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All Time Record Profits! So Why Are Investors So Worried About the Auto Industry?

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All Time Record Profits! So Why Are Investors So Worried About the Auto Industry? June 6, 2018 Automotive News Congress 2018, Turin All time record profits! So why are investors so worried about the auto industry? Max Warburton Head of Global Automotive Research +44-207-170-0544 [email protected] See Disclosure Appendix of this report for important Disclosures and Analyst Certifications You’ve never had it so good! The historic perception ▪ The auto sector is historically low margin, incredibly capital intense, value destructive ▪ State influence, family influence, poor investment decisions, cyclical and volatile ▪ Most long standing investors have had bad historic experiences and lost money in these stocks ▪ ‘Early cycle’ stocks – buy them when in financial distress, ahead of upturn - then sell quickly The reality this decade ▪ One of the longest periods of economic expansion in history (9 years and counting) ▪ US industry restructured in 2008-09 – reset pricing; European industry also subtly reshaped ▪ China: like finding another planet on which to sell cars, totally transformed many OEMs’ economics ▪ OEMs far more focused, more capital disciplined The result ▪ Almost a decade of profit expansion – total OEM industry earnings now over $120bn p.a. ▪ Vast premium segment earnings, NAFTA profits at record, European margins highest in 30 years ▪ Supplier margins the highest in modern history ▪ Huge cashflows, many being returned to shareholders ▪ But stock valuations imply investors believe it simply won’t last much longer GLOBAL AUTOS | 3 Let the good times roll: 9 years of global expansion Global Passenger Car Unit Sales US Light Vehicle Sales Seasonally (2006-2018E) Adjusted Annual Rate (2006-present) 90 14% 20 80 12% 10% 70 18 8% 60 6% 16 50 4% 2% 40 14 MillionUnits 30 0% -2% 20 12 -4% SAAR (Mn Units) 10 -6% 0 -8% 10 2009 2007 2008 2010 2011 2012 2013 2014 2015 2016 2017 2006 8 2018E Global PV Unit Sales Growth % YoY Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 May-07 May-09 May-11 May-13 May-15 May-17 Source: IHS Markit and Bernstein analy sis Source: Autodata and Bernstein analy sis Western Europe: Passenger Car Market China Domestic Passenger Vehicle Sales SAAR (2006-present) 30 (2006-2018E) 16,000 15,000 25 14,000 20 13,000 15 Units(000) 12,000 10 11,000 Sales Volume(Mn Units) 5 10,000 0 2006 2007 2008 2009 2010 2011 2014 2015 2016 2017 2018 2012 2013 Western Europe SAAR Rolling 6m Average Source: CAAM and Bernstein analy sis Source: LMC and Bernstein analy sis GLOBAL AUTOS | 4 China has been hugely transformative: profitability under-reported China passenger vehicle SAAR China unit sales as % of total 28 (2010-present) (2012-2017) 40% 26 24 35% 22 VW Group 30% 20 18 25% 16 BMW 20% SAAR (mn units)SAAR 14 % of total unit salesunittotalof % 12 15% Mercedes 10 10% 2012 2013 2014 2015 2016 2017 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-10 Source: Company reports and Bernstein analy sis Source: CAAM, Bernstein estimates and analy sis BMW Global vs China ARPU China as % of Net Income* 70 (2013-2017) (2013-2017) 80% 60 70% 50 60% 40 50% €k 30 40% 20 30% 10 20% 2013 2014 2015 2016 2017 0 2013 2014 2015 2016 2017 VW Group BMW Mercedes Audi BMW China ARPU BMW Global ex China ARPU * assuming 30% tax rate Source: Company reports and Bernstein analy sis and estimates Source: Company reports and Bernstein estimates and analy sis GLOBAL AUTOS | 5 Global pricing: significant discipline, at last Peugeot (PCD): pricing effect to Renault: pricing effect to Auto revenue growth Auto revenue growth (2014-2017) (2014-2017) 2.5% 5.0% 2.0% 3.9% 2.0% 4.0% 1.5% 1.5% 3.0% 1.2% 2.1% 1.0% 2.0% 1.5% 0.6% 0.8% 0.5% 1.0% 0.0% 0.0% 2014 2015 2016 2017 2014 2015 2016 2017 Price growth Price growth Source: Company reports and Bernstein analy sis Source: Company reports and Bernstein analy sis Ford North America - ARPU VW brand - ARPU (2010-2017) (2010-2017) $32,000 €25,000 $30,000 €22,500 $28,000 €20,000 $26,000 €17,500 $24,000 €15,000 ARPU ($m) ARPU (€m) Source: Company reports and Bernstein analy sis Source: Company reports and Bernstein analy sis GLOBAL AUTOS | 6 Global mix: everyone wants to drive an SUV (heading to 100% share?) Western Europe: SUV % of pass. car sales US: SUV and Pickup % of LV sales (2010-2018E) (2010-2018E) 70% 35% 33% 59% 60% 30% 60% 55% 30% 51% 26% 46% 46% 48% 50% 44% 44% 25% 23% 21% 40% 20% 18% 16% 30% 14% 15% 11% 20% 10% SUV & PUP % sales% of &PUP SUV 10% SUV % of PC sales PC of % SUV 5% 0% 0% SUV PUP Source: IHS Global Insight and Bernstein analy sis Source: IHS Global Insight and Bernstein analy sis China: SUV % of sales Brazil: SUV % of sales (2010-2018E) (2010-2018E) 39% 25% 40% 38% 34% 20% 35% 20% 19% 30% 28% 15% 15% 25% 21% 12% 20% 17% 14% 10% 9% 15% 12% 8% 7% 8% 10% 6% SUV % of salesof % SUV SUV % of salesof % SUV 10% 5% 5% 0% 0% Source: IHS Global Insight and Bernstein analy sis Source: IHS Global Insight and Bernstein analy sis GLOBAL AUTOS | 7 All time record profits – in nearly every region Global Auto EBIT North America earnings by OEM (2010-2017) (2017) 125,000 15.0 12% 100,000 12.0 10% 8% 75,000 9.0 6% $m 50,000 6.0 EBBIT ($m)EBBIT 4% Operaingmargin 25,000 3.0 2% 0 0.0 0% 2010 2011 2012 2013 2014 2015 2016 2017 Ford GM FCA European American Chinese Japanese Korean EBIT Operating margin Source: Company reports, Bloomberg and Bernstein analy sis Source: Company reports and Bernstein analy sis Auto EBIT for European OEMs Auto EBIT for Japanese/Korean OEMs (2017) (2016) 20,000 16,000 16,000 14,000 12,000 12,000 10,000 €m 8,000 8,000 $m 6,000 4,000 4,000 0 2,000 0 Kia Hyundai Toyota Nissan Honda Auto EBIT (€m) Auto EBIT ($m) Source: Company reports and Bernstein analy sis Source: Company reports and Bernstein analy sis GLOBAL AUTOS | 8 Capital discipline: spending control is evident in the core businesses Capex as % of sales by group (2012-2017) 8% 7% 6% 5% 4% 3% BMW Daimler FCA PSA Renault Volkswagen 2012 2013 2014 2015 2016 2017 Source: Company reports and Bernstein analy sis Combined capex spend of European OEMs (2012-2017) 40,000 6.2% 35,000 6.0% 30,000 25,000 5.8% 20,000 15,000 5.6% 10,000 5.4% salesof % asCapex Total capex spend (€m) spendcapexTotal 5,000 0 5.2% 2012 2013 2014 2015 2016 2017 Capex Capex as % of sales Source: Company reports and Bernstein analy sis GLOBAL AUTOS | 9 Awash with cash: flush after a decade of recovery – but what will it be spent on? Cyclical protection? Restructuring? Technology? FCF of top 15 OEMs Net Industrial Cash of top 15 OEMs (2018E) (2017) 16 60 14 50 12 40 10 30 8 $bn $bn 20 6 10 4 0 2 (10) 0 Kia VW GM PSA FCA Ford SAIC Kia BMW VW GM Honda FCA PSA Suzuki Ford Nissan Toyota SAIC BMW Daimler Renault Hyundai Honda Suzuki Toyota Nissan Daimler Renault Hyundai FCF ($m) Net Industrial Debt ($m) Source: Company reports, Bloomberg L.P. and Bernstein analy sis Source: Company reports, Bloomberg L.P. and Bernstein analy sis GLOBAL AUTOS | 10 So why are investors so worried?so investors are why So SXAP P/E rel to SXXP 85% (2013-present) 80% 75% 70% 65% 60% 55% 50% 45% SXAP P/E rel to SXXP Source: Bloomberg L.P. and Bernstein analy sis Current P/E ratio 35.0x 32.5x 30.0x 28.7x 27.0x 26.6x 25.0x 23.3x 22.3x 22.1x 19.3x 19.0x 18.2x 18.2x 20.0x 18.1x 15.0x 15.1x 9.4x 8.8x 7.4x 7.1x 7.8x 6.9x GLOBAL GLOBAL AUTOS 10.0x 6.7x 6.2x 6.0x 5.5x 4.6x 5.0x 0.0x Ford BMW Apple Nestle Honda Nissan Toyota Google Daimler Renault Unilever Walmart Peugeot Microsoft AB InBev AB Facebook | Volkswagen Exxon Mobil Exxon General Motors General General Electric General 11 Procter & Gamble & Procter Royal Dutch Shell Dutch Royal Johnson & Johnson & Johnson Source: Bloomberg L.P. and Bernstein analy sis Electronics Samsung No. 1: Old fashioned cyclical fears US Passenger Vehicle Sales Interest rates vs US light vehicle sales SAAR* 20 (2009-2017) 20% (1976-present) 15% 20 15 10% 18 5% 16 0% 10 14 -5% MillionUnits -10% 12 5 -15% 10 -20% R² = 0.3431 8 0 -25% (m) SAAR salesvehiclelight US 0 5 10 15 20 Effective Federal Funds Rate (%) 2009 2016 2010 2011 2012 2013 2014 2015 2017 Unit Sales % Growth YoY *Excluding interest rates below 0.5% Source: IHS Markit and Bernstein analy sis Source: Federal Reserv e and Bernstein analy sis China mass market retail volume & grow th China international mass JV pre -tax profit (Jan 2017 - present) & margin (2015-2017) 3,500 50% 70 14% 3,000 40% 60 13% 30% 2,500 50 20% 12% 2,000 10% 40 1,500 11% 0% 30 tax margin(%) 1,000 10% - -10% GrowthYoY (%) tax profit(RMB bn) 20 - 500 -20% Pre Retailvolume ('000 units) 9% Pre 10 0 -30% 0 8% H1 H2 H1 H2 H1 H2 2015 2015 2016 2016 2017 2017 Mass retail volume Growth YoY Aggregate pre-tax profit Aggregate pre-tax margin Source: C.A.D.
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