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27 March 2013 Asia Pacific/Indonesia&Japan Equity Research Auto & Auto Parts sector Connections Series Implications of Indonesia Figure 1: LCGC implementation increasing demand for automobiles The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. 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 Astra International 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 Car” (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), Daihatsu 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). DISCLOSURE APPENDIX CONTAINS 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 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, Toyota Sales Operation 10 PT Astra Daihatsu Motor 11 PT. Nissan Motor Indonesia 12 Automobile market – trucks 13 Visit diary–2 15 PT Isuzu Astra Motor Indonesia 15 P.T. Hino Motors 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 will 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: Automotive industry from upstream to downstream Product Criteria: Type of vehicles: MPV and compact cars 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, transmission and axle) in 5years, First-year minimum 40%, then done in stages. Potential Investors: Daihatsu, Suzuki, 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 Toyota Avanza Daihatsu Xenia Toyota Agya Daihatsu Ayla Honda Tiger Dimension