02 October 2015 Asia Pacific/Japan Equity Research Auto Parts & Equipment (Auto Parts (Japan)) / MARKET WEIGHT
Aisin Seiki (7259 / 7259 JP) Rating OUTPERFORM* Price (01 Oct 15, ¥) 4,155 THEME
Target price (¥) (from 6,200) 5,600¹ Chg to TP (%) 34.8 Market cap. (¥ bn) 1,174.24 (US$ 9.77) Essential reading: Toward newer heights and a Enterprise value (¥ bn) 1,327.29 Number of shares (mn) 282.61 leaner structure Free float (%) 50.0 52-week price range 5,810 - 3,505 Medium-term scenario fueled by organic growth and group reorganization
*Stock ratings are relative to the coverage universe in each ■ Aisin Seiki once again our top pick: We lower our target price from ¥6,200 to analyst's or each team's respective sector. ¹Target price is for 12 months. ¥5,600 (potential return 34.8%) but reiterate our OUTPERFORM rating. We continue to recommend Aisin Seiki as our top pick in the auto parts sector, as we Research Analysts expect the company to transform into a true major supplier with a leaner Masahiro Akita structure, aiming for new heights. 81 3 4550 7361 [email protected] ■ Revisiting fundamentals, catalysts and medium-term growth prospects: The shares have not performed well recently, reflecting various external factors. Koji Takahashi 81 3 4550 7884 However, as near-term concerns now appear priced into the shares, we [email protected] recommend a fresh look at the company’s fundamentals, catalysts and medium- term growth potential. Aisin Seiki looks primed for unprecedented topline highs, driven by organic growth, particularly in conventional automatic transmissions (ATs). We also anticipate a second round of business reorganization within the Toyota group, including the Aisin Seiki group, to kick-start greater supply chain efficiency. We further expect VISION 2020 targets to come into focus in the medium term. In this report, we examine a medium-term scenario for Aisin Seiki fueled by organic growth and group reorganization. ■ Catalysts/Risks: Catalysts include progress in the Toyota group’s supply chain reorganization, including in the Aisin Seiki group, and a reconfirmation of medium-term growth potential, particularly in ATs. Risks include higher costs due to AT capacity expansion and a lower-than-expected Toyota output in emerging markets including in Asia in the near-term. ■ Valuation: We derive our ¥5,600 TP by applying a target P/B of 1.2x to our FY3/17E BPS of ¥4,632. Our target P/B is based on a theoretical P/E of 13.6x (cost of equity 6.1%, discount 16.4%), and FY3/17E ROE of 8.8%.
Share price performance Financial and valuation metrics
Year 3/15A 3/16E 3/17E 3/18E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 2,964.0 3,210.0 3,380.0 3,580.0 6000 120 Operating profit (¥ bn) 165.8 200.0 222.0 252.0 5000 100 Recurring profit (¥ bn) 188.0 214.0 237.0 269.0 4000 Net income (¥ bn) 77.3 101.0 112.0 128.0 3000 80 EPS (¥) 273.9 357.8 396.7 453.4 2000 60 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Change from previous EPS (%) n.a. -5.6 -5.9 -4.5 IBES Consensus EPS (¥) n.a. 346.5 388.8 429.0 The price relative chart measures performance against the EPS growth (%) -14.3 30.6 10.9 14.3 TOPIX which closed at 1442.74 on 01/10/15 P/E (x) 15.9 11.6 10.5 9.2 On 01/10/15 the spot exchange rate was ¥120.18/US$1 Dividend yield (%) 2.2 2.6 2.9 3.4 EV/EBITDA(x) 4.2 3.3 3.0 2.6 Performance over 1M 3M 12M P/B (x) 1.1 1.0 0.9 0.8 Absolute (%) 1.0 -20.7 5.3 ROE(%) 7.2 8.4 8.8 9.5 Relative (%) 3.4 -8.0 -4.1 Net debt/equity (%) 13.3 12.4 10.5 6.6
Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
02 October 2015 Table of contents
Key charts 3 Toward newer heights and a leaner structure 4 Medium-term scenario fueled by organic growth and group reorganization 4 Bright outlook for AT business 6 No need for much concern about AT volume shortfall 6 Continued growth likely in global automatic transmission market 7 Market share growth likely to continue for Aisin Seiki 9 Stable growth at the conventional AT business likely in the longer term 10 Dealing with all-around automatic transmission market growth 12 Breakdown of conventional AT earnings structure 17 Ready for restructuring round 2 20 Expect further restructuring with focus on AT 20 Focus on AT business 21 Expecting internal restructuring of Aisin group 22 Aisin group's history of spinoffs and mergers 24 Future shape of Aisin group 25 Vision 2020 targets in sight 28 Benefits ready to be reaped after building business base and going through growth phase 28 FY3/16 earnings forecasts 33 Valuation 35 Looking undervalued in view of growth potential 35
Aisin Seiki (7259 / 7259 JP) 2 02 October 2015 Key charts
Figure 1: AT sales volume to increase to 11.1mn units in Figure 2: Anticipate average annual growth rate of 12.3% FY3/21 in AT volume in China 12,000 Thousand Units 14,000 Thousand Units
10,000 12,000
8,000 10,000
8,000 6,000
6,000 4,000 4,000 2,000 2,000 0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E 0 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Toyota G Japanese Others VW G D3 Chinese Local European Asia Others Automated Transmission
Source: Company data, Credit Suisse estimates Source: Company data, IHS, Credit Suisse estimates
Figure 3: Shift in shares of Toyota AT parts is under way Figure 4: Shift to new organizational structure focused on strengthening business tie-ups within the Aisin group
＊L&E： Life&Energy Products ＊A/M： Aftermarket Board of Directors
Chairman/CEO Automatic Dom. Share Dom. Share Dom. Share Toyota G Innovation Center Group Management Headquarter Transmission 2005 2010 2014 In-House 46.1% 53.2% 36.4% x Aisin Seiki 53.9% 46.8% 62.7% x Daihatsu 0.0% 0.0% 0.5% x Powertrain Chassis/Safety Body Product L&E* A/M* Elec. Product Product Component Department Department Department Department Department Department Dom. Share Dom. Share Dom. Share Torque Converter Toyota G 2005 2010 2014
In-house 57.9% 52.7% 41.0% x Material/ Powertrain Group Chassis/Safety Body Product Foundries Aisin Seiki 51.1% 38.6% 56.5% x Companies Group Companies Group Companies Gorup Companies
Exedy 0.0% 8.7% 2.5% x Group Company
Source: Company data, IRC, Credit Suisse estimates Source: Company data, Credit Suisse
Figure 5: OP should rise to ¥361bn by FY3/21 Figure 6: Substantial upside potential if share price reflects longer term EPS growth potential 400 Billion Yen 10% 7,000 Yen Yen 700 9% 600 350 6,000 8% 500 300 5,000 7% 400 250 6% 4,000 300 200 5% 3,000 200 4% 150 100 2,000 3% 100 0 2% 1,000 (100) 50 1% 0 (200) 0 0% FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
OP (LHS) OPM (RHS) Share Price (LHS) EPS (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Thomson Reuters, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 3 02 October 2015 Toward new heights and leaner structure Medium-term scenario fueled by organic growth and group reorganization Revisiting fundamentals, catalysts and medium-term growth prospects The shares have not performed well recently, reflecting various external factors including a slowdown in the Chinese auto market (where the company has a significant exposure in conventional ATs), the emissions scandal at Volkswagen (VW, a key customer) and elevated volatility in the equities market due to macroeconomic factors. However, as near- term concerns now appear priced into the shares, we recommend a fresh look at the company’s fundamentals, catalysts and medium-term growth potential. In fundamentals, Aisin Seiki is primed to attain unprecedented topline highs, driven by organic growth, particularly in conventional ATs, where the rate of growth has eclipsed that of the overall auto market as a result of increased adoption. In term of catalysts, we anticipate a second round of business reorganization within the Toyota group since the end of 2014, including Aisin Seiki group, to kick-start greater supply chain efficiency leading to fixed cost reductions and greater synergy effects. We also expect VISION 2020 targets to come into focus in the medium term. Taking into account Aisin Seiki’s growth potential, we think the shares are currently undervalued. We therefore renew our recommendation of Aisin Seiki, which we expect will transform into a true major supplier with a leaner structure, aiming for new heights, as our top pick in the auto parts sector. Bright outlook for AT business The Chinese auto market slowdown and Aisin Seiki’s exposure to this market have raised concerns about the risk of lower-than-expected AT volume at the company. Although AT volume for some Chinese automakers may decline versus initial guidance, we still think Aisin Seiki should maintain a high growth rate as global AT volume, though somewhat below guidance for 7.900mn units, is nonetheless likely to rise 12.7% YoY to 7.749mn units in FY3/16. While it is highly likely that volumes drop below anticipated levels for VW and PSA Peugeot Citroen (PSA) in China, we do not see much room for concern on AT volume shortfall, as initial guidance probably included a buffer of around 100,000 units and there may also be a volume upside for Toyota and for automakers in other regions including Europe and the US. For the medium term, we expect growth in the global automatic transmission market (including nonconventional automatic transmissions) to guarantee growth in Aisin Seiki’s AT business. We see growth in the global automatic transmission market fueling expansion not only in global auto volume but also in the automatic transmission adoption rate. We expect this rate to rise from 47.4% in 2014 to 50.7% in 2020. We see the rate in China as rising from 30.6% in 2014 to 41.6% in 2020, so conventional AT demand in the Chinese market should continue increasing at an average annual growth rate of 12.3% even after 2015. We expect global automatic transmission market growth to outpace growth in the overall auto market by 1–2% supported by the higher automatic transmission adoption rate, particularly in China and other emerging markets. Taking into account prospects of market share growth, we forecast Aisin Seiki’s conventional AT volume to increase to 11.1mn units in FY3/21. We expect the company's volume to grow at an annual average of 7.4% YoY from FY3/16 through FY3/21, substantially ahead of the global auto market growth rate. Preparing for a second round of reorganization Following the announcement of Toyota’s brake/ manual transmission (MT)/seat supply chain reorganization in end-2014 and the merger of Shiroki Corporation, we now see a high likelihood of the curtain rising on act two of a reorganization, which would involve Aisin Seiki. The company previously dealt in a variety of product areas including drivetrains, engines, chassis, and electronics, but with some parts supplies still overlapping between companies both within and outside of Toyota group, we expect Aisin
Aisin Seiki (7259 / 7259 JP) 4 02 October 2015
Seiki to remain a core target for reorganization within the group. Owing to its long history of spinoffs, Aisin Seiki has a large number of consolidated subsidiaries, but we look for greater supply chain efficiency within the Aisin Seiki group through reorganization, in tandem with the trend in the Toyota group overall. In particular, we focus on growth in Aisin AW’s share of conventional AT supplies to Toyota. We also look for greater supply chain efficiency within the Aisin Seiki group, particularly at its AT/MT businesses. We also expect Aisin Seiki’s synergy with Exedy to grow in importance. The company may even bolster business/capital ties with Exedy. In addition, we see room for further efficiency gains in the brake business. VISION 2020 target in sight Aisin Seiki went through a phase of foundation building from FY3/13 through FY3/15, and we expect that after a period of growth from FY3/16 to FY3/18, the company will finally reach a payoff period from FY3/19 through FY3/21. After analyzing medium-term earnings forecasts extending to FY3/21, we think the company is likely to achieve all of the goals envisioned in its VISION 2020 medium-term management plan (i.e., sales of ¥3trn or more, overseas sales weighting of 50% or more, and ROIC of 15% or more). We forecast sales to grow to ¥4.2trn in FY3/21. We anticipate topline growing at a CAGR of 6% from FY3/16 driven by sales growth in conventional ATs at Aisin AW. We look for Aisin Seiki to attain OP of ¥361bn in FY3/21. We expect expanding conventional AT production capacity overseas to boost the overseas sales weighting to 50% of overall sales in FY3/21. Also, Aisin Seiki’s ROIC should improve to 15.1% by FY3/21. We forecast OP of ¥200bn in FY3/16, premised on ¥121/$ and ¥136/€. While FY3/16 guidance was skewed toward 2H from the outset, 1Q OP was a modest ¥33.9bn (−12% YoY) due partly to a one-off increase in start-up costs associated with new conventional AT products and capacity expansion at the Tianjin plant in China, and lower shipments following the switch to Toyota’s new IMV model. That said, OP appears to have finished slightly ahead of the company’s estimates due to the boost from a lower yen and higher sales in North America. In spite of sustained expansion costs at the Okazaki East plant, a profit contribution from the Tianjin plant in China, stepped up shipments for Toyota’s new IMV model, and growth in Toyota’s output for the domestic market should lead to an earnings upswing from 2Q. Although the halt in operations due to the Tianjin explosion had initially triggered concerns, the full-year impact is likely to be negligible. We forecast a substantial 24.8% YoY growth in OP to ¥40bn in 2Q. However, we see little prospect for a full-year guidance hike at the 1H results. There appears to be some impact from VW and PSA production cutbacks on Chinese conventional AT volume, an area of concern, and the future outlook has grown increasingly murky. However, any impact from the Tianjin explosion is likely to be modest. In Japan, Toyota’s output has gained momentum QoQ, but start-up costs at the Okazaki East plant are also continuing. While demand for conventional ATs in SUVs such as RAV4/Hilux remains firm in North America, volumes slowed for Camry and other models. Conventional AT supplies for the new IMV model in ASEAN countries in Asia are apparently running slightly short of our expectations. Shares undervalued in light of growth potential The recent 12-month forward P/B (0.9x) still remains two standard deviations below the average since 2013, making the current valuations appear quite attractive. Also, 12-month forward P/E is tracking slightly below average valuations since 2013. We also find Aisin Seiki relatively undervalued based on the P/B-ROE correlation in the auto parts sector. While the share price has shown a strong correlation with EPS historically, we still see substantial room for an upside if investors begin pricing in longer-term EPS growth prospects. Moreover, growth in value-added stemming from sales growth in conventional ATs and better prospects for margin improvement should lead to higher valuations. We expect valuations to rise even further once greater efficiency from the Toyota group reorganization and prospective synergy effects are priced in.
Aisin Seiki (7259 / 7259 JP) 5 02 October 2015 Bright outlook for AT business No need for much concern about AT volume shortfall Despite downtrend in Chinese conventional AT volume, high growth rate still likely globally Some observers expressed concerns about conventional AT volume downside risk following the slowdown in the China auto market, to which Aisin Seiki has significant exposure. Although conventional AT volume for some Chinese automakers may decline versus initial guidance, we still think Aisin Seiki should maintain a high growth rate as global AT volume, though likely to finish below guidance for 7.9mn units, is nonetheless likely to rise 12.7% YoY to 7.749mn units in FY3/16. We anticipate a drop of around 15% versus initial guidance for VW and PSA in China, which have embarked on production cuts following sluggish sales. We also see volume coming nearly in line with guidance for Japanese automakers and Chinese local automakers. Also, the halt in operations due to the Tianjin explosion had initially triggered concerns, but the full-year impact is likely to be negligible. Meanwhile, in line with management’s comments previously, the company appears to have built in a fairly large buffer (around 100,000 units by our estimate) into its initial plan for 7.9mn units. This should help it offset some of the volume decline in China. We also look for a slight volume upside for Toyota and for automakers in other regions including Europe and the US. At its 1Q results, the company lowered its 1H volume projection by 100,000 units, from 3.7mn units to 3.6mn units. In line with its usual conservative outlook, it may lower full-year volume guidance by another notch, but taking into account the buffer discussed earlier and supplies to other automaker clients offsetting the volume decline, we think the company could leave its full-year earnings outlook intact.
Figure 7: Downtrend in China AT volume for VW/PSA Figure 8: Expect supplies for Toyota and other regions to offset drop in China AT volume 1,400 Thousand Units 3,500 Thousand Units 1,200 3,000
1,000 2,500
800 2,000
600 1,500
400 1,000
200 500
0 0 VW PSA Toyota Changan FAW Car SAIC Others Toyota G Japanese VW G D3 Chinese European Asia Others Local Others
FY14 FY15CoE FY15CSE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates High growth potential in China; sustained capacity expansion required for now A slowdown in the Chinese auto market is probably unavoidable in the near term, but we think growth potential for automatic transmissions (including conventional AT) remains high in the Chinese market. As discussed below, the adoption rate of automatic transmissions in China stood at 30.6% in 2014, substantially lower than that of developed markets including Japan and North America, but we expect this to rise to 41.6% in 2020. As a result, we look for automatic transmissions to register an average annual growth rate of 12.3%, substantially higher than the growth rate in the auto market, even beyond 2015. We believe that in order to handle further growth in the automatic transmission market, Aisin Seiki too will need to boost AT production capacity in China on a sustained basis.
Aisin Seiki (7259 / 7259 JP) 6 02 October 2015
In addition to the Tianjin No. 1 plant, the company started operating the Suzhou plant from 2013. It also brought the Tianjin No. 2 plant online in 2014. With this, Aisin Seiki’s AT production capacity in China now totals 90,000 units at the Tianjin No.1 plant, 160,000 units at the Suzhou plant and 700,000 units at the Tianjin No. 2 plant (increased from 330,000 units in June 2015) for a combined total capacity we estimate at around 950,000 units. On the other hand, we expect demand to outstrip this production capacity as early as 2016, so Aisin Seiki will likely need to continue raising local production capacity at a pace of 200,000–300,000 units on an ongoing basis in the medium term.
Figure 9: Current AT production capacity in China (as of Oct 2015) Plant Product Customer Capacity
Suzhou FF4AT Toyota, Changan 160,000/y
Tianjin #1 FR4AT, FR5AT Toyota 90,000/y
Tianjin #2 FF6AT VW, PSA 700,000/y
Source: Company data, Credit Suisse
Continued growth likely in global automatic transmission market Global automatic transmission market to expand to over ¥10trn We believe expansion in the global automatic transmission market guarantees growth in Aisin Seiki’s conventional AT business. We define an automatic transmission as any two- pedal transmission system including AMT (Automated Manual Transmission), DCT (Dual Clutch Transmission), CVT (Continuously Variable Transmission), AT (Automatic Transmission), and HVT (Hybrid Vehicle Transmission). The global automatic transmission market totaled a modest ¥7.0trn in 2010 but increased to ¥8.4trn in 2014 and is likely to rise to ¥10.4trn by 2020. Growth in the global automatic transmission market is fueling expansion not only in global auto volume but also in the adoption rate of automatic transmissions. We see a sustained uptrend in the adoption rate of automatic transmissions, which increased from 46.2% in 2010 to 47.4% in 2014, and we expect it to rise to 50.7% in 2020. We expect global automatic transmission market growth to outpace growth in the overall auto market by 1– 2% annually, supported by growing needs for automatic transmissions, particularly in emerging markets including China and developed markets such as Europe.
Figure 10: Global automatic transmission market size to Figure 11: Higher automatic transmission adoption rate surpass ¥10tn driving market growth 12,000 Billion Yen 120,000 Thousand Units 52% 51% 10,000 100,000 50%
8,000 80,000 49%
48% 6,000 60,000 47%
4,000 40,000 46%
45% 2,000 20,000 44%
0 0 43% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015E2016E2017E2018E2019E2020E
Automated Transmission Market MT AMT DCT CVT AT HVT Automated TM Rate
Source: Company data, IHS, Credit Suisse estimates Source: Company data, IHS, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 7 02 October 2015
Sharp increase in automatic transmission adoption rate in China We see the growing automatic transmission adoption rate in the Chinese market, which has emerged as the world’s largest auto market, as a key factor in driving the global automatic transmission market in the future. Automatic transmission adoption in China increased from 9.5% in 2010 to 30.6% in 2014, and we expect it to reach 41.6% in 2020. As a result, Chinese automatic transmission volume should increase from 5.91mn units in 2014 to 11.83mn units in 2020. Automatic transmission volume is thus likely to grow at an average annual rate of 12.3% even after 2015. While a temporary slowdown in the Chinese auto market has raised investor concerns, we think the Chinese automatic transmission market should be able to maintain relatively stable growth, supported by sustained growth in the automatic transmission adoption rate.
Figure 12: Substantial increase in AT adoption rate in Figure 13: Anticipate average annual growth rate of 12.3% China in AT volume in China 30,000 Thousand Units 45% 14,000 Thousand Units 40% 25,000 12,000 35% 10,000 20,000 30%
25% 8,000 15,000 20% 6,000 10,000 15% 4,000 10% 5,000 2,000 5%
0 0% 0 2010 2011 2012 2013 2014 2015E2016E2017E2018E2019E2020E 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
MT Automated Transmission Automated TM Rate Automated Transmission
Source: Company data, IHS, Credit Suisse estimates Source: Company data, IHS, Credit Suisse estimates
Conventional AT to maintain highest share among automatic transmission systems; trend toward transmissions with higher numbers of gears to continue Although we anticipate volume growth in CVT, which is increasingly used in front-engine, front-wheel drive (FF) cars manufactured by Japanese automakers, and DCT, whose adoption has picked up among European/US automakers, we still look for conventional AT to maintain the largest share (57%) in automatic transmission systems in 2020. Also, amid growing demand for automatic transmissions, we expect the trend toward higher numbers of gears in AT to gain momentum as the need for autos to comply with environmental regulations also increases. In 2014, six-speed AT held the highest market share at 60.5%, but its weighting is expected to decline to 36.1% in 2020. Instead, eight-speed AT, which held a 10.9% share in 2014, is likely to increase its share to 23.5% in 2020, while nine- speed AT should grow from 2% to 21% and 10-speed AT from 0% to 10% over the same period.
Aisin Seiki (7259 / 7259 JP) 8 02 October 2015
Figure 14: Conventional AT likely to maintain largest Figure 15: Trend toward AT with higher numbers of gears automatic transmission market share to continue 60,000 Thousand Units 35,000 Thousand Units
50,000 30,000
25,000 40,000 20,000 30,000 15,000 20,000 10,000
10,000 5,000
0 0 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E AMT DCT CVT AT HVT 3 Speed 4 Speed 5 Speed 6 Speed 7 Speed 8 Speed 9 Speed 10 Speed
Source: Company data, IHS, Credit Suisse estimates Source: Company data, IHS, Credit Suisse estimates
HVT market growing in tandem with greater demand for electric vehicles With environmental regulations growing increasingly strict (Europe is a leading indicator in this regard), automakers will likely be forced to move forward with electric powertrains. Amid this trend, sustained growth is also likely for the HVT market. HVT (mainly used in hybrid vehicles, in which Japanese automakers lead the market) accounted for a mere 5.3% of the automatic transmission market in 2014, but with further increases in hybrid vehicles and the introduction of new plug-in hybrid vehicles by European/US automakers, we expect HVT’s share to rise to 10.2% in 2020.
Figure 16: HVT market growing in tandem with greater demand for electric vehicles 60,000 Thousand Units 12%
50,000 10%
40,000 8%
30,000 6%
20,000 4%
10,000 2%
0 0% 2010 2011 2012 2013 2014 2015E2016E2017E2018E2019E2020E
Other Automated TM HVT HVT Rate
Source: Company data, IHS, Credit Suisse estimates
Market share growth likely to continue for Aisin Seiki Aisin Seiki holds an overwhelming share of the global automatic transmission market Aisin Seiki, which counts Aisin AW among its group companies, already holds an overwhelming share in the automatic transmission market. The company not only has conventional ATs but also CVTs and HVTs in its diverse product lineup, and it has a track record of supplying not only Toyota but also many other overseas automakers including VW and GM. The company also boasts a manufacturing scale substantially larger than its rivals’ and holds a share of the global automatic transmission market we estimate at
Aisin Seiki (7259 / 7259 JP) 9 02 October 2015
16.4%. Jatco of Japan, Hyundai Powertech of South Korea, and ZF and Getrag of Germany follow Aisin Seiki in market share. Aisin Seiki’s global market share is likely to continue upwards in the future and should reach 21% in 2020. In addition to sales growth effects from supplying automakers in the developed markets, increased adoption of its products by automakers in emerging markets, including by local Chinese automakers, should drive Aisin Seiki’s sales and market share.
Figure 17: Overwhelming share of the global automatic Figure 18: Aisin Seiki’s market share growth likely to transmission market continue 60,000 Thousand Units 25%
Aisin Seiki 50,000 16.4% 20%
40,000 15%
Jatco 11.6% 30,000 Others 50.3% 10% 20,000 Hyundai Powertech 5.8% 5% 10,000 ZF 5.3% Getrag 3.3% 0 0% Toyota In-house 2010 2011 2012 2013 2014 2015E2016E2017E2018E2019E2020E 7.3% Others Aisin Seiki Automated TM Aisin Seiki Share
Source: Company data, IHS, Credit Suisse estimates Source: Company data, IHS, Credit Suisse estimates
Stable growth at the conventional AT business likely in the longer term Conventional AT volume set to increase to 11.1mn units in FY3/21 We forecast Aisin Seiki’s conventional AT volume to rise 12.7% YoY to 7.749mn units in FY3/16. We also forecast the company’s conventional AT volume to grow to 11.1mn units in FY3/21. Although volumes are likely to fall somewhat short of guidance (7.9mn units) in FY3/16, we still expect the company to maintain a high growth rate. Production ramp-up following capacity expansion at the Tianjin plan is likely to contribute to volume growth. By customer, we look for volumes to fall short of plan for VW and PSA in China, but look for volume growth in supplies to local Chinese automakers, other European automakers, and Toyota. In particular, we look for conventional AT supplies for locally manufactured SUVs in China and new business to contribute to volume growth. Among European automakers, we see volume growth in supplies to Volvo and BMW. With Toyota, we look for a contribution from increased HVT production for the new Prius model in Japan in 2H FY3/16. Meanwhile, we forecast FY3/21 AT volume to surpass the company’s target of 10.0mn units and reach 11.1mn units under our base scenario. From FY3/16 through FY3/21, volume should continue to grow at an average of 7.4% YoY, substantially higher than the global auto market’s growth rate. The Chinese market, in which automatic transmission adoption continues to grow, is likely to account for roughly 40% of the volume growth during this period. By customer, volume growth is likely to continue for European automakers including VW, PSA, BMW, and Volvo and accelerate for Chinese local automakers such as Changan Automobile and Dongfeng Motor. In addition to CVTs, sales of existing two-motor HVTs and newly developed one-motor HVTs are also likely to increase to automakers other than Toyota. Also, depending on customer enquiries and the level of production capacity upgrades, we think there is still a chance for sales volume growth to as much as 12mn units in FY3/21.
Aisin Seiki (7259 / 7259 JP) 10 02 October 2015
Figure 19: AT sales volume to increase to 11.1mn units in FY3/21 12,000 Thousand Units
10,000
8,000
6,000
4,000
2,000
0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
Toyota G Japanese Others VW G D3 Chinese Local European Asia Others
Source: Company data, Credit Suisse estimates
Expansion of production capacity, particularly overseas Production capacity expansion is likely to continue for now in order to deal with a substantial increase in AT volume fueled by sales growth. Global AT production capacity was around 7mn units in FY3/15 (just under 6mn units in Japan and 600,000 units each in North America and China). Since the start of FY3/16, capacity has been increased at Line 2 of Tianjin Plant No. 2, and capacity expansion currently underway at the Okazaki East Plant in Japan is also likely to continue over the next few years (beyond FY3/17). The company is also scheduled to bring online a new plant in Thailand in 2017. Moreover, Aisin Seiki may consider establishing new plants in Central and South America, including in Mexico, in the longer term. As a result, the overseas production ratio of ATs is likely to rise from around 15% in FY3/15 to more than 35% in FY3/21.
Figure 20: Expansion of production capacity, particularly overseas 12,000 Thousand Units 40% 35% 10,000 30% 8,000 25%
6,000 20%
15% 4,000 10% 2,000 5%
0 0% FY14 FY15E FY16E FY17E FY18E FY19E FY20E
Japan US China Others Overseas Production Rate
Source: Company data, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 11 02 October 2015
Dealing with all-around automatic transmission market growth Supplying almost all types of transmissions, from light vehicles to commercial vehicles Aisin Seiki, which has an overwhelming share of the global transmission market, boasts a wide lineup of products that have evolved in response to diverse market needs. Among Aisin Seiki, Aisin AI, and Aisin AW, the Aisin group handles supplies of MT, AMT, AT, CVT, and HVT, and the products are mounted on diverse models from light vehicles to commercial vehicles as well as on industrial vehicles such forklifts, holds the top global market share in conventional AT and other automatic transmission systems. We expect the company to maintain its top market share in the future and deal with all-around growth in the transmission market by leveraging its diverse product line-up. Growth in FR-AT, particularly for trucks and large vehicles Starting with the launch of the 3-speed Toyoglide AT, Aisin AW’s (then Aisin-Warner) first product, launched in 1969, Aisin Seiki’s automatic transmission technology has evolved over time. The key features of FR-AT (front-engine rear-wheel drive AT), which has its roots in Toyoglide, include weight balance and stable steering/vehicle performance (even on large vehicles), and its adoption increased over time, particularly on large/luxury vehicles with higher engine output. The number of transmission gears has now progressed to eight-speed due to greater fuel economy requirements, but the company still manufactures a large number of high torque-capacity four- and six-speed ATs for trucks (where higher output is a priority) and for emerging markets (due to road conditions). Aisin Seiki holds a large market share in conventional ATs for light vehicles (light wagons/light trucks) and for commercial vehicles, and the company is likely to expand conventional AT sales particularly for emerging markets, trucks and large luxury vehicles in the future. Aisin AI is also involved in manufacturing transfer units that convert front-engine, rear-wheel drive into four-wheel drive; the group’s ability to handle a variety of auto model specifications is also a strong point of Aisin Seiki. In FF-AT, adoption of multi-speed models increasing on small and midsize autos The most common AT system is currently FF-AT (front-engine front-wheel drive AT). FF- AT’s adoption increased on small and midsize passenger cars, as the systems are not only easy to mount but also improve efficiency in terms of interior space. FF-AT was developed after FR-AT; Aisin AW started manufacturing its first model of FF-AT in 1983 and went on to manufacture the world’s first 6-speed FF-AT in 2002, demonstrating a sharp increase in both function and scale. Since these are used in models where greater fuel economy requirements trump engine output, there is an increasing need for higher gears. Currently, six-speed and higher multi-speed models have become the standard in developed markets, while six-speed AT adoption is gradually expanding in emerging markets. In line with stricter fuel economy regulations, future sales growth is likely to be centered around six-speed and higher ATs.
Aisin Seiki (7259 / 7259 JP) 12 02 October 2015
Figure 21: History of Aisin AW’s FR-AT/HVT Fwd Launch Type Model Code Speed Year 70 75 80 85 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10－ Toyoglide Toyoglide 1969 03-55 1972 3-Speed 03-56 1979 Type-03 03-75 1981 03-95 1980 03-50 1977 03-51 1982 03-70 1978 03-71 1979 03-72 1983 03-70L 1981 03-71L 1980 03-72L 1983 03-70LE 1983 03-71LE 1981 03-72LE 1983 Type-03 03-70LS 1998 03-71LS 1998 03-72LS 1998 30-40E 1987 30-43E 1990 30-40LE 1984 30-41LE 1989 30-42LE 1990 4-Speed 30-43LE 1990 30-40LS 1996 30-41LS 1996 30-43LS 1999 30-80LE 1985 30-83LE 1990 31-80LE 1993 31-81LE 1992 31-80LS 1998 30-40Ei 1992 Type-30 30-40LEi 1991 30-41LEi 1990 30-42LEi 1989 30-43LEi 1993 30-40LSi 1995 31-80LEi 1997 31-81LEi 2002 TW-40E 2003 Type-TW TW-40LE 2005 TW-40LS 2005 30-50LEi 1991 Type-30 30-50LSi 1995 35-50LS 1997 Type-35 35-51LS 1998 5-speed TB-50LE 2002 TB-50LS 2002 Type-TB50 TB-50SN 2003 TB-50NF 2004 TB-60SN 2003 TB-61SN 2003 TB-65SN 2004 Type-TB60 TB-68LS 2006 6-speed TB-60NF 2003 TB-61NF 2004 TR-60SN 2002 Type-TR TR-61SN 2003 Type-AWR AWR6B45 2014 TL-80SN 2006 Type-TL TL-80NF 2008 8-speed Type-TR TR-80SD 2010 Type-AWR AWR8L35 2013 Type-30 30-40SD 2002 Type-35 35-50SD 2001 HVT HR-10 2006 Type-HR HR-10F 2007 Type-AWR AWRHT25 2012 Source: Company data, Credit Suisse
Aisin Seiki (7259 / 7259 JP) 13 02 October 2015
Figure 22: History of Aisin AW’s FF-AT/CVT/HVT Fwd Model Launch Type 70 75 80 85 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10－ Speed Code Year 20-30 1983 3-Speed Type-Z 20-30L 1983 10-40L 1983 10-41L 1985 10-42L 1990 11-40L 1983 11-42L 1989 Type-Z 11-80L 1987 10-40LE 1983 10-41LE 1992 10-42LE 1990 11-40LE 1989 11-41LE 1986 11-43LE 1997 11-80LE 1995 70-40LE 1992 70-41LE 1993 Type-Z II 71-40LE 1997 71-41LE 1999 70-40LS 1994 71-40LS 1997 72-40LE 2000 72-41LE 2000 Type-Z III 4-Speed 73-40LS 2001 73-41LS 2001 50-40E 1998 50-42E 1998 50-40LE 1988 Type-50 50-41LE 1989 50-42LE 1991 50-40LM 1998 50-40LN 1995 60-40LE 1992 60-41LE 1997 Type-60 60-40SN 1997 60-41SN 1997 80-40LE 2002 81-40LE 1999 Type-80 80-40LS 1998 81-40LS 1999 90-40LE 2000 91-40LE 2000 Type-90 90-40LS 1999 91-40LS 2001 Type-AWF4 AWF4S15 2012 55-50SN 1998 Type-55 55-51SN 2002 55-51SNC 2003 5-speed 95-50LS 2001 Type-95 95-51LS 2003 96-50LS 2006 TF-60SN 2002 Type-TF60 TF-61SN 2003 TF-62SN 2003 Type-TF70 TF-70SC 2009 TF-80SC 2003 6-speed Type-TF80 TF-81SC 2004 Type-TM60 TM-60LS 2008 AWF6F16 2013 Type-AWF6 AWF6F25 2013 AWF6F45 2013 AWF8F35 2012 8-Speed Type-AWF8 AWF8F45 2013 XA-10LN 2004 XA-11LN 2008 Type-XA XA-12SN 2010 CVT XA-15LN 2002 Type-XB XB-20LN 2006 Type-AWFCX AWFCX12 2012 Type-AWFCX AWFCX18 2012 HD-10 2004 Type-HD HD-20 2008 HVT Type-HF HF-10 2008 Type-AWFHT AWFHT15 2010 Source: Company data, Credit Suisse
Aisin Seiki (7259 / 7259 JP) 14 02 October 2015
Figure 23: Aisin AW’s key FR-AT models (current) Approx. Forward Torque Drivetype Core Model Code Family Vehicles (Example) Production Site Speeds Range Volume
TW-40E 130Nm 60,000 Suzuki Every Ogawa (Aisin Seiki)
4-speed 03-70LS 215Nm 50,000 Toyota Innova Anjo
30-40LS 343Nm 450,000 Toyota Fortuner Anjo
5-speed TB-50LS 450Nm 580,000 Toyota Hilux Anjo/AWNC
TB-65SN 310Nm 100,000 Mazda Roadster Anjo
AWR6B45 450Nm 20,000 Lexus IS Anjo
AT-FR
6-speed TB-61SN 450Nm 180,000 Toyota Crown Anjo/Tianjin/AWNC
TB-68LS 650Nm 120,000 Toyota Tundra AWNC
Ogawa/ADI A45X 1000Nm 50,000 Chrysler RAM HD (Aisin Seiki)
AWR8L35 450Nm 30,000 Toyota Crown Royal Okazaki
8-speed TL-80SN 550Nm 50,000 Lexus LS Okazaki Higashi
TR-80SD 850Nm 160,000 Audi Q7 Okazaki
Source: Company data, IHS, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 15 02 October 2015
Figure 24: Aisin AW’s key FF-AT models (current) Approx. Forward Torque Drivetype Core Model Code Family Vehicles (Example) Production Site Speeds Range Volume
4-Speed AWF4S15 150Nm 510,000 Toyota Corolla Anjo/Tahara/Okazaki/Suzhou
55-51SN 350Nm 50,000 Guangzhou Chuanqi Anjo
5-speed
95-51LS 350Nm 10,000 Toyota EU Camry Okazaki/Kinuura
AWF6F16 250Nm 1,500,000 VW Polo Anjo/Tahara/Tianjin
AT-FF TM-60LS 300Nm 1,030,000 Toyota Camry Tahara/Kinuura
6-speed
AWF6F25 300Nm 350,000 Peugeot 308 Anjo/Tahara/Tianjin
AWF6F45 450Nm 500,000 VW Tiguan Anjo/Tahara
AWF8F35 350Nm 20,000 Lexus RX Anjo
8-Speed
AWF8F45 460Nm 120,000 Volvo S60 Anjo/Tahara
Source: Company data, IHS, Credit Suisse estimates
Locking in CVT/HVT market that is growing in tandem with stricter fuel economy regulations Aisin AW is also involved in CVT/HVT, the adoption of which is increasing as fuel economy regulations grow stricter. Jatco, a leader in the CVT market, boasts an overwhelming global share, but Aisin AW is gradually expanding its share, mainly for Toyota’s smaller autos. Unlike conventional ATs, CVTs do not shift speed by means of gears. They instead control engine output using the belt’s expansion and contraction. Their strength lies in seamless acceleration (i.e., no gear shift shock) and the elimination of potential mechanical loss of engine output due to gears. On the other hand, since CVTs use belts, their maximum level of output and durability (input torque) is inferior to that of conventional ATs, so their adoption mainly increased on small autos. CVTECH, a subsidiary of Aisin AW that makes belts (a core CVT component), has a base inside the premises of Toyota Hokkaido (Toyota’s transmission manufacturing plant) and shares key components with Toyota’s in-house manufactured CVTs. We are focusing on Aisin AW’s future CVT sales expansion to customers other than Toyota. We believe market expectations will also hinge on the company expanding CVT sales to overseas automakers in order to grab market share from Jatco, which boasts an overwhelming share for Nissan. Aisin AW developed an FF hybrid system for the first time in 2004 and went on to launch the world’s first twin-motor FR-HVT in 2006. Since then, the company has developed an integrated system starting with the development of HVT system to the production of
Aisin Seiki (7259 / 7259 JP) 16 02 October 2015 motors. While FF-HVT supplies for the Prius are split between Aisin AW and Toyota’s in- house manufacturing, the company appears to be supplying FR-HVT almost exclusively. Among clients other than Toyota, Aisin AW has supplied HVTs to Ford and has supplied eight-speed ATs to Volkswagen with built-in motors. We anticipate an increasing shift to electric-powered autos in the auto market in tandem with stricter fuel economy regulations and look for Aisin AW’s HVT technology to contribute to the increase in its market share.
Figure 25: Aisin AW’s key CVT/HVT models (current) Approx. Forward Torque Drivetype Core Model Code Family Vehicles (Example) Production Site Speeds Range Volume
AWFCX12 135Nm 210,000 Toyota Ractis Tahara
XA-10LN 135Nm 50,000 Toyota Vitz Tahara
CVT CVT
XA-11LN 135Nm 50,000 Toyota iQ Tahara
AWFCX18 160Nm 200,000 Toyota Porte Okazaki Higashi
AWRHT25 230Nm 50,000 Toyota Crown-Hv Okazaki-Higashi
HV-FR HEV HR-10 350Nm 5,000 Lexus GS-Hv Okazaki-Higashi
HR-10F 545Nm 5,000 Lexus LS-Hv Okazaki-HIgashi
AWFHT15 170Nm Okazaki Toyota HV-FF HEV 300,000 Prius, Camry Hv HF-10 250Nm Okazaki
Source: Company data, IHS, Credit Suisse estimates
Breakdown of conventional AT earnings structure AT cost weighting by key mechanism Conventional AT, made up of roughly 1,000 components, is said to have the highest number of parts for any auto unit component. A precise assembly of these parts creates a transmission unit that can efficiently transfer and control the engine’s power to the wheels. By amplifying, transferring, and shifting engine torque, conventional AT sends the engine’s output to the wheels in an appropriate and flexible manner, and there are multiple mechanisms within the AT that enable it to perform this function flawlessly. The power of the engine is conveyed first to a mechanism called a torque converter, which transmits it to the gear train inside of the transmission. The torque converter uses its internal turbine mechanism to amplify torque and cuts off the power from the engine during a gear shift (similar to the clutch function in an MT). Moreover, the torque converter must be highly durable as it receives all of the engine power. It is also high value-added since it is a single unit component that has multiple functions.
Aisin Seiki (7259 / 7259 JP) 17 02 October 2015
The gear train is a composite of various gears. It shifts gears by changing the combination of gears, and it delivers power to the wheels via the drive shaft. Since the gear train is the mechanism with the most parts in a conventional AT, and since most of those parts are precision-machined, it accounts for a significant proportion of the cost of the AT. In order to prevent gear burnout and operate the AT’s internal clutch/brake for use in gear combinations, it is necessary to generate hydraulic pressure inside the AT; this is handled by mechanisms known as the transmission oil pump and the valve body. All of these mechanisms are housed in the transmission case (typically made of die-cast aluminum), and the transmission assembly is complete once all external components including connectors have been attached to the transmission case. We estimate the gear train accounts for the largest proportion of the cost structure, as it is made up of more parts than any other unit component and requires different processes such as machining and heat treatment. After the gear train, the transmission case (as it is a substantial component with a large area that requires machining) and its assembly account for the largest proportion of costs, followed by the torque converter, which is a high value-added component in its own right.
Figure 26: AT cost breakdown by key mechanism
Torque Converter Geartrain Others Consists approx. Consists approx. Consists approx. 13.6% of the total 47.1% of the total 6.0% of the total component cost component cost component cost
Oil Pumps Valve-Body Transmission Cases Consists approx. Consists approx. Consists approx. 6.3% of the total 9.8% of the total 17.2% of the total component cost component cost component cost (Includes assembly)
Source: Company data, Credit Suisse estimates
AT manufacturing cost estimate Conventional AT components are wide-ranging (from bolts to the transmission case and electronic control solenoids) and require various processes during the manufacturing stage (e.g., pressing, cutting, sintering, heat treatment, and die casting). Accordingly, it is difficult for top-tier conventional AT makers to have all of the manufacturing processes in- house, so the cost of materials, mainly purchased parts, accounts for a large proportion of the AT manufacturing cost. According to our estimates, material costs account for more than 60% of a conventional AT unit’s cost. Also, material management costs tend to be high as external part procurement accounts for the bulk of the material cost. We therefore believe total materials costs (including cost of materials and cost of material management) account for nearly 80% of the total cost. Meanwhile, Aisin AW sources the majority of
Aisin Seiki (7259 / 7259 JP) 18 02 October 2015 components (including torque converters, cases, gears, and friction materials) from Aisin group companies, so we believe there are fairly large overlapping fixed costs such as internal/external material management costs. Conversely, duplication of the above fixed costs can be corrected if Aisin AW, a top-tier AT maker, were able to bring components procured from within the Aisin group under its own management.
Figure 27: Material/material management costs account for most of AT cost 100% Other Fixed Cost 10% 90% Fixed Cost In/Outsource 28% 80% Admin Cost 18% 70% Process Cost 4%
60%
50%
40% Variable Cost Material Cost 72% 30% 68%
20%
10%
0%
Source: Company data, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 19 02 October 2015 Ready for restructuring round 2 Expect further restructuring with focus on AT Likely to be at center of Toyota group restructuring moves In late 2014, Aisin Seiki, together with other members of the Toyota group, announced plans to: (1) strengthen the group’s brake business, (2) consolidate the MT business, (3) integrate Shiroki into Aisin Seiki, and (4) transfer automotive seat operations to Toyota Boshoku. The details are as follows: 1) Strengthening of brake business under ADVICS: Aisin Seiki, ADVICS, Denso, Sumitomo Electric Industries, and Toyota Motor announced they had agreed to consolidate brake operations under ADVICS to further strengthen the competitiveness of the Toyota group’s brake business. Aisin Seiki, Denso and Toyota agreed to strengthen development support to ADVICS through the dispatch of personnel and other measures starting in January 2015. From January 2016, manufacturing of electronically controlled brake systems currently conducted at Aisin Seiki’s Handa Plant and Denso’s Daian Plant will be gradually transferred to ADVICS' Handa Plant. 2) Consolidation of MT operations under Aisin AI: Aisin AI, an Aisin Seiki subsidiary, and Toyota Motor agreed to consolidate the development and production of manual transmissions under Aisin AI. The consolidation of MT operations, which are currently spread across the two companies, aims to strengthen the competitiveness of the MT business by facilitating a more efficient allocation of resources under one roof. Development and production of MT currently carried out at Toyota’s Kinuura Plant will be transferred to Aisin AI around mid-2016. Aisin AI's FY3/15 consolidated results included sales of ¥126.4bn and OP of ¥2.6bn. A specialized manufacturer of manual transmissions, Aisin AI supplies MT systems to automakers in Japan and overseas. The company produced 1.44mn MT systems in FY3/15. Toyota’s internal MT production volume during the same year was about 1.30mn. Toyota manufactures six-speed MTs at its Kinuura Plant in Japan, five-speed MTs at plants in the Philippines and India, and both five- and six-speed MT systems at its plant in Poland. 3) Management integration of Shiroki: Aisin Seiki announced that it would turn equity- method affiliate Shiroki into a wholly owned subsidiary via a share exchange. The main goal is to strengthen the competitiveness of the two companies’ auto body parts businesses. Integration will likely enable the two to optimize their combined production network by making mutual use of global production facilities. In addition, they plan to make more efficient use of development resources by having Aisin Seiki concentrate on systems and modular products while Shiroki focuses on external and functional body parts. They also expect to achieve synergies and expand sales by, for example, sharing customer bases. Aisin Seiki’s sales of auto body parts amounted to ¥524.4bn in FY3/15, while Shiroki’s sales totaled ¥125.3bn. 4) Transfer of mechanical seat frame components to Toyota Boshoku: Aisin Seiki and Shiroki announced that they would transfer their separately operated mechanical seat frame component businesses to Toyota Boshoku. These components are supplied to Toyota Motor. Specifically, Aisin Seiki and Shiroki will transfer their development and production of mechanical seat frame components, such as recliners and slide rails, to Toyota Boshoku. Aisin Seiki has been a core part of Toyota’s supply chain, providing the automaker with a wide range of products, including drivetrain, engine, body, brake & chassis, and electronic products. The Toyota supply chain remains laden with duplication inside and outside of the Toyota group. We therefore expect to see further restructuring of the group supply chain, with Aisin Seiki at the center of restructuring moves. Aisin Seiki itself has numerous consolidated companies, the result of spinning off operations into separate companies
Aisin Seiki (7259 / 7259 JP) 20 02 October 2015 over the years. We think that a restructuring within the Aisin group that corresponds to moves in the Toyota group will contribute to greater efficiency of Toyota’s supply chain. Get ready for Round 2 of Aisin group’s reorganization We think the Aisin group is very likely to follow up the string of restructuring moves announced toward the end of 2014 with a second round of reorganization. Toward the end of 2015, Toyota will launch the next-generation Prius, widely expected to be the first car to be based on Toyota’s new modular platform, the Toyota New Global Architecture (TNGA). The next-generation Camry, expected in early 2017, is also likely to come equipped with TNGA engines and transmissions. Aisin Seiki is deeply involved in the development of TNGA units, and we would not be surprised to see further business restructuring revolving around components from TNGA. Shifts in supply share precede reorganizations An examination of Aisin Seiki’s end-2014 release of data on supply shares of MT and brake systems supplied to Toyota, shows that the shift toward supply chain consolidation started before the announcement of the planned restructurings. Take MT for example. In 2005, Aisin Seiki supplied 68.3% of MT systems installed at Toyota’s domestic plants. By 2010, this figure had risen to 90% and in 2014 it expanded to 97%. Similarly, its supply of brake systems to domestic Toyota plants rose from 70% in 2005 to 79.7% in 2010 and 89% in 2014. Based on this trend, we searched for other product areas likely to undergo restructuring.
Figure 28: Changes in supply share preceded reorganization Toyota Toyota Toyota Product Supplier Domestic Domestic Domestic Notes Share 2005 Share 2010 Share 2014 Aisin Seiki 68.3% 90.0% 97.0% MT business consolidated to Aisin AI (Aisin MT In-House 31.7% 10.0% 3.0% Seiki) - November 2014 Aisin Seiki 70.0% 79.7% 89.0% Brakes Brake business consolidated to Advics (Aisin Denso 0.7% 0.4% 0.1% (ABS, Others) Seiki)- November 2014 In-house 25.2% 12.3% 7.1% Source: Company data, IRC, Credit Suisse estimates Focus on AT business Aisin’s share of Toyota AT components on the rise We have focused our attention on conventional AT components, such as AT assembly and torque converters. Similar to the situation with MT components, Toyota has been shifting its in-house production of conventional AT parts to some of its affiliates, in this case, mainly Aisin group company Aisin AW. For example, Aisin AW has been taking over conventional AT assembly from Toyota, raising its share of conventional AT systems installed on domestically produced Toyota vehicles from 53.9% in 2005 to 62.7% in 2014. Similarly, Aisin AW's share of Toyota’s domestic torque converter requirements has risen from 51.1% in 2005 to 56.5% in 2014. Aisin’s consolidation of its Toyota drivetrain supply chain is in keeping with Toyota Motor’s longer-term supply chain strategy. If the Aisin group were to supply all AT systems used in Toyota vehicles made around the world, its annual AT shipments would expand to about 6.1mn units (about 3.0mn units manufactured in-house by Toyota and another 3.1mn made by the Aisin Seiki group). We estimate this shift would add at least ¥35bn to Aisin Seiki’s annual consolidated OP, boosting its FY3/15 OP of ¥165.8bn, for example, by more than 20% and therefore having a rather large impact on company earnings. In addition, if the Aisin group were to take over all of Toyota’s in-house AT production, the Aisin group’s global output of AT systems would likely expand to 15mn units in FY3/21.
Aisin Seiki (7259 / 7259 JP) 21 02 October 2015
Figure 29: Shift in shares of Toyota AT parts is under way Automatic Dom. Share Dom. Share Dom. Share Toyota G Transmission 2005 2010 2014 In-House 46.1% 53.2% 36.4% x Aisin Seiki 53.9% 46.8% 62.7% x Daihatsu 0.0% 0.0% 0.5% x
Dom. Share Dom. Share Dom. Share Torque Converter Toyota G 2005 2010 2014 In-house 57.9% 52.7% 41.0% x Aisin Seiki 51.1% 38.6% 56.5% x Exedy 0.0% 8.7% 2.5% x Source: Company data, IRC, Credit Suisse estimates
Figure 30: Takeover of Toyota AT production would boost Aisin group’s volume 16,000 Thousand Units 14,000
12,000
10,000
8,000
6,000
4,000
2,000
0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E AT Original Volume Toyota Inhouse AT Volume
Source: Company data, Credit Suisse estimates
Expecting internal restructuring of Aisin group Are newly established group corporate planning HQ and product divisions precursors of group restructuring? As of 1 January 2015, the Aisin group corporate structure includes a new Aisin-Group Corporate Planning Headquarters and several new product divisions. The establishment of these new organizational units is likely to lead to further restructuring of the group. The group planning HQ and product divisions were established to strengthen group management and business strategies from a groupwide perspective. More specifically, by bringing management of diverse product domains under more broad-based product divisions such as powertrain products, chassis & vehicle safety systems, and body products, management hopes to deepen and strengthen collaboration among group companies. While this new structure might be viewed as a return to Aisin Seiki’s former business division structure, bringing together planning for various group companies active in similar product domains under one management unit raises hopes that group companies that have been competing with each other in their respective areas of expertise will be reorganized into a more efficient organizational structure.
Aisin Seiki (7259 / 7259 JP) 22 02 October 2015
Figure 31: Aisin group’s new organizational structure
Board of Aisin Seiki: New Organizational Structure Directors ＊L&E： Life&Energy Products ＊A/M： Aftermarket Chairman CEO
Group Management Headquarter
Innovation Center
Powertrain Chassis/Safety Body Product L&E* A/M* Elec. Product Product Component Department Department Department Department Department Department
Material/ Powertrain Group Chassis/Safety Body Product Foundries Companies Group Companies Group Companies Gorup Companies
Source: Company data, Credit Suisse Expect group reorganization centering on AT/MT business In particular, we look for the Aisin group to create a more efficient supply chain by promoting restructurings and integration within the group, centering on its conventional AT & MT businesses, whose resources are concentrated in Aisin AW. This company is already highly dependent on other group companies; for example, its AT cases and shafts are processed by Aisin AI while its AT gears and drive plates are assembled by Aisin Kiko. In addition, as reported by the Nikkan Kogyo Shimbun and other media, Aisin AW and Aisin Kiko, which handles ATs for commercial vehicles, are likely to strengthen collaboration in the areas of product development and production. Further evidence of greater collaboration is the adoption of a personnel system that will see executives from the group’s various transmission-related businesses alternating as the director in charge of technology. The Aisin group has in the past transferred commercial rights for ATs used in mini vehicles from Aisin Kiko to Aisin AW, so we think there are few obstacles to reorganizing the group’s transmission business, which includes Aisin AI and Aisin AW, and that these obstacles can be easily cleared. We will also be watching developments at Exedy, an equity-method affiliate in which Aisin Seiki has a 33.7% stake. However, the two companies’ transmission businesses compete with each other in such product areas as torque converters and clutches. The Toyota group’s consolidation of its MT/AT supply chain will likely press Aisin Seiki and Exedy to seek greater synergies in common business areas. Synergistic effects likely from transmission business restructuring At Aisin AW, procured parts and materials account for a major portion of AT production costs. Also, the company is highly dependent on other Aisin group companies for key functional parts including transmission cases, gears, and torque converters. Parts procured from other group companies entail administrative costs, at the supplying group companies for materials produced in-house and at Aisin AW for materials made by external vendors. In other words, this structure results in cost duplications. If Aisin AW were to produce all the required parts and materials internally, this cost duplication could be eliminated. We estimate this could improve its marginal profit ratio by about 2%.
Aisin Seiki (7259 / 7259 JP) 23 02 October 2015
Figure 32: Significant duplication of external/internal administrative costs (current estimates)
Others Admin, 0.9% Other Fixed Torque T/C Admin, 2.0% Cost, 12.8% 'Converter, 8.8% Others, 4.4% Geartrain In- house Admin, Case/Assembly, 1.2% Case Purchased 12.4% Admin, 2.3% Geartrain Purchased Case In-house Admin, 5.9% Pumps, 4.5% Admin, 0.3%
ValveBody, Pumps Admin, Geartrain, 34.0% 6.4% 0.9%
Valvebody Admin, 1.4%
Source: Company data, Credit Suisse estimates Plenty of room to improve efficiency at brake business The Aisin group’s brake operations also have plenty of room for efficiency improvements, in our view. For example, Hosei Brake, a consolidated subsidiary of Aisin Seiki (shares owned 53.1% by Aisin Seiki and 46.9% by Toyota Motor), produces conventional brakes and parts, including both drum brakes and disc brakes. Many of the same products are also manufactured by ADVICS. Akebono Brake, not a Toyota group supplier, is also worthy of some attention because Toyota’s 11.4% equity stake in the company and Aisin Seiki’s 2.3% stake hold some potential for inclusion of Akebono in Toyota's brake supply chain. Aisin group's history of spinoffs and mergers Restructuring nothing new for the Aisin group The Aisin group’s history is full of corporate spinoffs and mergers. Aisin Seiki traces its roots back to 1942, when the Japanese army requested a new company be established to produce aircraft engines. The result was Tokai Hikoki, established through joint investment with Kawasaki Aircraft. Tokai Hikoki never began full production owing to a change in army policy; however, after the war it capitalized on its engine technology to become an automotive parts manufacturer. The company changed its name to Aichi Kogyo, which merged with another auto parts maker, Shinkawa Kogyo, to form Aisin Seiki. The history of spinoffs and mergers to facilitate entry into different lines of business that has resulted in today’s Aisin group began in 1969, when Aisin Seiki and Borg Warner formed a joint venture called Aisin-Warner, now known as Aisin AW. Today the Aisin group has six core companies engaged in a wide variety of automotive parts businesses. Aisin AW, in which Toyota Motor is directly invested, is a specialized maker of automatic transmissions and supplies the group with AT components and peripheral parts, such as drivetrain components. Aisin AI manufactures mechanical drivetrain products, such as manual transmissions, as well as gears and other related components. Aisin Chemical makes friction materials, and Aisin Takaoka specializes in automotive castings. Together under the leadership of parent Aisin Seiki, these six companies form a corporate group with highly complementary businesses. In 2001, three group companies (Aisin Seiki, Aisin Holdings of America, and Aisin Europe) acquired the shares in auto parts maker Exedy that were previously held by Nissan Motor. The acquisition has established Aisin Seiki as Exedy’s largest shareholder, and the two companies have formed a cooperative business alliance in the area of drivetrain components, especially in foreign markets. Given Exedy’s position as an equity-method affiliate of Aisin Seiki and the convergence of its core products—clutches and torque converters—with the Aisin group’s core drivetrain business, we see potential for Exedy to strengthen business ties within the group.
Aisin Seiki (7259 / 7259 JP) 24 02 October 2015
Also in 2001, Aisin Seiki joined with Toyota Motor, Denso, and Sumitomo Electric Industries to establish ADVICS as a separate company to strengthen the group’s brake & chassis business. In late 2014, as earlier noted, the companies announced they would consolidate their brake business under ADVICS and shift Toyota’s internal production of MT systems to Aisin AI. At the same time, it was announced that auto body parts company Shiroki would be integrated into Aisin Seiki and that automotive seat operations would be transferred to Toyota Boshoku. Aisin Seiki is active in a diverse range of key product areas in the Toyota supply chain, including drivetrain, engine, body, brake & chassis, and electronic products. Given the conspicuous duplication in the Toyota supply chain, both inside and outside of the Toyota group, we expect to see further restructuring and integration of the group, with Aisin group companies playing a central role. Future shape of Aisin group Duplication of supplied products is striking feature of current Aisin group Looking at the product lineups of the 12 main companies of the Aisin group, we note that each company has some specialized expertise in a specific area, but the more striking feature is the overlap in group companies' product lineups. Looking first at the largest and oldest six companies, Aisin Seiki is a Tier 1 supplier in all its product areas—engines, drivetrains, bodies, brake & chassis, and electronics. Aisin Takaoka is Japan’s largest specialized maker of automotive castings and is a Tier 1 or Tier 2 supplier of cast parts made from steel and stainless steel. The group’s sole maker of chemical products, Aisin Chemical, makes friction materials for clutches, brake pads, damping materials, and other chemical-based automotive components. Aisin AW is a worldwide leader in automatic transmissions and car navigation systems. Aisin AI originally specialized in manual transmissions, but lately it has become more dependent on its supply of AT cases and shafts to Aisin AW. Lastly, ADVICS has established itself as a global supplier of brake systems. The other six group companies, however, are sources of duplication. Hosei Brake is a supplier of conventional brake components, but its product lineup overlaps with ADVICS’. Aisin Sinei is a supplier of auto body parts, but its product lineup overlaps Aisin Takaoka's lineup of auto body framework parts, such as pillars. Aisin Keikinzoku has a broad lineup of aluminum die-cast products, but this lineup overlaps the one at Aisin Seiki’s Nishio Die- casting Plant in many areas. Aisin AW Industries (separate from Aisin AW) supplies torque converters, gears, and other conventional AT components, but plays second fiddle in these areas to Aisin Seiki’s Ogawa Plant and equity-method affiliate Exedy. Aisin Kiko supplies AT gears and drive plates to Aisin AW, but it also makes door locks, a core product of Aisin Seiki’s body parts business. While building their businesses independently with a focus on their individual areas of expertise, Aisin group companies have also established product lineups that overlap those of other members of the group. In the future, it will be increasingly important for the group to increase its comprehensive strengths, which increasingly will require a group reorganization aimed at enhancing efficiencies at each company and across the group.
Aisin Seiki (7259 / 7259 JP) 25 02 October 2015
Figure 33: Aisin group companies and their main products Chassis/ Aisin Group Powertrain Drivetrain Body Electronics Product Examples Brakes
Aisin Seiki ○ ○ ○ ○ ○ Overall
Aisin Takaoka ○● ○● ○ ● Exhaust Module, differential, pillars, etc Friction material, sound insulation, intake manifolds, Aisin Chemical ○ ● ● etc Aisin AW ○ ○ Automatic transmission, navigation system Manual transmission, 4WD transfer, machining of Aisin AI ○● drivetrain components, etc ADVICS ○ Brake system, disk/drum brakes
Hosei Brake Industry ● ○ Disk/drum brakes, stamping Pillar, other structural body components, gear Aisin Sin'ei ● ○● stamping, etc Aisin Keikinzoku ○● ● ○● ● Diecast, aluminum components, etc
Aisin AW Industries ● Transmission components
Aisin Kiko ● ● Gear machining, driveplate, door-locks Aisin Development Construction, insurance agency, etc Note: ○ = Tier 1, ● = Tier 2 or lower Source: Company data, Credit Suisse Strengthening collaboration could trigger group restructuring/integration If Aisin Seiki advances collaboration within the Aisin group, one of the goals of its medium- term management plan, a likely side effect will be the restructuring and integration of core group companies in an effort to eliminate duplication within the product lineups. The new product divisions that have been established in Aisin Seiki’s new organizational structure are tasked with strengthening cooperation among group companies in each product area. Given the many areas of overlap in the product lineups of group companies active in the same business domain, any effort to maximize the group’s comprehensive strength should focus on creating a leaner organization, which most likely will lead to the restructuring and integration of core group companies. Figure 34: Shift to new organizational structure focused on strengthening business tie- ups within the Aisin group
＊L&E： Life&Energy Products ＊A/M： Aftermarket Board of Directors
Chairman/CEO
Innovation Center Group Management Headquarter
Powertrain Chassis/Safety Body Product L&E* A/M* Elec. Product Product Component Department Department Department Department Department Department
Material/ Powertrain Group Chassis/Safety Body Product Foundries Companies Group Companies Group Companies
Gorup Companies Group Company
Source: Company data, Credit Suisse
Aisin Seiki (7259 / 7259 JP) 26 02 October 2015
Our vision of the future shape of the Aisin group Assuming restructuring and integration of group companies takes place over the longer term along the lines indicated by our above analysis, we have drawn up our vision of the Aisin group of the future. First, we expect to see restructuring and integration of group companies in the three core product domains—powertrain products, chassis & vehicle safety systems, and body products. In the powertrain product domain, restructuring will focus on creating a more efficient supply chain for transmissions and related components. Currently, these products are manufactured by several group companies, so we look for management to seek to eliminate this duplication in its supply capabilities. Aisin AW’s conventional AT business, a core driver of consolidated earnings, is procuring components and commissioning processes to other group companies, such as Aisin Seiki, Aisin AI and Aisin Kiko. We think greater consolidation of these activities will generate synergistic effects. Aisin Seiki and Toyota have already announced plans to consolidate manual transmission operations. If they did the same for automatic transmissions, by shifting in- house production at Toyota to Aisin AW, we think it would make a big contribution to Aisin Seiki’s profits. We also see a growing importance for generating synergies with equity- method affiliate Exedy by strengthening business ties, even while continuing the competition in torque converters and clutches. In chassis & vehicle safety systems, Toyota has already decided to consolidate its brake supply chain under Aisin group company ADVICS. We think even greater efficiencies could be created if it restructured the supply chain for conventional brake parts handled by a number of companies, including Hosei Brake. In body products, Shiroki will be integrated into Aisin Seiki, but several other group companies remain involved in the production and supply of auto body components. Given the mature state of technologies used to manufacture many of the products in this domain, we think it would be advantageous to pursue greater benefits of scale through further restructuring. Possible target areas are the supply of door locks by both Aisin Kiko and Aisin Seiki and the overlap between Aisin Sinei and Aisin Takaoka in auto body framework parts, including pillars.
Aisin Seiki (7259 / 7259 JP) 27 02 October 2015 Vision 2020 targets in sight Benefits ready to be reaped after building business base and going through growth phase Medium-term earnings forecast (through FY3/21) After constructing a business base in FY3/13–15 and going through a growth phase in FY3/16–18, Aisin Seiki appears ready to reap the benefits in FY3/19–21. Aisin Seiki could eventually achieve the numerical targets outlined in its Vision 2020 medium-term plan lasting through FY3/21: sales of ¥3.0tn, overseas business at 50%, ROIC of 15%. Our own forecasts call for sales to increase to ¥4.2tn by FY3/21, as we expect topline CAGR of 6% in FY3/16 and thereafter driven by increasing AT sales by Aisin AW. We also expect the overseas business ratio to reach 50% in FY3/21 due in part to overseas expansion of AT production capacity and ROIC to improve to 15.1%.
Figure 35: Sales should increase to ¥4.2tn in FY3/21 Figure 36: Overseas sales ratio should rise to 50% in FY3/21 4,500 Billion Yen 4,500 Billion Yen 55% 4,000 4,000 50% 3,500 3,500 45% 3,000 3,000 2,500 40% 2,500 2,000 35% 2,000 1,500 1,500 30% 1,000 1,000 25% 500 500 0 20% 0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
Sales Domestic Sales (LHS) Overseas Sales (LHS) Oveseas Sales Ratio (RHS) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 37: ROIC should reach target of 15% or higher
16% 15%
14%
13%
12%
11%
10%
9%
8%
7% FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
ROIC
Source: Company data, Credit Suisse estimates
Expecting FY3/21 OP to reach ¥361bn at a higher-profit/leaner Aisin We expect Aisin's OP to ratchet up to ¥4.2tn by FY3/21 due to organic growth, especially in conventional AT. Conventional AT sales should rise to over ¥1.5tn by that time due to rising volume of 11.1mn units, beating guidance at 10.0mn. Sales to overseas manufacturers, including Chinese local manufacturers, will likely increase due to growth in the proportion of vehicles fitted with AT. Outside of conventional AT, we expect sales
Aisin Seiki (7259 / 7259 JP) 28 02 October 2015 growth in hybrid electric vehicle transmissions (HVT) driven by the trend toward increasing use of electronics in autos and also look for growth in electric oil and water pumps, next- generation variable valve timing (VVT) devices, electric 4WD systems, and grille shutters. In automation, we expect growth related to advanced driver assistance systems (ADAS) including advanced parking assist (APA) systems and electronic stability control (ESC) for emergency braking. Given the above factors, we think the company's non-Toyota sales will rise to around 43% in FY3/21 as a result. Our OP forecast is ¥361bn for FY3/21. We expect OPM to improve to 8.6% by that time due to sales expansion efforts in high-value-added products such as AT. In addition, if the company can achieve gains in supply chain efficiency through a restructuring of the Toyota group (and the Aisin group within it), whose handling of a wide range of products (drivetrains, engines, bodies, brake & chassis components, and electronics) produces notable product overlap within the group, we would expect cuts in fixed costs and synergy benefits, leading to further earnings outperformance and higher margins. We believe Aisin Seiki can ratchet up to a leaner true major supplier in the medium term.
Figure 38: Higher AT sales should drive organic growth Figure 39: Non-Toyota sales ratio rising 1,600 Billion Yen 4,500 Billion Yen 45% 1,400 4,000 3,500 40% 1,200 3,000 1,000 35% 2,500 800 2,000 30% 600 1,500 1,000 400 25% 500 200 0 20% 0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
AT Sales Toyota Sales (LHS) Non Toyota Sales (LHS) Non Toyota Sales Ratio (RHS) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 40: OP should rise to ¥361bn by FY3/21 400 Billion Yen 10% 350 9% 8% 300 7% 250 6% 200 5%
150 4% 3% 100 2% 50 1% 0 0% FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
OP (LHS) OPM (RHS)
Source: Company data, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 29 02 October 2015
Capex likely to decline but remain high due to conventional AT capacity expansion Due partly to capacity expansion at the company's plant in Tianjin, China, and its Okazaki East plant, we expect capex to increase to ¥325bn in FY3/16 and then switch to a gradual decline. However, capex should remain around ¥250bn in FY3/21 due to parallel capacity expansion driven by growth in conventional AT sales. In addition to the previously announced new conventional AT plant in Thailand (scheduled to start operations in July 2017), Aisin Seiki could also expand production bases in such location as Latin America. We expect the company to continue to invest in expanding conventional AT capacity for now, especially overseas. Growth in depreciation should slow down after capex peaks, while R&D spending will likely increase to around ¥210bn in FY3/21.
Figure 41: Expecting gradual decline in capex 350 Billion Yen
300
250
200
150
100
50
0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
CAPEX Depreciation R&D
Source: Company data, Credit Suisse estimates
Substantial improvement in margins and ROIC We expect ROE to improve to 10.8% in FY3/21. Breaking ROE down into components, financial leverage could fall to 222% by FY3/21 by making use of accumulated cash, which we expect will be more abundant as free cash flow (FCF), rising after capex peaks out, should move into the black in FY3/17 and then continue to expand. On the ROA side, we see the value rising to 9.7% by FY3/21, enough to drive up ROE. Breaking down ROA, we see an OPM of component of 8.7% and an asset turnover component (ratio to sales) of 113% in FY3/21. Asset turnover has declined recently due to the company's focus on capex, but should rise sharply as the company moves into growth phase and recoups its capital spending.
Figure 42: ROE should improve to 10.8% by FY3/21 Figure 43: FCF should expand from FY3/17 12% 500 Billion Yen 400 11% 300
200 10% 100
9% 0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E -100 8% -200
-300 7% FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E -400
ROE Operating C/F Investing C/F Free C/F
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 30 02 October 2015
Figure 44: Expecting substantial improvement in ROE in Figure 45: Expecting rises in OPM, asset turnover tandem with rise in ROA 12% 310% 11% 120% 118% 11% 290% 10% 116% 10% 9% 114% 270% 112% 9% 8% 250% 110% 8% 7% 108% 230% 7% 6% 106% 104% 6% 210% 5% 102% 5% 190% 4% 100% FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
ROE (LHS) ROA (LHS) Financial Leverage (RHS) ROA (LHS) OPM (LHS) Asset Turnover (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Expecting further enhancement of shareholder returns Aisin Seiki’s dividend payout ratio (DPR) is around 30%. However, we think it will enhance shareholder returns in the medium term. Our FY3/21 forecast is slightly conservative as it assumes the company will keep its DPR at 30%. However, the company's cash position shows that DPR is still on the high side within its historical range. The total value of cash and cash equivalents and highly liquid marketable securities in FY3/15 was equivalent to 1.65 trading months on a consolidated sales basis, beating the level prior to the global financial crisis (0.7–1.0 trading months). As we expect cash flow to improve, we would not be surprised if the company decided to return surplus cash to shareholders. We think the company might also emulate Toyota Motor, Denso and other companies and switch to the total shareholder return concept and note that Aisin has bought back shares in the past, including in 2008.
Figure 46: DPR currently around 30% Figure 47: Cash and cash equivalents and liquid securities still at a high level 250 Yen 40% 2.5
200 35% 2.0
1.5 150 30%
1.0 100 25%
0.5 50 20%
0.0 0 15% FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
Dividend (LHS) Dividend Payout Ratio (RHS) Cash & Cash Equivalents & Liquid Securities/ Monthly Sales
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 31
JP) 7259 / (7259 Seiki Aisin Figure 48: Forecasts through FY3/21 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E
Profit & Loss Statement Sales 1,221,916 1,408,012 1,605,252 1,829,064 2,120,588 2,378,611 2,700,405 2,214,492 2,054,474 2,257,436 2,304,168 2,529,964 2,822,215 2,963,971 3,210,000 3,380,000 3,580,000 3,777,000 3,985,000 4,206,000 Gross Profit 165,830 196,676 228,091 249,580 290,906 317,944 385,201 191,348 262,703 319,400 304,383 347,071 410,079 416,035 467,000 500,000 543,000 586,000 637,000 693,000 EBIT 60,644 80,600 86,768 95,110 118,096 131,034 180,484 (3,489) 87,546 137,266 121,832 148,892 171,196 165,752 200,000 222,000 252,000 282,000 319,000 361,000 Recurring Profit 60,308 76,590 84,654 98,457 125,096 134,287 186,309 (4,965) 94,942 147,894 129,140 158,725 189,462 188,026 214,000 237,000 269,000 300,000 338,000 382,000 Income before income taxes and minority interests 60,308 105,197 77,335 92,729 125,096 134,287 186,309 (14,983) 57,665 147,894 129,140 158,725 189,462 183,710 214,000 237,000 269,000 300,000 338,000 382,000 Net Profit 25,651 47,994 34,719 46,718 61,095 66,889 91,654 (25,149) 16,605 69,643 55,497 77,518 90,089 77,318 101,000 112,000 128,000 142,000 160,000 181,000 Basic EPS 91.84 171.98 126.11 159.94 209.15 233.03 322.50 (89.36) 59.00 247.46 197.04 275.05 319.47 273.87 357.76 396.72 453.40 502.99 566.74 641.13 Book Value Per Share 1,546.21 1,612.96 1,771.12 1,928.58 2,361.66 2,662.78 2,725.67 2,202.86 2,328.68 2,440.39 2,573.95 3,038.88 3,542.60 4,108.86 4,355.85 4,631.85 4,946.77 5,293.54 5,686.31 6,125.08 EBITDA 140,882 166,950 184,331 201,078 241,129 276,310 347,966 178,568 257,213 282,097 259,589 288,092 320,196 326,752 400,000 441,000 482,000 519,000 560,000 603,000
Investments 90,700 124,100 143,100 165,200 259,540 197,806 212,003 220,224 83,821 133,200 150,700 195,000 204,700 247,800 325,000 300,000 280,000 270,000 260,000 250,000 Depreciation 80,238 86,350 97,563 105,968 123,033 145,276 167,482 182,057 169,667 144,831 137,757 139,200 149,000 161,000 200,000 219,000 230,000 237,000 241,000 242,000 R&D 67,600 80,000 89,000 95,500 95,152 103,750 115,330 115,994 101,102 111,400 121,400 135,000 144,300 149,100 160,000 168,000 178,000 188,000 198,000 209,000
Cash Flow Statement Net cash used in operating activities 99,591 129,067 132,899 142,675 185,715 228,402 299,247 114,668 303,788 273,627 167,291 256,343 286,606 239,771 241,000 354,000 361,000 360,000 348,000 413,000 Net cash used in investing activities (79,789) (113,777) (160,798) (174,817) (215,495) (236,614) (217,844) (223,752) (331,630) 14,833 (195,165) (198,693) (265,405) (261,354) (346,000) (321,000) (301,000) (291,000) (281,000) (271,000) Net cash used in financing activities (20,072) (11,286) 44,223 22,304 36,834 13,361 (27,682) 75,743 34,817 (63,932) (66,537) (43,967) (1,886) (17,734) 125,000 (59,000) (62,000) (68,000) (58,000) (173,000) Cash and cash equivalents at beginning of the period 106,011 109,479 111,732 126,214 116,401 128,212 136,307 190,245 143,804 152,727 372,179 275,656 298,197 328,024 295,000 322,000 303,000 308,000 316,000 332,000 Increase (decrease) in cash and cash equivalents 3,467 1,979 14,481 (9,812) 11,811 8,094 53,937 (46,440) 8,923 219,451 (96,522) 22,540 24,740 (33,332) 27,000 (19,000) 5,000 8,000 16,000 (24,000) Cash and cash equivalents at end of the period 109,479 111,732 126,214 116,401 128,212 136,307 190,245 143,804 152,727 372,179 275,656 298,197 328,024 294,692 322,000 303,000 308,000 316,000 332,000 308,000
Balance Sheet Current assets 435,173 505,551 555,063 601,881 694,030 767,369 869,917 613,581 928,135 933,825 1,011,566 1,003,761 1,148,306 1,213,443 1,323,000 1,357,000 1,423,000 1,491,000 1,569,000 1,610,000 Fixed Assets 711,646 718,759 827,521 901,432 1,159,428 1,270,526 1,227,810 1,118,108 1,053,853 1,044,399 1,062,269 1,244,339 1,439,317 1,716,764 1,839,000 1,918,000 1,979,000 2,038,000 2,093,000 2,147,000 Total Assets 1,146,819 1,224,311 1,382,584 1,503,313 1,853,458 2,037,896 2,097,727 1,731,689 1,981,988 1,978,225 2,073,836 2,248,100 2,587,623 2,930,208 3,162,000 3,275,000 3,402,000 3,529,000 3,662,000 3,757,000 Current Liabilities 407,201 505,321 493,294 531,611 639,100 679,070 704,280 455,682 597,436 576,029 678,305 683,626 763,587 831,280 886,000 909,000 944,000 960,000 1,101,000 1,111,000 Long Term Liabilities 200,282 165,933 249,395 273,256 363,294 402,972 398,854 461,499 512,662 484,491 426,223 428,130 495,532 566,234 645,000 625,000 592,000 565,000 401,000 312,000 Shareholders' Equity 379,147 397,752 456,211 497,830 551,732 602,382 662,106 618,398 629,315 686,296 728,584 792,107 861,990 910,402 980,000 1,058,000 1,147,000 1,245,000 1,356,000 1,480,000 Total Liabilities 1,146,819 1,224,311 1,382,584 1,503,313 1,853,458 2,037,896 2,097,727 1,731,689 1,981,988 1,978,225 2,073,836 2,248,100 2,587,623 2,930,208 3,162,000 3,275,000 3,402,000 3,529,000 3,662,000 3,757,000
Margins Gross Margin (%) 13.6% 14.0% 14.2% 13.6% 13.7% 13.4% 14.3% 8.6% 12.8% 14.1% 13.2% 13.7% 14.5% 14.0% 14.5% 14.8% 15.2% 15.5% 16.0% 16.5% EBIT Margin (%) 5.0% 5.7% 5.4% 5.2% 5.6% 5.5% 6.7% -0.2% 4.3% 6.1% 5.3% 5.9% 6.1% 5.6% 6.2% 6.6% 7.0% 7.5% 8.0% 8.6% Recurring Profit Margin (%) 4.9% 5.4% 5.3% 5.4% 5.9% 5.6% 6.9% -0.2% 4.6% 6.6% 5.6% 6.3% 6.7% 6.3% 6.7% 7.0% 7.5% 7.9% 8.5% 9.1% Net Profit Margin (%) 2.1% 3.4% 2.2% 2.6% 2.9% 2.8% 3.4% -1.1% 0.8% 3.1% 2.4% 3.1% 3.2% 2.6% 3.1% 3.3% 3.6% 3.8% 4.0% 4.3%
Growth Sales 8.3% 15.2% 14.0% 13.9% 15.9% 12.2% 13.5% -18.0% -7.2% 9.9% 2.1% 9.8% 11.6% 5.0% 8.3% 5.3% 5.9% 5.5% 5.5% 5.5% EBIT -6.4% 32.9% 7.7% 9.6% 24.2% 11.0% 37.7% -101.9% -2609.2% 56.8% -11.2% 22.2% 15.0% -3.2% 20.7% 11.0% 13.5% 11.9% 13.1% 13.2% EBITDA -4.5% 18.5% 10.4% 9.1% 19.9% 14.6% 25.9% -48.7% 44.0% 9.7% -8.0% 11.0% 11.1% 2.0% 22.4% 10.3% 9.3% 7.7% 7.9% 7.7% Net Profit -454.8% 87.1% -27.7% 34.6% 30.8% 9.5% 37.0% -127.4% -166.0% 319.4% -20.3% 39.7% 16.2% -14.2% 30.6% 10.9% 14.3% 10.9% 12.7% 13.1%
Expense/Sales Ratio COGS 86.4% 86.0% 85.8% 86.4% 86.3% 86.6% 85.7% 91.4% 87.2% 85.9% 86.8% 86.3% 85.5% 86.0% 85.5% 85.2% 84.8% 84.5% 84.0% 83.5% SG&A 8.6% 8.2% 8.8% 8.4% 8.1% 7.9% 7.6% 8.8% 8.5% 8.1% 7.9% 7.8% 8.5% 8.4% 8.3% 8.2% 8.1% 8.0% 8.0% 7.9% Investments 7.4% 8.8% 8.9% 9.0% 12.2% 8.3% 7.9% 9.9% 4.1% 5.9% 6.5% 7.7% 7.3% 8.4% 10.1% 8.9% 7.8% 7.1% 6.5% 5.9% Depreciation 6.6% 6.1% 6.1% 5.8% 5.8% 6.1% 6.2% 8.2% 8.3% 6.4% 6.0% 5.5% 5.3% 5.4% 6.2% 6.5% 6.4% 6.3% 6.0% 5.8% R&D 5.5% 5.7% 5.5% 5.2% 4.5% 4.4% 4.3% 5.2% 4.9% 4.9% 5.3% 5.3% 5.1% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Profitability Ratios Return on Assets 5.4% 6.8% 6.7% 6.6% 7.0% 6.7% 8.7% -0.2% 4.7% 6.9% 6.0% 6.9% 7.1% 6.0% 6.6% 6.9% 7.5% 8.1% 8.9% 9.7% Return on Invested Capital 6.1% 6.5% 8.7% 8.9% 9.3% 8.9% 11.9% -1.9% 7.4% 10.6% 8.9% 11.5% 11.1% 8.6% 10.0% 10.3% 11.2% 12.2% 13.5% 15.1% Return on Equity 6.0% 11.2% 7.4% 8.8% 9.9% 9.3% 12.0% -3.6% 2.6% 10.4% 7.9% 9.8% 9.7% 7.2% 8.4% 8.8% 9.5% 9.8% 10.3% 10.8%
Per Share Information Basic EPS 91.84 171.98 126.11 159.94 209.15 233.03 322.50 (89.36) 59.00 247.46 197.04 275.05 319.47 273.87 357.76 396.72 453.40 502.99 566.74 641.13 Book Value Per Share 1,546.21 1,612.96 1,771.12 1,928.58 2,361.66 2,662.78 2,725.67 2,202.86 2,328.68 2,440.39 2,573.95 3,038.88 3,542.60 4,108.86 4,355.85 4,631.85 4,946.77 5,293.54 5,686.31 6,125.08 Dividends Per Share - - - - 32 40 60 40 30 50 50 75 95 95 110 120 140 155 175 200 Payout Ratio 0.0% 0.0% 0.0% 0.0% 15.3% 17.2% 18.6% -44.8% 50.8% 20.2% 25.4% 27.3% 29.7% 34.7% 30.7% 30.2% 30.9% 30.8% 30.9% 31.2%
02 October 2015 02 October
Source: Company data, Credit Suisse estimates
32
02 October 2015
FY3/16 earnings forecasts No need to be too concerned about AT volume misses We forecast FY3/16 OP of ¥200bn. The company's forex assumptions are ¥121/$ and ¥136/€. Some market participants appear overly concerned about the conventional AT volume miss risk due to the currently sluggish Chinese auto market. We, on the other hand, still expect the company to maintain a high growth rate, even though our forecast (7.749mn units, +12.7% YoY) is slightly below guidance (7.900mn units, +15.0%). Shipments to VW and PSA in China will likely miss target, but we think guidance includes a buffer of around 100,000 units and that in view of higher-than-expected shipments to Toyota and to other regions such as Europe and the US, great concern about AT volume misses is unwarranted . FY3/16 guidance is concentrated in 2H, but 1Q OP reached only ¥33.9bn (−12% YoY) due to temporary increases in startup costs including capacity expansion at the company's plant in Tianjin, China, and new conventional AT products and lower shipments due to the switch to Toyota's new international multi-purpose vehicles (IMV). However, we think results have slightly beat guidance due to higher sales including those in North America and the weaker yen. Although expansion expenses at the company's Okazaki East plant are set to continue from 2Q, we expect earnings to switch to a growth trend due to such factors as earnings contributions from the Tianjin plant, full-scale shipments for Toyota IMVs, and growth in production volume for Toyota Japan. Initially there were concerns about a halt in production due to the Tianjin port explosions but we think the full-year impact will be slight. 2Q OP: expecting substantial growth to ¥40bn We expect 2Q OP to be ¥40bn, up 24.8% YoY. We see revisions to full-year guidance when the company announces 2Q results as unlikely. Conventional AT volume in China, a cause for concern, is being impacted by VW and PSA production adjustments, making the outlook also uncertain. However, we think the Tianjin port explosions will have only a modest impact on Aisin Seiki. In Japan, we expect Toyota production volume to increase QoQ and also anticipate ongoing startup costs associated with the Okazaki East plant. In North America, shipments for SUVs such as the RAV4/Hilux are firm, but volumes for the Camry and other models have weakened. In Asia, we understand shipments for new model IMVs in southeast Asia have trended slightly below expectations.
Figure 49: Earnings forecasts summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated Mar-15 A 2,963,971 5.0 165,752 -3.2 188,026 -0.8 77,318 -14.2 273.9 -14.3 Mar-16 CS E (new) 3,210,000 8.3 200,000 20.7 214,000 13.8 101,000 30.6 357.8 30.6 (prev) 3,226,000 8.8 210,000 26.7 224,000 19.1 107,000 38.4 379.0 38.4 CoE 3,250,000 9.7 200,000 20.7 215,000 14.3 100,000 29.3 353.9 29.2 IBES E 3,215,605 8.5 192,103 15.9 207,917 10.6 97,530 26.1 346.5 26.5 Mar-17 CS E (new) 3,380,000 5.3 222,000 11.0 237,000 10.7 112,000 10.9 396.7 10.9 (prev) 3,412,000 5.8 235,000 11.9 250,000 11.6 119,000 11.2 421.5 11.2 IBES E 3,390,398 5.4 215,448 12.2 232,587 11.9 108,705 11.5 388.8 12.2 Mar-18 CS E (new) 3,580,000 5.9 252,000 13.5 269,000 13.5 128,000 14.3 453.4 14.3 (prev) 3,617,000 6.0 265,000 12.8 282,000 12.8 134,000 12.6 474.6 12.6 IBES E 3,548,662 4.7 238,811 10.8 254,459 9.4 119,970 10.4 429.0 10.4 Source: Company data, I/B/E/S, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 33 02 October 2015
Figure 50: Financial summary In JPY bn, unless otherwise stated Profit & Loss 3/15A 3/16E 3/17E 3/18E Key Financials 3/15A 3/16E 3/17E 3/18E Sales revenue 2,964.0 3,210.0 3,380.0 3,580.0 Growth(%) COGS 2,547.9 2,743.0 2,880.0 3,037.0 Sales 5.0 8.3 5.3 5.9 SGA 250.3 267.0 278.0 291.0 EBIT -3.2 20.7 11.0 13.5 Other op income(expense) -310.1 -360.0 -387.0 -408.0 Net Income -14.2 30.6 10.9 14.3 EBITDA 326.8 400.0 441.0 482.0 EPS -14.3 30.6 10.9 14.3 Depr. & Amort. 161.0 200.0 219.0 230.0 Margins(%) Goodwill amort. 0.0 0.0 0.0 0.0 EBITDA 11.0 12.5 13.0 13.5 EBIT 165.8 200.0 222.0 252.0 EBIT 5.6 6.2 6.6 7.0 Net interest income(exp.) 5.0 6.0 5.0 4.0 Pretax profit 6.2 6.7 7.0 7.5 Associates 8.7 9.0 9.0 9.0 Net income 2.6 3.1 3.3 3.6 Net other non-op income(exp.) 8.5 -1.0 1.0 4.0 Valuation(x) Recurring profit 188.0 214.0 237.0 269.0 EV/Sales 0.5 0.4 0.4 0.4 Extraordinary gain & loss 0.0 0.0 0.0 0.0 EV/EBITDA 4.2 3.3 3.0 2.6 Profit before tax 183.7 214.0 237.0 269.0 EV/EBIT 8.4 6.6 5.9 5.0 Income tax 65.6 67.0 74.0 83.0 PER 15.9 11.6 10.5 9.2 Minorities 40.8 46.0 51.0 58.0 PBR 1.1 1.0 0.9 0.8 Net Income 77.3 101.0 112.0 128.0 ROE analysis(%) Balance Sheet 3/15A 3/16E 3/17E 3/18E ROE 7.2 8.4 8.8 9.5 Cash & equivalents 273.9 322.0 303.0 308.0 ROIC 6.8 7.9 8.3 9.1 Receivables 429.1 465.0 490.0 519.0 Asset turnover 101.2 101.5 103.2 105.2 Inventories 245.4 266.0 280.0 297.0 Tax burden 35.7 31.3 31.2 30.9 Other current assets 265.0 270.0 284.0 299.0 Financial leverage(x) 2.5 2.6 2.5 2.4 Current assets 1,213.4 1,323.0 1,357.0 1,423.0 Credit ratio(%) Property, plant & equipments 1,006.3 1,133.0 1,198.0 1,235.0 Net debt/Equity 0.1 0.1 0.1 0.1 Intangibles 24.7 24.0 33.0 52.0 Net debt/EBITDA 0.5 0.4 0.3 0.2 Other non-current assets 685.8 682.0 687.0 692.0 Interest converage ratio(x) 5.3 6.4 6.8 7.5 Non-current assets 1,716.8 1,839.0 1,918.0 1,979.0 Per share data 3/15A 3/16E 3/17E 3/18E Total assets 2,930.2 3,162.0 3,275.0 3,402.0 No. of shares(millions) 282.3 282.3 282.3 282.3 Payables 381.6 413.0 435.0 461.0 EPS(¥) 273.9 357.8 396.7 453.4 Short term debt 106.9 87.0 84.0 87.0 BPS(¥) 4,108.9 4,355.9 4,631.9 4,946.8 Other current liability 342.7 386.0 390.0 396.0 DPS(¥) 95.0 110.0 120.0 140.0 Total current liability 831.3 886.0 909.0 944.0 Dividend payout ratio(%) 34.7 30.7 30.2 30.9 Long term debt 321.1 388.1 357.0 313.0 Other non-current liability 245.1 256.9 268.0 279.0 Total liabilities 1,397.5 1,531.0 1,534.0 1,536.0 Shareholders equity 1,161.2 1,231.0 1,309.0 1,398.0 Minority interests 369.7 398.0 430.0 466.0 Total shareholder funds 2,930.2 3,162.0 3,275.0 3,402.0 Cashflow 3/15A 3/16E 3/17E 3/18E EBIT 165.8 200.0 222.0 252.0 Depr & Amortisation 161.0 200.0 219.0 230.0 Chage in working capital -44.8 -26.0 -17.0 -20.0 Other -42.2 -133.0 -70.0 -101.0 Operating cashflow 239.8 241.0 354.0 361.0 Capex -240.5 -325.0 -300.0 -280.0 Disposal of PPE 11.9 0.0 0.0 0.0 Acquisitions & Investments 0.0 0.0 0.0 0.0 Asset sale proceeds 0.0 0.0 0.0 0.0 Other -32.8 -21.0 -21.0 -21.0 Investing cashflow -261.4 -346.0 -321.0 -301.0 Equity raised 0.0 0.0 0.0 0.0 Dividends paid -29.7 -31.0 -34.0 -40.0 Net borrowings 22.7 147.0 -34.0 -31.0 Other -10.8 9.0 9.0 9.0 Financing cashflow -17.7 125.0 -59.0 -62.0 Effect of exchange rates 6.0 7.0 7.0 7.0 Net Change in Cash -33.3 27.0 -19.0 5.0 Free cash flow -21.6 -105.0 33.0 60.0 Source: Company data, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 34 02 October 2015 Valuation Looking undervalued in view of growth potential Current P/B makes stock look undervalued at −2σ The recent 12-month forward P/B (0.9x) still remains two standard deviations below the average since 2013, making the current valuations appear quite attractive. Also, 12-month forward P/E is tracking slightly below average valuations since 2013. We also find Aisin Seiki relatively undervalued based on the P/B-ROE correlation in the auto parts sector. While the share price has shown a strong correlation with EPS historically, we still see substantial room for upside if investors begin pricing in longer-term EPS growth prospects. Moreover, growth in value-added stemming from sales growth in conventional ATs and better prospects for margin improvement should lead to higher valuations. We expect valuations to rise even further once greater efficiency from the Toyota group reorganization and prospective synergy effects are priced in.
Figure 51: Looking undervalued with current P/B at -2σ Figure 52: P/E below historical average
1.4 16 15 1.3 14 1.2 13
1.1 12
11 1.0 10 0.9 9
0.8 8
12MF PBR μ -2σ +2σ 12MF PER μ -2σ +2σ
Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse
Figure 53: Aisin Seiki is also looking relatively undervalued in terms of P/B–ROE correlation 2.5 PBR
2.0
1.5
1.0
0.5
ROE 0.0 0% 5% 10% 15% 20% 25% Source: Company data, Thomson Reuters, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 35 02 October 2015
Figure 54: Substantial upside potential if share price reflects longer term EPS growth potential 7,000 Yen Yen 700 600 6,000 500 5,000 400
4,000 300
3,000 200 100 2,000 0 1,000 (100)
0 (200)
Share Price (LHS) EPS (RHS)
Source: Company data, Thomson Reuters, Credit Suisse estimates
Valuation: Updating our base year to FY3/17 Our target price is ¥5,600 (potential return 34.8%), which we base on a target P/B of 1.2x applied to FY3/17E BPS of ¥4,632. The 1.2x target P/B references a theoretical P/E of 13.6x (cost of equity 6.1%, discount 16.4%), and FY3/17E ROE of 8.8%. We estimate shareholders' cost of capital based on an ERP of 5.75%, RFR of 0.4%, and beta of 1.0. Our previous P/B of 1.42x was based on a theoretical P/E of 15.9x (cost of equity 6.3%, ERP 5.75%, RFR 0.40%, and premium 0.3%) and FY3/16 ROE of 8.9%.
Potential return indicated by HOLT analysis is 80% Potential return indicated by our HOLT analysis is high at 80%. This analysis also suggests that the stock is currently undervalued.
Aisin Seiki (7259 / 7259 JP) 36 02 October 2015
Figure 55: Credit Suisse HOLT analysis
Source: Company data, HOLT, Credit Suisse estimates
Aisin Seiki (7259 / 7259 JP) 37 02 October 2015
Companies Mentioned (Price as of 01-Oct-2015) ADVICS (Unlisted) Aisin AI (Unlisted) Aisin AW (Unlisted) Aisin Chemical (Unlisted) Aisin Europe (Unlisted) Aisin Holdings of America (Unlisted) Aisin Keikinzoku (Unlisted) Aisin Kiko (Unlisted) Aisin Seiki (7259.T, ¥4,155, OUTPERFORM, TP ¥5,600) Aisin Sinei (Unlisted) Aisin Takaoka (Unlisted) Akebono Brake (7238.T, ¥388) BMW (BMWG.DE, €78.33) BorgWarner, Inc. (BWA.N, $41.73) CVTEC (Unlisted) Chongqing Changan Automobile (Unlisted) Denso (6902.T, ¥5,195) Dongfeng Motor Group Company Limited (0489.HK, HK$9.65) Exedy (7278.T, ¥2,673) Ford Motor Company (F.N, $13.67) General Motors Corp. (GM.N, $30.67) Getrag (Unlisted) Hosei Brake Industry (Unlisted) Hyundai Powertech (Unlisted) Jatco (Unlisted) Nissan Motor (7201.T, ¥1,150) Shiroki (7243.T, ¥303) Sumitomo Electric Industries (5802.T, ¥1,558) Toyota Boshoku (3116.T, ¥2,231) Toyota Motor (7203.T, ¥7,151) Volkswagen (VOWG_p.DE, €96.5) Volvo (VOLVY.PK, $11.685) ZF (Unlisted) psa peugeot citroen (Unlisted) For other companies mentioned, please refer to Figure 7
Disclosure Appendix Important Global Disclosures Masahiro Akita and Koji Takahashi, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Aisin Seiki (7259.T)
7259.T Closing Price Target Price Date (¥) (¥) Rating 05-Oct-12 2,224 3,050 O 20-Nov-12 2,241 3,100 15-Jan-13 2,826 3,350 25-Feb-13 3,310 3,700 05-Apr-13 3,545 4,000 30-May-13 3,755 4,500 20-Aug-13 3,865 4,850 17-Jan-14 4,125 5,100 05-Jun-14 3,755 4,800 17-Sep-14 3,910 4,650 OUTPERFORM 26-Nov-14 4,130 5,050 23-Mar-15 4,535 5,150 07-Jul-15 5,130 6,200 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Aisin Seiki (7259 / 7259 JP) 38 02 October 2015
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 56% (32% banking clients) Neutral/Hold* 29% (38% banking clients) Underperform/Sell* 13% (31% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current hold ings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Aisin Seiki (7259.T) Method: We derive our ¥5,600 target price for Aisin Seiki from a P/B of 1.2x applied to our end-FY3/17 BPS forecast of ¥4,632. The benchmark P/B 1.2x is based on a fair value P/E of 13.6x (cost of shareholders' equity 6.1% : Beta 1, ERP 5.75%, RFR 0.40%, Discount 16.4%) and our FY3/17 ROE forecast of 8.8%. Discount 16.4% is based on the shares' relative P/E vs. the average for auto parts companies in our coverage over the past two years. Risk: Risks to our ¥5,600 target price for Aisin Seiki include: higher costs due to AT capacity expansion and a lower-than-expected Toyota output in emerging markets including in Asia in the near-term.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
Aisin Seiki (7259 / 7259 JP) 39 02 October 2015
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (7259.T) within the next 3 months. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Masahiro Akita ; Koji Takahashi
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
Aisin Seiki (7259 / 7259 JP) 40 02 October 2015
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse International, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This information is being distributed by Credit Suisse AG, Dubai Branch, duly licensed and regulated by the Dubai Financial Services Authority (DFSA), and is directed at Professional Clients or Market Counterparties only, as defined by the DFSA. The financial products or financial services to which the information relates will only be made available to a client who meets the regulatory criteria to be a Professional Client or Market Counterparty only, as defined by the DFSA, and is not intended for any other person. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2015 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
7259_100215_Aisin Seiki_E.doc Aisin Seiki (7259 / 7259 JP) 41