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.