dampers in the wake of the company the company makes transmission components for starting torque converter production in FY15. Jatco, such as clutch and carrier packs. In FY15, it is  Chart 20: Sales for Unipres’ Transmission Parts Ops due to start production of torque converters. As of end- 2013, the company employed 368 workers, including (Y bil) 25 temporary employees. 60 New sales 6. Unipres Precision Guangzhou: plants 50 Mex ico China The plant supplies eight components, including clutch 40 drums, for Jatco’s CVT7 continuously variable Japan transmissions as well as parts for AW in Suzhou. 30

Unipres Precision Guangzhou procures almost all of its 20 materials from Japan through Unipres Guangzhou and neighbor Marubeni-Itochu Steel. In the future, it aims 10 to switch to locally procured materials for oil pans and some other parts. Parts previously made via forging are 0 now being produced with press technology with the use FY2012 2013 2014 2015 2016 of dedicated machines, including a servo press co- Source: Company materials; compiled by Daiwa. developed with an equipment maker. Note: Company projections from FY13.

Unlike the forging process, press technology enables improved product strength without having to cut fibers in the steel. Also, improving strength using the so- called tooth-form process, instead of conventional methods, has helped lower costs partly through the use of lower grade materials. The use of gauge control methods (near net shape) means that the company can tightly control the thickness of bended areas during the press process, which allows it to greatly reduce cutting of excess thickness after the press process. These are just some ways Unipres has further fine tuned its press technology.

7. Unipres Precision Guanzhou: outlook Unipres’ transmission parts operations are likely to book sales of Y38.9 billion in FY13, generating 13% of the company total. The Chinese transmission parts business is seen with sales of Y7.9 billion. However, the Chinese production base is expected to drive the transmission operations’ sales going forward, while a Mexican factory is scheduled to come on stream in July 2014. The company is also aggressively working to expand sales. As a result, Jatco’s weighting of its total Chinese transmission parts sales is estimated shrinking from 86% in FY12 to 80% in FY16 since the firm seems to predict an uptick in sales to existing customer Aisin AW, as well as increased new sales to Honda Motor and the like. Meanwhile, in FY16 Jatco is likely to

- 16 -

China Research Trip (automobiles/auto parts) 4 April 2014

understanding of Jatco in China through strategy updates, discussions about the overall Chinese market, Jatco (Guangzhou) Automatic and a Q&A session with the president. Transmission 2. Jatco (Guangzhou) Automatic Jatco (unlisted) Transmission Jatco (Guangzhou) Automatic Transmission was 1. Company overview, our visit established in 2007 and is a wholly-owned subsidiary of Jatco. It makes three types of CVT: the CVT7 for Jatco makes automatic transmissions, focusing on compact cars, CVT8 for mid-size automobiles, and continuously variable transmissions (CVT). The firm is CVT2 for previous-generation mid-size vehicles. one of a few global transmission pure plays and boasts

49% of the global CVT market. Nissan Motor owns a The company has an annual production capacity of 1 75% interest in Jatco, with Mitsubishi Motors (7211) million units and its main customers are Dongfeng and Suzuki Motor (7269) holding stakes of 15% and Nissan Passenger Vehicle and Dongfeng Motor. On top 10%, respectively. of local sales in China, some products are exported as

back-up for other overseas plants. The company aims On a volume basis, Jatco produces 64% of its to increase sales to other firms in the future, but no transmissions in Japan (42% CVT, 22% AT), followed specific timetable or customers were mentioned. by Mexico with 19%, China with 15%, and Thailand with 2%, based on FY13 forecasts. Overseas production At current foreign exchange rates, production costs in comprises entirely CVTs. Guangzhou look to be higher than in Japan and Mexico.

 Chart 21: Jatco Shipments Within two to three years, the company aims for the (000 units) location to have a leaner cost structure than other sites as a result of cost improvements. Potential seems to New transmissions exist to improve worker productivity during the Opportunities manufacturing process and to lower costs for cutting Jatco (Thailand) Jatco (Guangzhou) tools, which it currently imports from Japan. Jatco Mexico Jatco (CVT) 3. Chinese transmission market Jatco (AT) Almost 40% of new cars currently sold in China feature widely-defined AT (namely AT, CVT, dual-clutch transmission [DCT]). The rate has gained roughly 10 percentage points since 2010, but still the majority of vehicles sold have manual transmissions. This is mainly because customers prefer vehicles with manual transmissions, particularly when it comes to low-priced

Source: Company materials. automobiles, given the higher price for vehicles fitted Note: Company projections for FY13 and onward. with AT—at Dongfeng Nissan, automobiles with CVT are about 10,000 yuan more expensive than offerings We visited Jatco’s base in Guangzhou (Jatco with manual transmission. Even for front-wheel-drive [Guangzhou] Automatic Transmission) on a tour vehicles, AT likely accounts for only around 50%. jointly organized by Nissan Motor and Unipres. It proved a good opportunity to deepen our

 Chart 22: Overview of Jatco (Guangzhou) Automatic Transmission Established Apr 2007 Products Jatco CVT7, Jatco CVT8, belt CVT for mid-size front-engine, front- wheel-drive vehicles (CVT2) Business outline Position within group Consol. subsidiary of Jatco; no.2 overseas base after Mexico Ownership Jatco: 100% Outline of our visit Plant tour hosted by firm, incl. business update and Q&A with president. Employees 2,231 (as of 5 Mar 2014) Main customers Dongfeng Nissan Passenger Vehicle Dongfeng Motor Source: Company materials, interviews; compiled by Daiwa.

- 17 -

China Research Trip (automobiles/auto parts) 4 April 2014

China should be a market where vehicles with AT are generally favored, just like in Japan and the US. Company officials suggested that the proportion of automobiles with AT could grow to around 70% by 2020 given the increase in female drivers and congestion in urban areas.

Our eyes had been on the fact that the Chinese government’s 2011 revised Catalogue for the Guidance of Foreign Investment Industries dropped AT as an area for encouraging foreign investment and listed DCT instead. On our visit, however, we heard comments that the focus on DCT has faded since last year. This suggests a positive change for Japanese automobile firms relatively strong in AT and CVT.

Translation/style check/accuracy check: Research Production Department - 18 -

China Research Trip (automobiles/auto parts) 4 April 2014

IMPORTANT

This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Securities Co. Ltd. retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent. Ratings Issues are rated 1, 2, 3, 4, or 5 as follows: 1: Outperform TOPIX/benchmark index by more than 15% over the next six months. 2: Outperform TOPIX/benchmark index by 5-15% over the next six months. 3: Out/underperform TOPIX/benchmark index by less than 5% over the next six months. 4: Underperform TOPIX/benchmark index by 5-15% over the next six months. 5: Underperform TOPIX/benchmark index by more than 15% over the next six months. Benchmark index: TOPIX for Japan, S&P 500 for US, STOXX Europe 600 for Europe, HSI for Hong Kong, STI for Singapore, KOSPI for Korea, TWII for Taiwan, and S&P/ASX 200 for Australia. Japan Conflicts of Interest: Daiwa Securities Co. Ltd. may currently provide or may intend to provide services or other services to the company referred to in this report. In such cases, said services could give rise to conflicts of interest for Daiwa Securities Co. Ltd.

Daiwa Securities Co. Ltd. and Inc.: Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.

Ownership of Securities: Daiwa Securities Co. Ltd. may currently, or in the future, own or trade either securities issued by the company referred to in this report or other securities based on such financial instruments. Daiwa Securities Group has filed major shareholding reports for the following companies of which it owns over 5% (as of 14 March 2014): Azia (2352); Broccoli (2706); Hoshino Resorts REIT (3287); Kuriyama Holdings (3355); Nippon Ichi Software (3851); Septeni Holdings (4293); Seiryo Electric (4341); RaQualia Pharma (4579); MEC (4971); JCU (4975); MORESCO (5018); Nippon Hume (5262); Nippon Concrete Industries (5269); GEOSTR (5282); Japan Pile (5288); Nakayama Steel Works (5408); Onamba (5816); RIDE ON EXPRESS (6082); Rheon Automatic Machinery (6272); NISSEI ASB MACHINE (6284); Okada Aiyon (6294); Takatori (6338); ANEST IWATA (6381); Kato Works (6390); Fukusima Industries (6420); SUNCORPORATION (6736); KYOWA ELECTRONIC INSTRUMENTS (6853); Sansha Electric Manufacturing (6882); Astmax (7162); Nihon Flush (7820); Nippi (7932); Daiko Denshi Tsushin (8023); Money Partners Group (8732); Daiwa Office Investment Corporation (8976); The First Energy Service (9514); Cerespo (9625); DTS (9682); Imperial Hotel (9708); Marubeni Construction Material Lease (9763).

Lead Management: Daiwa Securities Co. Ltd. has lead-managed public offerings and/or secondary offerings (excluding straight bonds) in the past twelve months for the following companies: DAIHO CORPORATION (1822); INDUSTRY (1925); mixi (2121); Japan Best Rescue System (2453); ELECTRON DEVICE (2760); Pharmarise Holdings (2796); YOKOHAMA REITO (2874); The Monogatari Corporation (3097); ANAP (3189); Samty (3244); PRESSANCE CORPORATION (3254); Daiwa House REIT Investment Corporation (3263); Activia Properties (3279); Open House (3288); SIA REIT (3290); Hulic Reit (3295); create restaurants holdings (3387); eBOOK Initiative Japan (3658); enish, Inc. (3667); Nippon Ichi Software (3851); ASAHI PRINTING (3951); OncoTherapy Science (4564); C'BON COSMETICS (4926); (5406); UCHIYAMA HOLDINGS (6059); Amaze (6076); Escrow Agent Japan (6093); PUNCH INDUSTRY (6165); Nabtesco (6268); SUNCORPORATION (6736); Sharp (6753); KYOWA ELECTRONIC INSTRUMENTS (6853); Sansha Electlic Manufacturing (6882); Nojima (7419); AS ONE (7476); Wakita (8125); SUN-WA TECHNOS (8137); THE NAGANOBANK (8521); The Ehime (8541); TOSHO (8920); FJ NEXT (8935); Nippon Building Fund (8951); JREIT (8954); REIT (8966); Top REIT (8982); Daiwa House Residential Investment Corporation (8984); Japan Hotel REIT Investment Corporation (8985); VITEC (9957). (list as of 1 April 2014)

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

If you decide to enter into a business arrangement with our company based on the information described in this report, we ask you to pay close attention to the following items. . In addition to the purchase price of a financial instrument, our company 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, our company also may 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. . For derivative and margin transactions etc., our company 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 our company. . 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 our company. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact Daiwa Capital Markets Hong Kong Limited in respect of any matter arising from or in connection with this research. 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. 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 (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. - 19 -

China Research Trip (automobiles/auto parts) 4 April 2014

United Kingdom This research report is produced by Daiwa Securities 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 Conduct Authority and is a member of the London Stock Exchange, 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 Financial Conduct Authority 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 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-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, Frankfurt branch, which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

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.

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

Additional information may be available upon request.

- 20 -