27 March 2013 Asia Pacific/&Japan Equity Research

Auto & Auto Parts sector Connections Series

Implications of Indonesia

Figure 1: LCGC implementation increasing demand for automobiles

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Research Analysts

Issei Takahashi 81 3 4550 7884 Source: Credit Suisse estimates [email protected] ■ Implications of Indonesia: Our autos team visited several Japanese OEM Masahiro Akita 81 3 4550 7361 bases in Indonesia that are joint ventures with or [email protected] Indomobil. In this report, we review our outlook for the auto industry in Teddy Oetomo Indonesia and present feedback from our recent visit. 62 21 2553 7911 [email protected] ■ Key points: Dian Haryokusumo (1) Automobiles: “Low Cost Green ” (LCGC) program to be 62 21 255 37974 implemented from as early as May, and we expect this to lead to a rise [email protected] in demand. (2) Motorcycles: Margins likely a challenge for all makers as growth in motorcycle demand starts to peak out over the medium term and labor costs rise. (3) Trucks: A recovery in dump truck demand remains a way3 off, but we expect overall demand to rise 10–15% YoY in FY3/14 ■ Stock calls: We reiterate our OUTPERFORM ratings on Astra International (ASII.JK, OUTPERFORM, TP Rp9,502), Motors (7262, OUTPERFORM, TP ¥2,310), Hino Motor (7205, OUTPERFORM, TP ¥1,270 for the access they provide to Indonesia’s motorization. Among names with exposure to Indonesia, we maintain our UNDERPERFORM rating on Yamaha Motor (7272, UNDERPERFORM, TP ¥870).

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27 March 2013 Table of contents Indonesia overview 3 Automobile market – start of initial motorization phase 5 Automobile market: passenger vehicles 5 Visit diary–1 10 PT Astra International Tbk, Sales Operation 10 PT 11 PT. Motor Indonesia 12 Automobile market – trucks 13 Visit diary–2 15 PT Isuzu Astra Motor Indonesia 15 P.T. Manufacturing Indonesia (HMMI) 16 Motorcycle market – beginning of the end of demand growth 17 Visit diary–3 20 P.T. Astra Honda Motor (AHM) 20

Auto & Auto Parts sector 2 27 March 2013 Indonesia overview Indonesia's population is 250mn (the fourth largest in the world). With people aged 0–29 comprising 54% of the population, the country should benefit from a "population bonus" – i.e., a larger labor force than children/seniors should drive economic growth over the long term. Per-capita GDP in 2011 was $3,508, and the IMF forecasts it rise to $6,903 by 2017. In 2010, upper-middle income earners (ie, those with an annual disposable income of $15,000–35,000) comprised only 3.5% of the population, but the proportion is expected to rise to 32.8% (around 69mn people) by 2020. Domestic demand accounts for 80% of GDP, and we expect the country to achieve stable economic growth accompanied by expansion of the middle class.

Figure 2: Benefits from “population bonus” Figure 3: GDP per capita and growth rate 0 100+ 1 USD 5 95-99 10 33 90-94 61 25000 GDP/Cap GDP/Cap Growth 35% 155 85-89 249 Male 492 80-84 712 30% 1,048 75-79 1,402 Female 20000 1,757 70-74 2,188 25% 2,376 65-69 2,830 2,961 60-64 3,305 20% 4,311 55-59 4,356 15000 5,907 50-54 5,882 15% 7,226 45-49 7,197 10% 8,387 40-44 8,473 10000 9,269 35-39 9,430 10,043 30-34 10,212 5% 10,779 25-29 10,810 0% 10,869 20-24 10,683 5000 10,966 15-19 10,633 -5% 10,787 10-14 10,411 11,245 5-9 10,832

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 -10% 11,007 0-4 10,572

Source: United Nations Source: IMF

Figure 4: Income distribution trends

145108 x 1000 people x 1000 people 2020Y 2009Y 133973 160000 160000 140000 140000 120000 120000 76808 68850 53439 100000 68639 100000 36862 39154 35442 80000 80000 52383 31972 60000 60000 23174 43483 11218 16530 30100 40000 16492 40000 5519 14745 28012 5344 2192 1241021485 589 20000 2530 8401 20000 2980 1294 9451 Lower Income 4151 Lower Income 1382 0 2726 7924 0 604 10424 7275 21251 Lower Middle Income 2007 Lower Middle Income 7061 Upper Middle Income Upper Middle Income Upper Income Upper Income

Lower Income : Annual disposal Income 5,000USD > x Lower Middle Income : Annual disposal Income 15,000USD > x > 5,000USD Upper Middle Income : Annual disposal Income 35,000USD > x > 15,000USD Upper Income : Annual disposal Income x > 35,000USD

Source: Company data, JETRO

Auto & Auto Parts sector 3 27 March 2013

As we have noted, per-capita GDP in 2011 was $3,508, having already exceeded $3,000, which is said to be the motorcycle penetration rate reflection point. The motorcycle and automobile penetration rates in 2012 were around 27% and 4%, respectively. Considering prospective economic growth, we will probably see the motorcycle penetration rate peak out and the start of the initial phase of automobile motorization over the next few years. We assume average working life of 8–9 years for motorcycles and 10 years for automobiles. We expect peak demand for motorcycles in the medium term to reach 8–10mn units, and think that demand for automobiles, which was 1.1mn units in 2012, could grow to 6mn units by 2025.

Figure 5: GDP per capita and automobiles market penetration 100% 90% 80% USA 70%

60% Japan 50% 40% Malaysia

Penetrationrate 30% 20% 10% Indonesia China 0% India - 10,000 20,000 30,000 40,000 50,000 60,000 GDP(USD)/Cap

Source: IMF, Wards, Credit Suisse estimates

Figure 6: GDP per capita and motorcycles market penetration

100,000 Switzerland

Austria US Japan Germany Italy Spain

Brazil 10,000 Malaysia China

GDP per capita(USD) GDP Thailand Indonesia

Vietnam India

1,000 0 5 10 15 20 25 30 35 40 Penetration (%)

Source: IMF, JAMA, Credit Suisse estimates

Auto & Auto Parts sector 4 27 March 2013 Automobile market – start of initial motorization phase Automobile market: passenger vehicles Expect implementation of LCGC program to start in May at the earliest, which will signal the start of the initial phase of motorization Aside from economic growth, an event that will likely trigger an increase in automobile market penetration is the introduction of a "Low Cost Green Car" (hereafter LCGC) program. Specifications for LCGC designation are: (1) engine size of 1.0–1.2L, (2) priced below IDR100mn, (3) fuel economy of 20–22km/L, and (4) locally-procured parts comprising at least 40%, rising to 80% within five years (including engine). A system of tax breaks is expected to be put in place for LCGCs in the form of reductions in import duties on parts and machinery for OEMs and cuts in luxury/consumption tax for consumers. Assuming that the program is introduced in September 2013, we expect the market to reach 112mn/133mn units (autos, including commercial vehicles of around 1.29mn/1.52mn units) in 2013–14. For details of specific estimates, assumptions, etc, see our Time to Re-Enter report. The LCGC program looks likely to be implemented in May at the earliest, after it is signed by the president. Although this has yet to be decided, we expect the program to include a cut in the luxury tax (currently levied on automobiles at a rate of 10%). LCGC models from the Toyota/Daihatsu brands, named Agya/Ayla, seem to have received around 30,000 pre- orders by January. The official retail price looks likely to be decided at around IDR72– 80mn after the LCGC program is officially approved. A change in the timing of the introduction of the LCGC program could slightly impact short- term earnings, but would not affect the medium-term scenario in which the program triggers growth in car ownership among middle-income earners. We think there is little doubt that the program as such will be introduced in Indonesia, which is promoting the auto industry.

Figure 7: Low Cost Green Car program Program Name: Low-Cost Green Car (LCGC) Participants: from upstream to downstream Product Criteria: Type of vehicles: MPV and compact Machine capacity: 1,000-1,200cc Fuel consumption: 20-22 km/litre Price estimate: Below Rp 100mn/unit Target: Minimum 80% local component and the building power train (machine, and axle) in 5years, First-year minimum 40%, then done in stages. Potential Investors: Daihatsu, , Toyota, Nissan Assembly investment potential: Above US$2.2bn Component investment potential US$2.4bn New labour hire: 32,000 people (15,000 in assembly factory and 17,000 in component factory) Incentive: Waiver for machine and component import duties, reduction of luxury tax Incentive target: Assembly and Component integrated industry Competitor: Malaysia and Thailand Source: Credit Suisse estimates

Auto & Auto Parts sector 5 27 March 2013

Figure 8: Toyota – Agya Figure 9: Daihatsu – Ayla

Source: Company data Source: Company data

Figure 10: Comparison of LCGC and MPV Daihatsu Xenia Toyota Agya Honda Tiger Dimension 1.5 G M/T 1.3 R Family M/T (motorcycle) Engine capacity cc 1300, 1500 1000, 1300 1,000 1,000 197 Fuel consumption litre/km 1:12 1:12 1 : 20-22 1 : 20-22 1:35 Overall length mm 4,140 4,140 3,580 3,580 2,029 Overall width mm 1,660 1,660 1,600 1,600 747 Overall height mm 1,695 1,695 1,530 1,530 1,124 mm 2,655 2,655 2,730 2,730 1,327 Ground clearance mm 200 180 180 180 155 Turning radius m 4.7 4.7 4.4 4.4 2.3 Curb weight kg 1,435 1,065 745 745 139 Source: Company data, Credit Suisse estimates

Auto & Auto Parts sector 6 27 March 2013

Figure 11: High price competitiveness of LCGC program

Price Range : Unit 100mn INDR 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Toyota Camry Honda CR-V MMC Outlander Sport Honda City Altis Honda Freed Honda Jazz Ford Fiesta Rio Nissan Grand Livina Toyota Rush Suzuki Splash Suzuki APV Nissan March Nissan Evalia MMC Mirage Suzuki Estilo Kia Picanto Toyota Etios Daihatsu Xenia Daihatsu GranMax Toyota Avanza Toyota Agya Daihatsu Ayla

Source: Fourin, Company data, Credit Suisse estimates Nationwide infrastructure building, economic growth in regional cities, expansion of dealer networks key to growing demand for autos We think automobile affordability has clearly improved owing to rising cash earnings and the introduction of LCGC. As the initial phase of motorization gets under way, we see nationwide infrastructure building, economic growth in regional cities, and expansion of dealer networks as being key to growing demand. Demand for automobiles in Indonesia is concentrated in and on the island of Java. Jakarta accounts for 42% of total demand and Java for 70%. As the traffic in Jakarta is extremely congested, the road network needs to be expanded for demand to grow over the long term. Meanwhile, per-capita GDP outside Jakarta is only around $2,000–3,000, so further economic growth is required. OEM makers must set up retail outlets. Toyota Motor, which has the lion's share of the market, has 50% of its retail outlets in Jakarta, 15% in West Java, and 15% in East Java. There are few dealers in regional towns and cities, and we believe used cars trade at higher prices than they should.

Auto & Auto Parts sector 7 27 March 2013

Figure 12: Road total length per capita and automobile Figure 13: Low penetration rate except for Jakarta market penetration (2006) 30% 90% USA 80% 25% 70% 20% DKI Jakarta JPN 60% 15% 50%

40% y = 0.1793ln(x) - 0.0019 10% Bali Penetration % Penetration 30% R² = 0.5012 5% 20% Automotive Penetration Automotive INDO (2006) 10% INDO(2012) 0%

0% 0 2000 4000 6000 8000 10000 0 5 10 15 20 25 30 GDP/Cap (USD) Road Distance / 1,000 people Source: IMF, Credit Suisse estimates Source: Badan Pusat Statistik, Fourin, Credit Suisse estimates Note: Bubble size indicates regional population.

Japanese makers dominate the passenger car segment with the commanding the lion's share of around 50% (Toyota 36%, Daihatsu 15%), followed by Suzuki, Mitsubishi, Honda, and Nissan. It is also a unique market in terms of the type of automobiles sold, with MPVs accounting for 63% and SUV's for 16%. In the MPV segment, although the Toyota Avanza remains a favorite, accounting for around 40%, it appears that due in part to the launch of new models such as Suzuki's Ertiga and Nissan's Evaria, the discount rate has been increased from around IDR3mn to IDR5mn. Meanwhile, the resale value of a three-year-old Avanza is a high 95% of the new price. This is higher than the average resale value in Indonesia, which is 70–80%, indicative of the Avanza's high brand value. The focal point from now on will be LCGCs. We expect Toyota/Daihatsu to launch the Agya/Ayla in tandem with the implementation of the LCGC program. From 2014, we think the market will see the launch of Suzuki's Astar, Honda's Brio, and Nissan's . Given per-capita GDP in Indonesia, we think that even with LCGCs, potential purchasers will be concentrated in Jakarta for now. At the same time, given the relatively high automobile market penetration rate and traffic conditions in Jakarta, the true potential purchasers of LCGCs are the rich/upper-middle class, which we think will likely grow in number in regional towns and cities. Given the breadth of its retail network, the strength of Astra International's retail financing, the Toyota brand's strong image, and the company's lead in launching LCGCs, we think that the Toyota Group will likely continue to command a substantial share of the market for some time from 2013.

Auto & Auto Parts sector 8 27 March 2013

Figure 14: Passenger car share 40% Toyota, 36% 35%

30%

25%

20% Daihatsu, 15% 15% Suzuki, 11% 10% MMC, 8% 5% Honda, 6% Nissan, 6% 0% 2007 2008 2009 2010 2011 2012

Source: Fourin

Figure 15: Composition of passenger car segment Others 3% Toyota Rush 4% Toyota Vios 2% Daihatsu Terios 3%

Toyota Fortuner 3%

Others 9% MMC Pajero 2%

Sedan 5% Others 4% Honda Jazz 3% SUV 16%

H/B 16%

Toyota Yaris 3%

Others 9%

Toyota Avanza 25%

Honda Freed 3%

Suzuki Ertiga 4% MPV 63%

Nissan Grand Livina 4%

Daihatsu Xenia 9% Toyota Innova 9%

Source: Fourin

Auto & Auto Parts sector 9 27 March 2013

Visit diary–1 PT Astra International Tbk, Toyota Sales Operation Astra International is responsible for marketing and sales of Toyota vehicles in Indonesia. It currently employs 5,000 sales staff (per-employee sales of 70 units/month), and is planning to expand its sales force to around 7,000. Dealer distribution is 50% Jakarta, 15% West Java, 15% East Java, and 20% ex-Java. Ex-Java sales have been increasing, and the company plans to expand its sales network in these areas. In 2012, customer footfall at all the company's dealerships reached 2.1mn. The average price of vehicles sold by Toyota in Indonesia is IDR160–180mn. The Avanza, Toyota's best-selling model, remains popular, but the competitive environment looks to have become more severe due to the launch of new models by rivals, including Suzuki's Eltiga and 's Spin (supplied by Suzuki on an OEM basis). The Avanza used to command 52–54% of the MPV segment, but Toyota is targeting around 50% for 2013. However, we think risk of a decline in margins is limited, owing to the launch of new models, such as the Etios (already launched) and the Agya (an LCGC, which is scheduled to be launched in due course). Agya orders appeared to reach 15,000–20,000 units already in January. We get the impression that the timing of the final approval of LCGCs by the Indonesian government remains uncertain. The government says that it is planning to approve LCGCs in March, and if it does, actual sales will start in May–Jun, as a lead time for various procedures of 4–6 weeks is needed. In addition, the retail price and sales targets for Toyota's Agya have yet to be confirmed as the details of LCGCs remain unclear. Half the company's sales of Toyota vehicles are in cash, the other half via loans. Of the purchases made using loans, 10% are Sharia-compliant loans. Reference: Overview of Toyota in Indonesia § 2012 sales volume: 405,000 units § Major models: Avanza (supplied by Daihatsu on an OEM basis), Kijang Innova, Fortuner, Etios, etc § Production bases: Karawang No.1 plant, Karawang No. 2 plant

Figure 16: Toyota – Avanza Figure 17: Toyota – Kijang Innova

Source: Credit Suisse Source: Credit Suisse

Auto & Auto Parts sector 10 27 March 2013

PT Astra Daihatsu Motor PT Astra Daihatsu Motor is a set up in 1992 by Daihatsu (61.8% stake), Astra (31.8%), and Toyota Tsusho (6.4%). The company mainly manufactures Daihatsu vehicles in Indonesia, and also vehicles which it supplies to Toyota on an OEM basis. Its main plants are the Sunter Assembly Plant, Karawang Engine Plant, and recently established Karawang Assembly Plant. The company manufactured 454,000 units in 2012, and we forecast 25% growth YoY in 2013. It employs 9,290 people at its plants. It procures parts from 153 suppliers (81 Japanese companies, 69 local manufacturers, and three global makers). At the Sunter Plant, which we visited, the company manufactures the Xenia/Avanza, Gran Max/Townlife, Terios/Rush among others. The plant has two assembly lines, which are both used as part of a mixed production system. The plant's capacity is 417,000 units/year, and it operates two shifts. The automation ratio is not high at 15%, but we were impressed by efforts to boost production efficiency via a set parts system (SPS) and prevent defects arising in the production process via the use of a quality gate (QG). The number of processes carried out on assembly line No.2 was 71, broadly the same number as in Japan. We were surprised at the high level of productivity, takt time being 0.95 minutes. Although the plant has already started to manufacture Ayla/Agya LCGCs, the date when production will start in earnest has yet to be decided as the timing of official approval of LCGCs remains uncertain. The Karawang Assembly Plant was expanded to produce Ayla/Agya cars, but under current circumstances, the company appears to be striving to cut fixed costs by also producing the Xenia/Avanza model at the plant. Reference: Overview of Daihatsu in Indonesia § 2012 sales volume: 164,000 units § Main models: Xenia, Terios, GranMax, etc.

Figure 18: Daihatsu – Xenia Figure 19: Daihatsu – Luxio

Source: Credit Suisse Source: Credit Suisse

Auto & Auto Parts sector 11 27 March 2013

PT. Nissan Motor Indonesia PT. Nissan Motor Indonesia is a joint venture set up by Nissan and Indomobil. The Purwakarta plant started operating in 1996. In 2001, Nissan increased its stake, after which the plant started fully fledged production of Nissan vehicles. The plant, which is located in the Kawasan industrial estate, makes Grand Livina, Livina Xgear, Evalia, Serena, Xtrail, Juke, March and other models. The Grand Livina was the fourth-best- selling model in Indonesia in 2012. Nissan had the fifth largest share of the market in 2012, and aims to overtake fourth-placed Suzuki by 2014. The company manufactured 90,000 units in 2012 and seems to be planning to manufacture around 140,000 in 2013. It employs 1,770 people, including nine Japanese staff, the fewest among Japanese manufacturers. The Purwakarta plant is highly labor-intensive, employing just four robots on the assembly line. The plant operates two shifts, and takt time is three minutes. Capacity is currently 100,000 units/year, but should rise to 250,000 units/year thanks to the construction of a second assembly plant in 2014 and a third plant in 2016. The local procurement ratio is currently 66%, but the company plans to boost this to around 80% from June 2013 when the engine plant is due to start operating. There are no on-site supplier operations, but a total of 25 companies are due to move into the Kawasan industrial estate where the plant is located (five have already done so). Nissan launched the Evalia, to rival the Avanza, in June 2012. The Evalia is bigger than the existing Grand Livina, and is more practical, targeting the family market. A Datsun brand LCGC is expected to be launched in 2014. The local R&D department will participate in the launch of cars in Indonesia, including the Datsun brand LCGC, at the application development stage. The company is due to expand its R&D staff line-up from 15 in 2011 to 80 in 2016. These researchers will be responsible for the development of vehicles that meet market needs. Reference: Overview of Nissan in Indonesia § 2012 sales volume: 71,000 units § Main models: Grand Livina, Evalia, Serena, etc § Production base: Purwakarta Plant

Figure 20: Nissan – Grand Livina Figure 21: Nissan – Evalia

Source: Credit Suisse Source: Credit Suisse

Auto & Auto Parts sector 12 27 March 2013

Automobile market – trucks Since 2004, overseas direct investment and government infrastructure investment have increased, backed by the Yudhoyono administration's growth-focused policymaking. We think sustained growth in infrastructure investment is highly likely, given Indonesia's on-going motorization. Indonesia is a producer of tin, nickel, copper, gold, coal, natural gas, and other resources. With demand for resources growing globally, Indonesia has steadily increased investment in resource development.

Figure 22: Road total length Figure 23: Amount of coal production (km) Asphalted Not Asphalted yoy (RHS) 30 600,000 15% 25 500,000 10% 20 400,000

5% Millions metric ton 15 300,000 0% 10 200,000 5 -5% 100,000 0 1991 0 1987 1989 1993 1995 1997 1999 2001 2003 2005 2007 2009 -10%

Source: Badan Pusat Statistik Source: Company data Growing infrastructure and resource development demand have driven growth in demand for trucks. The truck market in Indonesia in 2012 was around 148,000 units, and it looks as though we can expect demand to grow in FY13 by around 10–15%. By type, Category 2 trucks (small trucks, weighing 5–8 tonnes) account for 74% of the market, while Category 3 & 5 (medium- and heavy-duty trucks, weighing more than 8 tonnes) account for 26%. Coal prices and production volume in Indonesia corrected in 2012, owing to changes in coal distribution driven by the downturn in the Chinese economy and the shale gas revolution. This depressed demand for dump trucks (Category 5). Coal prices, which are a leading indicator, bottomed out around summer last year, and we now expect coal production volume and related capex to recover.

Figure 24: Truck demand trends

(Unit) 180,000 Cat3/Cat5 Cat2 160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 CSE 2013

Source: Company data, Credit Suisse estimates

Auto & Auto Parts sector 13 27 March 2013

Market shares in Category 2 trucks are Mitsubishi 49%, Hino 34%, while in Categories 3 & 5 the shares are Hino 56%, Mitsubishi Fuso 22%, and Isuzu 8%. The medium-term trend to date has been that irrespective of segment, Hino (Toyota Group) and Isuzu have been winning share away from Mitsubishi Fuso. The truck business is a stock business and Mitsubishi Fuso, which arrived early and gained first-mover advantage, appears to be striving to defend its market share leveraging its large range of distribution parts and the breadth of its sales network. We think that the key to Hino and Isuzu gaining market share will be expanding their sales networks and appropriately expanding their supply capacity.

Figure 25: Share trends in Category 2 (small trucks) Figure 26: Share trends in Categories 3 & 5 (medium and large trucks)

(%) Market Share in Cat.2 (%) Market Share in Cat.3&5

80.0 70.0

70.0 60.0

60.0 50.0

50.0 40.0

40.0 30.0 30.0 20.0 20.0

10.0 10.0

0.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (CY) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (CY) Fuso Toyota G Toyota Hino Isuzu Hino Fuso UD Benz

Source: Company data Source: Company data

Figure 27: Comparison of three truck companies Mitsubishi Fuso Hino Motors Isuzu Motors Local companies Sales Company：KTB Manufacturing company：HMMI Manufacturing and sales company：IAMI Industrial car subconstructor：KRM Sales Company：HMSI Parts manufacturing subsidiary：AICC Parts manufacuring company：MKM Engine manufacturing subsidiary：MII KTB:Mitsubishi Corporation 40%, Krama Yudha 40%, HMMI:Hino Motors90%, IAMI:Astra International 44.94%, Investment Mitsubishi Fuso 18%, 2% Indomobil Sukses Internasional 10% Isuzu Motors44.94%, PPI10.12% HMSI:Hino Motors40%, Indomobil Sukses International 40%, Sumitomo KRM:Mitsubishi Fuso18% Corporation 20% MKM:Mitsubishi Fuso32.3% Major product Canter, FUSO truck Dutro, 500 series Panther, Elf, GIGA 30000 (+ plans to construct new company with 50000 units Sales volume per year 100000 50000 capacity)

Domestic production weighting 30～60% Dutro/Dyna 70%, 500 series 30% Elf:35%, GIGA17% Number of sales bases 180 120 90 Auto parts stores 3,500 1,800 1,802 Medium-duty trucks share 22% 56% 10% Small trucks share 49% 34% 13% Source: Fourin, Company data, Credit Suisse estimates

Auto & Auto Parts sector 14 27 March 2013

Visit diary–2 PT Isuzu Astra Motor Indonesia We visited Isuzu Astra's headquarters. Isuzu sold 33,000 vehicles (including passenger cars) in 2012, and is aiming to sell 38,000 in 2013. Its market shares in 2012 were 13% of small trucks and 10% of medium-duty trucks. Overall, the company had the third-largest share after Mitsubishi Fuso and Hino Motors. In the medium term, the company is aiming to become the leader in the commercial vehicle market by expanding its share of small and medium-duty trucks to 30%. It currently has 15 dealers and 92 outlets. It has 1,802 parts supply stores, which is a small number compared with Mitsubishi Fuso and Hino. Steps it could take to gain share over the medium term include: (1) accelerate development of vehicles that meet local needs, and (2) strengthen its sales network. Operating conditions for vehicles in the Indonesian market are tougher than in industrialized countries. As such, changes have to be made to conventional specifications for gauges, etc, to reduce the frequency of repairs and improve durability. Undercarriages, including chassis and brakes, also need to be strengthened as trucks in Indonesia often carry heavy loads. Necessary improvements to the sales network include strengthening service networks to reduce repair lead times when customers have breakdowns, and expanding sales and marketing resources to find new customers. The company's existing Bekasi Plant has a production capacity of 30,000 units/year. This should increase to 50,000 units/year as the new Karawang Plant is begins operations in 2013. Current local procurement ratios are 35% for small trucks and 17% for medium-duty trucks. This should improve to 60% and 50%, respectively, in 4–5 years. Large parts, including cabins and steel sheet, are currently locally sourced. The company imports key parts, excluding gauges, transmissions, and engine blocks, but aims to boost local procurement via cooperation with Japanese suppliers that move into Indonesia. Reference: Overview of Isuzu in Indonesia § 2012 sales volume: 31,000 units § Main models: Panther, N Series, F Series, etc § Production base: Bekasi Plant

Auto & Auto Parts sector 15 27 March 2013

P.T. Hino Motors Manufacturing Indonesia (HMMI) We visited HMMI's headquarters and plant. HMMI produced 64,000 vehicles (including both Hino and Toyota nameplates) in Indonesia in FY12 and plans to produce some 70,000 in FY13. In 2012, it was ranked second in the Indonesian light-duty truck market with a 34% production share and first in the medium-duty truck market with a 56% production share. It aims to increase its market share over the medium term by: (1) improving its vehicles' quality, durability and fuel efficiency and (2) expanding its network of parts distributors and truck dealers. HMMI expects that its transformation into an exporter will take time. Given that its first priority is developing trucks tailored to the Indonesian market, HMMI is still in the trial and error stage in terms of horizontally expanding sales of such trucks from Indonesia to other emerging markets. However, HMMI manufactures trucks for Haiti at its plant. We believe that it could eventually become an exporter. HMMI's production capacity is 50,000 vehicles/year (standard production capacity). While minimizing capex, it plans to secure sufficient production capacity to meet demand through overtime/holiday operation and improvement in its production lines' cycle time. By improving productivity with a set parts system (SPS), HMMI has improved its production lines' takt time from 7.5 to 4.2 minutes for light-duty trucks and from 11 to 9 minutes for medium-duty trucks. Currently, HMMI locally sources 70% of its parts and materials for light-duty trucks (in value terms, counting only primary suppliers). In 2012, it installed new engine and painting lines. For medium- and heavy-duty trucks, HMMI sources 30% of parts and materials locally. Cultivating suppliers and increasing local production capacity will be key factors in terms of both truck assembly capacity and local sourcing. Reference information: overview of Hino's Indonesian operations § 2012 production: 64,000 vehicles § Main models: Dutro, Dyna, 500 series, etc. § Production site: KBI Plant

Figure 28: PT Isuzu Astra Motor Indonesia Figure 29: HMMI (Headquarters) (Headquarters)

Source: Credit Suisse Source: Credit Suisse

Auto & Auto Parts sector 16 27 March 2013 Motorcycle market – beginning of the end of demand growth Medium-term demand growth is starting to come to an end The Indonesian motorcycle market is approaching the final stages of medium-term demand growth after growing 18% between 1998 in 2011. In 2012, Indonesian motorcycle sales totaled 7.3mn units. Between 1998 and 2012, motorcycle ownership has increased from 12.6mn to 65mn motorcycles, equivalent to an estimated 26% market penetration rate. Motorcycles' market penetration is approaching its presumptive plateau level of 30–35%. Meanwhile, in 2011 Indonesia's per capita GDP rose above US$3,000, the level at which demand typically shifts from motorcycles to automobiles. Assuming that motorcycles have an average useful life of 8–9 years, we estimate medium-term demand at 8–10mn units/year. In 2013, we expect Indonesian motorcycle sales to recover to 7.8mn units. However, YTD demand has not shown much growth while industry inventory seems to have increased by 170,000 units in just for two months. Inventory adjustments remain a risk, considering new down-payment requirements for bank-based Sharia-financed loans from April. While, considering that affordability is improving in the wake of recent wage growth and that the stricter downpayment requirements imposed last year on Sharia-noncompliance we see a possibility of YoY sales growth resuming in Jun–Sep. Based on the per capita GDP data by state presented above, per capita GDP remains low at US$2,000–3,000 except in Jakarta and Bali. Demand recovery mainly outside of Jakarta will be the key, in our view.

Figure 30: GDP per capita and penetration rate

100,000 Switzerland

Austria US Japan Germany Italy Spain

Brazil 10,000 Malaysia China

GDP per capita(USD) GDP Thailand Indonesia

Vietnam India

1,000 0 5 10 15 20 25 30 35 40 Penetration (%)

Source: IMF, Credit Suisse estimates

Auto & Auto Parts sector 17 27 March 2013

Figure 31: Motorcycle demand trends unit 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 -

Source: Credit Suisse estimates The Indonesian motorcycle market is an oligopoly dominated by Honda and Yamaha, which respectively captured 58% and 34% of 2012 motorcycle sales. Some 50% of Honda's motorcycle sales are apparently financed with Sharia-compliant loans. For Yamaha, the corresponding percentage is roughly 20%. The focus in the short term should be on whether market share is affected after implementation of the regulation for downpayment of Sharia financed loans. Honda is slated to release somewhat more new models, counting model variants, in 2013 than Yamaha. As demand matures over the medium term, we assume that Honda will increase its market share by leveraging its scale-derived cost competitiveness to beat the competition in terms of price and product performance.

Figure 32: Motorcycle share trends (%) 70

60

50

40

30

20

10

0 1975 1980 1985 1990 1995 2000 2005 2010 Honda Yamaha Suzuki Others

Source: Company data

Auto & Auto Parts sector 18 27 March 2013

Rapid wage inflation poses a profitability-versus-share dilemma for lower-tier motorcycle makers What made the biggest impression on us during our latest visit to Indonesia is that wages have increased sharply—by up to 58% YoY. This rapid wage inflation appears to be occurring across the auto industry, affecting both OEMs and suppliers. Labor costs generally account for less than 5% of companies' total expenses, but to maintain margins by absorbing a 60% increase in labor costs throughout the industry pyramid, companies must: (1) raise their final sales prices by roughly 4%, (2) achieve unit-volume growth of around 25%, or (3) reduce COGS commensurately. When we take a closer look at the pricing environment and demand growth potential, we reach the conclusion that lower-tier motorcycle makers' profitability has nearly peaked. First, in terms of the pricing environment, Honda, the market-share leader, intends to raise final sales prices as little as possible even amid an inflationary environment. Less cost- competitive rivals will consequently have difficulty absorbing cost increases by raising prices. Second, in terms of demand growth potential, we estimate the Indonesian motorcycle market's maximum potential size at 10mn units/year over the medium term, 40% above actual 2012 demand of approximately 7.2mn units. Although wage growth will stimulate end-demand through income effects, the motorcycle industry's potential to increase its unit volume enough to offset cost increases is limited even from a medium- term perspective. Consequently, both OEMs and suppliers are apparently pursuing a basic strategy of reducing COGS, mainly by sourcing a larger share of their parts and materials locally. Even though wages are rising sharply, Indonesian labor costs remain low in comparison to other Asian countries. Expansion of local sourcing will likely be the most important factor in maintaining profitability or competitive advantage.

Figure 33: Comparison of labor costs in Asia Labor Cost USD/m 400 350 300 250 200 150 100 50 0

Source: Credit Suisse estimates

Auto & Auto Parts sector 19 27 March 2013

Visit diary–3 P.T. Astra Honda Motor (AHM) AHM, jointly owned by Honda and Astra, makes and sells motorcycles. It has three production plants with combined capacity of 4.5mn motorcycles/year (1mn/yr at Plant No. 1, 1mn/yr at Plant No. 2, and 2.5mn/yr at Plant No. 3). Its plants are currently operating at full capacity. Management said that AHM will have to build a fourth plant if demand grows (AHM has already acquired a site for a fourth plant). We visited Plant No. 1, which opened in 1971 and currently produces Cubs and scooters. It has two assembly lines, both of which operate on a two-shift schedule. The lines are capable of switching from one model to another on a lot-by-lot basis. They are manned by about 80 workers apiece, reflecting AHM's strategy of minimizing capex with a labor- intensive production model. AHM consequently has a low automation rate. It plans to continue to invest sparingly in new plants and equipment. We surmise that its existing production facilities are more or less completely depreciated. Although Plant No. 1 utilizes a just-in-time production system, management said that the plant holds about two weeks of precautionary inventories due to local logistic conditions (traffic congestion, etc.). AHM's average sales price is IDR12mn. While Honda has captured most of the market, it faces competition from Yamaha, Suzuki and, in the sports segment, Bajaj et al. AHM has already released two new models in 2013. Including derivative models, it plans to roll out a total of 20 new models in 2013. Indonesia plans to adopt the Euro 3 emissions standard in 2014. By end-2013, all Honda models are to come equipped with systems. The new loan downpayment requirements' impact on demand has been a concern since 2012. The percentage of AHM motorcycle purchasers that finance their purchase with loans has apparently risen to around 80% recently from 60% in the past. Of the purchasers that use loans, 70% utilize Sharia-compliant loans. Although the demand outlook is currently murky, AHM aims to achieve unit-volume growth in excess of the market's growth rate, largely by rolling out new models. Reference information: overview of Honda's Indonesian operations 4W 2W 2012 Production 68,000 4,100,000 Main Models Brio, Freed Beat

Figure 34: Honda motorcycle dealer’s maintenance factory

Source: Credit Suisse

Auto & Auto Parts sector 20 27 March 2013

Companies Mentioned (Price as of 26-Mar-2013) Astra International (ASII.JK, Rp7,650, OUTPERFORM, TP Rp9,502) Bajaj Auto Limited (BAJA.BO, Rs1802.2) Daihatsu Motor (7262.T, ¥1,923) Hino Motors (7205.T, ¥1,035) Honda Motor (7267.T, ¥3,640) Isuzu Motors (7202.T, ¥579) Mitsubishi Fuso (Unlisted) Mitsubishi Motors (7211.T, ¥101) Nissan Motor (7201.T, ¥927) PT Indomobil Sukses Internasional (IMAS.JK, Rp5,550) Suzuki Motor (7269.T, ¥2,169) Toyota Motor (7203.T, ¥4,910) Toyota Tsusho (8015.T, ¥2,488) Yamaha Motor (7272.T, ¥1,281)

Disclosure Appendix Important Global Disclosures Issei Takahashi, Masahiro Akita, Teddy Oetomo and Dian Haryokusumo 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.

Price and Rating History for Astra International (ASII.JK)

ASII.JK Closing Price Target Price Target Price Closing Price ASII.JK Date (Rp) (Rp) Rating 11,000 03-May-10 4,640 5,200 N 30-Jul-10 5,070 5,400 16-Nov-10 5,600 6,400 8,500 13-Jul-11 6,800 7,800 * 29-Jul-11 7,050 7,920 6,000 27-Sep-11 6,055 7,400 O 01-Nov-11 6,650 7,879 N 08-Feb-12 7,485 6,589 U 3,500 14-Mar-12 7,305 6,589 N 1- Jul- 10 1- Jan- 11 1- Jul- 11 1- Jan- 12 1- Jul- 12 1- Jan- 13 25-Apr-12 7,090 6,700 NEUTRAL 27-Jul-12 6,650 6,850 OUTPERFORM UNDERPERFORM 04-Oct-12 7,750 9,000 O 29-Oct-12 7,850 9,400 01-Mar-13 8,100 9,502 * 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. 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 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. 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; Australia, New Zealand are, and 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, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Auto & Auto Parts sector 21 27 March 2013

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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.

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Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (54% banking clients) Neutral/Hold* 38% (46% banking clients) Underperform/Sell* 16% (40% banking clients) Restricted 3% *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 holdings, and other individual factors.

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Price Target: (12 months) for Astra International (ASII.JK) Method: Our Rp9,502/share target price for Astra International is based on our sum-of-the-parts valuation analysis. We value the automotive division by applying a FY13E price to earnings ratio (P/E) at 17.0x, agricultural division at 15.8x, financing division at 9.9x, heavy equipment division at 15.0x, and others at 15.5x. Risk: Potential risks to our Rp9,502/share target price for Astra International include: competition risk, regulatory risk in the form of import duties, plus a significant deterioration in the macro economy, particularly at the consumer confidence level, which has a high correlation with car sales, and liquidity in auto financing, which has a high correlation with motorcycle sales volume.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names Credit Suisse may have interest in (ASII.JK)

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 have not visited the material operations of the subject company (ASII.JK) within the past 12 months 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.

Auto & Auto Parts sector 22 27 March 2013

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Auto & Auto Parts sector 23 27 March 2013

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Auto_AutoParts_032613_E.doc Auto & Auto Parts sector 24