Pan-Asia Automobiles and Components

Pan Asia Consumer Discretionary 4 July 2018

Fuel-cell electric vehicles: the ultimate solution to zero emissions

 FCEVs set to replicate the rapid EV penetration of the past 3 years; raising global FCEV shipment forecast by 17% to 9.5m units by 2030 Sung Yop Chung  Expansion in trading multiples for FCEV players, more so component (82) 2 787 9157 makers across the board, set to accelerate in the next 12 months [email protected] Eiji Hakomori  Toyota Motors is our top pick over the next 12 months; we also like (81) 3 5555 7072 Hanon Systems and Hyundai Motor over the next 6 months [email protected]

See important disclosures, including any required research certifications, beginning on page 88

Pan Asia Consumer Discretionary 4 July 2018

Pan-Asia Automobiles and Components

Fuel-cell electric vehicles: the ultimate solution to zero emissions

What's new: Since we first published our Pan-Asia auto report on green Key stock calls cars (click here) on 14 November 2014, global shipments of electric New Prev. vehicles (EVs) have seen exponential growth, with 2017 shipments Hanon Systems (018880 KS) Rating Buy Buy reaching 1.26m units from a mere 180,000 units in 2014. However, with the Target 16,000 13,000 ongoing industry debate about the environmental benefits of EVs, we Upside  54.6% advocate our now more optimistic view on fuel-cell electric vehicles Hyundai Motor (005380 KS) (FCEVs) becoming the ultimate solution for zero emissions. Rating Buy Outperform Target 160,000 170,000 What's the impact: FCEVs to lead the pack over the long term. From Upside  31.1% 2025, we envisage FCEVs replicating the rapid penetration of EVs over the Hyundai Mobis (012330 KS) Rating Outperform Buy past 3 years. As such, we are revising up our global FCEV shipment CAGR Target 235,000 360,000 forecast for 2018-30E by 17% to 9.5m units by 2030 on: 1)The ever-more Upside  14.6%

stringent regulatory environment with potentially large fines for auto OEMs Toyota Motor (7203 JP) from 2020E, 2) FCEVs as the ultimate solution to countries achieving zero Rating Outperform Outperform emissions, and 3) a rise in infrastructure investment and decline in stack Target JPY8,700 JPY8,700 Upside  23.0% costs, which currently account for 30-40% of FCEV production costs. As such, we forecast a 62.5% FCEV unit CAGR over 2018-30E, outstripping Source: Daiwa forecasts the 20.4% CAGR that we forecast for EV units for the same period.

Expansion in trading multiples for FCEV component makers over the next 12 months. Since the launch of the first FCEVs in 2013, the FCEV players’ PERs have expanded by an average of 20.4%, with 25.5% for the components makers, across the board. We expect this expansion to become more apparent for FCEV parts makers, given the strong potential for them to lead the way in the initial stage of FCEV development over the next 12 months, with their comparative edge over the auto OEMs in manufacturing key components and system-supplying capability.

What we recommend: Toyota Motor (7203 JP, JPY7,075, Outperform [2]) is our top pick for its competitive edge in environmental technology, including FCEVs, which enables it to comply with current environmental regulations. We also like Hanon Systems (018880 KS, KRW10,350, Buy [1]) for its strong competitive foothold in thermal energy management for FCEVs. We upgrade Hyundai Motor (005380 KS, KRW122,000) to Buy (1) on the prospect of it entering an earnings-revision cycle from 2H18, and given it is one of the few global OEMs that has the technology for key components such as membrane electrode assembly (MEA). Finally, we downgrade Hyundai Mobis (012330 KS, KRW205,000) to Outperform (2) given its relative weakness in FCEVs. Key risk: regulatory changes.

How we differ: Our EPS forecasts for Toyota, HMC, Hanon, and Mobis are higher than the Bloomberg consensus, likely because of our view of an upward earnings-revision cycle and sound competitive footprint in FCEVs.

See important disclosures, including any required research certifications, beginning on page 88

Pan-Asia Automobiles and Components: 4 July 2018

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook FCEVs: Daiwa’s revised market forecasts We now expect FCEV shipments to get another boost from ('000 units) 2020E, triggered by: 1) the ever-more stringent regulatory 35,000 environment for auto OEMs from 2020E, 2) FCEVs as the 30,000 4,697 ultimate solution to countries achieving zero emissions, 25,000 4,361 and 3) a rise in infrastructure investment and decline in 20,000 4,146 17,169 stack costs. As such, we are revising up our global FCEV 15,000 3,951 14,308 3,651 shipment CAGR forecast for 2018-30E to 9.5m units (a 3,317 11,923 10,000 3,043 9,936 2,865 8,280 2018-30E 62.5% CAGR) vs. our previous forecast of 8.1m 2,5522,731 6,900 5,000 3,020 5,750 7,7339,460 2,1852,530 4,792 5,140 units for 2018-30E (51.9% CAGR). We expect FCEV 1,6951,880 1,980 2,3903,300 3,630 3,993 2,7013,494 1,5201050 1,561 1801 5402 7703 1,26210 1,850 28 61 109 289 464 959 1,5802,175 shipments to accelerate and surpass EV shipment growth 0 beyond 2025E. 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E FCEV EV HEV

Source: Daiwa estimates and forecasts

Valuation Auto OEMs vs. FCEV parts makers EPS CAGR vs. PER We look for FCEV auto-parts suppliers with system- (2018-20E EPS CAGR, % ) supplying capability and higher-than-expected FCEV parts 40 ASPs to lead the way in smart-car development over the 30 Kawasaki next 5 years. Global avg 20 HMC (12.0, 5.0) Iwatani Air Liquide Hence, we expect these companies’ valuation premiums 10 VW Shell Engie Alstom over global OEMs to widen over 2018-20. On both the Toyota Stat oil Linde 0 Daimler Total Daiwa and Bloomberg-consensus forecasts, the FCEV GM CHN Energy auto-parts’ players would deliver an EPS CAGR of 12.3% (10) Mitsui chemical Honda for 2018-20, vs. 6.3% for the global FCEV makers (OEMs). (20) 0 5 10 15 20 25

(2018E PER, x ) Source: Bloomberg, Daiwa forecasts

Earnings revisions Major Pan-Asia automakers and component makers: Bloomberg vs. Daiwa forecasts Within our Pan-Asia coverage of major auto and (USD) components makers, we expect HMC to see the strongest 35 upward earnings-revision cycle, followed by Mobis and 30 Toyota. 25 20 From its low base in 2017 with a steeper-than-expected 15 shipment decline from Korea and China’s THAAD 10 deployment, we look for HMC’s new product cycle, 5 product-mix improvements (a rise in its high-margin SUV 0 shipments), and competitive advantage in ex-China BBG Daiwa BBG Daiwa BBG Daiwa BBG Daiwa emerging markets to support an upward earnings-revision HMC Mobis Hanon Toyota cycle from 2H18 – the first since 2012. 2018E EPS 2019E EPS 2020E EPS

Source: Bloomberg, Daiwa forecasts

Pan-Asia Automobiles and Components: 4 July 2018

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Hanon Systems 018880 KS 10,350 Buy Buy 16,000 13,000 23.1% 605 592 2.2% 771 740 4.2% Hyundai Mobis 012330 KS 205,000 Outperform Buy 235,000 360,000 (34.7%) 23,149 30,809 (24.9%) 27,416 33,414 (17.9%) Hyundai Motor 005380 KS 122,000 Buy Outperform 160,000 170,000 (5.9%) 14,065 17,064 (17.6%) 16,839 20,124 (16.3%) Toyota Motor 7203 JP 7,075 Outperform Outperform 8,700 8,700 0 811.8 811.8 0 871.3 871.3 0 Source: Bloomberg, Daiwa forecasts. Share prices as of 3 July 2018

Potential FCEV beneficiaries by industry 2018E 2019E Share Market EPS EPS price Cap FY 2017 FY 2017 Growth Growth 2018E 2019E 2018E 2019E 2018E 2019E Company BBG Ticker (LC) (USDm) OPM (%) NPM (%) (%) (%) PER (x) PER (x) PBR (x) PBR (x) ROE (%) ROE (%) FCEV description Automotive OEMs GM GM US 39 57,801 (1.0) 6.5 n.a. 6.1 6.1 6.1 1.4 1.2 25.3 21.9 FCEV OEM VW VOW GR 140 83,631 2.4 5.0 16.8 8.2 5.3 4.9 0.6 0.6 12.1 11.8 FCEV OEM HMC* 005380 KS 122,000 23,990 4.8 4.3 (0.4) 19.7 8.7 7.2 0.5 0.4 5.3 6.1 FCEV OEM Toyota 7203 JP 7,075 209,183 6.4 6.6 (3.6) 7.3 8.7 8.1 1.0 0.9 12.0 11.9 FCEV OEM Honda 7267 JP 3,210 53,205 3.6 4.1 72.7 n.a. 6.2 8.0 0.8 0.7 13.9 8.8 FCEV OEM Daimler DAI GR 56 68,889 6.2 6.2 n.a. 2.2 6.1 5.9 0.9 0.8 15.8 15.1 FCEV OEM Fuel-cell energy/parts Shell RDSA NA 30 291,087 3.8 5.4 82.3 6.6 12.3 11.2 1.4 1.4 11.8 12.0 Hydrogen Energy Total FP FP 53 161,073 5.0 7.0 46.8 7.2 11.9 11.1 1.3 1.2 11.3 11.0 Hydrogen Energy Stat oil STOHF 27 87,640 8.0 7.3 30.7 10.4 14.1 13.2 2.0 1.8 14.5 13.7 Hydrogen Energy Air Liquide AI FP 107 52,930 13.7 10.0 1.2 10.5 20.5 18.5 2.6 2.4 13.1 13.5 Fuel cell energy Linde LIN GR 178 42,100 10.2 8.0 n.a. 13.6 21.0 19.4 2.2 2.2 10.8 11.3 Hydrogen gas engineering Ballard Power System BLDP US 3 508 (5.1) (3.9) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Fuel cell stack Anglo American Platinum AMS SJ 36,957 6,522 5.8 5.3 99.2 45.3 23.7 16.6 2.2 2.0 10.5 12.3 Platinum supplier Engie ENGI FP 13 37,201 4.0 3.9 90.6 10.9 13.3 12.0 0.8 0.8 6.5 7.1 Electric utility Iwatani 8088 JP 3,775 1,774 2.8 2.4 6.2 7.0 11.0 9.9 1.3 1.1 12.2 11.0 Hydrogen gas station Kawasaki 7012 JP 3,180 4,907 2.6 1.6 10.4 63.6 19.9 11.2 1.2 1.1 6.4 9.5 Hydrogen gas transportation Others Alstom ALO FP 39 10,041 5.4 3.9 62.9 n.a. 19.1 19.4 2.1 2.2 12.5 10.0 Fuel cell train Mitsui & Co. 8031 JP 1,817 29,071 3.4 6.6 38.8 4.4 7.7 7.3 0.8 0.7 10.9 10.5 Hydrogen gas Industry Average 67,929 4.6 5.0 42.9 15.3 12.6 11.2 1.4 1.3 12.2 11.6

Source: Companies, Bloomberg, *Daiwa forecasts Note: Share prices are as of 3 July 2018

Korea: potential FCEV beneficiaries by industry 2018E 2019E Share Market EPS EPS price Cap FY 2017 FY 2017 Growth Growth 2018E 2019E 2018E 2019E 2018E 2019E Company BBG Ticker (KRW) (USDm) OPM (%) NPM (%) (%) (%) PER (x) PER (x) PBR (x) PBR (x) ROE (%) ROE (%) FCEV description Automotive OEMs HMC* 005380 KS 122,000 23,990 4.8 4.3 (0.4) 19.7 8.7 7.2 0.5 0.4 5.3 6.1 FCEV OEM Mobis* 012330 KS 205,000 17,840 3.3 6.8 43.7 18.4 8.9 7.5 0.6 0.6 7.4 8.1 FCEV OEM Kia* 000270 KS 30,950 11,201 1.0 2.5 118.8 24.8 5.9 4.7 0.4 0.4 7.6 8.8 FCEV OEM FCEV parts Hanon* 018880 KS 10,350 4,930 6.3 5.2 11.9 27.4 17.1 13.4 2.7 2.6 15.9 20.0 FCEV thermal management Hyosung 004800 KS 134,000 4,215 5.8 4.3 39.3 15.5 9.8 8.5 1.2 1.1 12.3 13.2 Hydrogen station Kolon Industries 120110 KS 58,200 1,564 3.0 3.2 26.2 26.7 9.8 7.7 0.8 0.7 7.3 8.6 Fuel cell parts S&T Motiv 064960 KS 32,350 432 7.0 6.2 n.a. 28.8 8.7 6.8 0.6 0.6 7.3 8.9 FCEV motor parts Motonic 009680 KS 9,360 283 4.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Hydrogen station parts Iljin Diamond 081000 KS 25,300 245 7.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Hydrogen gas tank Synopex 025320 KS 3,470 202 7.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Fuel cell membrance GMB Korea 013870 KS 8,100 134 2.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FCEV water pump Daewoo Electronic Components 009320 KS 3,775 137 6.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FCEV CCH, EWP Daewon Kangup 000430 KS 4,210 242 3.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FCEV end plate Woory Industrial 215360 KS 26,600 230 5.1 4.2 17.5 36.5 16.4 11.4 2.2 1.9 13.2 15.7 FCEV PTC heater Others Cowell Fashion 033290 KS 5,610 447 15.1 13.5 28.9 16.3 8.8 7.5 2.2 1.7 29.0 26.0 FCEV film capacitor, condensor Industry Average 4,564 5.6 5.6 32.2 21.6 10.4 8.5 1.2 1.1 11.6 12.2

Source: Companies, Bloomberg, *Daiwa forecasts Note: Share prices are as of 3 July 2018

Pan-Asia Automobiles and Components: 4 July 2018

Table of contents

FCEV: upward revision to our forecast ...... 5

What are FCEVs and why are they better than other vehicles? ...... 6

FCEV market outlook ...... 29

Valuations and recommendations ...... 34

Company Section

Toyota Motor ...... 55

Hanon Systems ...... 61

Hyundai Motor ...... 67

Hyundai Mobis ...... 75

GMB Korea Corp ...... 80

Pan-Asia Automobiles and Components: 4 July 2018

FCEV: upward revision to our forecast

We envisage FCEVs seeing faster-than-expected penetration vs. our previous forecast and as such, revise up our global FCEV shipment CAGR forecast from 2018-30E by 17% to 9.5m units on: 1) more stringent government regulation and penalty programmes to

reduce CO2 emissions and increase fuel efficiency, which could lead auto OEMs to develop more FCEVs, 2) a decline in FCEV prices with a decline in key component costs such as fuel-cell stacks, 3) a rise in the number of hydrogen stations from 2020E onwards with abundant hydrogen as an energy source.

Previous shipment forecasts for EVs We are revising up our In our previous report on electric vehicles and smart cars (Reinventing the wheel, FCEV shipment CAGR published on 23 June 2016), we estimated that the total number of green cars would reach forecast for 2018-30 11.1m units by 2025 (including 3.3m HEVs, 5.7m EVs, and 2.1m FCEVs). Despite our assumption of stronger demand growth for EVs on stricter fuel efficiency requirements and a stronger-than-expected growth trajectory from China, we estimated the total demand for EVs would remain smaller than that for HEVs until 2025E, possibly constrained by higher prices with limited product offerings and higher-than-expected EV battery costs.

Daiwa previous green car shipment forecasts

('000 units) 35,000 30,000 4,697 25,000 4,361 20,000 4,146 17,169 15,000 3,951 3,651 14,308 3,317 11,923 10,000 3,043 9,936 2,865 2,731 8,280 5,000 3,020 2,552 6,900 2,530 5,750 8,090 2,185 3,993 4,792 5,140 6,733 1,695 1,880 1,980 2,390 3,300 3,630 2,801 3,894 0 1,520 1051.1 1,561 1801.6 540 6 77010 1,26220 1,85025 70 150 500 750 1,200 1,572 2,075 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E FCEV EV HEV

Source: Daiwa estimates and forecasts

Revising our FCEV forecasts We now believe FCEV shipments will get another boost from 2020E, triggered by: 1) the ever-more stringent regulatory environment with potentially large fines for auto OEMs from 2020E, 2) FCEVs as the ultimate solution to countries achieving zero emissions, and 3) a rise in infrastructure investment and decline in stack costs. As such, we are revising up our global FCEV shipment CAGR forecast to 9.5m units for 2018-30E (CAGR of 62.5%) vs. our previous forecast of 8.1m units by 2030E (a 2018-30E CAGR of 51.9%).

Daiwa revised green car shipment forecasts ('000 units) 35,000

30,000 4,697

25,000 4,361 20,000 4,146 17,169 15,000 3,951 14,308 3,651 10,000 3,317 11,923 3,043 9,936 2,865 8,280 5,000 3,020 2,552 2,731 6,900 2,530 5,750 7,733 9,460 2,185 3,993 4,792 5,140 1,695 1,880 1,980 2,390 3,300 3,630 2,701 3,494 0 1,5201050 1,5611801 5402 7703 1,26210 1,85028 61 109 289 464 959 1,580 2,175 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E FCEV EV HEV

Source: Daiwa estimates and forecasts

Pan-Asia Automobiles and Components: 4 July 2018

What are FCEVs and why are they better than other vehicles? 1) What is an FCEV? An FCEV, a zero- Hydrogen fuel-cell cars, sometimes referred to as fuel-cell electric vehicles (FCEVs) are emissions vehicle, uses vehicles that use the natural element of hydrogen gas (Symbol: H) as their main fuel hydrogen gas to power it source and have a completely different propulsion system to conventional vehicles. and only produces water and heat as a by-product High-pressure hydrogen gas is stored in tanks, similar to the way gasoline or diesel is stored in combustion-powered vehicles. This hydrogen gas is later converted into energy by the fuel cell, to power the electric motor and propel the vehicle. Because the vehicles run on pure hydrogen gas (the most abundant element on planet earth), they are significantly more efficient than gasoline-powered vehicles.

FCEVs use hydrogen gas to power an electric motor. Unlike conventional vehicles which run on gasoline or diesel, fuel-cell cars and trucks combine hydrogen and oxygen to produce electricity, which runs a motor. Since they’re powered entirely by electricity, FCEVs are considered electric vehicles (EVs) – but unlike other EVs, their range and refuelling processes are comparable to conventional cars and trucks.

Converting hydrogen gas into electricity produces only water and heat as a by-product, meaning FCEVs don’t create tailpipe pollution when they’re driven. Producing the hydrogen itself can lead to pollution, including greenhouse gas emissions, but even when the fuel comes from one of the dirtiest sources of hydrogen, natural gas, today’s early fuel- cell cars and trucks can cut emissions by over 30% when compared with their gasoline- powered counterparts. Future renewable fuel standards – such as the requirements currently in place in California – could make hydrogen even cleaner.

FCEVs: core parts and how they work

Source: IEA

Pan-Asia Automobiles and Components: 4 July 2018

FCEV parts and technology Fuel cells Fuel cells can be thought of as batteries that never run flat. Instead of slowly depleting the chemicals inside them (as normal batteries do), fuel cells run on a steady supply of hydrogen and keep making electricity for as long as there’s fuel in the tank. Electricity is produced through a chemical reaction between a source fuel and an oxidant (the source fuel being hydrogen gas). As such, the only by-products are water and a small amount of nitrous oxide if air is used as the oxidizer.

Fuel-cell stack Fuel-cell stack is a key Since individual cells generate relatively small amounts of electricity, they are grouped component for FCEV together into what are called fuel-cell stacks. Some fuel-cell stacks contain hundreds of individual fuel cells, each producing less than one volt. Together, these fuel-cell stacks produce enough power to propel the vehicle.

FCEV: fuel-cell stack

Source: Daiwa research

Polymer electrolyte membrane (PEM) and membrane electrode assembly (MEA) Polymer electrolyte membrane (PEM) fuel cells are the current focus of research for FCEV applications. PEM fuel cells are made from several layers of different materials. The heart of a PEM fuel cell is the membrane electrode assembly (MEA), which includes the membrane, the catalyst layers, and gas diffusion layers (GDLs).

FCEV: Polymer Electrolyte Membrane

Source: Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

Polymer electrolyte membrane. The proton exchange membrane (PEM) conducts only positively charged ions and blocks the electrons. The PEM is the key to fuel cell technology; it permits only the necessary ions to pass between the anode and cathode.

Catalyst layers. A layer of catalyst is added on both sides of the membrane – the anode layer on one side and the cathode layer on the other.

Gas diffusion layers. The GDLs sit outside the catalyst layers and facilitate transport of reactants into the catalyst layer, as well as removal of product water.

Hydrogen storage tank The hydrogen tank Hydrogen fuel tanks mainly comprise 2 different types: 1) compressed hydrogen gas, and enables the storage of 2) cryogenic hydrogen (super-cooled liquid hydrogen). Since hydrogen gas is the more high-pressured common of the two, most common fuel tanks are set up for hydrogen gas storage. The gas hydrogen gas to feed the is stored in a compressed state in high-pressure tanks, located either in the trunk or under fuel cell the floor of the vehicle. Hydrogen fuel is sourced from these tanks to feed the fuel cells. These tanks are connected to the fuel port (where the gas is dispensed into from refuelling stations). Most hydrogen fuelling stations dispense compressed hydrogen gas at 5,000 psi and 10,000 psi or at both pressures.

FCEV: hydrogen storage tank

Source: Daiwa Note: TPRD stands for thermally activated pressure relief device

Electric motor Similar to an electric car, hydrogen cars use an electric motor located near the vehicle’s front wheels for power propulsion. The electric motor propels the vehicle with little noise or vibration. It gets its power from the electricity generated by the fuel cells. It can also source energy through regenerative braking technology, whereby the electric power is stored in a battery pack and later drawn out to supplement torque and power.

FCEV: electric motor

Source: Hyundai Motor Co.

Motor controller (control unit) The power control unit manages and governs the flow of electricity generated in the fuel cell, as well as battery input/output in accordance with driving conditions. The amount of electricity converted and fed to the electric motor is based on the input delivered from the

Pan-Asia Automobiles and Components: 4 July 2018

accelerator pedal. By drawing power from either the battery or fuel-cell stack, it delivers electric power to the motor, which then uses the electricity to propel the vehicle.

FCEV: control unit

Source: Toyota

Hydrogen station The power control unit manages and governs the flow of electricity generated in the fuel cell, as well as battery input/output in accordance with driving conditions. The amount of electricity converted and fed to the electric motor is based on the input delivered from the accelerator pedal. By drawing power from either the battery or fuel-cell stack, it delivers electric power to the motor, which then uses the electricity to propel the vehicle.

FCEV: hydrogen station

Source: Green Car Congress

Thermal energy management system Thermal energy For FCEVs, an adequate thermal energy management (TEM) is pivotal to increase the management system is energy efficiency, but is also pivotal for the durability of fuel-cell stacks and vehicles’ torque pivotal for FCEVs power. As fuel-cell stacks’ cost accounts for 30-40% of the production cost of an FCEV, it is important to maintain the durability of the fuel-cell stacks.

E-compressor Heat pump system

Source: Daiwa Source: Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

FCEV: core parts description Image Part name Description

Fuel-cell stack A group of fuel cells, generating electricity in compact space

Membrane Electrode A part of the fuel cell where power is produced; consisting of the membrane, the catalyst Assembly (MEA) layers, and gas diffusion layers

Hydrogen storage tank A device where compressed hydrogen coming via fuel port is stored to feed fuel cells

Electric motor A device that propels the vehicle using electricity from fuel cells

Control unit A device that controls the flow of electricity from fuel cells, and battery input/output

Hydrogen station A storage or filling station for hydrogen, as part of the distributed generation resources concept

Heat pump A device that transfers heat from a colder area to a hotter area, to warm the air inside a vehicle

E-compressor A machine that pressurizes and stores air within a tank for use in powering pneumatic tools

Source: Daiwa

FCEVs: thermal energy management

Source: Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

2) Why are FCEVs better than other vehicles? Given FCEVs’ total “well-to-wheel” efficiency and faster refuelling time, we believe FCEVs are more efficient and have a higher driving range as well as shorter fuel-charging time than any other EV vehicles.

Well-to-wheel efficiency Since on average 52% of electricity in the US comes from coal, and since the grid efficiency is on the order of only 35%, greenhouse-gas (GHG) emissions are much greater for EVs than for hydrogen-powered FCEVs, assuming that most hydrogen is made by reforming natural gas.

FCEVs have a greater Also, the increased weight of the EV required to achieve a reasonable vehicle range driving range and faster increases fuel consumption as the vehicle becomes heavier. The hydrogen FCEV running refuelling time than EVs on hydrogen made from natural gas can achieve the 300-350 mile range demanded by consumers without sacrificing GHG reductions.

Thus, hydrogen FCEVs cut GHG emissions by more than 50% on average compared to regular cars. This GHG calculation includes all “welltowheel” GHGs adjusted for a 100year atmospheric lifetime.

FCEV and EV comparison FCEV EV

Power source Electricity from hydrogen Electricity Refuelling time 3-5 minutes 3-6 hours Driving range 400-700km 130-420km Emissions Water vapour none Product price USD 58,000-80,000 USD40,000-60,000 Fuel cost (% vs. gasoline price) 15% 47% Charging infrastructure cost USD2-3m USD3,000-50,000 Smart-car features More applicable Less applicable

Source: Daiwa

FCEVs: pros and cons Pros Cons Reduced pollution Lacking infrastructure Fuel efficient Vehicle production costs Reduced maintenance Potential dangers Longer driving range Hydrogen storage Fast refuelling Climate sensitivity

Source: Daiwa

Energy efficiency As is widely known, the refuelling time for hydrogen FCEVs is much shorter than an EV’s recharging time. Although infrastructure investment and technology development is needed for more hydrogen stations to be built in cities around the world, we believe stronger-than- expected shipments of FCEVs would provide incentives for governments to build more hydrogen stations in the longer term.

Also, according to the US Department of Energy (DOE), one would need to burn about 1.18m BTU’s (MBTU) of natural gas in a combustion turbine to generate the electricity to power a battery EV for 300 miles (based on the Environment Protection Agency’s (EPA) 1.25x driving cycle). However, only 0.81 MBTUs of natural gas is required to generate enough hydrogen to power a FCEV for 300 miles. On a full cycle welltowheels basis, the hydrogen powered FCEV is 1.5-2.2x more energy-efficient than a battery EV in converting natural gas to vehicle fuel.

Pan-Asia Automobiles and Components: 4 July 2018

Industry’s next response to cleaner energy needs Environmental controversy over EVs where 39% of world electricity is generated from coal EV shipments rose Since our first report on EVs back in 2014, global EV shipments have grown exponentially exponentially by 7x to by 7x to 1.26m units in 2017 from a mere 180,000 units in 2014. This growth was due 1.26m units in 2017 from mainly to: 1) the China government’s strong push on NEVs, 2) more stringent measures for 180k units in 2014 eco-friendly vehicles following VW’s ‘dieselgate’ in 2015 and the Mitsubishi scandal in 2016, and 3) declining prices of EV batteries which account for 30% of an EV‘s production cost.

We still see strong growth potential for EV shipments until 2025E. However, with the ongoing industry debate about the environmental benefits of EVs, whereby charging electric batteries also burns carbon, and with coal still accounting for an overwhelming proportion of electricity production, we advocate our more optimistic view on FCEVs becoming the ultimate solution for zero emissions.

World electricity production by source (2017)

Oil, 4.1% Others, 2.2% Renewables, 4.9%

Nuclear, 10.6% Coal, 39.3%

Hydro, 16.0%

Gas, 22.9%

Source: IEA

Major countries target for a 30-65% reduction in CO2 by 2030, which entails 50% penetration rate of emissions-free vehicles globally Major countries are In December 2015, 195 countries signed the The Paris Agreement, which promotes a 37% aiming to reduce CO2 reduction in CO2 emissions by 2030E and aims to keep global warming below 2°C. Since emissions then, major countries have undertaken ambitious plans to reduce their carbon footprints and focused on setting ‘top-down’ targets to drive national action. To reach this target, the

world will need to cut energy-related CO2 emissions by 60% by 2050. This requires dramatic changes to the world’s energy system: a strong increase in energy efficiency, a transition to renewable-energy sources and low-carbon energy carriers, and an increase in

the rate at which industry captures and stores or reuses the CO2 emissions created by the remaining fossil fuels in use.

CO² emissions from fuel combustion breakdown by country (2016) (Mt CO2) 10,000 8,796 9,000 8,000 7,000 6,000 5,112 5,000 4,000 3,000 2,088 1,560 2,000 1,096 744 610 588 564 555 1,000 470 454 0 China US India Russia Japan Germany Iran South Canada Saudi Indonesia South Korea Arabia Africa Source: IEA

Pan-Asia Automobiles and Components: 4 July 2018

For example, China, the country with the largest emissions, has set an aggressive target to reduce emissions by up to 65% by 2030 from the 2005 level. Likewise, Japan and Korea also aim for around a 30% reduction in emissions by 2030.

CO² emissions reduction targets by country Country Reduction target Base year Target year

Korea 37% reduction 2015 2030

EU 40% reduction 1990 2030

Japan 26% reduction 2013 2030

Russia 25-30% reduction 1990 2030

India 33-35% reduction 1) 2005 2030

US 26-28% reduction 2005 2025

China 60-65% reduction 2005 2030

Source: OECD, government agencies, compiled by Daiwa

The transportation According to the IEA, the transportation sector accounts for about 22% of all energy- sector accounts for 22% related CO2 emissions globally and is the fastest-growing sector among all emissions of all CO2 emissions sources. Land transport is a major carbon emitter: according to recent ITF data, CO2 emissions from global surface passenger transport will increase by between 30% and 110% by 2050. Considering these dynamics, the role of the transport sector in achieving climate change and sustainable development action is fundamental.

Transportation sector: contribution of global energy-related CO² emissions

Train 4% Transport, 22.0% Airplane 11% Out of road-transport

Pasenger vehicle and light Road 73% truck 53%

Commercial vehicle 47%

Marine 12% Others, 78.0%

Source: Global Transportation roadmap, IEA

Emission regulation: major automotive market

Source: UNEP, Global Fuel Economy Initiative

Over the past decade we have seen increasing demand for vehicles with improved performance, not just in terms of higher output, but also additional safety features, electronics and eco-friendly vehicles to improve fuel-efficiency as well as CO² emissions. Meanwhile, governments have come up with more stringent regulations on emissions

Pan-Asia Automobiles and Components: 4 July 2018

standards and clean energy solutions, as we have already seen from the VW “dieselgate” controversy in 2015 and the Mitsubishi scandal in 2016.

With global governments’ stricter regulation and penalty programmes to promote eco- friendly vehicles, we estimate auto OEMs would inevitably need to introduce FCEVs to

meet the CO2 emissions target for the transport sector in the longer term.

Industry’s next response to cleaner energy needs: FCEVs and a hydrogen society

1) Hydrogen Council The Hydrogen Council In January 2017, the Hydrogen Council (a CEO-level initiative with GM, BMW, Daimler, was established to Toyota, GWM, HMC, and other global companies as members) was established at the promote the Davos World Economic Forum to promote FCEV development. The Hydrogen Council is a development of FCEVs global initiative of leading energy, transport and industry companies with a united vision and long-term ambition for hydrogen to foster the energy transition.

Hydrogen Council members

Source: Hydrogen Council

During our visit to the International Hydrogen Energy Forum in Seoul in February 2018, we learned of the strategic effort to launch a multilateral dialogue between industry, policy makers and investors to accelerate deployment of hydrogen technologies to address challenges posed by the energy transition. The speakers all highlighted that, if deployed at scale, hydrogen technologies could deliver about a fifth of the world’s energy demand by

mid-century, while reducing CO2 emissions by 6Gt annually and creating 30m jobs.

The Korean Government has also announced ambitious plans to reduce overall CO2 output by 37% until 2030 compared to business as usual, a goal which goes hand-in-hand with the announcement of increased investments in hydrogen refueling stations – with a target of 310 by 2022.

Korea: fuel-cell stations and vehicle plan by 2022E

Source: Hydrogen Council

Pan-Asia Automobiles and Components: 4 July 2018

2) Moving towards a hydrogen society

The Japanese Each government has also taken steps to expand its footprint towards a hydrogen society. government plans to In Japan, the Tokyo Metropolitan Government (TMG) announced in 2017 its plan to establish a “hydrogen establish a “hydrogen society” by 2020E before Japan hosts the Tokyo Olympics in the society” by 2020E summer of 2020E.

Japan: hydrogen society

Source: Hydrogen Council

Tokyo Institute of Technology Professor Takao Kashiwagi believes the use of hydrogen is the key to a carbon-neutral world. In a report titled Japan Takes Action to Preserve Our Earth by the Japanese government (published in June 2017), Professor Kashiwagi states that, “Hydrogen energy emits no carbon dioxide when used. The hydrogen that serves as the energy source is currently produced mainly by reforming fossil fuels like natural gas, and this process results in the emission of carbon dioxide. But in the future it will become possible to greatly reduce the volume of these emissions by combining the process with technologies such as underground storage of carbon dioxide and the growing of tiny algae to produce biofuel. And in the future it will become a zero-emission energy source when produced using solar and other types of renewable energy.”

Introduction of more stringent regulation and aggressive targets: shifting a gear towards FCEV development 1) Each government’s aggressive FCEV target provides a strong growth trajectory for FCEV A group of countries – led by the US (namely California), Germany, Japan and South Korea – are driving developments, currently spending more than USD850m annually over 2017-20E to advance hydrogen and fuel-cell technology. Each country is introducing government-driven investment and developments to accelerate FCEV market growth.

US Led by California, the US The US DOE’s Fuel Cell Technologies Office (FCTO) in the Office of Energy Efficiency and is planning to expand Renewable Energy covers a comprehensive portfolio of activities that focuses on applied Zero Emission Vehicle research, development, and innovation to advance hydrogen and fuel cells for scenario to other states transportation and diverse applications. Currently, the state of California is fully engaged in a zero emissions vehicle (ZEV) mandate and the US is planning to expand this scenario in coordination with other states.

FCEVs are one aspect of California’s overall goal to deploy 1.5m ZEVs by 2025, as articulated in the state’s ZEV Action Plan. Financial support today relies on public funds allocated through the California Energy Commission’s Alternative and Renewable Fuel and Vehicle Technology Program, which is authorised to allocate USD20m in programme funds to hydrogen refuelling stations each year with the goal of deploying 3.3m ZEVs by 2025 (equivalent to 25-30% of all new vehicles in 2025) in California, Connecticut, Maryland, Massachusetts, New York, Oregon, Rhode Island and Vermont.

Pan-Asia Automobiles and Components: 4 July 2018

Also, as shown in the below table, the US government plans to adapt a strict credit and fine programme for OEMs to promote ZEVs by 2020E. Auto OEMs have to pay USD5,000/credit if they do not meet the required credit criteria, which enforces OEMs to develop and sell ZEVs going forward.

US: ZEV credit criteria Type AER (mile) Credit cap

ZEV* ~50 4 ≥50, <350 4

≥350 4 TZEV** <10 1.3 ≥10, <80 1.3

≥80 1.3 HICE*** ≥250 1.25 BEVx <75 4 ≥75, <350 4

≥350 4 NEV**** 0.15

Source: US DoE, Daiwa Note: *Zero Emission Vehicle, **Transitional Zero Emission Vehicle, ***Hydrogen Internal Combustion Engine, ****Neighbourhood Electric Vehicle

US: ZEV credit criteria Min ZEV credit Max TZEV credit 2018 2.0% 2.5% 2019 4.0% 3.0% 2020 6.0% 3.5% 2021 8.0% 4.0% 2022 10.0% 4.5% 2023 12.0% 5.0% 2024 14.0% 5.5% 2025~ 16.0% 6.0%

Source: US DoE, Daiwa Note: Auto OEMs to pay penalty of USD5,000/credit

Through this strict ZEV mandate, the US plans to achieve a high FCEV penetration rate with FCEV markets and station network development responding to consumer demand, strong market support initiatives implemented at city, state, and national levels, as well as aggressive stakeholder coordination and planning across economically integrated mega regions.

Europe The European The European Union (EU) proposed tougher car emissions targets in November 2017 Commission has set an including a credit system for carmakers to encourage the rollout of EVs and fines for aggressive target to exceeding carbon dioxide limits. The EU’s proposal aims to curb greenhouse gases from reduce CO2 emissions transport as part of a drive to cut emissions by at least 40% below 1990 levels by 2030. by 40% by 2030 The EU’s executive is keen for legislation to stimulate European industry to develop EVs and FCVs, concerned that it is falling behind China, Japan and the US.

The proposal calls for a 30% reduction in the average CO2 emissions of carmakers’ fleets by 2030 compared with 2021 levels. It also sets an interim goal of a 15% reduction by 2025 to help ensure automakers start investments early. If they are found in breach of new rules, carmakers face potential fines in the millions of euros, with penalties set at 95 euros

for every gram of CO2 above the limit and for each new vehicle registered in that year.

EU: CO2 emissions penalty Excess emission (g/km) EUR per excess gram per car 1 5 2 15 3 25 4+ 95

Source: Daiwa Note: CO2 emissions limit would be 95g/km by 2020E

Pan-Asia Automobiles and Components: 4 July 2018

Japan Japan has always been completely dependent on imported fossil fuels such as LNG, coal, and nuclear power. However, after the Fukushima disaster, energy sourced from nuclear power declined significantly, leading to a sharp increase in Japan’s energy import volume. Thus, the Japanese government plans to reduce the country’s dependence on fossil fuels

and CO2 emissions and take a path toward a society that uses hydrogen as a major source of power.

Japan: next generation vehicle (NGV) target by 2030E 2016 2030 Gasoline vehicles 65.2% 30-50% NGVs 34.9% 50-70% Hybrid vehicles 30.8% 30-40% BEVs/PHEVs 0.6% 20-30% FCVs 0.0% 6% Clean diesel vehicle 3.5% 5-10%

Source: Daiwa

The Japanese government does not have the details of a subsidy or credit programme for FCEVs formulated yet but plans to provide a tax cut of USD2,000/vehicle and to reach FCEV shipments of 800,000 units by 2025E.

China The China government According to the China central government’s New Energy Vehicle (NEV) expansion plan plans to reduce the BEV from 2016-20E, the BEV subsidy will be cut back from 2018 while the FCEV subsidy will subsidy and promote remain solid until 2020E. This includes the central government’s subsidy of CNY200k as FCEVs well as local government subsidies subject to local governments’ policy standards. Also, the China government has adapted a credit penalty programme similar to the US whereby auto OEMs can receive full credits for every FCEV they produce and requiring auto OEMs to pay USD780/credit for every credit they fail to reach.

China: eco-friendly vehicle credit criteria Type AER (km) Credit calculation Credit cap x AER (km) + BEV - 0.012 0.8 5 HEV - 0 2 5 FCEV ≥250, <350 0 4 5 ≥350 0 5 5

Source: Daiwa Note: Auto OEMs to pay penalty of USD780/credit

FCEV: government subsidy and investment blueprints Subsidy Development and commercialization target (by 2020)

FCEV to reach USD 20,000 (2018)/vehicle FCEV: shipments target of 20,000 units (50% export) Korea Fuelling station: USD 1.5m Fuelling station: 100 places (310 by 2022E) FCEV: USD 1,300/vehicle FCEV: 30% tax reduction for auto makers US Fuelling station: 100+ places (25 places as of end-2016) backed by ARFVT project (USD Fuelling station: USD 33m (CA) 20m annual R&D investment) EV subsidy decreased; FCEV subsidy FCEV: 5,000 units (60 units as of March 2017) remains still Fuelling station: 100 places → 300 places (2025) → 1,000 places (2030); 5 places as of China FCEV: USD 30,000 March 2017 Fuelling station: 60% of costs, CNY 4m (200kg+) FCEV: USD 2,000 tax reduction for buyers Hydrogen society (by 2020 Tokyo Olympics) Japan Fuelling station: 50% of costs FCEV: 100+ FCEV bus Fuelling station: 160 places → 320 places (2025); 77 places as of 2015 FCEV: up to 11,000 EUR FCEV: 150k units → 1.8m units (2030) Germany Fuelling station: 100 places (2019) → 400 places (2020) → 1,000 places (2030) Vehicle tax exemption for ZEV (since UK Fuelling station: 65 places → 330 places (2025) → 1,150 places (2030) 2017) FCEV: 12,000 EUR FCEV: 800,000 units (2030) ('H2 Mobility France') France Fuelling station: 600 places (2030)

USD 14.7bn investment (2014-20) CHIC (Clean Hydrogen In European Cities) project: FCEV bus commercialization Europe Fuelling station: 1,000 places

Hydrogen storage infrastructure: USD3bn investment

Source: Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

2) More stringent regulation and introduction of credit programmes is changing the landscape for eco-friendly vehicles

HEVs: losing steam With more stringent Combining a conventional ICE propulsion system with an electric propulsion system, the standards for eco- HEV has been the defending champion in the eco-friendly vehicle market for over a friendly vehicles, HEV decade, with its more affordable pricing and less stringent regulations/standards than EVs shipment growth is likely or FCEVs. In Europe, to reduce the number of diesel-fuelled vehicles following the to decelerate going adoption of Euro V standards from 2010 and the VW “dieselgate” controversy in 2015, forward HEVs have been the alternative choice vs. gas-fuelled vehicles for auto OEMs as well as customers.

Number of registered hybrid vehicles (units) 2,500,000

2,000,000

1,500,000

1,000,000

500,000

0 2010 2011 2012 2013 2014 2015 2016 2017 Europe North America Asia Others

Source: hybrid cars.com, KAMA

However, we expect HEV shipment growth to decelerate going forward as: 1) HEVs become less competitive compared to EVs and FCEVs in terms of fuel efficiency, 2) governments reduce subsidies on HEVs, and 3) HEVs fail to meet the more stringent emissions targets in major countries. In 2017, global HEV shipment growth slowed to 5.0% YoY from 10.5% YoY growth for 2016 and governments plan to remove subsidies or credit programmes for HEVs going forward.

EVs: leading the green-car market EVs stand as a leader in EVs are changing the landscape of the global auto market, with EV sales on track to reach the eco-friendly vehicle 1.8m units in 2018 from just 180k units back in 2014. We expect EVs to stand as a leader market in the green-car market given: 1) the increasingly stringent environmental regulations being put in place around the world, as well as policy support to purchase EVs, 2) the steeper- than-expected decline in EV battery prices over the past 8 or so years, and potential for a continued decline, with energy density improvements, and 3) rising commitments from auto OEMs to aggressively introduce EVs until 2025E.

Global passenger EV sales by type ('000 units) (% )

2,000 69.1 80 65.7 67.7 62.7 70 55.7 55.4 1,500 51.9 597 60 48.1 44.6 44.3 50 37.3 34.3 390 1,000 30.9 32.3 40 30 287 1253 500 185 872 20 483 10 99 129 355 68 160 0 54 107 0 2012 2013 2014 2015 2016 2017 2018E BEV PHEV % of total EV (BEV) % of total EV (PHEV)

Source: Bloomberg New Energy Finance (BNEF), Daiwa forecasts

Pan-Asia Automobiles and Components: 4 July 2018

1) More stringent environmental regulation and policy support for EVs In our view, the VW “dieselgate” controversy in September 2015 and Mitsubishi scandal in April 2016 changed the landscape for the automobile industry, prompting increased development of green-car line-ups, and governments introducing more stringent regulation/subsidy programmes for green cars. As a result, many governments made clear

their intention to phase out diesel and ICE vehicles to meet global CO2 emissions standards in the longer term.

EV shipments set to China’s central government is guiding automakers to sell NEVs to generate “credits” continue to rise due to equivalent to 8% of sales by 2018, 10% in 2019, and 12% by 2020E. The EU will regulate policy support, ever- CO2 emissions with an emissions limit for average new car sales in the EU to comply with lower battery prices and the target of 95g/km. If a manufacturer fails to reach that target it will have to pay EUR95 auto OEMs expanding per excess gram per registered car per year, implemented straight away in 2020. their EV model line-ups 2) Steeper-than-expected EV battery price decline with energy density improvements In 2010, EV battery prices were USD1,000/kWh on average, which was a main hurdle for commercialisation of EVs in the past. However, EV battery prices have declined dramatically over the past 8 years, by 79% to USD209/kWh in 2017, on our estimates. According to Tesla, the battery cost for the Model 3 was already below USD190/kWh, and GM said it expects to source EV battery cells from LG Chem for USD145-150/kWh by 2018. With declining battery prices and energy density improvements, we expect EVs to be more cost-effective than ICE vehicles by 2020E.

EV battery price outlook (USD/KWh) 1,200 1,000 1,000 800 800 642 599 600 540

350 400 180 200 120 100

0 2010 2011 2012 2013 2014 2015 2017 2020E 2025E Source: Bloomberg New Energy Finance (BNEF), Daiwa forecasts

3) Rising commitments from auto OEMs to aggressively introduce EV until 2025E Chinese local OEMs as well as global automakers such as VW, Daimler, Nissan and HMG have announced plans to expand their EV model line-ups until 2025E, including: 1) GM plans to produce 20 EV models by 2023, 2) VW targets to produce 3m units of EVs by 2025, 3) HMG plans to expand its EV portfolio to 14 models by 2025, and 4) Ford plans to launch 13 EV models by 2025. We estimate the number of EV models will jump to 289 models by 2022E compared to 155 at end-2017.

FCEVs: longer term, but the ultimate solution We expect FCEVs to take FCEVs are currently behind the curve in terms of the green car race. However, we believe over the baton from EVs these vehicles could be the next response to governments’ as well as consumers’ needs in in the longer term the longer term. With reduced CO2 emissions inevitable in order for the guidance provided by each government to be met, we expect FCEVs to be a “must-have” rather than just an option. As discussed in the section below, the development and expansion of FCEV model line-ups is inevitable considering governments’ more stringent regulations and introduction of penalty programmes from 2020E onwards.

Pan-Asia Automobiles and Components: 4 July 2018

3) Penalty estimates by 2022E in the case of HMG auto OEMs New penalties and credit As we have described above, more stringent regulations will lead to auto OEMs developing programme will be and introducing more FCEVs. However, more importantly, we believe the new penalties critical for OEMs and credit programmes will be critical to FCEV development by auto OEMs because if they do not meet the requirements, they will be required to pay huge penalties by 2022E.

US: credit criteria Type AER (mile) Credit calculation Credit cap x AER (mile) + ZEV ~50 0 0 4 ≥50, <350 0.01 0.5 4

≥350 0 4 4 TZEV <10 0 0 1.3 ≥10, <80 0.01 0.3 1.3

≥80 1.1 0 1.3 HICE ≥250 0.75 0 1.25 BEVx <75 0 0 4 ≥75, <350 0.01 0.5 4

≥350 4 0 4 NEV TBU 0.15

Source: California Air Resources Board, Daiwa Note: To calculate credit per vehicle for Ioniq, 0.01* 124+0.5

US: required credit scheme by 2025E Year Min ZEV credit Max TZEV credit 2018 2.0% 2.5% 2019 4.0% 3.0% 2020 6.0% 3.5% 2021 8.0% 4.0% 2022 10.0% 4.5% 2023 12.0% 5.0% 2024 14.0% 5.5% 2025~ 16.0% 6.0%

Source: California Air Resources Board, Daiwa

China: credit criteria Type AER (km) Credit calculation Credit cap x AER (km) + BEV - 0.012 0.8 5 HEV - 0 2 5 FCEV ≥250, <350 0 4 5 ≥350 0 5 5

Source: KOTRA, Daiwa Note: To calculate credit per vehicle for Elantra Yuedong EV, 0.012* 270+0.8

China: required credit scheme by 2021E Year Credit requirment 2018 8.0% 2019 9.0% 2020 12.0% 2021 TBD

Source: KOTRA, Daiwa

EU: CO2 emissions penalty Excess emission (g/km) EUR per excess gram per car 1 5 2 15 3 25 4+ 95

Source: Daiwa Note: CO2 emissions limit would be 95g/km by 2020E

As shown in the below table, we conducted an estimate of fines for HMG OEMs in 2022E after considering the US, China, and EU credit programmes.

Pan-Asia Automobiles and Components: 4 July 2018

HMC: fine estimation in 2022E Country Type1 Type2 Model AER* Credit per car** # of cars sold Total credit Required credit Credit gap Penalty (USDm) US ZEV*** BEV IONIQ (AE EV) 124 1.74 4,274 7,436.73

Kona (EV) 239 2.89 16 45.48

FCEV NEXO (FE) 378 4.00 25 99.67

Tucson (LMFC) 186 2.36 0 0.00

US ZEV total 4,315 7,581.88 38,764.02 31,182.14 156

TZEV*** PHEV IONIQ (AE PHEV) 29 0.59 5,448 3,214.16

Sonata (PHEV) 29 0.59 75 44.10

Elantra (HEV) 27 0.57 0 0.00

US TZEV total 5,522 3,258.26 22,612.35 19,354.09 97

US total 253

China BEV*** Elantra Yuedong EV 270 4.04 3 12.74 69,367.78

FCEV IX 35 594 5.00 0 0.00

China total 12.74 69,367.78 69,355.04 54

Europe 930

In total 1,237

Source: Company, Daiwa forecasts Note: * All Electric Range refers to mile for US and km for China,***Zero Emission Vehicle, ***Transitional Zero Emission Vehicle, ***Battery Electric Vehicle, 1) based on Wholesales shipments in Europe, and 2) our HEV, EV, and FCEV shipment CAGR applied for 2022E to derive penalty per vehicle in Europe.

Kia: fine estimation in 2022E Country Type1 Type2 Model AER* Credit per car # of cars sold Total credit Required credit Credit gap Penalty (USDm) US ZEV** BEV Niro (EV) 193 2.43 0 0.00

Soul (EV) 112 1.62 1,851 2,997.84

Ray (EV)

US ZEV total 33,386.68 33,386.68 167 Niro TZEV*** PHEV 2,358 0.00 (PHEV) K5 (PHEV) 1,535 0.00

US TZEV total 19,475.56 19,475.56 97 US total 264 China BEV**** Niro (EV) 310 4.52 n.a. n.a.

Soul (EV) 180 2.96 n.a. n.a.

Ray (EV)

HEV Niro (HEV) 2.00 n.a. n.a.

China total K5 (HEV) 44 2.00 4,826 9,652.96 44150.008 34497.053 27 Europe 622

Source: Company, Daiwa forecasts Note: * All Electric Range refers to mile for US and km for China,**Zero Emission Vehicle, ***Transitional Zero Emission Vehicle, ****Battery Electric Vehicle, 1) based on Wholesales shipments in Europe, and 2) our HEV, EV, and FCEV shipment CAGR applied for 2022E to derive penalty per vehicle in Europe.

HMG: penalty cost summary (KRWbn) Company Country Penalty (by 2020) HMC US 253 China 54

Europe 930

Total 1,237 Kia US 264 China 27

Europe 622

Total 914 HMG US 517 China 81

Europe 1,553

Total 2,151

Source: Company, Daiwa forecasts Note: 1) based on wholesale shipments in Europe, and 2) our HEV, EV, and FCEV shipment CAGR applied for 2022E to derive penalty per vehicle in Europe.

From our penalty cost analysis, we expect the penalties placed on HMG auto OEMs to potentially reach as much as KRW2.2tn by 2022E, which would translate into 22% of HMC and Kia’s net profit in 2022E. According to AP Consulting, CO2 emissions regulations in Europe could lead to auto OEMs being fined up to EUR45bn by 2021E. As such, we believe such stiff penalties to inevitably lead to auto OEMs stepping up their FCEV development as FCEVs could receive full credits, whereas the HEV credit scheme will end from 2019E.

Pan-Asia Automobiles and Components: 4 July 2018

A rise in hydrogen stations and FCEV price competitiveness with a decline in key components costs 1) Stronger-than-expected rise in hydrogen stations Stronger-than-expected In our view, the major barrier to widespread national deployment of FCEVs is the lack of rise in hydrogen stations convenient, extensive networks of hydrogen refuelling stations. In 2016, Air Liquide and supported by each Toyota announced plans to install an initial network of 12 hydrogen refuelling stations along government globally the US northeast corridor extending from northern New Jersey through to Boston. In early 2017, the California Energy Commission announced awards for 16 additional stations in California. Nevertheless, these plans will still see a shortfall of hydrogen stations for the targeted number of FCEVs to be deployed on roads.

Thus, each country is introducing its target to build hydrogen stations, keeping in step with FCEV developments. Globally, a number of countries have already announced that they will build some 2,800 hydrogen refuelling stations by 2025. That is a small number compared with the estimated 600,000 petrol filling stations worldwide, but would be sufficient to cover the leading markets for hydrogen vehicles. In our view, a stronger-than- expected rise in hydrogen stations is critical for FCEV deployment going forward.

Hydrogen station in 2017 and plan by each country Country FCEV* Stations Planned hydrogen station US 1,668 68 100 for California by 2023E / 320-570 by 2025E Germany 103 43 400 by 2023E Japan 3,000 101 320 by 2023E Korea 150 12 310 by 2022E China n.a. n.a. 1,000 by 2030E France 180 11 n.a. United Kingdom 66 9 n.a. Scandinavia 85 21 n.a. Total 5,252 265

Source: International Hydrogen Energy Forum 2018, Daiwa research, Note: *excluding FC buses

Improvements in fuel cell efficiency and a rise in hydrogen stations as well as retail infrastructure would go a long way to reducing fuel consumption by 20-35% until 2030. Such developments would lead to fuel costs per kg hydrogen declining, putting FCEVs at an advantage to diesel or other automotive segments.

FCEV: fuel cost trend (kg/100km) Scenario 2 Fuel cost 1.2 1.1 would decline by 34% 1.0 Scenario 1 Fuel cost would decline by 20% 0.8 0.7 0.7 0.6 0.6

0.4

0.2

0.0 Scenario 1 Scenario 2

2017 2030

Source: International Hydrogen Energy Forum 2018, Daiwa

US US federal government According to the US government, each local government’s knowledge of robust networks to establish 320-570 of hydrogen stations must be established in advance of selling large volumes of FCEVs additional hydrogen into any urban area. Following the rollout of stations planned for California, by 2025 a total stations by 2025E of 320-570 additional stations would be required both in California and nationwide to enable significant FCEV market growth. In the longer term, the US plans to build 1,500- 3,300 hydrogen stations by 2035E, with hydrogen capacity of 1.3-3.4m kg/day, serving 1.8- 4.5m FCEVs.

Pan-Asia Automobiles and Components: 4 July 2018

US: hydrogen station expansion scenario by 2025E

Source: H2 USA, Daiwa

Japan The Japanese An alliance of 11 Japanese firms called “Japan H2 Mobility”, including automakers and government and energy firms, has pledged to build 80 fuelling stations for hydrogen FCEVs by 2022 to help companies have joined accelerate take-up of next-generation fuel technology. Beside H2 Mobility, the Japanese forces to roughly halve government plans to expand the number of hydrogen stations in the country to 320 by the cost of building a 2023E. In alignment with central government policies, the 11 founding companies joined hydrogen station forces to create the world's first framework in which not only infrastructure developers and automakers but also investors are involved in collaboration, based on the common belief in the effectiveness of hydrogen and FCEVs for mobility and continued sustainable societal development.

By about 2020, the Japanese government aims to have roughly halved the cost of building a hydrogen fuelling station, which is currently about JPY400-500m (USD3.8-4.7m), well above JPY100m for a gasoline station.

As countries seek low emissions energy sources to power vehicles, homes and industry, Japan is counting heavily on becoming a “hydrogen society” despite the high costs and technical difficulties of a process that creates electricity from a chemical reaction of fuel and oxygen.

Japan H2 Mobility: hydrogen station deployment plan

Source: Japan H2 Mobility

Pan-Asia Automobiles and Components: 4 July 2018

Korea South Korea’s government and leading corporations of the country have agreed to start a business with the aim of installing a network of hydrogen filling stations by 2022. HMC as well as state-owned Korea Gas Corporation are part of the deal set to be finalised in November 2018.

To start with, the partners plan to install eight H2 filling stations located on Korea’s busiest highways with another ten to supply FCEVs in Seoul and other large cities with hydrogen. Korea government plans The special purpose company (SPC) is to be established November 2018 with the Ministry to establish an SPC to of Trade, Industry and Energy having already signed a memorandum of understanding with install hydrogen local automakers, state-run utilities companies and related organisations. refuelling stations The government in Seoul plans to supply about 15,000 hydrogen vehicles and 310 charging stations nationwide by 2022 to tackle air pollution and foster demand for FCEVs.

Korea: fuel cell energy, mobility, technology roadmap

Source: Korea government, Daiwa

China Although the China government has an aggressive target to boost NEV shipments, Shanghai first released its development plan for FCEVs in September 2017. Shanghai is planning to build anywhere between 5 and 10 hydrogen stations and plans to launch at least 3,000 fuel-cell buses and vehicles by 2020; and it also plans to build 1,000 hydrogen refuelling stations by 2030E.

EU EUHJU, with a budget of Fuel Cells and Hydrogen Joint Undertaking (FCHJU) is a public-private partnership Euro1.4bn, aims to supporting research, technological development and demonstration activities in fuel cell accelerate development and hydrogen energy technologies in Europe. FCHJU, with a budget of Euro1.4bn, aims to of FCEVs and hydrogen accelerate the development of the technology base towards market deployment of fuel cell technologies and hydrogen technologies.

Pan-Asia Automobiles and Components: 4 July 2018

Europe: FCHJU objectives

Source: FCHJU, Daiwa

FCHJU: project portfolio

Cross-cutting, 6.0% Overarching, 6.0%

Energy, 48.0%

Transport, 40.0%

Source: FCHJU, Daiwa

2) A decline in FCEV parts cost with technology development as well as economies of scale FCEVs set to be cost- Since HMC’s Tucson FCEV was first launched back in 2013, the price of an FCEV has competitive in terms of declined by 38% to USD68,000 when HMC launched its NEXO in February 2018. technology development However, we still believe component prices as well as technology developments need to as well as economies of be resolved as FCEV production approaches economies of scale by 2025E. That said, we scale by 2025E envisage FCEVs will be cost-competitive from an operating standpoint vs. EVs or ICEs by 2025E as we believe: 1) FCEV technology development will lead to lower components costs, by 2020E, 2) auto OEMs will develop more FCEV models by 2025E and gain economies of scale with rising FCEV shipments, and 3) due to co-operation between auto OEMs.

Pan-Asia Automobiles and Components: 4 July 2018

Global auto OEMs: FCEV model line-ups Auto OEM Model Segment Launched Toyota Mirai Sedan 2015 New Mirai Sedan 2020E Lexus LF Sedan 2019E BMW BMW 5 Sedan 2020E Nissan Terra SUV 208E Daimler F-Cell Sedan n.a. GLC SUV 2018E Ford Focus FCV SUV n.a. Honda Clarity Sedan 2015 New Clarity Sedan 2020E HMC ix35 SUV 2013 NEXO SUV 2018 GV80 SUV 2020E Kia Sportage FCV SUV 2019E VW Passat Hymotion Sedan 2020E Golf FCV Hatchback 2020E Audi A7 FCV Sedan 2020E

Source: Companies, Daiwa

Platinum usage in an For example, the use of platinum, which is a core raw material for fuel-cell stacks, is FCEV was previously the expected to decline to 70g in an FCEV in 2018E and to further fall to 20g by 2020E. Based main reason for the on Hyundai’s Nexo price of USD68,000/car and the current price of platinum of USD36 per higher price of FCEVs gram, platinum costs would represent 3.7% of Nexo’s production costs. Bart Biebuyck, vs. EVs or ICEs executive director of the European Commission’s fuel cell and hydrogen joint undertaking, said the amount of platinum in the next generation of FCEVs aims to cut similar to that used in the catalytic converters of diesel vehicles, which the industry estimates at 3-7 grams.

Using only a thin film of platinum in fuel cells could allow them to retain the technical advantages of using the metal while cutting costs to negligible levels, he said. This, in turn, should lead to a steeper-than-expected decline in fuel-cell stack costs going forward.

FCEV: platinum usage (g) 250 200 200

140 150

100 70

50 20

0 2002 2015 2018E 2020E

Source: HMC, Daiwa estimates

In our view other auto-parts prices for FCEVs would decline with rising FCEV shipments and technical developments, as we have seen from the decline in auto-parts’ prices for EVs and HEVs in the past.

Pan-Asia Automobiles and Components: 4 July 2018

FCEVs will be a long-term but ultimate solution Abundant hydrogen as an energy resource provides incentive to develop more FCEVs We expect hydrogen Although there are conflicting views as to whether hydrogen energy could be the ultimate energy to deliver a clean solution in the future, we expect hydrogen energy to deliver a clean and efficient energy and efficient energy source in the future as: 1) hydrogen has abundant sources such as natural gas and water, source 2) hydrogen is a pollution-free energy, and 3) it is an efficient energy compared to any other sources of energy (FCEVs have a greater mile range vs. ICE and EVs with an equal amount of gasoline). Nonetheless, technological development and infrastructure investment are prerequisites for hydrogen energy to be a future energy source, as hydrogen is still expensive and a complicated process to store and ship.

Hydrogen energy: pros and cons Pros Cons Renewable energy source and abundant supply Hydrogen energy is expensive Clean energy source Complicated storage and liquefied process Hydrogen Efficient than any other energy It's not the safest source of energy Energy Hydrogen energy is non-toxic and not harmful Technically difficult to transport Practical use for spaceships, cars, boats, and airplane Difficult to substitute fossil fuels

Source: Daiwa

Hydrogen production is estimated by the Hydrogen Council at 65m tonnes per annum, with most produced from natural gas. As hydrogen is hard to both store and ship to other regions, most hydrogen is consumed from the production site. That said, in order for hydrogen to be commercialised globally, it needs to be technically liquefied.

Hydrogen energy still Once hydrogen is liquefied, its storage density increases by 800x and therefore becomes needs further technical 10x more efficient to transport. For example, for FCEVs, it is more efficient to store development to be hydrogen in its liquefied form as liquefied hydrogen not only can be stored for long periods efficiently used as an of time but also needs smaller hydrogen tanks for storage compared to hydrogen gas. energy source Hydrogen can also be easily produced, stored for long periods at low cost, and transported across regions.

Korea: hydrogen production source for domestic market Steel Others Naphtha cracking 0.4% 2.6% 12.9%

CA process 2.8% Hydrogen manufacture 6.4%

Refinery process 74.9%

Source: Daiwa

According to the Hydrogen Council, producing almost 80 EJ worth of hydrogen would meet

18% of total final energy demand by 2050, which in turn would reduce annual CO2 emissions by roughly 6Gt compared to 2017 and meet roughly 20% of the abatement to reach the 2-degree scenario. The transition to hydrogen would also create opportunities for sustainable economic growth. As the technology reaches mass market beyond 2050, it would create sustainable value chains and revenue potential of more than USD2.5tn per annum.

Pan-Asia Automobiles and Components: 4 July 2018

However, hydrogen Based on Hydrogen Council estimates for the automotive sector, by 2050, hydrogen could energy has strong power a global fleet of more than 400m cars, 15-20m trucks, and around 5m buses, which potential to act as a constitute on average 20-25% of their respective transportation segments. Also, the substitute for other fuel adoption of hydrogen vehicles would range from roughly 10% for small cars and 20-25% supply and create a for large cars and trucks to roughly 35% for vans. Hydrogen-powered trains could replace clean society around 20% of the world’s diesel trains. Hydrogen could also replace 5% of the world’s fuel supply to airplanes and freight ships by 2050.

Hydrogen energy: potential significance by industry application

Source: Hydrogen Council Note: Bubble size indicates hydrogen potential in 2050 in 1 EJ (equivalent to 7 million tons of hydrogen) % indicates market share potential in segment

FCEVs’ comparative advantage in terms of range and user-friendly refuelling infrastructure better suited for commercial use We expect the use of FCEVs as commercial vehicles to provide another boost for FCEV market expansion over the forecast period as we believe government funds and incentive programmes also encourage the adoption of fuel-cell buses and trucks. Also, we see FCEVs’ comparative advantage in terms of range and user-friendly refuelling infrastructure benefitting their use for commercial purposes.

Thus, we expect commercial vehicles, such as trucks and buses, to account for a greater portion of the demand growth for FCEVs compared to EVs, as FCEVs provide longer distances and higher energy efficiency. To this end, a number of major countries are already developing and subsidising projects to support fuel cell technology to commence commercial vehicle production.

FCEVs would eventually follow the EV growth story FCEV would follow the Most countries plan to phase out HEV subsidies or credit programmes going forward. As foot print of EV growth countries are introducing more stringent regulations and credit/penalty programmes for story EVs, we expect it would be inevitable for auto OEMs to develop more EVs and FCEVs. Despite EVs taking the lead in terms of shipments and market expansion, we expect demand growth for HEVs to shift to FCEVs, which will compete with EVs in the longer term.

Pan-Asia Automobiles and Components: 4 July 2018

FCEV market outlook Auto parts makers to lead in short term; auto OEMs to integrate value chain with engineering capability 1) Auto parts: lead the pack with higher ASP Auto parts players Given that the content per vehicle in FCEVs is almost 4-5 times larger than the figure for should be key other parts used in ICEs, and their competency in key components for FCEVs as well as beneficiaries, with 4-5 their system-supplying capabilities, we expect auto parts companies to be the main times greater content beneficiaries of strong FCEV shipment growth in the short term. Further out, we believe the per FCEV compared with auto OEMs will integrate the value chain with their own engineering capabilities. ICEs Hyundai Mobis Mobis has played a pivotal role in the development of HMG’s FCEV business. In August 2017, Mobis invested USD70m in the construction of a powertrain fuel-cell complete (PFC) module manufacturing facility with an annual production capacity of 3,000 units. This approach differs from that of other FCEV parts makers, in that Mobis can realise scale economies by producing comprehensive modules which are comprised of all essential parts (such as fuel-cell stacks, MEAs, and motors), in a wholly-integrated manner based on Mobis’ own technology.

Hanon Systems Hanon Systems has developed lightweight parts specifically targeted at energy-efficient and eco-friendly cars. It also provides thermal management systems for electrified vehicles, which include compressors, hybrid air conditioners systems, and radiators used for heat control in FCEVs.

For example, Hanon’s major offerings include a centrifugal air compressor, a turbo blower for FCEVs that generates electricity by supplying oxygen to the stack of a fuel cell, and a coolant heater, a high-voltage integrated heater used in FCEVs.

Hanon Systems: FCEV product offerings Image Name Description

Centrifugal air A turbo blower for FCEVs that generates electricity by supplying oxygen to the stack of a fuel cell, compressor compressing air to a set pressure and flow rate

A high voltage integrated heater for FCEV applications that heats the fuel-cell stack for optimal operation Coolant heater during cold start conditions

High voltage cooling fan Combination of a motor and an inverter, incorporating a brushless DC motor offering high efficiency and motor reliability in FCEV applications

An air conditioning compressor controlled by an on-board electric motor and integrated power E-compressor electronics

Source: Company, Daiwa

Denso As a major part supplier to Toyota, DENSO provides a range of offerings for use in FCEVs by harnessing the technology it has accumulated in providing parts for hybrid vehicles and conventional vehicles. Denso provides thermal and pressure sensors, fuel-cell controllers, and IR transmitters used in the Mirai, Toyota’s high-profile FCEV model. Fuel-cell controllers collect thermal and pressure data and transmit it fuelling stations, which facilitates fast and precise battery charging.

Pan-Asia Automobiles and Components: 4 July 2018

Denso: FCEV product offerings

Source: Company, Daiwa

Linde Group Linde Group provides innovative solutions for hydrogen energy management, from production, storage and distribution to dispenser manufacturing, fuelling stations and infrastructure for fleet applications like BeeZero. Launched by subsidiary Linde Hydrogen Concepts in the summer of 2016, BeeZero is the world’s first car sharing service which exclusively uses H2-powered fuel-cell cars. Based in Munich, Germany, the BeeZero fleet comprises 50 Hyundai ix35 models. Although the company announced its hydrogen car sharing service will come to an end this summer due to the lack of economic viability, the service has covered 400,000 zero-emission kilometres, and saved almost 40,000kg of

CO2.

One of its affiliates, Linde Material Handling, has conducted a comprehensive study, under the name “H2IntraDrive”, of the economic and technical possibilities of fuel cell technology with the BMW group.

Ballard Power System Ballard Power System Ballard Power System is well-known for its state-of-art fuel-cell power products. It has manufactures fuel-cell proprietary membrane electrode assembly (MEA), and has begun volume manufacturing stacks and modules for based on solid tier 1 customers. Its FCEV-related offerings are core parts such as heavy FCEV duty modules, fuel-cell stacks and backup power systems.

On 11 June, Ballard Power Systems announced its decision to extend their fuel cell cooperation with Audi for another 3.5 years until August 2022. The extension is valued between USD62-100m. The cooperation initially began in 2013, and was set to last for four years in order to help Audi advance a small series FCEV. This collaborative programme includes the development of fuel-cell stacks as well as supporting system design. Ballard is focusing on the development and production of next generation fuel-cell stacks for usage in Audi’s FCEV demonstration programme.

Ballard power system: FCEV product offerings Image Name Description

A PEM fuel-cell engine including air delivery and cooling systems ready for integration with electric Motive modules drives, which is developed for mobility applications

A power system to operate core FCEV functions, featuring proprietary MEA, purpose-built design Fuel-cell stack optimisation

A power system to support backup operations, providing clean and quiet backup power to critical Backup power systems infrastructure

Source: Company, Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

1) Auto OEMs: strong engineering capability to take the baton in the longer term

Hyundai Motor: the SUV that could result in the market for hydrogen powered cars really taking off HMC will launch its 2nd- Hydrogen-powered vehicles have historically lived somewhere between the technology of generation FCEV tomorrow and a green-car pipe dream. First exhibited in CES 2018, a pre-launch NEXO “NEXO” in late 2018E model was demoed at the PyeongChang Winter Olympics in February 2018, where the company also showcased its ‘Hydrogen Life Vision’, featuring home applications for hydrogen power that move sustainable transportation advances into more everyday applications.

HMC: second generation FCEV, “NEXO”

Source: Company

The new Hyundai NEXO is the company’s 2nd-generation mass-produced FCEV that will be available in selected markets from late-2018. The NEXO features an improved air supply system, performance at high altitude and refuelling times, along with overall efficiency and fuel economy. Extensive testing, in particular in extreme temperatures and environments, has proven that the vehicle is capable of starting after being subject to overnight temperatures of –29°C (–20°F). Its cold-start capability within 30 seconds is an industry-leading achievement, and the fuel cell system also warms up more quickly than other FCEVs for maximum performance. The NEXO also has excellent cooling performance on steep inclines with temperatures exceeding 49°C (120°F).

The current NEXO, released in March 2018, features higher power output and lower overall weight. The higher power output and lower overall weight have cut the 0–60 mph acceleration time from 12.5s to 9.5s, and boosted the anticipated range from 265 miles (425 km) to an estimated 497 miles (800 km), compared to its predecessor ix35/Tucson Fuel Cell (launched in March 2013). The NEXO's hydrogen storage system is lighter than its predecessor, and offers a world-class storage density, with refuelling within five minutes.

NEXO: technical specifications and reviews HMC Model NEXO Total power output 135 kW Driving range 800km Re-charging time 5 min Price (USD) 68,000 CO2 combined 0g/km Launch date 18-Mar

Source: Company, Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

HMC developed its own MEA-manufacturing technology, and by procuring core parts from its affiliates, HMC has successfully localised core technologies to achieve price competitiveness compared to its former FCEV model and its peers.

To spur FCEV infrastructure development, HMC has also agreed on an MOU with the government and other companies to establish 310 hydrogen fuelling stations by 2022. Earlier this year, HMC also announced plans to invest USD21.6bn across its five new growth engines, which include FCEV and future energy.

Toyota: sold 1.52m electrified vehicles in 2017, three years ahead of its 2020 target and guides to commence production of 2nd generation of FCEV “Mirai” by 2020E

Toyota reached 1.52m In February 2018, Toyota announced that it reached 1.52m of annual sales of electrified electrified vehicle sales powertrains worldwide in 2017. This marked an 8.0% YoY growth, meeting one of Toyota's in 2017, three years Environmental Challenge 2050 targets to sell more than 1.5 million electrified vehicles in a ahead of its 2020 single year. Additionally, Toyota’s cumulative sales of electrified vehicles now exceed guidance 11.47m, which represents a reduction of more than 90m tons of CO2 compared to sales of equivalent conventional vehicles.

Since the introduction of its first commercially available electrified powertrain on the Prius in Japan in 1997, Toyota has worked at improving the technology, having launched its first mass-produced FCEV, the Mirai, in 2014, the 4th generation of the Prius in 2016, and the 2nd generation Prius Plug-In Electric Vehicle in 2017.

The company’s efforts to improve and increase the diversity of electrified power train options is tied directly to Toyota's ‘Environmental Challenge 2050', where the company aims to achieve annual electrified vehicle sales of 5.5 million units by 2030, as announced in December 2017. To achieve its goal, Toyota unveiled plans to have 10 BEV models available worldwide by the early 2020s and the company also unveiled plans to launch the 2nd generation “Mirai” FCEV in 2020E for the Tokyo Summer Olympics. Toyota aims to launch its “Sora” fuel-cell bus in 2018 and aims to sell at least 100 such buses ahead of the Tokyo Olympic and Paralympic Games in 2020.

Toyota: Environmental Challenge 2050 (announced in October 2015) Target Year Environmental Challenge 2050 target 2020E FCEV sales of 30,000 units 2020E 100 fuel-cell buses by Tokyo Olympics 2020E HEV sales of 1.5 million units per annum 2020E Reducing CO2 emissions by 22% (compared to Toyota’s 2010 global average) 2050E CO2 reduction by 90% (compared to Toyota’s 2010 global average)

Source: Company, Daiwa

To stimulate FCEV industry growth, Toyota plans to release 5,600 patents without any royalties from 2015-20E. The company also recently announced that it is expanding manufacturing facilities for the mass production of fuel-cell stacks and high-pressure hydrogen tanks. Toyota plans to start operations around 2020 as it aims for sales of more than 1,000 FCEV units per month and over 10,000 units annually in the Japanese market, and more than 30,000 units worldwide, from around 2020.

Pan-Asia Automobiles and Components: 4 July 2018

Risks to our investment case Regulatory changes and The main risks to our thesis on the FCEV car market’s development are: 1) unexpected slower-than-expected changes in the regulatory environment for fuel-economy and carbon emission standards, ASP declines are risks to especially in the US, Europe and China, and 2) a slower-than-expected decline in FCEV our case auto-parts’ ASP and hydrogen station cost.

Currently, the regulations for carbon emission standards and fuel economy are stricter in order to compel auto OEMs to develop more eco-friendly vehicles. From 2022E, auto OEMs need to comply with stricter regulations to meet the standards or pay huge penalties. Some experts and auto OEM companies argue these standards are unachievable and “too high” for them to meet considering technology development. Thus, we believe that unexpected changes in the regulatory framework to ease standards would be a risk for our FCEV shipment forecast.

Without subsidies, the price of an FCEV is roughly double that of an ICE vehicle in the same segment and setting up a hydrogen fuelling station costs 5x that of setting up a regular petrol station. Thus, we believe slower-than-expected FCEV shipment and technology development are preconditions and could be a key risk for our investment case.

Pan-Asia Automobiles and Components: 4 July 2018

Valuations and recommendations Multiple expansion likely to become apparent for FCEV players, but more so for parts suppliers FCEV parts: valuation premium vs. OEMs on better earnings outlook Japanese and Korea As described in the following chart, the Japanese FCEV players, including OEMs and FCEV players have seen FCEV parts suppliers, have experienced an average of 24.5% PER multiple expansion similar PER multiple since the launch of Toyota’s Mirai FCEV and Honda’s Clarity FCEV in December 2014 and expansion May 2016, respectively.

The magnitude of PER multiple expansion is similar for the Korean FCEV players. The OEMs and FCEV parts suppliers have staged an average of 16.4% PER multiple expansion following the launch of HMC’s Tucson FCEV and Nexo FCEV on 1 February 2013 and 9 January 2018, respectively.

Korea FCEV players: event-driven analysis (x ) Sep-15 Mar-18 25 HMC developed Membrane Electrode Assemble (MEA) NEXO's pre-order reached Feb-13 technology 780 units in the first 2 days 20 First FCEV, HMC's of its sales in Korea Tuscon FC launched 15

10 Feb-18 HMC launched 2nd FCEV 5 "NEXO"

0 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Aug-13 Dec-13 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17

Source: Bloomberg, Daiwa Note: Korean FCEV players include HMC, Mobis, Hanon, GMB Korea, Iljin Diamond, Motonic, Woory Industrial, Kolon Industries, and Daewon Kangup

Japan FCEV players: event-driven analysis (x) Mar-18 16 Japan venture aims to build 80 hydrogen fuelling 14 stations by 2020E 12 10 8 Jan-16 Oct-17 Mar-18 6 Japanese Dev-14 Toyota opens FCEV patents May-16 Japan's New Energy 4 government's big Toyota launched for free of charge from Honda launched Clarity Development Organization push toward FCEV 2 Mirai (FCEV) 2015-20E (FCEV) (NEDO) introduce hydrogen society plan 0 Jul-15 Jul-16 Jul-17 Jan-15 Jan-16 Jan-17 Jan-18 Mar-15 Mar-16 Mar-17 Mar-18 Nov-14 Sep-15 Nov-15 Sep-16 Nov-16 Sep-17 Nov-17 May-15 May-16 May-17 May-18

Source: Bloomberg, Daiwa Note: Japanese FCEV players include Toyota, Honda, Nissan, Panasonic, Mitsui Chemical, Tohoku Electric Power, Brother Industries, Kawasaki Heavy Industries, Iwatani, New Cosmos Electric, and JFE Container.

FCEV parts makers’ PER Meanwhile, during these periods, as shown in the following chart, FCEV parts suppliers multiple expansion has both in Japan and Korea outperformed the OEMs, with the former group seeing average been stronger than PER multiple expansion of 35.8% vs. the latter group’s 16.4% in Japan, and the former OEMs’ group seeing average PER multiple expansion of 18.7% vs. the latter group’s 8.7% in Korea.

As highlighted previously, we expect the FCEV parts suppliers’ PER multiple expansion to become more apparent going forward compared with the auto OEMs’, as the parts suppliers have more scope to lead the way in the initial stages given their comparative edge in manufacturing key components and supplying auto components.

Pan-Asia Automobiles and Components: 4 July 2018

Korea FCEV players: parts suppliers vs. OEMs (x ) 25

0 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Aug-13 Dec-13 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 FCEV OEM FCEV parts Source: Bloomberg, Daiwa Note: Korean FCEV players include HMC, Mobis, Hanon, GMB Korea, Iljin Diamond, Motonic, Woory Industrial, Kolon Industries, and Daewon Kangeup

Japan FCEV players: parts suppliers vs. OEMs (x) 18 16 14 12 10 8 6 4 2 0 Jul-15 Jul-16 Jul-17 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jan-15 Jun-15 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Feb-15 Mar-15 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 May-15 May-16 May-17 May-18 FCEV OEM FCEV parts

FCEV parts makers to Incorporating upward revisions to our global FCEV shipment forecasts, which now call for record stronger earnings shipments of 9.5m units by 2030 (a 2018-30E CAGR of 62.5%), we see potential for the growth than OEMs over FCEV parts suppliers’ earnings to expand more than the OEMs’ over the next 5 years. Our the next 5 years, on our expectation here reflects the following factors: 1) the market size reaching critical mass forecasts… earlier than we had expected, with most global major OEMs for developed markets likely to launch FCEVs to comply with more stringent environmental regulations, and 2) the stronger bargaining power of FCEV parts makers, as there are only a few makers globally with the capability to supply key FCEV components, from MEA, plates and thermal energy management systems. As shown in the following chart, on Daiwa and Bloomberg consensus forecasts, FCEV parts suppliers’ earnings growth trajectory over the next 2 years outpaces that of the OEMs, with a 2018-20E EPS CAGR of 12.3% vs. 6.3% for the OEMs.

International OEMs vs. FCEV parts suppliers: EPS CAGR (2018-20E) (x ) 25% 22.7%

20% average of 12.3% 15% 13.5% 11.0% 9.6% average of 9.0% 10% 7.9% 7.8% 6.3% 8.1% 4.2% 5% 2.5% 3.0%

0% Hanon Mobis Denso Toyota Aisin Seiki HMC Toyota Honda GM VW Daimler Industries 2018-20E EPS CAGR

Source: Bloomberg, Daiwa forecasts

Pan-Asia Automobiles and Components: 4 July 2018

… leading to a larger On the same basis, the FCEV parts suppliers’ forward-looking 2-year EPS CAGR of 12.3% valuation premium for is 6.0pp higher than the major global OEMs’ EPS CAGR of 6.3%. Hence, we see grounds the parts suppliers vs. for the valuation premium of the FCEV parts suppliers to widen, given the stronger the OEMs shipment growth potential for FCEVs.

International OEMs vs. FCEV parts suppliers: PER comparison (2018E) (x ) 20 18.1

15 13.8 13.5 10.6 average of 9.3 13.1x 9.1 9.6 10 8.3 6.9 average of 6.0 6.5 7.7x 5

0 Hanon Mobis Denso Toyota Aisin Seiki HMC Toyota Honda GM VW Daimler Industries 2018E PER

Source: Bloomberg, Daiwa forecasts

Also, based on a PEG comparison between FCEV parts suppliers and auto OEMs, our PEG ratio of 0.86x for FCEV parts suppliers (vs. major auto OEMs’ PEG ratio of 1.11x) looks more appealing, given global FCEV parts suppliers are expected to post a much stronger 2018-20E EPS CAGR of 12.3% (vs. global major auto OEMs’ 6.3%) with stronger shipment growth potential for FCEVs and higher ASPs.

International OEMs vs. FCEV parts suppliers: PEG comparison PEG ratio for FCEV parts suppliers 2018-20E PER (x) 10.6 2018-20E EPS growth (%) 12.3 PEG ratio 0.86 PEG ratio for major auto OEMs 2018-20E PER (x) 7.0 2018-20E EPS growth (%) 6.3 PEG ratio 1.11

Source: Bloomberg, Daiwa forecasts

Global EV parts makers: valuation comparison Absolute Performance Relative Performance PER PBR EV/EBITDA ROE Div. Yield EPS growth Company Ticker Curr. Share Daiwa Mkt cap (%) (%) (x) (x) (x) (%) (%) (%) Price Rating (USDm) YTD 1M 3M YTD 1M 3M 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E Siemens SIE GR EUR 113 Not rated 112,282 (2.5) 0.1 10.9 1.9 3.1 8.0 15.2 13.9 2.1 1.9 10.6 9.5 13.7 13.9 3.4 3.5 (5.3) 9.4 General Electric GE US USD 13 Hold 116,123 (23.4) (5.2) 1.8 (24.9) (4.4) (1.9) 14.3 12.7 2.0 2.0 11.5 10.6 12.4 12.4 3.7 3.8 (11.0) 11.9 VISTEON VC US USD 126 Not rated 3,709 0.3 (0.3) 13.6 (1.2) 0.5 9.9 18.0 15.8 8.0 6.8 9.6 8.9 33.5 36.2 0.0 0.0 12.0 13.5 GS Yuasa 6674 JP JPY 499 Not rated 1,867 (11.1) (3.9) (11.4) (4.2) (0.6) (10.7) 16.1 14.4 1.2 1.1 7.0 6.7 7.8 8.1 2.2 2.4 3.4 19.1 Hota Industrial* 1536 TT TWD 143 Buy 1,194 (2.7) (1.4) 16.7 (3.4) 0.8 17.7 25.0 20.7 5.3 4.8 19.4 16.3 22.6 24.7 2.8 3.3 17.1 21.0 BYD* 1211 HK HKD 47 Buy 17,854 (31.1) (7.1) (22.7) (26.5) (0.7) (17.2) 27.2 21.0 2.1 2.0 11.4 9.8 8.1 9.6 0.6 0.7 12.1 29.5 Samsung SDI* 006400 KS KRW 212,500 Buy 13,112 3.9 1.7 7.6 11.8 8.5 14.5 19.9 14.4 1.2 1.1 13.9 10.8 6.3 8.3 0.5 0.5 6.7 37.8 Tesla TSLA US USD 220 Not rated 853 (21.2) 5.0 (0.5) (21.9) 7.2 0.5 17.7 14.1 3.1 2.9 11.5 9.2 19.4 21.9 3.5 4.3 21.4 25.6 Denso 6902 JP JPY 5,199 Hold 37,354 (23.1) (3.0) (10.0) (16.3) 0.2 (9.4) 12.9 13.0 1.1 1.1 5.7 5.5 9.2 8.5 2.5 2.6 35.7 (0.6) Autoliv ALV US USD 100 Hold 8,734 9.5 (7.5) (5.9) 8.1 (6.7) (9.7) 13.5 11.3 2.0 1.8 6.8 5.9 15.3 19.9 3.2 2.8 19.4 19.6 Ametek Inc AME US USD 72 Not rated 16,574 (1.2) (3.6) (5.4) (2.7) (2.8) (9.1) 22.8 20.8 3.7 3.4 14.8 13.8 17.1 16.8 0.8 0.8 21.5 9.5 Industry average 29,969 (9.3) (2.3) (0.5) (7.2) 0.4 (0.7) 18.4 15.7 2.9 2.6 11.1 9.7 15.0 16.4 2.1 2.3 12.1 17.8 Source: Bloomberg, *Daiwa forecasts. Note: 1) share prices are as of 3 July 2018, 2) **Relative to each country index

Pan-Asia Automobiles and Components: 4 July 2018

Global auto OEMs: valuation comparison EV/ EBITDA Div. Yield Company Ticker Curr. Share Daiwa Mcap Absolute Performance (%) Relative Performance (%) P/E (x) P/BV (x) ROE (%) EPS Growth (%) (x) (%) Price Rating (USDm) YTD 1M 3M YTD 1M 3M 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E US

FORD F US USD 11.0 Hold 43,795 (12.0) (6.1) (1.4) (13.5) (5.4) (5.2) 7.1 7.2 1.1 1.0 2.9 2.7 16.7 15.4 5.7 5.5 (12.8) (1.4) GM GM US USD 39.0 Outperform 54,926 (4.9) (9.8) 5.5 (6.4) (9.0) 1.7 6.1 6.1 1.4 1.2 3.2 3.1 25.3 21.9 3.9 4.0 1.1 0.6 Europe

DAIMLER DAI GR EUR 56.0 Not rated 69,844 (20.9) (9.6) (19.1) (16.5) (6.7) (22.0) 6.1 5.9 0.9 0.8 1.9 1.8 15.8 15.1 6.5 6.7 (2.4) 3.1 BMW BMW GR EUR 77.7 Not rated 58,868 (10.6) (9.6) (12.6) (6.2) (6.7) (15.5) 6.9 6.7 0.9 0.8 6.2 5.9 13.2 12.6 5.2 5.3 (2.7) 2.7 VW VOW GR EUR 139.5 Not rated 82,141 (17.3) (12.9) (15.1) (12.9) (10.0) (18.0) 5.3 4.9 0.6 0.5 1.6 1.5 12.1 11.8 3.8 4.7 10.9 8.0 Japan

HONDA 7267 JP JPY 3,210 Hold 53,205 (16.9) (7.4) (11.2) (10.0) (4.2) (10.6) 5.6 8.0 0.7 0.7 7.8 7.8 13.1 8.8 3.1 3.6 78.9 (28.9) NISSAN 7201 JP JPY 1,043 Hold 39,832 (7.2) (3.2) (5.0) (0.3) 0.1 (4.4) 5.7 7.4 0.7 0.7 3.1 3.1 13.5 9.8 5.1 5.4 22.6 (23.4) TOYOTA 7203 JP JPY 7,075 Outperform 209,183 (1.9) (0.7) 5.1 5.0 2.6 5.8 8.7 8.1 1.0 0.9 8.2 7.8 12.0 11.9 3.4 3.7 (3.6) 7.3 China

GWM 2333 HK HKD 5.9 Outperform 11,226 (34.5) (24.1) (25.4) (29.9) (17.7) (19.9) 5.2 4.3 0.8 0.7 3.3 2.4 16.6 17.6 5.9 7.2 51.5 12.8 BAIC 1958 HK HKD 7.5 Hold 7,673 (26.2) (1.8) (23.2) (21.6) 4.6 (17.8) 6.9 5.6 1.0 0.9 1.3 0.9 16.3 17.7 5.0 6.2 90.6 26.5 Geely 175 HK HKD 20.0 Buy 22,865 (26.3) (10.0) (13.1) (21.7) (3.6) (7.7) 9.9 7.1 3.2 2.4 5.9 3.7 38.1 38.8 3.0 4.2 37.2 29.5 Korea

HYUNDAI* 005380 KS KRW 122,000 Buy 23,990 (21.8) (12.9) (19.7) (13.9) (6.0) 4.4 8.7 7.2 0.5 0.4 5.2 4.5 5.3 6.1 4.1 4.9 (0.4) 19.7 KIA* 000270 KS KRW 30,950 Outperform 11,201 (7.6) (3.0) (2.5) 0.3 3.8 1.1 5.9 4.7 0.4 0.4 2.8 2.4 7.6 8.8 3.9 4.2 n.m. 24.8 Industry average 52,926 (16.0) (8.5) (10.6) (11.4) (4.5) (8.3) 6.8 6.5 1.0 0.9 4.4 3.9 15.9 15.1 4.5 5.0 26.2 5.3

Source: Bloomberg, *Daiwa forecasts. Note: 1) share prices are as of 3 July 2018, 2) **Relative to each country index

Global auto parts makers: valuation comparison Company Ticker Curr. Share Daiwa Mcap Absolute Performance (%) Relative Performance (%) P/E (x) PBR (x) EV/ EBITDA (x) ROE (%) Div. Yield (%) EPS growth (%) Price Rating (USDm) YTD 1M 3M YTD 1M 3M 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E US

Aptiv APTV US USD 90.9 Hold 24,070 7.2 (8.2) 10.1 5.7 (7.5) 6.3 16.9 15.4 5.7 4.7 11.3 10.5 43.5 41.0 1.0 1.0 9.7 8.2 Autoliv ALV US USD 100.3 Hold 8,734 9.5 (7.5) (5.9) 8.1 (6.7) (9.7) 13.5 11.3 2.0 1.8 6.8 5.9 15.3 19.9 3.2 2.8 19.4 19.6 JOHNSON CONTROLS JCI US USD 33.6 Not rated 31,148 (11.8) (0.3) (2.3) (13.2) 0.5 (6.1) 12.0 11.0 1.6 1.5 9.0 8.5 11.2 12.1 3.2 3.4 7.6 8.9 BORGWARNER BWA US USD 43.4 Not rated 9,121 (15.0) (13.1) (13.8) (16.5) (12.3) (17.6) 9.9 9.1 2.0 1.8 6.1 5.8 22.1 20.6 1.6 1.6 15.3 8.0 VISTEON VC US USD 125.6 Not rated 3,709 0.3 (0.3) 13.6 (1.2) 0.5 9.9 18.0 15.8 8.0 6.8 9.6 8.9 33.5 36.2 0.0 0.0 12.0 13.5 Japan

DENSO 6902 JP JPY 5,199 Hold 37,354 (23.1) (3.0) (10.0) (16.3) 0.2 (9.4) 12.9 13.0 1.1 1.1 5.7 5.5 9.2 8.5 2.5 2.6 35.7 (0.6) AISIN SEIKI 7259 JP JPY 4,960 Outperform 13,225 (21.6) (9.2) (13.3) (14.8) (5.9) (12.6) 10.3 9.5 1.0 0.9 4.2 3.9 10.3 10.4 2.8 3.1 20.2 9.0 NSK 6471 JP JPY 1,132 Buy 5,646 (36.2) (8.5) (18.9) (10.5) (5.3) (18.2) 9.2 8.2 1.2 1.0 5.5 5.0 13.3 13.0 3.4 3.6 54.9 11.6 Korea

HYUNDAI MOBIS* 012330 KS KRW 205,000 Outperform 17,840 (22.1) (9.5) (19.8) (14.2) (2.7) (12.8) 8.9 7.5 0.6 0.6 3.7 3.0 7.4 8.1 2.4 2.4 43.7 18.4 MANDO* 204320 KS KRW 36,650 Buy 1,544 (40.6) (10.2) (22.5) (32.7) (3.4) (15.6) 9.4 7.2 1.0 1.1 5.7 4.5 11.8 14.5 3.0 4.1 n.m. 30.2 HYUNDAI WIA* 011210 KS KRW 39,700 Outperform 969 (38.9) (21.2) (27.7) (31.0) (14.4) (20.7) 5.3 4.1 0.3 0.3 4.3 3.7 6.1 7.4 5.0 6.3 n.m. 28.9 Hanon Systems* 018880 KS KRW 10,350 Buy 4,957 (25.5) 2.0 (12.3) (17.6) 8.8 (5.3) 17.1 13.4 2.7 2.6 7.8 6.3 15.9 20.0 3.4 3.8 11.9 27.4 Others

Nexteer 1316 HK HKD 11.0 Outperform 3,519 (40.8) (12.8) (6.3) (36.2) (6.4) (0.9) 9.5 7.9 2.1 1.7 4.8 3.8 23.7 23.5 2.1 2.5 4.7 20.4 Continental AG CON GR EUR 195 Not rated 45,351 (13.6) (11.1) (12.4) (9.2) (8.2) (15.3) 11.8 10.6 2.1 1.8 5.9 5.4 18.7 18.2 2.6 2.8 5.1 10.9 BASF SE BAS GR EUR 81 Not rated 87,046 (11.4) (4.2) (1.4) (7.0) (1.3) (4.2) 12.3 11.4 2.1 2.0 6.8 6.4 17.3 17.2 4.0 4.1 1.4 7.8 MAGNA INTL MG CN CAD 77 Not rated 20,561 8.0 (7.8) 6.7 7.7 (9.2) (0.5) 10.9 10.0 2.1 1.9 5.3 5.1 21.1 21.7 1.6 1.8 18.5 8.8 VALEO FR FP EUR 46.1 Not rated 12,911 (26.0) (16.4) (13.2) (26.0) (13.7) (16.4) 11.0 9.5 2.2 1.9 5.2 4.6 20.2 20.2 2.9 3.3 (1.1) 16.0 Industry average 19,281 (17.7) (8.3) (8.8) (13.2) (5.1) (8.8) 11.7 10.3 2.2 2.0 6.3 5.7 17.7 18.4 2.6 2.9 17.3 14.5

Source: Bloomberg, *Daiwa forecasts. Note: 1) share prices are as of 3 July 2018, 2) **Relative to each country index

Korea FCEV players: valuation comparison Absolute Performance Relative Performance EV/ EBITDA Div. Yield EPS Growth Company Ticker Curr. Share Daiwa Mcap P/E (x) P/BV (x) ROE (%) (%) (%) (x) (%) (%) Price Rating (USDm) YTD 1M 3M YTD 1M 3M 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E 18E 19E Korea FCEV players

Hanon* 018880 KS KRW 10,350.0 Buy 4,930 (25.5) 2.0 (12.3) (17.6) 8.8 (5.3) 17.1 13.4 2.7 2.6 7.8 6.3 15.9 20.0 3.4 3.8 11.9 27.4 Hyosung 004800 KS KRW 134,000.0 Not rated 4,223 (3.9) 6.3 7.2 3.9 15.2 13.6 9.8 8.5 1.2 1.1 7.9 7.4 12.3 13.2 3.9 4.1 (9.3) 15.5 Kolon Industries 120110 KS KRW 58,200.0 Not rated 1,341 (34.6) (18.0) (15.0) (26.7) (11.2) (8.1) 9.6 7.5 0.7 0.7 7.4 6.2 7.2 8.6 2.0 2.0 9.7 26.7 S&T Motiv 064960 KS KRW 32,350.0 Not rated 424 (30.9) 4.9 (17.1) (23.1) 11.7 (10.1) 8.7 6.8 0.6 0.6 3.5 2.9 7.3 8.9 3.1 3.1 (25.0) 28.8 Motonic 009680 KS KRW 9,360.0 Not rated 277 1.7 (5.2) (9.1) 9.6 1.6 (2.2) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Iljin Diamond 081000 KS KRW 25,300 Not rated 256 23.4 22.5 (1.7) 31.3 29.3 5.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Synopex 025320 KS KRW 3,470 Not rated 204 (30.5) 5.3 (13.3) (22.6) 12.1 (6.3) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. GMB Korea 013870 KS KRW 8,100 Not rated 139 (2.8) 9.6 (15.9) 5.1 16.4 (8.9) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Daewoo Elec. Comp. 009320 KS KRW 3,775.0 Not rated 161 42.2 13.2 5.4 50.1 20.0 12.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Daewon Kangup 000430 KS KRW 4,210.0 Not rated 234 12.6 (9.4) (9.7) 20.5 (2.6) (2.7) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Woory Industrial 215360 KS KRW 26,600.0 Not rated 218 (24.2) (1.5) (20.7) (16.3) 5.3 (13.8) 16.7 11.6 2.2 1.9 10.0 8.1 13.2 15.7 0.3 0.4 30.6 44.0 Cowell Fashion 033290 KS KRW 5,610 Not rated 456 4.1 (3.8) 13.7 12.0 3.0 20.6 9.0 7.7 2.3 1.8 6.8 5.8 29.0 26.0 0.5 0.5 n.a. 17.9 Sang A Frontec 089980 KS KRW 15,450 Not rated 198 8.0 4.4 (9.1) 15.9 11.2 (2.2) 19.0 13.1 1.8 1.6 11.6 9.0 10.1 13.3 0.9 0.9 n.a. 45.3 Industry average 1,007 (4.7) 2.3 (7.5) 3.2 9.3 (0.6) 12.8 10.0 1.6 1.4 8.0 6.7 13.6 14.6 2.0 2.1 2.7 27.4

Source: Bloomberg, *Daiwa forecasts. Note: 1) share prices are as of 3 July 2018, 2) **Relative to each country index

Pan-Asia Automobiles and Components: 4 July 2018

Top pick over the next 12 months: Toyota Motors Plans to boost FCEV capacity; full-on electric in all areas Toyota is our top pick Toyota announced in May that it plans to bolster capacity for fuel-cell stacks (core unit of within Pan-Asia Autos FCEV) and highly-compressed hydrogen storage tanks. It aims to ramp up capacity by improving its FCEV manufacturing technology, with the goal of lifting annual FCEV sales from the current 3,000 vehicle mark to around 30,000 from 2020. It looks to begin selling FCEVs outside the 4 major metropolitan areas in Japan, as well as regions outside the US and Europe overseas. Toyota has stated that it plans to beef up its lineup of FCEVs. According to news reports, it aims to halve the fuel-cell system production costs for its next FCEV model, which is slated for release around 2020. Should it succeed, we could see a dramatic drop in FCEV selling prices.

There are only c.100 hydrogen refuelling stations in Japan and 31 in California, meaning there are many areas that lack the infrastructure to service FCEVs. But the picture is changing. In Japan, hydrogen is being used more widely in fuel-cell-powered buses and forklifts. Hydrogen use will also likely receive a boost from Toyota’s joint project with

Seven-Eleven to cut CO2 emissions. The first stage of this project is to kick off in 2019, with the convenience store operator introducing fuel-cell-powered delivery trucks on a trial basis. In California, the firm plans to team up with Shell and Honda to boost the number of hydrogen refuelling stations and build up the state’s hydrogen supply infrastructure.

Valuation and recommendation We have an Outperform (2) rating on the stock. There are a number of positives that set Toyota apart in terms of environmental technology, in our view. One area is compliance with regulations to improve average fuel economy, where Toyota holds an edge over its peers, with its sales of hybrid-electric vehicles (HEVs) playing a role. While new cars sold

in Europe average 118 g/km of CO2 emissions, Toyota brand vehicles release an even lower 101 g/km. Another area where Toyota deserves credit is in its push to release electric vehicles (EVs) equipped with all-solid-state batteries by the early 2020s. This ambitious drive stands out given the similarities many automakers’ EV strategies share. The third area in which Toyota has impressed us is the FCEV sphere. The technological hurdle for FCEVs is higher than that for EVs, making it difficult to enter this space. Toyota is taking the lead on this front with the Mirai, the first commercially produced FECV. It is one of the few firms pushing to apply electrically-driven vehicle technology in all areas at high dimensions.

Given the firm’s abundant cash, we expect it to return around JPY550.0bn (just over JPY190 per share) to shareholders through share buybacks in FY18, roughly equal to the sum for FY17. This, combined with our dividend forecast of JPY240 per share, would bring total shareholder payouts to over JPY430 per share. We set our 12-month target price at JPY8,700, based on a payout yield of around 5% to this figure (ie, JPY430). Our TP also implies a PER of nearly 11x on our FY18E EPS, and represents a premium of around 10% to the sector average.

Key downside risk: stronger-than-expected appreciation of the JPY vs. the USD and US president Trump’s intent to impose a tariff of 25% as half of Toyota US sales are imported from Japan, Canada, and Mexico.

Pan-Asia Automobiles and Components: 4 July 2018

We like Hanon and HMC on a 6-month view Hanon (Buy [1]): competitive edge in thermal energy management systems Thermal energy For FCEVs, having an adequate thermal energy management (TEM) is pivotal to management is crucial increasing energy efficiency, as well as the maximising the durability of fuel-cell stacks and to FCEVs vehicles’ torque power. Since fuel-cell stacks account for 30-40% of the cost of an FCEV, their durability is an important consideration.

Furthermore, as with EVs, it is important to cool the electronic parts within FCEVs, including the motors, inverter and motor control units (MCUs).

FCEVs: thermal energy management

Source: Daiwa

Hanon has a competitive Denso and Hanon are the 2 global climate control system makers which have system loop edge in TEMS capability for eco-friendly cars. For the thermal energy management system (TEM) used in FCEVs, Hanon’s products include centrifugal air compressors, coolant heaters, high voltage cooling fan motors, e-compressors, and heat pumps. We believe that Hanon’s competitive edge in this area, especially for heat pump systems used in FCEVs, comes from its software technology for control units.

Hanon Systems: e-compressor Hanon Systems: coolant heater

Source: Company, Daiwa Source: Company, Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

Hanon Systems: high voltage cooling fan motor Hanon Systems: heat pump system

Source: Company, Daiwa Source: Company, Daiwa

Centrifugal air Among the contents of an FCEV, centrifugal air compressors are used exclusively in compressors are used FCEVs and have a content-per-vehicle price of USD200-300. Centrifugal air compressors exclusively in FCEVs are essentially turbo blowers for FCEVs that help these vehicles generate electricity by supplying oxygen to the stack of a fuel cell. The component compresses air at a set pressure and flow rate, and also includes a brushless DC motor. The brushless DC motor is designed to rotate the compressor smoothly and at high speed.

Hanon Systems: centrifugal air compressor

Source: Company, Daiwa

Hanon’s TEM content Hanon’s FCEV TEM content per vehicle totals USD2,500, compared with USD1,500 for its per vehicle for FCEVs is EVs without heat pumps and USD2,000 for its EVs with heat pumps. Its FCEVs’ and EVs’ the highest among the TEM content per vehicle are 4-5 times higher than HEVs’ and ICEs’ TME content per different types of vehicle of USD800-USD1,500/car and USD400/car, respectively. vehicles it manufactures Hanon Systems: TEM content per vehicle (USD/vehicle) 3,000 2,500 2,500 2,000 2,000

1,500 1,000 1,000 400 500 100 200 0 ICE EV ICE HEV EV FCEV

E-compressor System Source: Company, Daiwa forecasts Notes: 1) The above is based on a mid-sized sedan for HMG, and 2) California-based EV maker’s vehicles have no heat pumps

Hanon is the only Meanwhile, Hyundai Motor Group (HMG) aims to improve its fuel efficiency by 25% on supplier of climate average by 2020, in order to comply with varying environmental protection measures in control systems for different countries. The company’s roadmap, announced in 2016, includes measures such Hyundai Motor Group’s as improving ICE powertrains and reducing the weight of vehicles, but rests mainly on eco-friendly cars expanding its product line-up of eco-friendly cars. HMG aims to expand its eco-friendly product line-up to 31 car models by 2020 and 38 models by 2025.

Pan-Asia Automobiles and Components: 4 July 2018

In 2017, HMG’s eco-friendly car shipments rose by 109% YoY to 236,422 units, and we now forecast another 50% YoY rise to 354,633 units in 2018E. A faster-than-expected penetration of eco-friendly cars, including FCEVs, offered by Hyundai Motor Group should be long-term earnings accretive for Hanon, the only system supplier of climate control systems for the group.

Eco-friendly car TEM We estimate Hanon to record a CAGR of 28.5% in revenue from eco-friendly products over products should be 2017-20E. Our view factors in the upward revisions made to our global eco-friendly car long-term earnings shipments (now forecast to reach 31.3m units by 2030, from 3.3m units in 2017), backed accretive for Hanon by our expectations of a rise in eco-friendly car adoption and faster penetration of FCEVs. Also, we take into account the company’s TEM content per vehicle of USD800-1,500 for HEVs, USD1,500-2,000 for EVs and USD2,500 for FCEVs, and a rise in its EV compressor shipments to 1.5m units by 2020 from 450,000 units in 2017. In turn, we forecast Hanon’s revenue contribution from eco-friendly products to rise to 12% by 2022E, with its operating profit margin for eco-friendly products expanding by 4pp to 5% by 2020 from our estimate of 1% currently.

Hanon Systems: revenue and operating profit from eco-friendly cars (KRW bn) 2013 2014 2015 2016 2017 2018E 2019E 2020E Hanon's total revenue 5,189 5,455 5,558 5,704 5,586 6,145 6,706 7,145 Revenue from Eco-friendly cars 156 164 255 331 358 431 533 759 % of total revenue 3.0 3.0 4.6 5.8 6.4 7.0 7.9 10.6 Hanon's total operating profit 364 370 360 423 468 482 564 638 Operating profit from eco-friendly cars** 0 0 0 1 4 7 19 38 Operating profit margin from eco-friendly cars 0.0 0.0 0.1 0.4 1.2 1.7 3.6 5.0 Hanon's climate control market share (%)* 11 11 12 13 13 13 13 13 Contents per vehicle (KRW)*** 874,000 858,800 1,035,000 1,053,000 1,053,000 1,035,000 1,035,000 1,035,000

Source: Company, Daiwa forecasts Note: *assuming HS would maintain its current market share of 13% until 2020E / ** Daiwa forecasts / *** Content per vehicle based on blended basis

Valuation and recommendation 12-month TP raised to We raise our 2018E and 2019E EPS for Hanon by 2.2% and 4.2%, respectively. The KRW16,000 revisions flow from upward revisions to our forecasts of: 1) Hanon’s operating profit from eco-friendly cars by 4.3% and 11.8% to KRW7.3bn and KRW19.0bn for 2018E and 2019E, respectively, and 2) HMG’s eco-friendly car shipments by 4.1% to 354,633 units and 6.2% to 486,245 units for 2018E and 2019E, respectively.

Also, we raise our target PER multiple by 19.5% to 23.3x (from 19.5x), in line with the average multiple expansion of 19.5% experienced by Hanon following the launch of HMC’s Tucson FCEV in 2013 and the Nexo FCEV in March 2018. The resulting 23.3x multiple compares with the stock’s past 3-year PER range of 15.1-29.6x. In turn, we raise our 12- month TP by 14.2% to KRW16,000 (from KRW13,000).

Bottom-fishing Hanon shares have corrected by 23.3% YTD due to: 1) weaker YTD EV shipments of opportunity, with 9,766 units of Tesla’s Model 3 vs. the company’s target of 32,500 units for the first 5 stronger catalysts ahead months of 2018 (2% of Hanon’s 2018E revenue), 2) potential industry-wide pricing pressure from Beijing Hyundai Motor Company (BHMC), 3) weaker-than-expected 1Q18E results, and 4) a likely miss in its 2Q18E earnings (see our 22 June Flash: Key highlights from Hanon’s Asia NDR).

Pan-Asia Automobiles and Components: 4 July 2018

Hanon Systems: event-driven analysis Jul 2017: (x ) Sep 2016: May 2017: Feb 2018: Oct 2016: steep decline in China News on Hanon participating in Calsonic Better-than-expected 1Q17 Market's expectation on FCEV as shipmnets Kansei's acquisition Ford to halt production earnings HMC launch "Nexo" 24 for 2 weeks May 2016: Nov 2016: Better-than-expected Trump's presidential election 22 1Q16 earnings victory Dec 2016: Mobis exhibits compressors in 20 CES

18 Aug 2016: Oct 2017: 16 New order win from Beijing Announcement of JV with Benz CSGC in China 14 Jan 2018: Mar 2018: Jun 2017: Announcement of EV parts Feb 2016: Potential industry-wide picing Feb 2017: News on Tesla model 3 to be business expansion pressure from BHMC 12 Resumed trading after stock HMC delayed the launch of new shipped in July split of 5:1 Sonata PHEV in China 10 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 12m fwd PER +1 STD +2 STD -1 STD -2 STD Average

Source: Bloomberg, Daiwa

Although Hanon shares may remain under pressure until the company announces its 2Q18 results in August 2018, with the possibility of downward earnings revisions by the street prior to the announcement, we see a bottom-fishing opportunity as we still expect an HoH rise in the company’s 2H18 earnings. Moreover, we are upbeat on Hanon’s long-term growth trajectory, and now expect a faster rise in its e-compressor margin, to 6% (from our previous estimate of 4.5%) by 2020, through faster growth in its e-compressor shipments to 1.5m units by 2020 (from 450,000 units in 2017).

Furthermore, we contend that Hanon’s prevailing valuation is appealing, with the stock trading at a PER discount of 10% to its global EV-related peers (based on Bloomberg consensus data), compared with its average premium of 11.1% to the same peers since September 2015.

Hanon Systems: PER valuation gap vs global EV-related peers (PER,x ) (% ) Hanon has been trading on 11.1% premium to global EV-related peers (since VW diesel 35 gate scandal in Sep 2015) 50 30 Current PER premium for 40 Hanon to global EV-related peers is 10.0% 30 25 20 20 10 15 0 (10) 10 (20) 5 (30) 0 (40)

Premium/Discount (RHS) Global EV-related parts (LHS) Hanon (LHS) Source: Bloomberg, Daiwa

Key downside risk: larger-than-expected non-contractual pricing pressure from HMG OEMs Since 48% of Hanon’s revenue currently comes from Hyundai Motor Group OEMs, stronger-than-expected non-contractual pricing pressure from HMG is a key risk to our Buy (1) call, in our view. A secondary risk would be a rapid appreciation of the KRW against the USD and Euro.

HMC (Buy [1]): solid FCEV footprint, with earnings recovery from 2H18E Establishing a presence Including Kia Motors (000270 KS, KRW30,950, Outperform [2]), HMG’s market share in in the eco-friendly car eco-friendly cars globally was 7.4%, making it the No.2 player (albeit well behind Toyota’s market market share of 38.1%). HMG’s mid- to long-term eco-friendly car development strategy is centred on gradually transitioning to clean mobility technology (EVs and FCEVs) from hybrid technology (HEVs and PHEVs).

Pan-Asia Automobiles and Components: 4 July 2018

Global eco-friendly car market share by OEMs (2017)

Others, 25.6%

Toyota, 38.1%

Ford, 3.0% Tesla, 3.2% BAIC, 3.2% BYD, 3.4% Renault-Nissan, 7.5% Hyundai and Kia, 7.4% Honda, 8.5%

Source: Bloomberg, Daiwa

As shown in the following table, HMG aims to expand its eco-friendly car product line-up to 31 models and 38 models by 2020E and 2025E, respectively, from the current range of 13 models. And it targets to maintain its No. 2 market share in eco-friendly cars globally by selling 1m units in 2018, from 236,422 units in 2017.

HMG: eco-friendly car expansion plan by segment No.of models 2017 2020 2025 HEV 6 10 10 PHEV 4 11 12 EV 2 8 14 FCEV 1 2 2 Total 13 31 38

Source: Company, Daiwa

HMC: eco-friendly car shipment trend (units) 2014 2015 2016 2017 2018E EV/PHEV 0 1,337 6,719 23,097 46,840 HEV 49,223 41,064 55,651 83,881 88,400 FCEV 118 229 242 232 3,000 Total Eco-friendly shipments 49,341 42,630 62,612 107,210 138,240

Source: Company, Daiwa forecasts

Kia: eco-friendly car shipment trend (units) 2014 2015 2016 2017 2018E EV/PHEV 1,383 8,456 8,627 18,579 24,012 HEV 24,786 19,396 41,736 110,633 115,200 Total Eco-friendly shipments 26,169 27,852 50,363 129,212 139,212

Source: Company, Daiwa forecasts

Strong competitive HMC launched the world’s first fuel-cell vehicle, the Tucson ix-35, in 2013. It rolled out the advantage in FCEVs Nexo, the first fully fledged FCEV, on 20 March 2018, for which sales totalled 124 units in April and May (pre-orders totalled 1,000 units in Korea), compared with its full-year production target of 3,000 units. Given the possibility of the Korean government extending subsidies for FCEVs we see scope for Nexo shipments to accelerate in 2H18.

As shown in the following table, Nexo has a driving range of 609km (or 378 miles), with a maximum of speed of 179km/hour, both of which top the equivalent figures of competitors such as Toyota’s Mirai and Honda’s Clarity.

Specification of FCEVs: Toyota, HMC and Honda HMC HMC Toyota Honda Model ix 35 Nexo Mirai Clarity Type SUV SUV Sedan Sedan Weight (kg) 1,835 1,820 1,850 1,625 Refueling time (min) 5 5 5

Driving range (km) 426 609 502 386 Motor power (kW) 100 120 114 130 Max speed (km/h) 160 179 178 160 Price (USD) 85,000 68,000 60,000 76,000 Launch date Feb-13 Mar-18 Dec-14 May-16

Source: Companies, Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

Besides, HMC is one of the few global OEMs with proprietary membrane electrode assembly (MEA) and gas diffusion layer (GDL) technology, which is deployed by Mobis.

FCEV: MEA and GDL

Provide gas-tight seal

Source: Daiwa

2Q18 earnings tracking Meanwhile, HMC is slated to report its 2Q18 earnings on 25 July, whereby we look for its weaker than market earnings to fall short of the Bloomberg consensus forecast. We do see positive factors consensus such as: 1) product-mix improvements, with our forecast for the revenue proportion of high- margin SUV shipments to rise to 29% (from 27% in 2017), 2) our forecast for a YoY rise in 2Q18E retail shipments for both Korea and the US, and 3) our forecast 12.6% YoY decline in US incentives.

However, we believe these positives will be offset by: 1) 7.7% YoY and 9.0% YoY depreciation in major emerging-market currencies such as the Russian Rouble and Brazil Real against the KRW, whereby we estimate a 1% weaker Russian Rouble and Brazil Real relative to the KRW results in 0.8% and 0.7% declines in HMC’s 2018E EPS, on our forecasts, 2) our forecast rise in its warranty provisioning to KRW220bn, given a 5% QoQ stronger USD against the KRW based on the end-2Q18 rate of KRW1,110:USD1 and considering its US-denominated debt of KRW4.4tn in 1Q18, and 3) provisioning of KRW116bn for the airbag recall (see our 19 March sector Memo: US NHTSA launches investigation into Hyundai and Kia’s airbags) affecting 580,000 US-made Sonatas produced between January 2009 and August 2012.

In view of these negative factors, we cut our 2Q18E revenue and operating-profit estimates for HMC by 3.8% and 31.6% to KRW24,123bn and KRW952bn, respectively. Our revised estimates are below the current Bloomberg consensus forecasts by 1.4% and 21.9%, respectively.

Pan-Asia Automobiles and Components: 4 July 2018

HMC: 2Q18 earnings preview (KRW bn) 2Q18E-Daiwa 2Q18E-BBG Diff(%) 2Q17 YoY(%) 1Q18 QoQ(%) USD:KRW (Quarter Avg) 1,076.0 1,130.3 (4.8) 1,072.3 0.3 Total shipments ('000 Unit, Inc.China) 1,208 1,098 10.0 1,004 20.3 Total shipments ('000 Unit, Ex-China) 994 993 0.2 841 18.2 HMC (Korea) 476 484 (1.6) 402 18.5 HMI (India) 165 157 5.0 172 (4.0) HAOS (Turkey) 59 62 (5.0) 21 184.1 HMMA (US) 72 96 (25.0) 65 10.5 HMMC (Czech) 91 90 1.0 82 11.0 HMMR (Russia) 62 60 3.0 58 6.5 HMB (Brazil) 45 43 5.0 41 9.4 BHMC & CHMC (China) 213 105 103.0 163 31.3 ASP ('000 KRW, Inc.China) 18,096 18,755 (3.5) 20,026 (9.6) ASP ('000 KRW, Ex-China) 18,714 19,155 (2.3) 19,299 (3.0) HMC (Korea) 24,613 24,224 1.6 24,072 2.3 HMI (India) 9,596 9,104 5.4 10,418 (7.9) HAOS (Turkey) 14,724 13,484 9.2 15,237 (3.4) HMMA (US) 20,691 21,172 (2.3) 21,041 (1.7) HMMC (Czech) 18,860 18,500 1.9 19,716 (4.3) HMMR (Russia) 11,414 12,794 (10.8) 12,146 (6.0) HMB (Brazil) 11,547 12,816 (9.9) 12,554 (8.0) BHMC & CHMC (China) 15,218 14,982 1.6 23,787 (36.0) Revenue 23,971 24,301 (1.4) 24,308 (1.4) 22,437 6.8 Auto 19,113 19,187 (0.4) 17,389 9.9 HMC (Korea) 11,722 11,726 (0.0) 9,672 21.2 HMI (India) 1,586 1,433 10.7 1,659 (4.4) HAOS (Turkey) 870 839 3.7 724 20.2 HMMA (US) 1,486 2,027 (26.7) 1,334 11.4 HMMC (Czech) 1,723 1,673 3.0 1,594 8.1 HMMR (Russia) 707 770 (8.1) 745 (5.0) HMB (Brazil) 517 547 (5.4) 505 2.4 Others 503 173 191.5 1,156 (56.5) Finance 3,665 3,571 2.6 3,778 (3.0) Others 1,193 1,550 (23.0) 1,269 (6.0) COGS 19,393 19,581 (1.0) 18,969 2.2 Gross profit 4,578 4,727 (3.1) 3,468 32.0 GP margin(%) 19.1 19.4 - 15.5 - SG&A 3,633 3,382 7.4 2,786 30.4 Salary and Wage 791 658 20.2 670 18.0 % to Revenue 3.3 2.7 - 3.0 - Marketing Expense 887 877 1.1 877 1.1 % to Revenue 3.7 3.6 - 3.9 - Warranty Provision 479 589 (18.6) 589 (18.6) % to Revenue 2.0 2.4 - 2.6 - Others 1,475 1,258 17.2 650 127.0 % to Revenue 6.2 5.2 - 2.9 - Operating profit 946 1,211 (21.9) 1,344 (29.7) 681 38.8 OP margin(%) 3.9 5.0 5.5 3.0 Auto 856 877 (2.4) 400 114.0 OP Margin (%) 4.5 4.6 2.3 Finance 213 213 (0.2) 173 22.9 OP Margin (%) 5.8 6.0 4.6 Others 60 76 (21.5) 38 57.0 OP Margin (%) 5.0 4.9 3.0 Consolidation adjustments (183) 178 70

Equity method gain 246 143 71.6 242 1.4 Recurring Profit 1,182 1,165 1.4 926 27.6 Recurring Profit Margin (%) 4.9 4.8 4.1 Tax 260.0 251.3 194.3 Tax rate(%) 22.0 21.6 21.0 Net profit 922 1,143 (19.4) 914 0.9 732 26.0 NP margin(%) 3.8 4.7 3.8 3.3

Source: Company, Bloomberg, Daiwa forecasts

We expect a sequential HMC has seen its earnings decline for the past 5 years, but we continue to look for an earnings improvement earnings recovery in both the US and China to support a YoY earnings recovery for the from 2H18E company from 2H18.

Despite BHMC’s run-rate of 42% YTD (of its full-year target), we still believe the company’s 2018 shipment target of 900,000 units (+14.6% YoY) in China is achievable given: 1) its recent launch of localised models with better connectivity features (Baidu navigation) and local designs, such as the ix-35, whereby the price gap with local OEMs has fallen to 10% from 35% previously, 2) our forecast for SUV shipments to rise to 40% of its China shipments in 2018E and 45% in 2019E, from 35% in 2017, with the launch of the Encino (Kona), the Tucson facelift, and redesigned Santa Fe.

Pan-Asia Automobiles and Components: 4 July 2018

Beijing Hyundai Motor Company: equity-method income trend (1Q15-4Q18E) (KRWbn) (% ) 400 200 300 151 150 200 100

309 50 255 233 100 32 230 210 20 16 18 195 146 92 82 10 27 33 0

262 0 0 0 205 (12) 93 (7) 0 224 (19) 221 (19) 70 (59) 89 (57) (53) (60) -50 (68) (82) (100) (90) -100 (200)

(193) -150 (183) (300) -200 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

BHMC equity method…

Source: Company, Daiwa forecasts; note 3Q18 and 4Q18 are estimates

China: market share trend China: market share in May 20% HMG 4.2% Toyota 15% VW 13.0% 3.8%

10% Honda 4.6% 5% PSA 1.2% 0% Nissan GWM 4.5% Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 2.5% BHMC DKIA Toyota Honda Changan BYD 2.6% Geely 1.6% Geely Changan VW 5.5% Source: CAAM, Daiwa Source: CAAM, Daiwa

As for the US, we look for Hyundai Motor America’s (HMA) earnings to recover from 2H18 on: 1) a rise in high-margin SUV shipments to 40% in 2018E and 45% in 2019E, from 35% in 2017, with the launch of its mainstay Santa Fe, the Tucson facelift, as well as adding new SUV line-ups in the A and E segments by 2019E, 2) a further reduction in inventory to less than 3 months in 2H18E (vs. 3.5 months currently), and 3) more efficient alignment of its production and sales following the recent appointment of a new CEO for the US market.

HMA and HMMA: revenue and net profit trend (2012-17) (KRWbn) (KRWbn) 480 421 20,000 362 600 282 294 490 400 470 115 15,000 378 200 0 10,000 (200) -163 -342 17,322 17,107 17,079 (400) 16,813 16,593 16,083 5,000 (600) 8,217 7,510 7,437 7,385 7,049 6,992 (800)

0 -868 (1,000) 2012 2013 2014 2015 2016 2017 HMA's Revenue HMMA's Revenue HMA's Net profit HMMA's Net profit

Source: Company, Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

US: market share trend HMC: US inventory months and incentives 25% (USD/vehicle) (x ) 3,500 4.6 4.5 5 4.2 4.4 4.2 4.4 4.2 3.9 3.9 4.0 20% 3,000 3.8 3.8 3.7 3.5 3.5 3.5 4 15% 2,500 2,000 3 10% 1,500 3,220 3,220 3,192 3,192 3,188 3,188 3,134 3,134 3,120 3,120 2 2,982 2,982 2,944 2,944 2,890 2,890 2,875 2,875 2,809 2,809 2,807 2,807 2,755 2,755 2,692 2,692 5% 2,684 2,591 2,591

1,000 2,342 2,176 2,176 1 0% 500 0 0 Jul-15 Jul-16 Jul-17 Jan-15 Jan-16 Jan-17 Jan-18 Mar-15 Mar-16 Mar-17 Mar-18 Sep-15 Nov-15 Sep-16 Nov-16 Sep-17 Nov-17 May-15 May-16 May-17 May-18

Toyota Nissan Honda Jul-17 Apr-17 Oct-17 Apr-18 Jan-17 Jun-17 Jan-18 Feb-17 Mar-17 Feb-18 Mar-18 Aug-17 Sep-17 Nov-17 Dec-17 VW Chrysler Ford May-17 May-18 GM HMC Kia US incentives for HMC (LHS) US inventory (RHS) Source: Autodata, Daiwa Source: Autodata, Daiwa

HMC: new model cycle HMC: global inventory trend HMC 1H17 2H17 1H18 2H18 (Units) (Months) 4.6 70,000 4.5 4.4 4.4 5 Korea ix25 (OS) Sonata F/L Sante-Fe Avante F/L 4.2 4.2 4.2 4.0 Grandeur HEV Genesis G70 Tucson F/L EQ900 F/L 3.9 3.8 3.8 3.9 3.7 60,000 3.5 3.5 3.5 Kona Kona EV SUV 4 Veloster Veloster 50,000 i40 F/L 40,000 3 US Ioniq EV/HEV Sonata F/L G70 Kona EV 30,000 i30 Kona GV80 2 57,885 52,508 20,000 52,049 48,329

Veloster Elantra F/L 46,583 44,966 42,053 41,351 40,881 40,152 39,353 39,306 39,248 37,320 36,982 1 Tucson F/L 10,000 33,597 Sante-Fe 0 0 China Yuidong All new Reina Sonata PHEV Santa-Fe (CELESTA) Jul-17 Apr-17 Oct-17 Apr-18 Jan-17 Jun-17 Jan-18 Feb-17 Mar-17 Feb-18 Mar-18 Aug-17 Sep-17 Nov-17 Dec-17

Sonata F/L Kona Tucson F/L May-17

ix 35 C2 sedan Korea (RHS) US (LHS) EU Ioniq PHEV Solaris (Russia) Sante-Fe West Europe (months) Global (LHS) G70 Tucson F/L

Source: Company, Daiwa Source: Company, Daiwa

Expect more efficient On 27 April 2018, HMC disclosed plans to cancel KRW972tn (USD900m) worth of treasury capital deployment shares (3% of total shares, through 1% buyback and 2% cancellation). After the going forward transaction, HMC will still be left with 3% of its treasury shares. During our recent NDR with the company, HMC pledged to come up with more shareholder-friendly measures to deploy capital on a regular basis, possibly including further share buybacks and share cancellations. As of 1H18, the company’s automotive net cash totalled KRW14.9tn (USD13.8bn).

HMC: potential impact on dividend pay-out ratio from share HMC: share buyback and cancellation scheme buyback and cancellation HMC common shares FY2017 2018E Shareholder return summary Details DPS for common shares (KRW) [A] 4,000 4,000 Expected share buyback and cancellation 30.April.2018 - 27.July.2018 No. of common shares (m) [B] 220 214 Total no. of shares for cancellation (m) 8.5 Dividend paid for common shares (KRW bn) [A]*[B] = [C] 881 855 Common 6.6 Share buyback and cancellation amount (KRW bn) [D] 0 764 Preferred (including preferred #1, #2, and #3) 1.9 Total dividend (KRW bn) [C]+[D] = [E] 881 1,619 Remaining treasury shares after cancellation (m) 8.3 YoY (%) 83.7% Common 6.6 Net profit for common shareholders (KRW bn) [F] 3,104 3,745 % of outstanding shares 3.1% Pay-out ratio ([C]+[D])/[F] = [G] 28.4% 43.2% Preferred (including preferred #1, #2, and #3) 1.7 HMC preferred shares FY2017 2018E % of outstanding shares 2.6% DPS for preferred shares (KRW) [A] 4,100 4,100 Total no. of shares (including preferred shares, KRW bn) 285.5 No. of preferred shares (m) [B] 65 63 Common 220.3 Dividend paid for preferred shares (KRW bn) [A]*[B] = [C] 267 259 Preferred (including preferred #1, #2, and #3) 65.2 Share buyback and cancellation amount (KRW bn) [D] 0 208 % of share cancellation 3.0% Total dividend (KRW bn) [C]+[D] = [E] 267 467 Common 3.0% YoY (%) 74.8% Preferred (including preferred #1, #2, and #3) 3.0% Net profit for preferred shareholders (KRW bn) [F] 928 1,120 Total cancellation amount (KRW bn) 972 Pay-out ratio ([C]+[D])/[F] = [G] 28.8% 41.7% Cancellation from share buyback 413

Cancellation from treasury shares 559 Total no. of shares after share cancellation (m) 276.9 Common 213.7 Preferred 63.3

Source: Company, Daiwa Source: Company, Daiwa

Pan-Asia Automobiles and Components: 4 July 2018

Valuation and recommendation Downward revisions to In conclusion, we lower our 2018E and 2019E EPS for HMC by 17.6% and 16.3%, our EPS forecasts; 12- respectively. These revisions reflect the following: 1) the likely miss in its 2Q18E earnings, month TP lowered to 2) a downward revision to our forecast of 2018E equity-method income from BHMC to KRW160,000 KRW38bn (from KRW165bn) to incorporate a potential rise in incentives and price cuts, 3) downward revisions to our forecasts of HMC’s global ex-China shipments by 1% and 2.6% for 2018E and 2019E, to 3,679k and 3,830k units, respectively, assuming slower growth in global auto demand from 3Q18 as US interest rates rise, and 4) cuts of 1.7% and 1.1% to our 2018E and 2019E global ex-China shipments APS forecasts to KRW19.3m and KRW20.1m, respectively.

HMC: major changes to our assumptions 2018E 2019E Previous Revised Diff. (%) Previous Revised Diff. (%) USD:KRW (Year Avg) 1,077.1 1,077.1 0.0 1,120.0 1,120.0 0.0 Total shipments ('000 Unit, Ex-China) 3,721 3,679 (1.1) 3,931 3,830 (2.6) HMC (Korea) 1,722 1,707 (0.8) 1,754 1,758 0.2 HMI (India) 710 710 0.0 750 756 0.8 HAOS (Turkey) 197 193 (2.2) 243 200 (17.8) HMMA (US) 308 293 (4.8) 338 301 (11.0) HMMC (Czech) 345 344 (0.3) 372 354 (4.8) HMMR (Russia) 249 244 (1.9) 266 260 (2.2) HMB (Brazil) 191 189 (1.1) 209 202 (3.3) BHMC & CHMC (China) 860 837 (2.7) 984 890 (9.6) ASP ('000 KRW, Ex-China) 19,731 19,387 (1.7) 20,317 20,100 (1.1) HMC (Korea) 25,213 25,260 0.2 26,057 25,994 (0.2) HMI (India) 10,745 9,798 (8.8) 11,508 10,176 (11.6) HAOS (Turkey) 15,164 16,267 7.3 15,349 15,089 (1.7) HMMA (US) 22,945 21,432 (6.6) 23,847 24,124 1.2 HMMC (Czech) 19,915 19,440 (2.4) 20,360 21,208 4.2 HMMR (Russia) 12,268 11,906 (2.9) 12,290 11,958 (2.7) HMB (Brazil) 12,622 11,915 (5.6) 13,909 13,404 (3.6) Revenue 95,771 94,483 (1.3) 102,319 101,275 (1.0) Auto 74,998 74,840 (0.2) 80,478 79,887 (0.7) HMC (Korea) 43,417 43,129 (0.7) 45,704 45,704 (0.0) HMI (India) 7,626 6,954 (8.8) 8,628 7,689 (10.9) HAOS (Turkey) 2,994 3,141 4.9 3,725 3,011 (19.1) HMMA (US) 7,057 6,274 (11.1) 8,069 7,262 (10.0) HMMC (Czech) 6,862 6,681 (2.6) 7,573 7,510 (0.8) HMMR (Russia) 3,051 2,904 (4.8) 3,264 3,106 (4.8) HMB (Brazil) 2,408 2,248 (6.6) 2,905 2,705 (6.9) Others 1,583 3,509 121.7 612 2,900 373.9 Finance 14,210 14,662 3.2 14,917 15,327 2.8 Others 6,563 4,981 (24.1) 6,924 6,061 (12.5) COGS 77,730 77,323 (0.5) 82,935 82,186 (0.9) Gross profit 18,040 17,160 (4.9) 19,383 19,089 (1.5) GP margin(%) 18.8 18.2 18.9 18.8 SG&A 13,014 12,545 (3.6) 13,630 13,904 2.0 Salary and Wage 3,129 3,048 (2.6) 3,377 3,342 (1.0) % to Revenue 3.3 3.2 3.3 3.3 Marketing Expense 3,035 3,252 7.2 3,121 3,139 0.6 % to Revenue 3.2 3.4 3.0 3.1 Warranty Provision 1,341 1,741 29.9 1,126 1,190 5.7 % to Revenue 1.4 1.8 1.1 1.2 Others 5,509 4,504 (18.2) 6,007 6,233 3.8 % to Revenue 5.8 4.8 5.9 6.2 Operating profit 5,026 4,615 (8.2) 5,754 5,186 (9.9) OP margin(%) 5.2 4.9 5.6 5.1 Auto 4,924 3,411 (30.7) 6,027 4,807 (20.2) OP Margin (%) 6.6 4.6 7.5 6.0 Finance 759 804 6.0 865 889 2.8 OP Margin (%) 5.3 5.5 5.8 5.8 Others 328 224 (31.9) 215 188 (12.5) OP Margin (%) 5.0 4.5 3.1 3.1 Equity method gain 968 1,098 13.5 1,084 1,585 46.2 Recurring Profit 6,961 5,860 (15.8) 8,170 6,960 (14.8) Recurring Profit Margin (%) 7.3 6.2 8.0 6.9 Tax 2,096 1,845 (12.0) 2,419 2,153 (11.0) Tax rate(%) 30.1 31.5 29.6 30.9 Net profit 4,865 4,015 (17.6) 5,752 4,807 (16.3)

Source: Daiwa forecasts

Pan-Asia Automobiles and Components: 4 July 2018

Rolling forward our valuation basis and taking into consideration HMC’s average PER multiple expansion of 4.0% following the launch of the Tucson FCEV in 2013 and Nexo FCEV in March 2018, we now apply a target multiple of 10.4x (from 10.0x) to the average of our 2018-19E EPS forecasts (previously 2018E only). However, given our lowered earnings base we trim our 12-month TP by 5.9% to KRW160,000.

HMC: PER multiple expansion from the launch of Tucson and Nexo FCEV (x ) Mar-18 Feb-13 NEXO's pre-order reached 14 First FCEV, HMC's Sep-15 780 units in the first 2 days Tuscon FC launched HMC developed Membrane 12 of its sales in Korea Electrode Assemble (MEA) 10 technology 8 6 Feb-18 HMC launched 2nd FCEV 4 "NEXO" 2 0 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Source: Bloomberg, Daiwa

Negatives look largely Over the next 12 months, we look for HMC’s PER multiple expansion to become more priced in; upgrading apparent, backed by the stronger-than-expected shipments of the Nexo FCEV as well as HMC to Buy (1) from the Korean government’s recent decision to allocate KRW2.6tn to FCEV industry Outperform (2) development by 2022. Given potential upside of 31% to our revised TP, we upgrade our rating on HMC to Buy (1) from Outperform (2).

Risk/reward profile now HMC shares have corrected by 21.8% YTD due to: 1) the company’s significantly weaker- appears more appealing than-expected 1Q18E earnings, 2) market concerns about HMC’s prospects in China, given its weaker-than-expected retail shipments there in 2Q18 as well as a simmering conflict with its local partner, Beijing Motors, over the supply chain, 3) the potential imposition in the US of a 25% tariff on imported vehicles, and 4) failure to unwind Hyundai Motor Group’s cross-holding structure due to the cancellation of the planned Hyundai Mobis spin-off and Hyundai Glovis merger.

HMC: event-driven analysis Jan 2017: Nov 2017: (x ) Sep 2015: Nov 2015: Potential border-tax issue Mar 2017: Tension between Korea 13 Currency tailwinds, China purchase tax cut and special shipment increase in Korea, U.S and China THAAD deployment news and China released on consumption tax cuts in Korea Jul-Oct 2016: THAAD issue Jan 2018: 12 worse-than-expected Labor dispute Jan 2016: labor dispute agreement failed 11 highest 2015 sales reported 10

7 Nov 2016: Mar 2017: Sep-Nov 2014: Trump's presidential HMG group Apr 2015: restructuring issue 6 Announced to purchase election victory Oct 2017: KEPCO HQ land Disappointing 1Q15 July 2017: China shipment results released June 2015: Jan 2017: increased by 60.4%. 5 Weaker-than-expected May shipment released 4Q16 earnings shock China and US shipments 4 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 12m fwd PER +1 STD +2 STD -1 STD -2 STD Average

Source: Bloomberg, Daiwa

However, we see a bottom-fishing opportunity ahead of the likely resumption of an upward earnings-revision cycle from 2H18, along with potential positives such as a further extension of the Korea governments’ subsidies for FCEVs and stronger-than-expected shipments of HMC’s Nexo FCEV.

Pan-Asia Automobiles and Components: 4 July 2018

Furthermore, we contend that HMC’s valuation looks appealing, with the shares trading currently at a 2018E PBR of 0.47x compared with its past-5-year range of 0.46-1.24x and considering that its automotive net cash of KRW14.9tn represents 52% of its current market cap.

HMC: 12-month forward PBR band (x ) 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Sep-13 Nov-13 Sep-14 Nov-14 Sep-15 Nov-15 Sep-16 Nov-16 Sep-17 Nov-17 May-13 May-14 May-15 May-16 May-17 May-18 12m fwd PBR +1 STD +2 STD -1 STD -2 STD Average

Source: Bloomberg, Daiwa forecasts

Risks: adverse currency swings and labour disputes The key downside risks to our call on HMC would be a rapid appreciation of the KRW against major currencies and labour disputes.

Hyundai Mobis (Buy [1]): a key supplier for FCEVs The first parts maker to In June 2017, HMG disclosed plans to establish an annual production capacity of 3,000 mass produce FCEV key FCEVs. Following the announcement, Mobis said it had started construction of an components and additional plant to manufacture key components for FCEVs within its existing eco-friendly modules auto parts production complex, located in Chung Ju, North Chung Cheong Province. Following spending of KRW700bn, the plant is now capable of producing 3,000 units of power train fuel-cell complete (PFC) modules, which consist of converters, traction motors, inverters, battery system assembly (BSA), fuel-cell stack and bi-directional high-voltage DC converters (BHDC), and fuel process systems (FPS).

As highlighted, the fuel-cell stack is a major component of the MEA which determines the performance of FCEVs in terms of fuel efficiency and durability. One fuel-cell stack consists of 440 MEAs. HMG has successfully localised key components such as MEAs and GDL, whereas Mobis is responsible for the production.

Mobis is the key Given HMG’s plan to expand its eco-friendly car product line-up to 31 models and 38 component supplier for models by 2020E and 2025E, respectively, from 13 models currently, we believe Mobis is HMG, with its eco- on track for a stronger long-term earnings-growth trajectory. In 2017, Mobis’ revenue from friendly component eco-friendly car components totalled KRW1.5tn, or 4.3% of its overall revenue of revenue forecast to KRW35.1tn. In view of HMG’s goal of selling 1m units of eco-friendly vehicles in 2025, from quadruple to KRW6tn 236,422 units in 2017, we look for Mobis’ revenue from eco-friendly car components to by 2025E quadruple to KRW6tn during the same period.

Core parts division Although the planned Hyundai Mobis spin-off and Hyundai Glovis merger has been targeting an operating- shelved, Mobis’ 1Q18 results announcement featured for the first time a 2025E revenue profit margin of 10% target of KRW44tn (a 7-year CAGR of 8%) and non-Hyundai Motor Group OEMs’ new by 2025 order target of USD10bn by 2022E (vs. USD6bn in 2017 for its present core parts division). Mobis also disclosed a targeted operating profit margin of 10% for its future/core parts by 2025. During the conference call, the CFO said this margin could be achieved through pre- emptive cost management, which could include: 1) reducing the material cost-to-revenue ratio to less than 60%, vs. our estimate of 64% currently, and 2) optimising its capex and costs by focusing on profitable projects, and streamlining its sourcing, logistics and ordinary expenses.

Pan-Asia Automobiles and Components: 4 July 2018

Mobis: medium- to long-term revenue target Mobis: new order target from non-captive customers (KRW tn) CAGR (USD bn) 50 CAGR 8% (2018E-2025E) 44 2018-25E 12

36 12% 40 11 10 CAGR 53% (2015-2022E) 9 30 25 7 8% 8 5 5 20 6 4 7% 10 26 4 10 22 16 6 2 0 0.5 2018E 2022E 2025E 0 Investment division Core parts division Future tech division 2015 2017 2022E Source: Company, Daiwa Source: Company, Daiwa

Mobis: major action plans to achieve revenue and order target Mobis: pre-emptive cost management plans to maximise profits Internalize core tech Expand global OE sales Lead future strategy Internalising core Technology/cost Develop new revenue technology of competitiveness, global sources autonomous driving and production connectivity HW/SW integrated Expand customer and Expand investment in Directions platform/system product bases future technology/new business Pioneering future Establish stable revenue Expand investment and automotive industry, core based on core parts develop new revenue based on SW and expanded revenue core as a parent architecture source company In-house development Technology marketing to Global start-ups leading OEMs Action plans Open innovation Partnership with emerging Co-investment with OEMs group affiliates

Source: Company, Daiwa Source: Company, Daiwa

2Q18E earnings tracking Meanwhile, Mobis is scheduled to report its 2Q18E earnings in late July, and we now weaker believe it is likely to fall short of the Bloomberg consensus estimate.

We revise down our 2Q18E revenue and operating-profit forecasts by 6.1% and 30.3% to KRW8,824bn and KRW475bn, respectively. Our revisions reflect the following factors: 1) potential non-contractual pricing pressure from BHMC in conjunction with the rising influence of Beijing Motors, especially on the cost side, and 2) a slower-than-expected shipment recovery for HMG OEMs, with a 10.2% YoY rise in its 2Q18 shipments to 1,937k units. Our revised 2Q18E operating profit is 7.6% below the Bloomberg consensus forecast of KRW514bn.

Mobis: 2Q18 earnings preview 2Q18E-Daiwa 2Q18E-Bbg Diff(%) 2Q17 YoY(%) 1Q18 QoQ(%) USD/KRW (Avg) 1,076.0 1,130.3 (4.8) 1,072.3 0.3 Revenue 8,824 8,848 (0.3) 8,282 6.5 8,194 7.7 Module and Core parts 7,057 6,657 6.0 6,450 9.4 A/S Parts 1,767 1,625 8.7 1,744 1.3 Operating profit 475 514 (7.6) 492 (3.6) 450 5.6 OP margin(%) 5.4 5.8 5.9 5.5 Module and Core-parts 71 84 (15.8) 27 158.5 OP margin(%) 1.0 1.3 0.4 A/S Parts 404 409 (1.0) 423 (4.3) OP margin(%) 22.9 25.1 24.2 Recurring Profit 731 690 5.9 615 18.9 RP Margin (%) 8.3 8.3 7.5 Tax 190 208 149 Tax rate(%) 26.0 30.1 24.2 Net profit 541 606 (10.8) 482 12.2 466 16.1 NP margin(%) 6.1 6.8 5.8 5.7

Source: Bloomberg, Company, Daiwa forecasts

Pan-Asia Automobiles and Components: 4 July 2018

Valuation and recommendation Downgrading to We revise down our forecasts of Mobis’ 2018E and 2019E EPS by 25% and 18%, Outperform (2), with a respectively. Our revisions reflect the following factors: 1) the likely 2Q18E earnings miss, new 12-month TP of 2) reduced potential for HMG OEMs in China to lock in profits for its captive parts maker KRW235,000 amid tensions with Beijing Motors, 3) a downward revision to our 2018E equity-method income forecast to KRW889bn (previously KRW1,140bn) following on from the cut to our 2018E earnings for HMC, 4) and our assumption of higher-than-expected R&D expenses of KRW845bn for 2018E and KRW1,014bn for 2019E (vs. our prior estimates of KRW768bn and KRW945bn, respectively).

Mobis: major changes in our assumptions 2018E 2019E Previous Revised Chg (%) Previous Revised Chg (%) Revenue 37,831 35,526 (6.1) 40,052 37,326 (6.8) Module and Core parts 30,784 28,444 (7.6) 32,776 29,961 (8.6) A/S Parts 7,048 7,082 0.5 7,276 7,365 1.2 Operating profit 2,761 2,169 (21.5) 3,049 2,631 (13.7) OP margin (%) 7.3 6.1 7.6 7.0 Module and Core-parts 1,058 479 (54.7) 1,311 922 (29.7) OP margin (%) 3.4 1.7 4.0 3.1 A/S Parts 1,703 1,689 (0.8) 1,738 1,709 (1.7) OP margin (%) 24.2 23.9 23.9 23.2 Recurring Profit 4,039 3,017 (25.3) 4,382 3,593 (18.0) RP Margin (%) 10.7 8.5 10.9 9.6 Tax 1,040 763 (26.6) 1,139 934 (18.0) Tax rate (%) 25.8 25.3 26.0 26.0 Net profit 2,999 2,253 (24.9) 3,253 2,669 (17.9) NP margin (%) 7.9 6.3 8.1 7.2

Source: Daiwa forecasts

Although we expect Mobis to gain a stronger foothold in FCEVs upon its production ramp- up for key components, we look for HMC to benefit more than Mobis, as the former has proprietary technology, whereas the latter focuses mainly on assembly and production. Hence, we do not expect Mobis’ PER multiple expansion to bring the stock into line with the prevailing peer average of 11.3x for 2018E.

Nevertheless, our SOTP-based target price implies a PER multiple of 9.3x (up by 6.7% from our previous implied PER), on the average of our 2018-19E EPS. The upward revision in our implied PER multiple marks a 53% discount (Mobis has been trading at a 53% discount for the past-3-years vs. its global auto parts’ makers) to the average multiple expansion of 14.3% (excluding HMG restructuring issues in March 2018) seen following the launch of HMC’s Tucson FCEV in 2013 and Nexo FCEV in March 2018.

Mobis: SOTP valuation (KRWbn) EBITDA EV/EBITDA (x) Value A/S 890 6.0 5,296 Module 1,813 1.5 2,630 Core-parts 957 3.5 3,390 11,315 Affiliate holdings* 4,262 Total EV 15,577 Net debt (7,313) Net equity value 22,890 No of shares (m) 97 Value per share (KRW) 235,000

Source: Daiwa forecasts Note: 2018-19E average EBIDTA applied

Pan-Asia Automobiles and Components: 4 July 2018

Mobis: PER valuation gap vs. global auto parts makers (PER,x) 25 Mobis has been trading on a discount of 53.0% 40% vs. global peers since 2010 20 20% 0% 15 (20%) 10 (40%)

5 Currently Mobis is trading at a premium of 2.8% vs. (60%) global auto parts makerrs 0 (80%) Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jun-15 Jun-16 Jun-17 Jun-18 Feb-15 Feb-16 Feb-17 Feb-18 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 Premium/Discount (RHS) Global auto-parts Mobis

Source: Bloomberg, Daiwa

As such, we cut our 12-month TP to KRW235,000. Our new target PER of 9.3x compares with the stock’s past-3-year PER range of 7.4-11.5x. We downgrade our rating on Hyundai Mobis to Outperform (2) from Buy (1) as a result of the company’s relative weakness in FCEVs and the downward revisions to our 2018-19E EPS.

YTD laggard for various Hyundai Mobis shares have corrected by 22.1% YTD, likely due to: 1) the company’s reasons weaker-than-expected 1Q18E earnings, 2) market concerns about HMC’s prospects in China, given weaker-than-expected retail shipments in China for May and continued conflicts with its local partner, Beijing Motors, and 3) the cancellation of the planned Hyundai Mobis spin-off and Hyundai Glovis merger.

Nevertheless, we look for a resumption of the upward earnings-revision cycle from 2H18, as well as positive factors such as the Korean government potentially allocating KRW2.6tn to FCEV industry development by 2022E and stronger-than-expected shipments of HMC’s FCEV Nexo. Hence, we see a bottom-fishing opportunity in the shares.

We still expect Mobis to Furthermore, we expect HMG at some stage to restart the restructuring of the group’s become the de-facto shareholding structure in a bid to untangle the cross-holding structure. In this context, we holding company, and believe Mobis will have to become the de-facto holding company for the group, as the look for the company to current holding company act prohibits holding companies from having stakes in financial unlock value intermediaries and as key affiliates cannot make joint investments. Moves towards this end could be accretive for Mobis, as we look for the value of the entity to rise through a potentially more efficient use of its capital to improve shareholder value, through M&A into smart and eco-friendly car components as well as a higher dividend policy.

Key downside risk: larger-than-expected non-contractual pricing pressure from HMG OEMs Since 95% of Mobis’ revenue currently comes from Hyundai Motor Group OEMs, stronger- than-expected non-contractual pricing pressure from HMG is a key risk, in our view. A secondary risk would be a rapid appreciation of the KRW against the USD and Euro.

Pan-Asia Automobiles and Components: 4 July 2018

Japan Transportation equipment 4 July 2018 Japanese report: 4 July 2018

Toyota Motor (7203 JP)

Target price: JPY8,700 (from JPY8,700 as of 1 Jun) Outperform Share price (3 Jul): JPY7,075 | Up/downside: +23.0% (not reviewed)

Plans to boost FCV capacity; full-on electric in all areas Eiji Hakomori  Toyota Motor began selling world’s first FCV in 2014 81-3-5555-7072 [email protected]  Eyes on whether firm can slash production costs for next FCV model

 Aims for annual FCV sales of least 30,000 from 2020 Daiwa Securities Co. Ltd.

State of play for FCV: In 2014, Toyota Motor began selling the Mirai, the world’s Share Price Chart first commercially produced fuel cell vehicle (FCV). The selling price in Japan is just over JPY7.0m, but it can be bought for JPY4-5.0m using Japanese government subsidies. It takes roughly three minutes to fill the hydrogen fuel cells, which offer a range of around 650 km. The Mirai is sold in Japan, the US, and Europe, with annual sales of around 3,000 vehicles. Some 5,000 Mirai FCVs have been sold to date, with more than 3,000 sold in California. Toyota views FCVs as the ultimate eco cars in the long term. With this in mind, it looks to rev up the development of its FCV business from around 2020.

What's the impact: Toyota announced in May this year that it plans to bolster Source: Compiled by Daiwa. capacity for fuel cell stacks (core unit of FCV) and highly-compressed hydrogen Market data storage tanks. It aims to ramp up capacity by improving its FCV manufacturing technology, with the goal of lifting annual FCV sales from the current 3,000 vehicle 12-month range (JPY) 5,887-7,806 mark to around 30,000 from 2020. It looks to begin selling FCVs outside the four Market cap (JPY m; 3 Jul) 20,579,998 major metropolitan areas in Japan as well as regions outside the US and Europe Shares outstanding (000; 7/18) 2,908,834 overseas. Toyota has stated that it plans to beef up its lineup of FCVs. According to Foreign ownership (%; 3/18) 22.0 news reports, it aims to halve the fuel cell system production costs for its next FCV model, which is slated for release around 2020. Should it succeed, we could see a Investment Indicators dramatic drop in FCV selling prices. 3/18 3/19 E 3/20 E

There are only around 100 hydrogen refueling stations in Japan and a scant 31 in P/E (X) 8.4 8.7 8.1 California, meaning there are still many areas that lack the infrastructure to service EV/EBITDA (X) 8.3 8.2 7.8 FCVs. That said, recent developments show that the picture is changing. In Japan, P/B (X) 1.10 1.01 0.92 hydrogen is being used more widely in fuel-cell-powered buses and forklifts. Dividend yield (%) 3.11 3.39 3.67 Hydrogen use will also likely receive a boost from Toyota’s joint project with Seven- ROE (%) 13.8 12.0 11.9 Eleven, Japan’s largest convenience store chain, to cut CO2 emissions. The first Net debt/equity (X) 0.7 0.7 0.6 stage of this project is to kick off in 2019, with the convenience store operator introducing fuel cell-powered delivery trucks on a trial basis. In California, the firm Income Summary

plans to team up with Shell and Honda to boost the number of hydrogen refueling stations and build up the state’s hydrogen supply infrastructure. (SEC; JPY m) 3/18 3/19 E 3/20 E Sales 29,379,510 29,500,000 30,300,000 What we recommend: We have an Outperform (2) rating on the stock with a 12- Op profit 2,399,862 2,600,000 2,710,000 month TP of JPY8,700. There are a number of positives that set Toyota apart from Pretax income 2,620,429 2,700,000 2,900,000 other automakers in terms of environmental technology, in our view. One area is compliance with regulations to improve average fuel economy, where Toyota holds Net income 2,493,983 2,330,000 2,500,000 a competitive edge over its peers, with its sales of hybrid-electric vehicles (HEVs) EPS (JPY) 842.0 811.8 871.3 DPS (JPY) 220.00 240.00 260.00 playing a role. While new cars sold in the European market average 118 g/km of CO2 emissions, Toyota brand vehicles release an even lower 101 g/km. Another Source: Company, Bloomberg, Daiwa forecasts area where Toyota deserves credit is in its push to release electric vehicles (EVs) See end of report for notes concerning indicators. equipped with all-solid-state batteries by the early 2020s. This ambitious drive Note: Per-share figures based on common shares outstanding. stands out given the similarities many automakers’ EV strategies share. The third area in which Toyota has impressed us is the FCV sphere. The technological hurdle for FCVs is higher than that for EVs, making it difficult to enter this space. Toyota is taking the lead on this front with the Mirai, the first commercially produced FCV. It is one of the few firms pushing to apply electrically-driven vehicle technology in all areas at high dimensions.

Given the firm’s abundant cash, we expect it to return around JPY550.0bn (just over JPY190 per share) to shareholders through share buybacks in FY18, roughly equal to the amount for FY17. This, combined with our dividend forecast of JPY240 per share, would bring total shareholder payouts to over JPY430 per share. We set our TP at JPY8,700, applying a payout yield of c.5% to this figure (JPY430).

Important disclosures, including any required research certifications, are provided on the last two pages of this report.

Toyota Motor (7203): 4 July 2018

Toyota Motor (7203): Income Summary (SEC; JPY m; y/y %)

Year to Sales Op profit Pretax income Net income EPS (Y) DPS (Y) 3/16 28,403,118 (4) 2,853,971 (4) 2,983,381 (3) 2,312,694 (6) 741.4 210.00 3/17 27,597,193 (-3) 1,994,372 (-30) 2,193,825 (-26) 1,831,109 (-21) 605.5 210.00 3/18 29,379,510 (6) 2,399,862 (20) 2,620,429 (19) 2,493,983 (36) 842.0 220.00 3/19 E 29,500,000 (0) 2,600,000 (8) 2,700,000 (3) 2,330,000 (-7) 811.8 240.00 3/20 E 30,300,000 (3) 2,710,000 (4) 2,900,000 (7) 2,500,000 (7) 871.3 260.00 3/19 CP 29,000,000 (-1) 2,300,000 (-4) 2,450,000 (-7) 2,120,000 (-15) 723.4 - E: Daiwa estimates. CP: Company projections.

Notes: 1) Our EPS estimates reflect share buyback program announced on 9 May (up to 55m shares or Y300bn). 2) Per-share figures based on common shares outstanding.

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Toyota Motor (7203): 4 July 2018

Chart 1: Earnings (JPY bn) FY14 15 16 17 18 E 19 E % sales Y/y % % sales Y/y % % sales Y/y % % sales Y/y % % sales Y/y % % sales Y/y % Sales 27,234.5 100.0 6.0 28,403.1 100.0 4.3 27,597.2 100.0 -2.8 29,379.5 100.0 6.5 29,500.0 100.0 0.4 30,300.0 100.0 2.7 Japan 14,403.9 52.9 0.7 14,759.5 52.0 2.5 14,830.9 53.7 0.5 16,024.8 54.5 8.1 16,100.0 54.6 0.5 16,500.0 54.5 2.5 North America 9,677.6 35.5 19.2 11,052.0 38.9 14.2 10,239.1 37.1 -7.4 10,574.4 36.0 3.3 10,750.0 36.4 1.7 10,850.0 35.8 0.9 Europe 2,848.3 10.5 4.5 2,661.3 9.4 -6.6 2,681.0 9.7 0.7 3,185.2 10.8 18.8 3,180.0 10.8 -0.2 3,270.0 10.8 2.8 Asia (excl. Japan) 4,981.2 18.3 2.1 5,003.9 17.6 0.5 4,819.8 17.5 -3.7 5,148.1 17.5 6.8 5,250.0 17.8 2.0 5,520.0 18.2 5.1 Other 2,449.2 9.0 4.8 2,210.2 7.8 -9.8 2,161.1 7.8 -2.2 2,453.3 8.4 13.5 2,410.0 8.2 -1.8 2,480.0 8.2 2.9 Eliminations -7,125.7 -26.2 -7,283.7 -25.6 -7,134.7 -25.9 -8,006.4 -27.3 -8,190.0 -27.8 -8,320.0 -27.5 Automotive 25,062.1 92.0 5.4 25,977.4 91.5 3.7 25,081.8 90.9 -3.4 26,397.9 89.9 5.2 26,400.0 89.5 0.0 27,060.0 89.3 2.5 Financial services 1,661.1 6.1 16.9 1,896.2 6.7 14.2 1,823.6 6.6 -3.8 2,017.0 6.9 10.6 2,120.0 7.2 5.1 2,240.0 7.4 5.7 Other 1,255.8 4.6 9.1 1,177.4 4.1 -6.2 1,321.1 4.8 12.2 1,646.1 5.6 24.6 1,670.0 5.7 1.5 1,700.0 5.6 1.8 Eliminations -744.5 -2.7 -647.9 -2.3 -629.3 -2.3 -681.6 -2.3 -690.0 -2.3 -700.0 -2.3 COGS 20,916.4 76.8 4.6 21,456.1 75.5 2.6 21,543.0 78.1 0.4 22,600.5 76.9 4.9 22,480.0 76.2 -0.5 23,040.0 76.0 2.5 Financial expenses 925.3 3.4 13.8 1,149.4 4.0 24.2 1,191.3 4.3 3.6 1,288.7 4.4 8.2 1,320.0 4.5 2.4 1,370.0 4.5 3.8 SG&A 2,642.3 9.7 1.7 2,943.7 10.4 11.4 2,868.5 10.4 -2.6 3,090.5 10.5 7.7 3,100.0 10.5 0.3 3,180.0 10.5 2.6 Operating profit 2,750.6 10.1 20.0 2,854.0 10.0 3.8 1,994.4 7.2 -30.1 2,399.9 8.2 20.3 2,600.0 8.8 8.3 2,710.0 8.9 4.2 Japan 1,571.5 10.9 4.1 1,677.5 11.4 6.7 1,202.2 8.1 -28.3 1,659.9 10.4 38.1 1,770.0 11.0 6.6 1,812.0 11.0 2.4 North America 584.5 6.0 79.3 528.8 4.8 -9.5 311.2 3.0 -41.2 138.9 1.3 -55.4 210.0 2.0 51.2 230.0 2.1 9.5 Europe 81.1 2.8 39.3 72.4 2.7 -10.7 -12.2 -0.5 Loss 75.0 2.4 Profit 65.0 2.0 -13.4 70.0 2.1 7.7 Asia (excl. Japan) 421.8 8.5 6.6 449.2 9.0 6.5 435.2 9.0 -3.1 433.2 8.4 -0.5 450.0 8.6 3.9 490.0 8.9 8.9 Other 111.5 4.6 162.0 108.9 4.9 -2.3 58.7 2.7 -46.1 112.7 4.6 91.9 105.0 4.4 -6.8 108.0 4.4 2.9 Eliminations -19.8 17.1 -0.7 -19.8 0.0 0.0 Automotive 2,325.3 9.3 19.9 2,449.0 9.4 5.3 1,693.0 6.7 -30.9 2,011.1 7.6 18.8 2,218.0 8.4 10.3 2,330.0 8.6 5.0 Financial services 361.8 21.8 22.7 339.2 17.9 -6.2 222.4 12.2 -34.4 285.5 14.2 28.4 280.0 13.2 -1.9 275.0 12.3 -1.8 Other 65.7 5.2 2.1 66.5 5.6 1.3 81.3 6.2 22.3 100.8 6.1 24.0 102.0 6.1 1.2 105.0 6.2 2.9 Eliminations -2.2 0.3 -0.8 0.1 -2.4 0.4 2.4 -0.3 0.0 0.0 0.0 0.0 Net non-operating income 142.3 129.4 199.5 220.6 100.0 190.0 Interest and dividend income 147.1 157.9 159.0 179.5 180.0 180.0 Interest expenses -22.9 -35.4 -29.4 -27.6 -30.0 -30.0 Other 18.0 7.0 69.8 68.6 -50.0 40.0 Pretax income 2,892.8 10.6 18.5 2,983.4 10.5 3.1 2,193.8 7.9 -26.5 2,620.4 8.9 19.4 2,700.0 9.2 3.0 2,900.0 9.6 7.4 Income taxes 893.5 878.3 628.9 504.4 732.0 782.0 Noncontrolling interests -134.6 -121.5 -95.9 -92.1 -98.0 -98.0 Equity-method income 308.5 329.1 362.1 470.1 460.0 480.0 Net income (a) 2,173.3 8.0 19.2 2,312.7 8.1 6.4 1,831.1 6.6 -20.8 2,494.0 8.5 36.2 2,330.0 7.9 -6.6 2,500.0 8.3 7.3 Depreciation (b) 1,409.1 5.2 1,625.8 5.7 1,611.0 5.8 1,734.0 5.9 1,600.0 5.4 1,630.0 5.4 Capex (c) 1,177.4 4.3 1,292.5 4.6 1,211.8 4.4 1,302.7 4.4 1,370.0 4.6 1,350.0 4.5 R&D 1,004.5 3.7 1,055.6 3.7 1,037.5 3.8 1,064.2 3.6 1,080.0 3.7 1,100.0 3.6 Simplified cash flow (a + b) 3,582.4 13.2 3,938.5 13.9 3,442.1 12.5 4,228.0 14.4 3,930.0 13.3 4,130.0 13.6 Simplified free cash flow (a + b – c) 2,405.0 2,646.0 2,230.3 2,925.3 2,560.0 2,780.0 Source: Company materials; compiled by Daiwa. Note: Figures in chart may differ from text due to rounding. E: Daiwa estimates.

Chart 2: Sales Volume and Production Volume (000 vehicles) FY14 15 16 17 18 E 19 E % total Y/y % % total Y/y % % total Y/y % % total Y/y % % total Y/y % % total Y/y % Sales volume 8,972 -1.6 8,681 -3.2 8,971 3.3 8,964 -0.1 9,000 0.4 9,160 1.8 Japan 2,154 24 -9.0 2,059 24 -4.4 2,274 25 10.4 2,255 25 -0.8 2,210 25 -2.0 2,235 24 1.1 North America 2,715 30 7.3 2,839 33 4.6 2,837 32 -0.1 2,806 31 -1.1 2,800 31 -0.2 2,800 31 0.0 Europe 859 10 1.8 844 10 -1.7 925 10 9.5 968 11 4.6 962 11 -0.6 992 11 3.1 Asia (excl. Japan) 1,489 17 -7.4 1,345 15 -9.7 1,588 18 18.1 1,543 17 -2.8 1,620 18 5.0 1,690 18 4.3 Central/South America 422 5 2.2 392 5 -7.1 409 5 4.3 445 5 8.8 470 5 5.6 490 5 4.3 Oceania 250 3 -3.5 260 3 4.0 260 3 0.0 283 3 8.8 285 3 0.7 290 3 1.8 Other 1,083 12 -1.3 942 11 -13.0 678 8 -28.0 664 7 -2.1 653 7 -1.7 663 7 1.5 Global production volume 10,211 -0.2 10,043 -1.6 10,402 3.6 10,418 0.2 10,485 0.6 10,723 2.3 Toyota Motor 8,948 0.0 8,931 -0.2 9,080 1.7 8,923 -1.7 9,060 1.5 9,280 2.4 Daihatsu Motor 1,079 -2.7 939 -13.0 1,140 21.5 1,294 13.5 1,225 -5.3 1,233 0.7 Hino Motors 183 1.3 174 -5.1 183 5.3 201 10.0 200 -0.5 210 5.0 Japan 4,125 40 -5.1 3,981 40 -3.5 4,109 40 3.2 4,286 41 4.3 4,228 40 -1.3 4,273 40 1.1 Toyota Motor 3,185 -5.7 3,172 -0.4 3,188 0.5 3,199 0.3 3,200 0.0 3,250 1.6 Daihatsu Motor 777 -3.8 661 -15.0 773 16.9 928 20.1 875 -5.7 863 -1.4 Hino Motors 162 1.8 148 -9.0 148 0.2 159 7.2 153 -3.5 160 4.6 Overseas 6,085 60 3.3 6,062 60 -0.4 6,293 60 3.8 6,132 59 -2.6 6,257 60 2.0 6,450 60 3.1 Toyota Motor 5,763 3.5 5,759 -0.1 5,892 2.3 5,725 -2.8 5,860 2.4 6,030 2.9 Daihatsu Motor 302 0.1 277 -8.1 367 32.3 365 -0.5 350 -4.2 370 5.7 Hino Motors 21 -2.8 26 25.9 35 34.2 42 22.3 47 10.7 50 6.4 North America 2,024 20 8.9 2,048 20 1.2 2,078 20 1.5 1,903 18 -8.4 1,890 18 -0.7 1,890 18 0.0 Europe 638 6 10.7 657 7 2.9 727 7 10.7 773 7 6.4 751 7 -2.8 781 7 4.0 Asia (excl. Japan) 2,933 29 -1.2 2,861 28 -2.4 2,951 28 3.1 2,918 28 -1.1 3,135 30 7.4 3,285 31 4.8 Central/South America 267 3 10.3 255 3 -4.5 282 3 10.6 333 3 18.1 340 3 2.1 353 3 3.8 Oceania 88 1 -14.6 95 1 8.0 88 1 -7.4 43 0 -51.1 0 0 -100.0 0 0 - Other 136 1 -5.1 147 1 7.9 168 2 14.5 163 2 -3.1 141 1 -13.3 141 1 0.0 Exports 1,784 -3.8 1,759 -1.4 1,726 -1.9 1,882 9.0 1,890 0.4 1,910 1.1 North America 721 40 0.1 772 44 7.1 706 41 -8.5 796 42 12.7 810 43 1.8 810 42 0.0 Europe 250 14 -5.3 207 12 -17.2 264 15 27.5 248 13 -6.1 260 14 4.8 260 14 0.0 Asia (excl. Japan) 208 12 0.5 225 13 8.2 267 15 18.7 323 17 21.0 300 16 -7.1 300 16 0.0 Other 605 34 -8.7 555 32 -8.3 489 28 -11.9 515 27 5.3 520 28 1.0 540 28 3.8 Source: Company materials; compiled by Daiwa. Note: Figures in chart may differ from text due to rounding. E: Daiwa estimates.

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Toyota Motor (7203): 4 July 2018

Chart 3: Balance Sheet (JPY bn) FY14 15 16 17 18 E 19 E Total assets 47,729.8 47,427.6 48,750.2 50,308.2 51,696.8 54,060.6 Current assets 17,936.4 18,209.6 17,833.7 18,152.7 18,687.0 20,166.7 Cash and cash equivalents 5,216.0 5,482.9 5,899.3 5,721.9 5,912.6 6,885.0 Accounts receivable 2,108.7 2,000.1 2,115.9 2,219.6 2,228.7 2,289.1 Finance receivables (net) 6,269.9 5,912.7 6,196.6 6,348.3 6,672.5 7,050.1 Inventories 2,137.6 2,061.5 2,388.6 2,539.8 2,550.2 2,619.4 Other 2,204.3 2,752.4 1,233.2 1,323.1 1,323.1 1,323.1 Noncurrent finance receivables (net) 9,202.5 8,642.9 9,012.2 9,481.6 9,965.8 10,529.9 Investments and other assets 11,295.2 10,834.7 11,707.2 12,406.3 12,406.3 12,406.3 Tangible fixed assets 9,295.7 9,740.4 10,197.1 10,267.7 10,637.7 10,957.7 Liabilities 30,082.5 29,339.4 30,081.2 30,386.2 30,807.9 31,301.2 Current liabilities 16,431.5 16,124.5 17,319.0 17,796.9 16,825.0 17,118.3 Short-term borrowings 8,963.5 8,521.1 9,244.1 9,341.2 8,358.7 8,581.6 Accounts payable 2,410.6 2,389.5 2,566.4 2,586.7 2,597.3 2,667.7 Other 5,057.4 5,213.9 5,508.5 5,869.0 5,869.0 5,869.0 Long-term liabilities 13,651.0 13,215.0 12,762.3 12,589.3 13,982.9 14,182.9 Long-term borrowings 10,014.4 9,772.1 9,911.6 10,006.4 11,400.0 11,600.0 Other 3,636.6 3,442.9 2,850.7 2,582.9 2,582.9 2,582.9 Noncontrolling interests 859.2 861.5 668.3 694.1 792.1 890.1 Shareholders’ equity 16,788.1 16,746.9 17,514.8 18,736.0 20,096.7 21,869.2 Book value per share (JPY) 5,335.0 5,513.1 5,887.9 6,438.7 7,039.3 7,660.2 Automotive Total assets 26,259.4 26,651.1 27,242.0 28,363.2 28,960.9 30,386.8 Current assets 10,147.1 11,020.1 10,265.0 10,599.8 10,827.5 11,933.4 Cash and cash equivalents 3,932.6 3,528.6 3,697.0 3,937.0 4,145.2 5,121.4 Accounts receivable 2,179.0 2,089.2 2,191.6 2,304.7 2,313.8 2,374.2 Inventories 2,137.0 2,061.1 2,388.4 2,539.5 2,549.9 2,619.1 Other 1,898.6 3,341.2 1,988.0 1,818.7 1,818.7 1,818.7 Investments and other assets 10,765.7 10,204.8 11,276.1 11,861.4 11,861.4 11,861.4 Tangible fixed assets 5,346.6 5,426.2 5,700.8 5,902.0 6,272.0 6,592.0 Liabilities 10,704.8 10,728.8 10,847.7 11,158.3 10,522.9 10,306.3 Current liabilities 7,400.2 7,562.2 8,160.2 8,486.7 8,243.9 8,027.3 Short-term debt and long-term debt due within one year 684.1 704.2 866.2 722.0 480.0 200.0 Accounts payable 2,372.4 2,356.4 2,540.1 2,556.4 2,555.6 2,619.0 Other 4,343.8 4,501.6 4,754.0 5,208.3 5,208.3 5,208.3 Long-term liabilities 3,304.6 3,166.7 2,687.5 2,671.7 2,279.0 2,279.0 Long-term borrowings 564.7 584.8 590.4 642.7 250.0 250.0 Other 2,739.8 2,581.9 2,097.1 2,029.0 2,029.0 2,029.0 cf. Total liquid assets (net) for automobile ops 7,259.4 7,940.9 7,743.0 8,007.4 8,850.3 10,106.5 Source: Company materials; compiled by Daiwa. Note: Figures in chart may differ from text due to rounding. E: Daiwa estimates.

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Toyota Motor (7203): 4 July 2018

Chart 4: Financial Data FY14 15 16 17 18 E 19 E Asset/ ROA (%) 4.9 4.9 3.8 5.0 4.6 4.7 capital Automotive ROA (estimated) 7.8 7.9 6.3 7.1 7.3 7.7 efficiency ROE (%) 13.9 13.8 10.7 13.8 12.0 11.9 Automotive ROE (estimated) 13.4 13.3 10.4 11.8 11.8 11.9 Net income margin 7.6 7.9 6.5 7.2 7.7 8.1 Total asset turnover (X) 1.0 1.0 1.0 1.0 1.0 0.9 Financial leverage (X) 1.7 1.7 1.7 1.7 1.6 1.6 Financial services ROE (estimated) 12.2 10.3 6.6 20.8 8.0 7.5 ROIC (%) 6.5 6.5 5.1 6.7 6.0 6.1 Automotive ROIC 12.3 12.3 9.6 10.8 11.2 11.5 ROCE (%) 8.3 8.1 5.6 6.4 6.7 6.6 Automotive ROCE 15.2 14.8 10.1 11.6 12.3 12.4 Op profit margin 9.3 9.5 6.9 7.7 8.5 8.7 Sales / capital employed (X) 1.6 1.6 1.5 1.5 1.5 1.4 Working capital / avg. monthly sales 0.8 0.7 0.8 0.8 0.9 0.9 Inventory / avg. monthly sales 0.9 0.9 1.0 1.0 1.0 1.0 Accounts receivable / avg. monthly sales 0.9 0.9 0.9 0.9 0.9 0.9 Accounts payable / avg. monthly sales 1.0 1.0 1.1 1.1 1.1 1.0 Safety/ Interest-bearing debt 18,977.9 18,293.2 19,155.7 19,347.6 19,758.7 20,181.6 efficiency Automotive 1,248.8 1,289.0 1,456.5 1,364.7 730.0 450.0 Net interest-bearing debt 13,761.9 12,810.3 13,256.4 13,625.7 13,846.2 13,296.6 Automotive -2,683.8 -2,239.6 -2,240.5 -2,572.3 -3,415.2 -4,671.4 Total liquid assets (net) for automobile ops 7,259.4 7,940.9 7,743.0 8,007.4 8,850.3 10,106.5 Equity / assets (%) 35 35 36 37 39 40 Automotive 59 60 60 61 63 65 Net debt / equity (%) 82 76 76 73 69 61 Automotive -17 -14 -14 -15 -19 -23 Current assets / current liabilities (%) 109 113 103 102 111 118 Automotive 137 146 126 125 131 149 Fixed assets / shareholders' equity (%) 123 123 125 121 115 107 Automotive 104 98 104 103 99 93 Fixed assets / (long-term liabilities + shareholders' equity; %) 68 69 72 72 68 65 Automotive 85 82 89 89 88 83 Interest coverage ratio (X) 126.7 85.1 73.4 93.5 92.7 96.3 Source: Company materials; compiled by Daiwa. Note: ROIC = net income / total assets = net income / (interest-bearing debt + shareholders’ equity). ROCE = op profit / total assets = op profit / (interest-bearing debt + shareholders’ equity) = (op profit / sales) × (sales / [interest-bearing debt + shareholders’ equity]). E: Daiwa estimates.

Chart 5: Cash Flow Statement (JPY bn) FY14 15 16 17 18 E 19 E Cash flows from operating activities 3,685.8 4,460.9 3,414.2 4,210.0 3,743.0 3,943.0 Automotive 2,878.3 3,268.3 2,564.3 2,917.9 2,892.7 3,044.3 Net income 2,071.2 2,210.5 1,774.7 2,064.6 2,104.4 2,272.0 Depreciation 844.5 927.8 939.8 1,011.0 1,046.6 1,076.6 Increase (decrease) in working capital (estimated) -126.8 149.7 -245.9 -247.9 -20.3 -66.3 Other 89.5 -19.7 95.8 90.2 -238.0 -238.0 Financial services 777.8 1,241.1 1,028.2 1,315.8 850.2 898.6 Inter-segment eliminations -29.6 48.6 178.3 23.7 0.0 0.0 Cash flows from investing activities -3,813.5 -3,182.5 -2,969.9 -3,660.1 -2,178.3 -2,291.8 Automotive -1,636.1 -1,521.4 -1,288.5 -1,549.9 -1,355.7 -1,335.7 Investments -1,093.1 -1,224.0 -1,166.5 -1,206.0 -1,355.7 -1,335.7 Other -543.0 -297.4 -121.9 -343.9 0.0 0.0 Financial services -2,167.9 -1,721.1 -1,910.5 -2,178.0 -822.6 -956.1 Inter-segment eliminations 9.5 -60.0 -229.0 -67.8 0.0 0.0 Cash flows from financing activities 306.0 -423.6 -375.2 -449.1 -464.1 -510.6 Automotive -1,000.2 -967.4 -1,325.7 -1,218.4 205.6 211.4 Increase (decrease) in short-term debt -47.0 76.0 51.5 -122.2 272.5 585.0 Increase (decrease) in long-term debt 18.8 38.9 28.9 42.3 -67.0 -373.6 Dividends paid -624.2 -779.1 -702.1 -690.7 -675.3 -733.5 Other -347.8 -303.3 -704.0 -447.8 675.3 733.5 Financial services 1,326.4 555.3 1,001.2 813.3 -669.7 -722.1 Inter-segment eliminations 20.1 11.4 50.7 44.1 0.0 0.0 Effect of exchange rate changes on cash & cash equivalents 65.1 -199.9 -13.5 -43.6 0.0 0.0 Free cash flow -127.7 1,278.3 444.3 549.9 1,564.7 1,651.2 Automotive free cash flow 1,242.3 1,746.9 1,275.9 1,368.0 1,537.1 1,708.7 Source: Company materials; compiled by Daiwa. Note: Figures in chart may differ from text due to rounding. E: Daiwa estimates.

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Toyota Motor (7203): 4 July 2018

Financial Statements

(JPY m) 3/15 3/16 3/17 3/18 3/19 E 3/20 E Income statement Sales / Revenue 27,234,521 28,403,118 27,597,193 29,379,510 29,500,000 30,300,000 Operating profit 2,750,564 2,853,971 1,994,372 2,399,862 2,600,000 2,710,000 EBITDA 4,159,639 4,479,808 3,605,322 4,133,895 4,200,000 4,340,000 Pretax income 2,892,828 2,983,381 2,193,825 2,620,429 2,700,000 2,900,000 Net income 2,173,338 2,312,694 1,831,109 2,493,983 2,330,000 2,500,000 Balance sheet Liquidity on hand 5,215,977 5,482,851 5,899,327 5,721,873 5,912,559 6,884,981 Fixed assets / Non-current assets 29,793,433 29,218,044 30,916,491 32,155,593 33,009,741 33,893,841 Total assets 47,729,830 47,427,597 48,750,186 50,308,249 51,696,757 54,060,563 Interest-bearing debt 18,977,887 18,293,153 19,155,727 19,347,564 19,758,721 20,181,573 Total liabilities 30,082,501 29,339,411 30,081,233 30,386,173 30,807,938 31,301,225 Total net assets / Total equity 17,647,329 18,088,186 18,668,953 19,922,076 20,888,819 22,759,338 Shareholders' equity 16,788,131 16,746,935 17,514,812 18,735,982 20,096,699 21,869,218 Cash flow statement Cash flows from operating activities 3,685,753 4,460,857 3,414,237 4,210,009 3,742,955 3,942,955 Net income 2,173,338 2,312,694 1,831,109 2,493,983 2,330,000 2,500,000 Depreciation and amortization 1,409,075 1,625,837 1,610,950 1,734,033 1,600,000 1,630,000 Cash flows from investing activities -3,813,490 -3,182,544 -2,969,939 -3,660,092 -2,178,304 -2,291,786 Free cash flow -127,737 1,278,313 444,298 549,917 1,564,651 1,651,169 Cash flows from financing activities 306,045 -423,571 -375,165 -449,135 -464,126 -510,629 Increase (decrease) in cash and cash equivalents 243,387 654,871 55,647 57,194 1,100,525 1,140,540

Accounting standards SEC SEC SEC SEC SEC SEC

Financial indicators Growth Sales / Revenue (y/y %) 6.0 4.3 -2.8 6.5 0.4 2.7 Operating profit (y/y %) 20.0 3.8 -30.1 20.3 8.3 4.2 Profitability Operating profit margin (%) 10.1 10.0 7.2 8.2 8.8 8.9 EBITDA margin (%) 15.3 15.8 13.1 14.1 14.2 14.3 ROE (%) 13.9 13.8 10.7 13.8 12.0 11.9 ROA (%) 4.9 4.9 3.8 5.0 4.6 4.7 Financial leverage/dividend policy Net debt-to-equity ratio (X) 0.8 0.8 0.8 0.7 0.7 0.6 Equity-to-assets ratio (%) 35.2 35.3 35.9 37.2 38.9 40.5 Total dividends / shareholders' equity (%) 3.7 3.8 3.6 3.4 3.4 3.4 Dividend payout ratio (%) 29.1 28.3 34.7 26.1 29.6 29.8 Per-share data EPS (Y) 688.0 741.4 605.5 842.0 811.8 871.3 DPS (Y) 200.00 210.00 210.00 220.00 240.00 260.00 Book value per share (Y) 5,335.0 5,513.1 5,887.9 6,438.7 7,039.3 7,660.2 Valuations Share price: JPY7,075; market cap: JPY20,579,998m (3 Jul 2018) P/E (X) 10.3 9.5 11.7 8.4 8.7 8.1 EV/EBITDA (X) 8.3 7.5 9.4 8.3 8.2 7.8 P/B (X) 1.33 1.28 1.20 1.10 1.01 0.92 Dividend yield (%) 2.83 2.97 2.97 3.11 3.39 3.67

Source: Company materials; compiled by Daiwa. Note: Figures in chart may differ from text due to rounding. E: Daiwa estimates.

Company Outline

Toyota is one of the world’s largest automakers. With strengths in next-generation technology, it has a significant edge vs. peers in hybrid vehicles, as highlighted by its launch of the world’s first hydrogen fuel cell vehicle at end-2014. The firm commands the highest market share in both Japan and the ASEAN region, as well as a high market share in the US. It sells vehicles under the Toyota and luxury Lexus brands, and the Toyota group includes subsidiaries Daihatsu Motor and Hino Motors.

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Korea Consumer Discretionary 4 July 2018

(018880 KS) Hanon Systems Hanon Systems

Target price: KRW16,000 (from KRW13,000) Share price (3 Jul): KRW10,350 | Up/downside: +54.6%

Competitive edge in thermal energy management

 Pioneer in thermal energy management (TEM) and crucial for FCEVs Sung Yop Chung (82) 2 787 9157  A key beneficiary of HMG’s eco-friendly model expansion by 2025E [email protected]  Reiterating our Buy (1) rating; raising our TP to KRW16,000

What's new: Following our upward revision to 2030E global FCEV Forecast revisions (%) shipments and Hyundai Motor Group (HMG) OEMs’ stronger growth Year to 31 Dec 18E 19E 20E trajectory for eco-friendly cars, we are more optimistic on Hanon Systems’ Revenue change 0.9 1.2 - Net profit change 2.2 4.2 - (HS) long-term earnings growth trajectory and expect HS’ multiple Core EPS (FD) change 2.2 4.2 - expansion plans to become more apparent over 2018-20. Source: Daiwa forecasts

What's the impact: Competitive edge in TEM for eco-friendly cars is Share price performance long-term earnings accretive. We forecast HS to record a revenue CAGR (KRW) (%) of 28.5% from eco-friendly products over 2017-20E, driven by: 1) our 15,000 130 upward revision in global eco-friendly car shipment forecast to 31.3m units 13,500 120 by 2030, from 3.3m units in 2017, with faster penetration of FCEVs, 2) HS’ 12,000 110 10,500 100

TEM system-based content per vehicle of USD800-1,500 for HEVs, 9,000 90 USD1,500-2,000 for EVs, and USD2,500 for FCEVs, and 3) a rise in EV Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 compressor shipments to 1.5m units by 2020E from 600,000 units in 2017. Hanon Syst (LHS) Relative to KOSPI (RHS) We expect this revenue growth to lead to revenue contributions from eco- friendly products rising to 10.6% by 2020 and project HS’ OPM from eco- 12-month range 9,970-14,550 friendly products to expand by 3.8pp to 5% by 2020 from 1.2% in 2017. Market cap (USDbn) 4.93 3m avg daily turnover (USDm) 9.86 2Q18 earnings likely to miss consensus, but 2H18E to be stronger. Shares outstanding (m) 534 Major shareholder Hahn & Co Auto Holdings (50.5%) We continue to expect HS’ 2Q18 operating profit to fall short of the current consensus estimate by 18.4% (see our 22 June Flash). But we expect its Financial summary (KRW) 2H18 earnings growth to accelerate to 54% HoH to KRW292bn, led by: 1) Year to 31 Dec 18E 19E 20E a rise in HS’ content per vehicle and shipments for 2H18, following the Revenue (bn) 6,145 6,706 7,145 introduction of new powertrains by global OEMs to comply with the Operating profit (bn) 482 564 638 introduction of the Worldwide Harmonized Light Vehicle Test Procedure Net profit (bn) 323 411 486 Core EPS (fully-diluted) 605 771 911 (WLTP) from September 2018 in the EU, China, India and Korea, and 2) EPS change (%) 11.9 27.4 18.3 stronger shipment growth of Hyundai Motor Group’s OEMs in China. Daiwa vs Cons. EPS (%) (2.5) 9.3 21.8 PER (x) 17.1 13.4 11.4 What we recommend: After factoring in our higher assumptions for HS’ Dividend yield (%) 3.4 3.8 3.8 DPS 350 390 390 operating profit from eco-friendly cars (up by 4.3% and 11.8% to KRW7.3bn PBR (x) 2.7 2.6 2.5 and KRW19.0bn for 2018E and 2019E, respectively), we lift our 2018-19E EV/EBITDA (x) 7.8 6.3 5.3 EPS by 2-4%. We also raise our target PER by 19.5% to 23.3x (from ROE (%) 15.9 20.0 22.6 19.5x), in tandem with the average multiple expansion of 19.5% seen after Source: FactSet, Daiwa forecasts the launch of HMC’s (005380 KS, KRW122,000, Buy [1]) Tucson FCEV in 2015 and Nexo FCEV in March 2018. In turn, we raise our 12-month TP to KRW16,000 (from KRW13,000) and reiterate our Buy (1) call. Although we believe HS’ shares could remain under pressure until the 2Q18 results with a slew of downward earnings revisions by the street, we would recommend bottom-fishing ahead of a likely HoH rise in 2H18E earnings. Key downside risk: steeper-than-expected non-contractual pricing pressure.

How we differ: Our 2019-20E EPS are 9-22% above the consensus, which we attribute to our more positive view on HS’s mix improvement from eco- friendly products.

See important disclosures, including any required research certifications, beginning on page 88

Hanon Systems (018880 KS): 4 July 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Korea Revenue (KRW bn) 2,349.4 2,342.7 2,273.9 2,227.1 2,291.9 2,387.8 2,506.8 2,607.1 China Revenue (KRW bn) 1,050.5 1,104.5 1,135.9 1,090.6 999.6 1,211.1 1,315.3 1,427.3 North America Revenue (KRW bn) 886.7 850.7 973.8 1,051.1 1,081.5 1,043.8 1,145.2 1,225.4 Europe Revenue (KRW bn) 1,985.7 2,279.6 2,371.7 2,496.9 2,605.5 2,798.4 2,862.8 2,933.5 Others (KRW bn) 645.5 622.9 603.7 673.1 705.4 749.6 802.1 858.2 Internal adj. (KRW bn) (1,728.5) (1,745.3) (1,801.0) (1,835.2) (2,098.1) (2,045.5) (1,926.2) (1,906.9)

Profit and loss (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Korea 2,349 2,343 2,274 2,227 2,292 2,388 2,507 2,607 China 1,051 1,104 1,136 1,091 1,000 1,211 1,315 1,427 Other Revenue 1,789 2,008 2,148 2,386 2,294 2,546 2,884 3,110 Total Revenue 5,189 5,455 5,558 5,704 5,586 6,145 6,706 7,145 Other income 0 0 0 0 0 0 0 0 COGS (4,326) (4,546) (4,697) (4,805) (4,639) (5,105) (5,614) (6,054) SG&A (500) (538) (502) (476) (478) (558) (528) (452) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 364 370 360 423 468 482 564 638 Net-interest inc./(exp.) (3) (8) (6) (15) (11) (11) (11) (12) Assoc/forex/extraord./others 37 8 (8) 8 (36) (12) 33 66 Pre-tax profit 397 371 346 416 422 460 586 692 Tax (85) (80) (102) (112) (123) (132) (170) (201) Min. int./pref. div./others (16) (15) (13) (12) (10) (5) (5) (5) Net profit (reported) 296 275 231 292 289 323 411 486 Net profit (adjusted) 296 275 231 292 289 323 411 486 EPS (reported)(KRW) 555 516 432 547 541 605 771 911 EPS (adjusted)(KRW) 555 516 432 547 541 605 771 911 EPS (adjusted fully-diluted)(KRW) 555 516 432 547 541 605 771 911 DPS (KRW) 194 194 194 225 225 350 390 390 EBIT 364 370 360 423 468 482 564 638 EBITDA 519 534 526 594 636 727 907 1,076

Cash flow (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 397 371 346 416 422 460 586 692 Depreciation and amortisation 164 172 175 179 177 254 353 449 Tax paid (85) (80) (102) (112) (123) (132) (170) (201) Change in working capital (30) (62) 170 (125) (254) 108 86 53 Other operational CF items (27) (54) (141) 31 346 (70) (70) (68) Cash flow from operations 418 347 448 389 567 620 786 925 Capex (193) (269) (227) (250) (322) (480) (495) (351) Net (acquisitions)/disposals (34) 22 (31) (78) (74) (60) (97) (133) Other investing CF items (327) (34) 2 (124) 50 (97) (97) (97) Cash flow from investing (554) (282) (256) (452) (347) (637) (689) (581) Change in debt 213 75 (4) 248 115 36 38 40 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (77) (119) (108) (203) (171) (187) (208) (208) Other financing CF items (35) 0 0 4 0 117 261 109 Cash flow from financing 101 (44) (112) 48 (56) (33) 91 (59) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (35) 21 80 (14) 164 (50) 188 284 Free cash flow 225 77 221 139 245 140 291 574 Source: FactSet, Daiwa forecasts

Hanon Systems (018880 KS): 4 July 2018

Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 358 388 460 446 628 627 636 647 Inventory 347 372 382 430 469 423 421 454 Accounts receivable 900 963 1,039 964 936 1,024 1,118 1,151 Other current assets 100 133 113 312 208 105 105 105 Total current assets 1,705 1,856 1,994 2,151 2,241 2,179 2,280 2,357 Fixed assets 970 1,053 1,093 1,178 1,262 1,442 1,787 1,988 Goodwill & intangibles 156 172 207 350 438 547 684 855 Other non-current assets 123 159 166 180 179 185 186 188 Total assets 2,954 3,240 3,459 3,860 4,120 4,353 4,937 5,388 Short-term debt 71 123 335 301 134 141 148 155 Accounts payable 810 815 832 865 907 959 1,138 1,261 Other current liabilities 153 186 264 297 259 246 246 246 Total current liabilities 1,034 1,124 1,431 1,463 1,299 1,345 1,532 1,663 Long-term debt 219 258 46 326 608 638 669 702 Other non-current liabilities 159 189 183 186 181 344 651 806 Total liabilities 1,413 1,570 1,660 1,975 2,088 2,327 2,853 3,171 Share capital 53 53 53 53 53 53 53 53 Reserves/R.E./others 1,487 1,617 1,746 1,832 1,978 1,973 2,031 2,164 Shareholders' equity 1,541 1,670 1,799 1,885 2,031 2,026 2,084 2,217 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 2,954 3,240 3,459 3,860 4,120 4,353 4,937 5,388 EV 5,457 5,517 5,445 5,706 5,639 5,676 5,705 5,734 Net debt/(cash) (67) (8) (79) 181 114 151 181 210 BVPS (KRW) 2,887 3,128 3,371 3,538 3,813 3,802 3,912 4,162

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 42.1 5.1 1.9 2.6 (2.1) 10.0 9.1 6.5 EBITDA (YoY) 23.9 2.8 (1.4) 12.8 7.1 14.2 24.8 18.7 Operating profit (YoY) 17.4 1.9 (2.9) 17.5 10.9 2.9 17.1 13.1 Net profit (YoY) 28.0 (7.1) (16.3) 26.7 (1.2) 11.9 27.4 18.3 Core EPS (fully-diluted) (YoY) 28.0 (7.1) (16.3) 26.7 (1.2) 11.9 27.4 18.3 Gross-profit margin 16.6 16.7 15.5 15.8 16.9 16.9 16.3 15.3 EBITDA margin 10.0 9.8 9.5 10.4 11.4 11.8 13.5 15.1 Operating-profit margin 7.0 6.8 6.5 7.4 8.4 7.8 8.4 8.9 Net profit margin 5.7 5.0 4.1 5.1 5.2 5.3 6.1 6.8 ROAE 19.9 17.2 13.3 15.9 14.7 15.9 20.0 22.6 ROAA 11.4 8.9 6.9 8.0 7.2 7.6 8.9 9.4 ROCE 21.7 19.1 17.0 18.0 17.7 17.3 19.8 21.4 ROIC 22.3 18.5 15.0 16.3 15.7 15.9 18.0 19.3 Net debt to equity n.a. n.a. n.a. 9.6 5.6 7.5 8.7 9.5 Effective tax rate 21.3 21.7 29.6 26.9 29.2 28.6 29.0 29.0 Accounts receivable (days) 56.1 62.3 65.7 64.1 62.1 58.2 58.3 58.0 Current ratio (x) 1.6 1.7 1.4 1.5 1.7 1.6 1.5 1.4 Net interest cover (x) 107.6 49.3 57.8 27.6 42.1 45.0 49.4 52.3 Net dividend payout 34.9 37.6 44.9 41.1 41.6 57.9 50.6 42.8 Free cash flow yield 4.1 1.4 4.0 2.5 4.4 2.5 5.3 10.4 Source: FactSet, Daiwa forecasts

Company profile

Hanon Systems (HS, previously Halla Visteon Climate Control) manufactures automotive climate control systems and components, such as air conditioners, front-end modules, compressors and heat exchangers. HS was established in 1986 as a joint venture between Ford Motor Company and Mando Machinery, and its shares were listed on the KOSPI in 1996. Following its acquisition of the automotive climate business of Visteon Corporation in 2013, the company had the second-largest market share in the world.

Hanon Systems (018880 KS): 4 July 2018

EV-related Siemens SIE GR EUR 113 Not rated 112,282 (2.5) 0.1 10.9 1.9 3.1 8.0 15.2 13.9 2.1 1.9 10.6 9.5 13.7 13.9 3.4 3.5 (5.3) 9.4 General Electric GE US USD 13 Hold 116,123 (23.4) (5.2) 1.8 (24.9) (4.4) (1.9) 14.3 12.7 2.0 2.0 11.5 10.6 12.4 12.4 3.7 3.8 (11.0) 11.9 VISTEON VC US USD 126 Not rated 3,709 0.3 (0.3) 13.6 (1.2) 0.5 9.9 18.0 15.8 8.0 6.8 9.6 8.9 33.5 36.2 0.0 0.0 12.0 13.5 GS Yuasa 6674 JP JPY 499 Not rated 1,867 (11.1) (3.9) (11.4) (4.2) (0.6) (10.7) 16.1 14.4 1.2 1.1 7.0 6.7 7.8 8.1 2.2 2.4 3.4 19.1 Hota Industrial* 1536 TT TWD 143 Buy 1,194 (2.7) (1.4) 16.7 (3.4) 0.8 17.7 25.0 20.7 5.3 4.8 19.4 16.3 22.6 24.7 2.8 3.3 17.1 21.0 BYD* 1211 HK HKD 47 Buy 17,854 (31.1) (7.1) (22.7) (26.5) (0.7) (17.2) 27.2 21.0 2.1 2.0 11.4 9.8 8.1 9.6 0.6 0.7 12.1 29.5 Samsung SDI* 006400 KS KRW 212,500 Buy 13,112 3.9 1.7 7.6 11.8 8.5 14.5 19.9 14.4 1.2 1.1 13.9 10.8 6.3 8.3 0.5 0.5 6.7 37.8 Tesla TSLA US USD 220 Not rated 853 (21.2) 5.0 (0.5) (21.9) 7.2 0.5 17.7 14.1 3.1 2.9 11.5 9.2 19.4 21.9 3.5 4.3 21.4 25.6 Denso 6902 JP JPY 5,199 Hold 37,354 (23.1) (3.0) (10.0) (16.3) 0.2 (9.4) 12.9 13.0 1.1 1.1 5.7 5.5 9.2 8.5 2.5 2.6 35.7 (0.6) Autoliv ALV US USD 100 Hold 8,734 9.5 (7.5) (5.9) 8.1 (6.7) (9.7) 13.5 11.3 2.0 1.8 6.8 5.9 15.3 19.9 3.2 2.8 19.4 19.6 Ametek Inc AME US USD 72 Not rated 16,574 (1.2) (3.6) (5.4) (2.7) (2.8) (9.1) 22.8 20.8 3.7 3.4 14.8 13.8 17.1 16.8 0.8 0.8 21.5 9.5 Industry average 29,969 (9.3) (2.3) (0.5) (7.2) 0.4 (0.7) 18.4 15.7 2.9 2.6 11.1 9.7 15.0 16.4 2.1 2.3 12.1 17.8 Source: Bloomberg, *Daiwa forecasts. Note: 1) share prices are as of 3 July 2018, 2) **Relative to each country index

HS: thermal system loops in a vehicle HS: event-driven analysis

Source: Company, Daiwa Source: Bloomberg, Daiwa

HS: revenue and operating profit from eco-friendly cars (KRWbn) 2013 2014 2015 2016 2017 2018E 2019E 2020E Hanon's total revenue 5,189 5,455 5,558 5,704 5,586 6,145 6,706 7,145 Revenue from eco-friendly cars 156 164 255 331 358 431 533 759 % of total revenue 3.0 3.0 4.6 5.8 6.4 7.0 7.9 10.6 Hanon's total operating profit 364 370 360 423 468 482 564 638 Operating profit from eco-friendly cars 0 0 0 1 4 7.3 19.0 38.0 Operating profit margin from eco-friendly cars 0.0 0.0 0.1 0.4 1.2 1.7 3.6 5.0 Hanon's climate control market share (%)* 11 11 12 13 13 13 13 13 Content per vehicle (KRW)** 874,000 858,800 1,035,000 1,053,000 1,053,000 1,035,000 1,035,000 1,035,000

Source: Daiwa estimates Note: *Assuming HS would maintain its current market share of 13% until 2020E /** Daiwa forecasts and content per vehicle based on blended basis

HS: global climate control technology market share - 2017 HS: content per vehicle for ICE vs. eco-friendly vehicles (USD/vehicle) Denso 3,000 22% 2,500 Others 2,500 31% 2,000 2,000

1,500 1,000 Hanon Systems 1,000 13% 400 500 Sanden 100 200 4% Calsonic Kansei 0 5% Mahle ICE EV ICE HEV EV FCEV Valeo 13% 12% E-compressor System

Source: IHS, Company Source: Company, Daiwa Note: 1) The above is based on a mid-sized sedan for HMG, and 2) California-based EV maker’s vehicles have no heat pumps

Hanon Systems (018880 KS): 4 July 2018

FCEVs: thermal energy management

Source: Daiwa

HS: PER valuation gap vs. global EV related peers (PER,x) Hanon has been trading on 11.1% premium to global EV-related peers (since VW diesel (%) gate scandal in Sep 2015) 35 50 Current PER premium for 40 30 Hanon to global EV-related peers is 10.0% 30 25 20 20 10 15 0 (10) 10 (20) 5 (30) 0 (40) Premium/Discount (RHS) Global EV-related parts (LHS) Hanon (LHS)

Source: Bloomberg, Daiwa

Hanon FCEV product offering: e-compressor Hanon FCEV product offering: coolant heater

Source: Company, Daiwa Source: Company, Daiwa

Hanon Systems (018880 KS): 4 July 2018

Hanon FCEV product offering: high-voltage cooling fan motor Hanon FCEV product offering: heat pump system

Source: Company, Daiwa Source: Company, Daiwa

Korea Consumer Discretionary 4 July 2018

(005380 KS) Hyundai Motor Hyundai Motor

Target price: KRW160,000 (from KRW170,000) Share price (3 Jul): KRW122,000 | Up/downside: +31.1%

Upgrading: robust FCEV footprint; recovery from 2H18E

 Solid FCEV footprint with the launch of its 2nd FCEV, the Nexo Sung Yop Chung (82) 2 787 9157  Earnings likely to be soft in 2Q18E, but stage a rebound in 2H18 [email protected]  Upgrading to Buy (1) on valuation; lowering TP by 6% to KRW160,000

What's new: We are turning more optimistic about HMC’s dominance in Forecast revisions (%) eco-friendly cars, driven by its competitive advantage in FCEVs. Year to 31 Dec 18E 19E 20E Revenue change (1.6) (0.9) - What's the impact: Establishes a solid FCEV footprint with the launch Net profit change (17.6) (16.3) - Core EPS (FD) change (17.6) (16.3) - of its 2nd FCEV, the Nexo. Hyundai Motor Group (HMG) aims to expand its Source: Daiwa forecasts eco-friendly car product line-up to 31 models and 38 models by 2020E and 2025E, respectively, from 13 models currently. Also, it targets to maintain Share price performance its position as the 2nd largest eco-friendly car manufacturer globally in terms (KRW) (%) of market share by selling 1m units in 2025E, from 236,422 in 2017. To this 165,000 100 end, HMC launched its first exclusive FCEV, the Nexo, on 20 March. With 153,750 94 the government likely to extend the subsidies for fuel cell car-buyers until 142,500 88 end-2018, we see potential for Nexo’s shipments to accelerate in 2H18. 131,250 81 120,000 75 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18

Earnings likely to be weak in 2Q18E, but rebound in 2H18E. We are Hyund Mot (LHS) Relative to KOSPI (RHS) revising down our 2Q18E revenue and operating profit by 3.8% and 31.6% to KRW24,123bn and KRW952bn, respectively, after factoring in: 1) the 12-month range 122,000-164,500 7.7% YoY and 9.0% YoY depreciation in the Rouble and Real against the Market cap (USDbn) 23.99 Won in 2Q18, 2) a YoY gain in HMC’s warranty provisioning to KRW220bn 3m avg daily turnover (USDm) 75.26 due to a 5% QoQ stronger USD against the KRW based on our end-2Q18E Shares outstanding (m) 220 Hyundai Mobis (20.8%) rate, and 3) our 2Q18 provision estimate of KRW116bn for airbag recalls in Major shareholder the US (see our 19 March Memo). Our revised 2Q18E operating profit is Financial summary (KRW) 22% below the consensus figure. However, we still expect an earnings Year to 31 Dec 18E 19E 20E recovery in both the US and China in 2H18 on a likely rise in SUV Revenue (bn) 94,483 101,275 106,004 shipments, driven by the Santa Fe, Kona and Tucson models. Operating profit (bn) 4,615 5,186 6,327 Net profit (bn) 4,015 4,807 6,144 Core EPS (fully-diluted) 14,065 16,839 21,522 What we recommend: We are cutting our 2018-19E EPS by 16-18%, EPS change (%) (0.4) 19.7 27.8 given: 1) the high likelihood of HMC’s 2Q18E earnings missing consensus Daiwa vs Cons. EPS (%) 4.1 5.7 24.9 forecasts, 2) our lower equity-method income assumption for its China PER (x) 8.7 7.2 5.7 operation, BHMC (KRW38bn from KRW165bn) in 2018, and 3) our Dividend yield (%) 4.1 4.9 5.7 DPS 5,000 6,000 7,000 downward revisions to HMC’s global ex-China shipment forecasts (cut by PBR (x) 0.5 0.4 0.4 1% and 2.6% to 3,679k units and 3,830k units for 2018E and 2019E, EV/EBITDA (x) 5.2 4.5 3.7 respectively) to incorporate the potential for slower-than-expected growth in ROE (%) 5.3 6.1 7.4 global auto demand from 3Q18E. Applying the past-5-year average PER Source: FactSet, Daiwa forecasts expansion of 4.0% following the launch of the Tucson FCEV in 2013 and Nexo FCEV in March 2018, we lift our target PER to 10.4x (from 10.0x). Rolling forward our valuation horizon to average EPS for 2018-19E (from 2018E), which partly offsets our lower earnings base, we derive our new 12-month TP of KRW160,000 (from KRW170,000). However, we upgrade our rating to Buy (1) from Outperform (2) given our view of a more appealing risk and reward profile. Key downside risks: rapid appreciation of the KRW against major currencies and labour disputes.

How we differ: Our 2018-20E EPS are 4-25% above consensus, which we attribute to our more upbeat view on HMC’s earnings recovery in the US.

See important disclosures, including any required research certifications, beginning on page 88

Hyundai Motor (005380 KS): 4 July 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales volume ex. China ('000 Units) 3,656 3,815 3,866 3,675 3,657 3,679 3,830 4,045 Average Selling Price ex. China (KRW 19,652 18,796 18,101 18,965 19,207 19,387 20,100 19,303 '000) Sales volume in. China ('000 Units) 4,732.1 4,961.1 4,942.1 4,817.1 4,440.8 4,516.1 4,719.8 4,961.7

Profit and loss (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Auto Revenues 71,535 72,307 72,680 72,684 74,491 74,840 79,887 81,386 Finance Revenues 9,893 10,772 12,436 14,052 15,745 14,662 15,327 17,251 Other Revenue 5,880 6,177 6,843 6,913 6,140 4,981 6,061 7,367 Total Revenue 87,308 89,256 91,959 93,649 96,376 94,483 101,275 106,004 Other income 0 0 0 0 0 0 0 0 COGS (67,859) (70,126) (73,701) (75,960) (78,798) (77,323) (82,186) (85,841) SG&A (11,133) (11,580) (11,900) (12,496) (13,003) (12,545) (13,904) (13,836) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 8,315 7,550 6,358 5,194 4,575 4,615 5,186 6,327 Net-interest inc./(exp.) 240 352 232 105 108 425 469 518 Assoc/forex/extraord./others 3,141 2,049 1,870 2,008 (244) 821 1,305 1,909 Pre-tax profit 11,697 9,951 8,459 7,307 4,439 5,860 6,960 8,754 Tax (2,703) (2,302) (1,950) (1,587) 108 (1,280) (1,531) (1,926) Min. int./pref. div./others (452) (303) (92) (313) (514) (565) (621) (684) Net profit (reported) 8,542 7,347 6,417 5,406 4,033 4,015 4,807 6,144 Net profit (adjusted) 8,542 7,347 6,417 5,406 4,033 4,015 4,807 6,144 EPS (reported)(KRW) 29,921 25,735 22,479 18,938 14,127 14,065 16,839 21,522 EPS (adjusted)(KRW) 29,921 25,735 22,479 18,938 14,127 14,065 16,839 21,522 EPS (adjusted fully-diluted)(KRW) 29,921 25,735 22,479 18,938 14,127 14,065 16,839 21,522 DPS (KRW) 1,950 3,000 4,000 4,000 4,000 5,000 6,000 7,000 EBIT 8,315 7,550 6,358 5,194 4,575 4,615 5,186 6,327 EBITDA 10,062 9,335 8,197 7,067 7,514 7,449 8,224 9,507

Cash flow (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 11,697 9,951 8,459 7,307 4,439 5,860 6,960 8,754 Depreciation and amortisation 1,746 1,785 1,839 1,873 2,939 2,835 3,038 3,180 Tax paid (2,703) (2,302) (1,950) (1,587) 108 (1,280) (1,531) (1,926) Change in working capital 4,925 2,910 (3,530) 2,524 1,975 2,212 3,158 3,780 Other operational CF items (14,075) (10,223) (3,570) (9,120) (5,539) (3,869) (5,312) (6,455) Cash flow from operations 1,589 2,121 1,248 997 3,922 5,758 6,313 7,332 Capex (3,171) (3,354) (8,142) (2,971) (3,055) (4,744) (4,981) (5,230) Net (acquisitions)/disposals (3,819) (4,596) 370 (3,958) (2,218) (1,419) (1,449) (1,480) Other investing CF items 4 1,755 (288) 617 529 217 1,012 (351) Cash flow from investing (6,986) (6,195) (8,060) (6,312) (4,744) (5,946) (5,419) (7,062) Change in debt 6,083 5,292 8,877 7,125 3,216 (48) (199) (117) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (633) (587) (1,353) (1,085) (1,139) (1,427) (1,713) (1,998) Other financing CF items 250 1 (311) (349) 104 (757) (2,246) (1,393) Cash flow from financing 5,700 4,707 7,214 5,691 2,181 (2,232) (4,158) (3,507) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 303 633 402 377 1,359 (2,421) (3,264) (3,237) Free cash flow (1,582) (1,233) (6,893) (1,974) 867 1,014 1,331 2,102 Source: FactSet, Daiwa forecasts

Hyundai Motor (005380 KS): 4 July 2018

Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 43,434 48,482 48,348 52,841 54,990 56,619 58,323 60,107 Inventory 7,073 7,417 9,199 10,524 10,280 9,880 10,502 11,446 Accounts receivable 6,547 7,441 8,286 7,587 6,809 7,081 7,506 7,731 Other current assets 1,802 1,685 1,695 1,497 1,897 1,992 2,092 2,196 Total current assets 58,856 65,026 67,529 72,450 73,976 75,573 78,422 81,480 Fixed assets 21,463 22,542 28,699 29,406 29,827 43,388 45,331 47,382 Goodwill & intangibles 3,129 3,822 4,298 4,586 4,809 4,857 4,906 4,955 Other non-current assets 49,974 55,836 64,842 72,394 69,587 70,359 71,144 71,941 Total assets 133,421 147,225 165,368 178,836 178,199 194,178 199,804 205,758 Short-term debt 11,118 14,475 16,867 20,438 19,541 19,628 19,660 19,741 Accounts payable 11,856 12,019 12,255 12,252 11,963 11,843 11,725 11,139 Other current liabilities 8,946 8,685 12,092 10,920 11,656 11,074 10,852 10,635 Total current liabilities 31,920 35,180 41,214 43,610 43,161 42,545 42,237 41,515 Long-term debt 33,989 37,733 44,760 49,846 48,942 48,807 48,576 48,379 Other non-current liabilities 10,930 11,692 12,513 13,035 11,339 26,129 28,550 30,565 Total liabilities 76,839 84,605 98,487 106,491 103,442 117,482 119,363 120,458 Share capital 1,489 1,489 1,489 1,489 1,489 1,489 1,489 1,489 Reserves/R.E./others 55,094 61,132 65,392 70,856 73,268 75,207 78,951 83,810 Shareholders' equity 56,583 62,621 66,881 72,345 74,757 76,696 80,440 85,299 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 133,421 147,225 165,368 178,836 178,199 194,178 199,804 205,758 EV 28,547 30,600 40,152 44,316 40,367 38,690 36,787 34,886 Net debt/(cash) 1,673 3,726 13,278 17,443 13,493 11,816 9,913 8,013 BVPS (KRW) 198,203 219,353 234,278 253,415 261,867 268,658 281,773 298,794

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 3.4 2.2 3.0 1.8 2.9 (2.0) 7.2 4.7 EBITDA (YoY) (0.7) (7.2) (12.2) (13.8) 6.3 (0.9) 10.4 15.6 Operating profit (YoY) (1.5) (9.2) (15.8) (18.3) (11.9) 0.9 12.4 22.0 Net profit (YoY) (0.3) (14.0) (12.7) (15.8) (25.4) (0.4) 19.7 27.8 Core EPS (fully-diluted) (YoY) (0.3) (14.0) (12.7) (15.8) (25.4) (0.4) 19.7 27.8 Gross-profit margin 22.3 21.4 19.9 18.9 18.2 18.2 18.8 19.0 EBITDA margin 11.5 10.5 8.9 7.5 7.8 7.9 8.1 9.0 Operating-profit margin 9.5 8.5 6.9 5.5 4.7 4.9 5.1 6.0 Net profit margin 9.8 8.2 7.0 5.8 4.2 4.2 4.7 5.8 ROAE 16.3 12.3 9.9 7.8 5.5 5.3 6.1 7.4 ROAA 6.7 5.2 4.1 3.1 2.3 2.2 2.4 3.0 ROCE 8.7 7.0 5.2 3.8 3.2 3.2 3.5 4.2 ROIC 11.9 9.3 6.7 4.8 5.1 4.1 4.5 5.4 Net debt to equity 3.0 5.9 19.9 24.1 18.0 15.4 12.3 9.4 Effective tax rate 23.1 23.1 23.1 21.7 n.a. 21.8 22.0 22.0 Accounts receivable (days) 26.1 28.6 31.2 30.9 27.3 26.8 26.3 26.2 Current ratio (x) 1.8 1.8 1.6 1.7 1.7 1.8 1.9 2.0 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 6.5 11.7 17.8 21.1 28.3 35.5 35.6 32.5 Free cash flow yield n.a. n.a. n.a. n.a. 3.2 3.8 5.0 7.8 Source: FactSet, Daiwa forecasts

Company profile

Established in 1967, HMC is the largest vehicle manufacturer in Korea. With the 33.58%-owned Kia Motors, it has 8m units of production capacity globally. The company produces a range of vehicles, including passenger cars, SUVs, minivans and commercial vehicles.

Hyundai Motor (005380 KS): 4 July 2018

Global eco-friendly car market share by OEMs (2017)

Others 25.6%

Toyota 38.1% Ford 3.0% Tesla 3.2% BAIC 3.2% BYD 3.4% Hyundai and Kia Renault-Nissan Honda 7.4% 7.5% 8.5% Source: Bloomberg, Daiwa

HMG: eco-friendly car expansion plan of each segment No. of models 2017 2020 2025 HEV 6 10 10 PHEV 4 11 12 EV 2 8 14 FCEV 1 2 2 Total 13 31 38

Source: Company, Daiwa

HMC: eco-friendly car shipment trend (units) 2014 2015 2016 2017 2018E EV/PHEV 0 1,337 6,719 23,097 46,840 HEV 49,223 41,064 55,651 83,881 88,400 FCEV 118 229 242 232 3,000 Total eco-friendly shipments 49,341 42,630 62,612 107,210 138,240

Source: Company, Daiwa forecasts

Kia: eco-friendly car shipment trend (units) 2014 2015 2016 2017 2018E EV/PHEV 1,383 8,456 8,627 18,579 24,012 HEV 24,786 19,396 41,736 110,633 115,200 Total eco-friendly shipments 26,169 27,852 50,363 129,212 139,212

Source: Company, Daiwa forecasts

FCEV specifications: Toyota, HMC and Honda HMC HMC Toyota Honda Model ix 35 Nexo Mirai Clarity Type SUV SUV Sedan Sedan Weight (kg) 1,835 1,820 1,850 1,625 Refueling time (min) 5 5 5

Driving range (km) 426 609 502 386 Motor power (kW) 100 120 114 130 Max speed (km/h) 160 179 178 160 Price (USD) 85,000 68,000 60,000 76,000 Launch date Feb-13 Mar-18 Dec-14 May-16

Source: Companies, Daiwa

Hyundai Motor (005380 KS): 4 July 2018

HMC: 2Q18 earnings preview (KRWbn) 2Q18E-Daiwa 2Q18E-BBG Diff (%) 2Q17 YoY (%) 1Q18 QoQ (%) USD:KRW (Quarter Avg) 1,076.0 1,130.3 (4.8) 1,072.3 0.3

Total shipments ('000 Units, Inc. China) 1,208 1,098 10.0 1,004 20.3

Total shipments ('000 Units, Ex-China) 994 993 0.2 841 18.2

HMC (Korea) 476 484 (1.6) 402 18.5

HMI (India) 165 157 5.0 172 (4.0)

HAOS (Turkey) 59 62 (5.0) 21 184.1

HMMA (US) 72 96 (25.0) 65 10.5

HMMC (Czech) 91 90 1.0 82 11.0

HMMR (Russia) 62 60 3.0 58 6.5

HMB (Brazil) 45 43 5.0 41 9.4

BHMC & CHMC (China) 213 105 103.0 163 31.3

ASP ('000 KRW, Inc. China) 18,096 18,755 (3.5) 20,026 (9.6)

ASP ('000 KRW, Ex-China) 18,714 19,155 (2.3) 19,299 (3.0)

HMC (Korea) 24,613 24,224 1.6 24,072 2.3

HMI (India) 9,596 9,104 5.4 10,418 (7.9)

HAOS (Turkey) 14,724 13,484 9.2 15,237 (3.4)

HMMA (US) 20,691 21,172 (2.3) 21,041 (1.7)

HMMC (Czech) 18,860 18,500 1.9 19,716 (4.3)

HMMR (Russia) 11,414 12,794 (10.8) 12,146 (6.0)

HMB (Brazil) 11,547 12,816 (9.9) 12,554 (8.0)

BHMC & CHMC (China) 15,218 14,982 1.6 23,787 (36.0)

Revenue 23,971 24,301 (1.4) 24,308 (1.4) 22,437 6.8 Auto 19,113 19,187 (0.4) 17,389 9.9

HMC (Korea) 11,722 11,726 (0.0) 9,672 21.2

HMI (India) 1,586 1,433 10.7 1,659 (4.4)

HAOS (Turkey) 870 839 3.7 724 20.2

HMMA (US) 1,486 2,027 (26.7) 1,334 11.4

HMMC (Czech) 1,723 1,673 3.0 1,594 8.1

HMMR (Russia) 707 770 (8.1) 745 (5.0)

HMB (Brazil) 517 547 (5.4) 505 2.4

Others 503 173 191.5 1,156 (56.5)

Finance 3,665 3,571 2.6 3,778 (3.0)

Others 1,193 1,550 (23.0) 1,269 (6.0)

COGS 19,393 19,581 (1.0) 18,969 2.2

Gross profit 4,578 4,727 (3.1) 3,468 32.0

GP margin (%) 19.1 19.4 - 15.5 -

SG&A 3,633 3,382 7.4 2,786 30.4

Salary and Wage 791 658 20.2 670 18.0

% to Revenue 3.3 2.7 - 3.0 -

Marketing Expense 887 877 1.1 877 1.1

% to Revenue 3.7 3.6 - 3.9 -

Warranty Provision 479 589 (18.6) 589 (18.6)

% to Revenue 2.0 2.4 - 2.6 -

Others 1,475 1,258 17.2 650 127.0

% to Revenue 6.2 5.2 - 2.9 -

Operating profit 946 1,211 (21.9) 1,344 (29.7) 681 38.8 Operating margin (%) 3.9 5.0 5.5 3.0

Auto 856 877 (2.4) 400 114.0

Operating Margin (%) 4.5 4.6 2.3

Finance 213 213 (0.2) 173 22.9

Operating Margin (%) 5.8 6.0 4.6

Others 60 76 (21.5) 38 57.0

Operating Margin (%) 5.0 4.9 3.0

Consolidation adjustments (183) 178 70

Equity method gain 246 143 71.6 242 1.4

Recurring Profit 1,182 1,165 1.4 926 27.6

Recurring Profit Margin (%) 4.9 4.8 4.1

Tax 260.0 251.3 194.3

Tax rate(%) 22.0 21.6 21.0

Net profit 922 1,143 (19.4) 914 0.9 732 26.0 Net profit margin (%) 3.8 4.7 3.8 3.3

Source: Company, Bloomberg, Daiwa forecasts

Hyundai Motor (005380 KS): 4 July 2018

BHMC: equity method income trend (1Q15-4Q18E) (KRWbn) (%) 400 150.9 200 300 150 200 100 262 255 309

82 50 224 66 221 49 233 205 100 38 10 27 33 146 89 92 0 93 0 70 20.1 (12.1) 16.3 17.7 32.4 (7.3) 0.0 0.0 0.0 (50) (100) (18.9) (19.4) (52.8) (100) (58.6) (56.9) (193) (60.1) (68.5) (81.7) (200) (89.6) (150) (300) (182.9) (200) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18E 3Q18E 4Q18E

BHMC equity method income (LHS) Equity method income YoY (%) Source: Company, Daiwa forecasts

China auto: market share trend China auto: market share in May 20% HMG 10% Toyota 15% VW 30% 9%

10% Honda 10% 5% PSA 3% 0% Nissan GWM 10% Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 6% Changan BYD BHMC DKIA Toyota Honda 6% Geely 4% Geely Changan VW 12% Source: CAAM, Daiwa Source: CAAM, Daiwa

HMA and HMMA: revenue and net profit trends (2012-17) (KRWbn) (KRWbn) 480 20,000 421 362 600 282 294 400 470 490 115 15,000 378 200 0 10,000 -200 -163 -400 -342 5,000 -600 -800 17,107 17,107 16,593 16,813 17,079 17,322 16,083 6,992 6,992 7,385 7,437 7,510 8,217 7,049 0 -1,000 -868 2012 2013 2014 2015 2016 2017 HMA's Revenue (LHS) HMMA's Revenue (LHS) HMA's Net profit (RHS) HMMA's Net profit (RHS)

Source: Company, Daiwa; Note: HMA = Hyundai Motor America; HMMA = Hyundai Motor Manufacturing Alabama

US auto: market share trend HMC: US inventory months and incentives 25% (USD/vehicle) (x) 3,500 4.6 4.5 5 4.2 4.4 4.2 4.4 4.2 20% 4.0 3,000 3.9 3.8 3.8 3.9 3.7 3.5 3.5 3.5 4 15% 2,500 2,000 3 10% 220 1,500 , 3 3,192 3,192 809 3,188 3,188 3,134 3,134 755 3,120 3,120

692 2 , , 2,982 2,982 , 2,944 2,944 2,890 2,875 2,875 2 2,807 2,807 2 2 5% 2,684 2,591 2,591

1,000 2,342 2,176 2,176 1 0% 500 0 0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Toyota Nissan Honda Jul-17 Apr-17 Oct-17 Apr-18 Jan-17 Jun-17 Jan-18 Feb-17 Mar-17 Feb-18 Mar-18 Nov-17 Dec-17 Aug-17 Sep-17 VW Chrysler Ford May-17 May-18 US incentives for HMC (LHS) US inventory (RHS) GM HMC Kia Source: Autodata, Daiwa Source: Autodata, Daiwa

Hyundai Motor (005380 KS): 4 July 2018

HMC: new model cycle HMC: global inventory trend (Units) (Months) HMC 1H17 2H17 1H18 2H18 4.6 70,000 4.5 4.4 4.4 5 Korea ix25 (OS) Sonata F/L Sante-Fe Avante F/L 4.2 4.2 4.2 4.0 Grandeur HEV Genesis G70 Tuscon F/L EQ900 F/L 3.9 3.8 3.8 3.9 3.7 60,000 3.5 3.5 3.5 Kona Kona EV SUV 4 Veloster Veloster 50,000 i40 F/L 40,000 3 US Ioniq EV/HEV Sonata F/L G70 Kona EV 30,000 2

i30 Kona GV80 57885 52508 52049

20,000 48329 46583

Veloster Elantra F/L 44966 42053 41351 40881 40152 39353 39306 39248 37320 36982 1 Tuscon F/L 10,000 33597 Sante-Fe 0 0 China Yuidong All new Reina Sonata PHEV Santa-Fe (CELESTA) Jul-17 Apr-17 Oct-17 Apr-18 Jan-17 Jun-17 Jan-18 Feb-17 Mar-17 Feb-18 Mar-18 Aug-17 Sep-17 Nov-17 Dec-17

Sonata F/L Kona Tuscon F/L May-17

ix 35 C2 sedan Korea (RHS) US (LHS) EU Ioniq PHEV Solaris (Russia) Sante-Fe West Europe (months) Global (LHS) G70 Tuscon F/L

Source: Company, Daiwa Source: Company, Daiwa

HMC: potential impact on dividend payout ratio from share HMC: share buyback and cancellation scheme buyback and cancellation HMC common shares 2017 2018E Shareholder return summary Details

DPS for common shares (KRW) [A] 4,000 4,000 Expected share buyback and cancellation 30.April.2018 - 27.July.2018 No. of common shares (m) [B] 220 214 Total no. of shares for cancellation (m) 8.5 Dividend paid for common shares (KR bn) [A]*[B] = [C] 881 855 Common 6.6 Share buyback and cancellation amount (KRWbn) [D] 0 764 Preferred (including preferred #1, #2, and #3) 1.9 Total dividend (KRWbn) [C]+[D] = [E] 881 1,619 Remaining treasury shares after cancellation (m) 8.3 YoY (%) 83.7% Common 6.6

Net profit for common shareholders (KRWbn) [F] 3,104 3,745 % of outstanding shares 3.1% Pay-out ratio ([C]+[D])/[F] = [G] 28.4% 43.2% Preferred (including preferred #1, #2, and #3) 1.7 % of outstanding shares 2.6% HMC preferred shares 2017 2018E Total no. of shares (including preferred shares, KRW bn) 285.5

DPS for preferred shares (KRW) [A] 4,100 4,100 Common 220.3 No. of preferred shares (m) [B] 65 63 Preferred (including preferred #1, #2, and #3) 65.2 Dividend paid for preferred shares (KRWbn) [A]*[B] = [C] 267 259 % of share cancellation 3.0% Share buyback and cancellation amount (KR bn) [D] 0 208 Common 3.0% Total dividend (KRWbn) [C]+[D] = [E] 267 467 Preferred (including preferred #1, #2, and #3) 3.0% YoY (%) 74.8% Total cancellation amount (KRW bn) 972

Net profit for preferred shareholders (KRWbn) [F] 928 1,120 Cancellation from share buyback 413 Pay-out ratio ([C]+[D])/[F] = [G] 28.8% 41.7% Cancellation from treasury shares 559 Total no. of shares after share cancellation (m) 276.9 Common 213.7 Preferred 63.3

Source: Company, Daiwa estimates Source: Company, Daiwa

HMC: multiple PER expansions from the launch of Tucson and Nexo FCEVs (x) Mar-18 Feb-13 NEXO's pre-order reached 14 First FCEV, HMC's Sep-15 780 units in the first 2 days Tuscon FC launched 12 HMC developed Membrane of its sales in Korea Electrode Assemble (MEA) 10 technology 8 6 Feb-18 HMC launched 2nd FCEV 4 "NEXO" 2 0 Jul/14 Jul/15 Apr/12 Oct/13 Oct/14 Apr/15 Apr/16 Apr/17 Oct/17 Jan/12 Jun/12 Jan/13 Jun/13 Jan/14 Jun/16 Jan/17 Jun/17 Jan/18 Mar/13 Mar/14 Mar/17 Mar/18 Feb/12 Feb/15 Feb/16 Aug/12 Sep/12 Nov/12 Aug/13 Dec/13 Aug/14 Dec/14 Sep/15 Nov/15 Dec/15 Aug/16 Sep/16 Nov/16 Aug/17 Nov/17 May/13 May/14 May/15 May/18

Source: Bloomberg, Daiwa

Hyundai Motor (005380 KS): 4 July 2018

HMC: event-driven analysis Mar 2017: (x) Jan 2017: Sep 2015: Nov 2015: THAAD deploymentNov 2017: Potential border-tax 13 Currency tailwinds, China purchase tax cut shipment increase in Korea, U.S news Tension between Korea issue and China released on and special consumption tax cuts in Korea and China Jan 2016: 12 Jul-Oct 2016: THAAD issue Jan 2018: highest 2015 worse-than-expected Labor dispute 11 sales reported labor dispute agreement failed 10 9 8 Mar 2017: Oct 2017: 7 Sep-Nov 2014: HMG group China Nov 2016: July 2017: Announced to restructuring shipment 6 Trump's presidential issue Weaker-than- purchase KEPCO Apr 2015: Jan 2017: increased by 5 June 2015: election victory expected China HQ land Disappointing 1Q15 4Q16 earnings 60.4%. May shipment released shock and US shipments 4 results released Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

12m fwd PER +1 STD +2 STD -1 STD -2 STD Average

Source: Bloomberg, Daiwa

HMC: PBR band (x) 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17 Apr/13 Oct/13 Apr/14 Oct/14 Apr/15 Oct/15 Apr/16 Oct/16 Apr/17 Oct/17 Apr/18 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jan/18 Jun/18 Feb/13 Feb/14 Feb/15 Feb/16 Feb/17 Mar/18 Nov/13 Nov/14 Nov/15 Nov/16 Nov/17 Aug/13 Aug/14 Aug/15 Aug/16 Aug/17 May/13 May/14 May/15 May/16 May/17 12m fwd PBR +1 STD +2 STD -1 STD -2 STD Average

Source: Bloomberg, Daiwa forecasts

Korea Consumer Discretionary 4 July 2018

Hyundai Mobis (012330 KS) Hyundai Mobis

Target price: KRW235,000 (from KRW360,000)

Share price (3 Jul): KRW205,000 | Up/downside: +14.6%

Downgrade: weak 2Q18E, but good long-term potential

 The first parts maker to mass-produce FCEV parts Sung Yop Chung (82) 2 787 9157  2Q18 earnings likely to miss both our and consensus forecasts [email protected]  Downgrading to Outperform (2); lowering TP by c.35% to KRW235,000

What's new: We downgrade Hyundai Mobis to Outperform (2) from Buy (1) Forecast revisions (%) on its relative weakness in core technology for FCEVs and downward Year to 31 Dec 18E 19E 20E revisions to our 2018-19E EPS forecasts. However, given HMG’s plans to Revenue change (6.1) (6.8) - Net profit change (24.9) (17.9) - expand its eco-friendly car product line-up to 31 models and 38 models by Core EPS (FD) change (24.9) (17.9) - 2020E and 2025E (from 13 currently), we look for Mobis to have a stronger Source: Daiwa forecasts long-term earnings growth trajectory. Share price performance What's the impact: The first parts maker to start mass market (KRW) (%) production of FCEV parts. In June 2017, HMG announced plans for an 275,000 105 annual production capacity of 3,000 FCEVs. Following the announcement, 256,250 99 Mobis said it had started construction of an additional plant to manufacture 237,500 93 key components for FCEVs within its existing eco-friendly auto parts 218,750 86 200,000 80 production complex, located in Chung Ju, North Chung Cheong Province, Jul-17 Oct-17 Jan-18 Apr-18 Jul-18

Korea. Following capex of KRW700bn, the plant can produce 3,000 Hyund Mob (LHS) Relative to KOSPI (RHS) powertrain fuel cell complete (PFC) modules per annum.

12-month range 205,000-273,500 2Q18E earnings likely tracking weaker. We revise down our 2Q18E Market cap (USDbn) 17.84 revenue and operating-profit forecasts by 6.1%/30.3% to KRW8,824bn/ 3m avg daily turnover (USDm) 51.98 KRW475bn, respectively, after factoring in: 1) potential non-contractual Shares outstanding (m) 97 Major shareholder Kia Motors (16.9%) pricing pressure from BHMC in conjunction with rising pricing pressure from HMC’s JV partner, Beijing Motors, especially on the cost side, and 2) a Financial summary (KRW) slower-than-expected shipment recovery for HMG OEMs with a 10.2% YoY Year to 31 Dec 18E 19E 20E rise in HMG’s 2Q18 shipments to 1,937k units. Our 2Q18 operating-profit Revenue (bn) 35,526 37,326 41,913 forecast of KRW475bn is 7.6% below the consensus figure. Operating profit (bn) 2,169 2,631 3,209 Net profit (bn) 2,253 2,669 3,445 Core EPS (fully-diluted) 23,149 27,416 35,394 What we recommend: We cut our 2018-19E EPS by 18-25%, factoring in: EPS change (%) 43.7 18.4 29.1 1) 2Q18E earnings being likely to undershoot forecasts, 2) weaker potential Daiwa vs Cons. EPS (%) 0.5 0.5 16.3 PER (x) 8.9 7.5 5.8 for HMG OEMs in China to lock in profit for HMG OEMs’ captive parts Dividend yield (%) 2.4 2.4 2.4 makers due to pricing pressure from Beijing Motors, 3) a downward DPS 5,000 5,000 5,000 revision to our equity-method income assumption for 2018 to KRW789bn PBR (x) 0.6 0.6 0.5 EV/EBITDA (x) 3.7 3.0 2.3 from KRW1,140bn, following a cut to our 2018E earnings for HMC, and 4) ROE (%) 7.4 8.1 9.7 higher-than-expected R&D expenses of KRW845bn/KRW1,014bn for Source: FactSet, Daiwa forecasts 2018/19E (previously KRW768bn/KRW945bn). As such, we cut our SOTP- based 12-month TP to KRW235,000 (from KRW360,000). Our TP now implies a 6.7% higher PER of 9.3x (around the middle of the past-3-year range of 7.4-11.5x) on our average 2018-19E EPS. The upward revision to our implied target multiple marks a discount of 53% (its past-3-year average discount to global auto parts’ makers) to the 14.3% multiple expansion experienced by FCEV auto parts players following the launch of HMC’s Tucson FCEV (2013) and Nexo FCEV (March 2018). Downside risk: steeper-than-expected non-contractual pricing pressure.

How we differ: Although our new 2018-19E earnings are in line with consensus, we are now more bearish on Mobis’ China earnings.

See important disclosures, including any required research certifications, beginning on page 88

Hyundai Mobis (012330 KS): 4 July 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E A/S parts' revenue growth (YoY %) 5.6 0.7 0.7 4.6 4.4 2.9 4.0 5.3 Module's revenue growth (YoY %) 12.3 6.8 3.0 6.3 (10.5) 0.6 5.3 14.0 A/S parts' operating profit margin (%) 21.1 21.0 22.0 22.9 25.1 23.9 23.2 23.7 Module's operating profit margin (%) 6.3 6.3 5.4 4.4 1.1 1.7 3.1 4.0

Profit and loss (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Module and Core-parts Revenues 27,022 28,864 29,716 31,575 28,261 28,444 29,961 34,161 A/S Parts Revenues 6,220 6,263 6,304 6,592 6,884 7,082 7,365 7,752 Other Revenue 956 (0) 0 95 (0) 0 (0) 0 Total Revenue 34,199 35,127 36,020 38,262 35,145 35,526 37,326 41,913 Other income 1,139 1,170 1,218 1,312 1,213 1,230 1,292 1,451 COGS (29,386) (30,003) (30,872) (32,966) (30,679) (30,530) (31,876) (35,794) SG&A (1,889) (1,982) (2,213) (2,391) (2,440) (2,827) (2,819) (2,910) Other op.expenses (1,139) (1,170) (1,218) (1,312) (1,213) (1,230) (1,292) (1,451) Operating profit 2,924 3,141 2,935 2,905 2,025 2,169 2,631 3,209 Net-interest inc./(exp.) 119 163 100 79 95 107 112 126 Assoc/forex/extraord./others 1,491 1,355 1,178 1,128 615 741 850 1,307 Pre-tax profit 4,535 4,659 4,213 4,111 2,734 3,017 3,593 4,642 Tax (1,138) (1,181) (1,131) (1,064) (1,177) (773) (934) (1,207) Min. int./pref. div./others 25 30 15 (9) 10 10 10 10 Net profit (reported) 3,422 3,508 3,097 3,038 1,568 2,253 2,669 3,445 Net profit (adjusted) 3,422 3,508 3,097 3,038 1,568 2,253 2,669 3,445 EPS (reported)(KRW) 35,149 36,039 31,814 31,207 16,109 23,149 27,416 35,394 EPS (adjusted)(KRW) 35,149 36,039 31,814 31,207 16,109 23,149 27,416 35,394 EPS (adjusted fully-diluted)(KRW) 35,149 36,039 31,814 31,207 16,109 23,149 27,416 35,394 DPS (KRW) 1,950 3,000 3,500 3,500 3,500 5,000 5,000 5,000 EBIT 2,924 3,141 2,935 2,905 2,025 2,169 2,631 3,209 EBITDA 4,064 4,311 4,152 4,217 3,238 3,399 3,923 4,661

Cash flow (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 4,535 4,659 4,213 4,111 2,734 3,017 3,593 4,642 Depreciation and amortisation 1,139 1,170 1,218 1,312 1,213 1,230 1,292 1,451 Tax paid (1,138) (1,181) (1,131) (1,064) (1,177) (773) (934) (1,207) Change in working capital (1,490) (1,425) 2,029 (1,796) (895) (486) (548) (761) Other operational CF items (1,118) (410) (2,634) 290 600 (1,027) (1,027) (1,026) Cash flow from operations 1,928 2,812 3,695 2,854 2,477 1,960 2,376 3,100 Capex (652) (1,070) (4,080) (1,296) (677) (796) (876) (964) Net (acquisitions)/disposals (1,800) (1,082) (192) (1,652) (910) (711) (781) (910) Other investing CF items (1) (0) (19) (13) (6) (36) 8 8 Cash flow from investing (2,453) (2,152) (4,291) (2,961) (1,593) (1,543) (1,649) (1,866) Change in debt 392 (69) 484 (5) (79) (35) (32) (28) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (185) (190) (292) (332) (332) (487) (487) (487) Other financing CF items 0 36 (22) 0 16 (109) 309 344 Cash flow from financing 208 (222) 170 (336) (396) (631) (209) (171) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (317) 438 (427) (443) 488 (213) 517 1,062 Free cash flow 1,276 1,743 (385) 1,558 1,800 1,164 1,500 2,136 Source: FactSet, Daiwa forecasts

Hyundai Mobis (012330 KS): 4 July 2018

Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 7,385 8,964 6,816 7,977 9,135 9,834 10,697 11,826 Inventory 2,314 2,391 2,562 2,830 2,690 2,663 2,717 2,798 Accounts receivable 5,628 6,117 6,343 7,224 6,151 6,335 6,526 6,591 Other current assets 245 250 203 232 241 290 348 522 Total current assets 15,572 17,722 15,925 18,263 18,218 19,123 20,287 21,736 Fixed assets 3,887 4,435 7,947 8,516 8,206 8,625 9,056 9,524 Goodwill & intangibles 979 967 931 961 957 1,005 1,055 1,161 Other non-current assets 13,992 15,988 12,972 13,971 14,356 15,073 15,827 17,089 Total assets 34,430 39,112 37,775 41,712 41,737 43,826 46,226 49,510 Short-term debt 1,565 1,401 1,565 1,453 1,236 1,174 1,115 1,059 Accounts payable 4,738 5,262 5,379 6,027 4,907 5,300 5,883 6,530 Other current liabilities 1,031 1,395 1,347 1,353 1,750 1,838 1,930 2,026 Total current liabilities 7,334 8,058 8,291 8,833 7,893 8,312 8,928 9,616 Long-term debt 1,200 1,126 1,305 1,667 1,320 1,347 1,374 1,401 Other non-current liabilities 5,703 6,642 2,502 2,653 3,164 2,331 1,916 1,535 Total liabilities 14,237 15,826 12,099 13,154 12,378 11,990 12,217 12,552 Share capital 491 491 491 491 491 491 491 491 Reserves/R.E./others 19,702 22,795 25,185 28,067 28,868 31,345 33,517 36,466 Shareholders' equity 20,193 23,286 25,676 28,558 29,359 31,836 34,008 36,957 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 34,430 39,112 37,775 41,712 41,737 43,826 46,226 49,510 EV 15,335 13,519 16,009 15,099 13,376 12,642 11,747 10,590 Net debt/(cash) (4,620) (6,437) (3,946) (4,857) (6,579) (7,313) (8,208) (9,365) BVPS (KRW) 207,442 239,215 263,768 296,417 304,731 330,445 352,990 383,596

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 11.1 2.7 2.5 6.2 (8.1) 1.1 5.1 12.3 EBITDA (YoY) 3.6 6.1 (3.7) 1.6 (23.2) 5.0 15.4 18.8 Operating profit (YoY) 0.6 7.4 (6.6) (1.0) (30.3) 7.1 21.3 22.0 Net profit (YoY) (3.9) 2.5 (11.7) (1.9) (48.4) 43.7 18.4 29.1 Core EPS (fully-diluted) (YoY) (3.9) 2.5 (11.7) (1.9) (48.4) 43.7 18.4 29.1 Gross-profit margin 14.1 14.6 14.3 13.8 12.7 14.1 14.6 14.6 EBITDA margin 11.9 12.3 11.5 11.0 9.2 9.6 10.5 11.1 Operating-profit margin 8.6 8.9 8.1 7.6 5.8 6.1 7.0 7.7 Net profit margin 10.0 10.0 8.6 7.9 4.5 6.3 7.2 8.2 ROAE 18.4 16.1 12.7 11.2 5.4 7.4 8.1 9.7 ROAA 10.6 9.5 8.1 7.6 3.8 5.3 5.9 7.2 ROCE 13.8 12.9 10.8 9.6 6.4 6.5 7.4 8.5 ROIC 15.4 14.5 11.1 9.5 5.0 6.8 7.7 8.9 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 25.1 25.3 26.9 25.9 43.0 25.6 26.0 26.0 Accounts receivable (days) 57.8 61.0 63.1 64.7 69.5 64.1 62.9 57.1 Current ratio (x) 2.1 2.2 1.9 2.1 2.3 2.3 2.3 2.3 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 5.5 8.3 11.0 11.2 21.7 21.6 18.2 14.1 Free cash flow yield 6.4 8.7 n.a. 7.8 9.0 5.8 7.5 10.7 Source: FactSet, Daiwa forecasts

Company profile

Mobis is the sole distributor of Hyundai/Kia’s after-sales parts globally and the largest auto-parts company in Korea. It has two major business divisions: 1) module-assembly and key auto-components manufacturing (ABS, airbags, etc.), which accounts for 83% of revenue, and 2) after-sales parts, which accounts for 17%.

Hyundai Mobis (012330 KS): 4 July 2018

Mobis: medium to long-term revenue target Mobis: new order target from non-captive customers (non HMG) (KRW tn) CAGR (USD bn) 50 CAGR 8% (2018E-2025E) 44 2018-25E 12 40 36 12% 11 10 CAGR 53% (2015-2022E) 9 30 25 7 8% 8 5 5 20 6 4 7% 10 26 10 22 4 16 6 0 2 2018E 2022E 2025E 0.5 0 Investment division Core parts division Future tech division

2015 2017 2022E

Source: Company Daiwa Source: Company, Daiwa

Mobis: 2Q18E earnings preview 2Q18E-Daiwa 2Q18E-Bbg Diff(%) 2Q17 YoY(%) 1Q18 QoQ(%) USD/KRW (Avg) 1,076.0 1,130.3 (4.8) 1,072.3 0.3 Revenue 8,824 8,848 (0.3) 8,282 6.5 8,194 7.7 Module and Core parts 7,057 6,657 6.0 6,450 9.4 A/S Parts 1,767 1,625 8.7 1,744 1.3 Operating profit 475 514 (7.6) 492 (3.6) 450 5.6 OP margin(%) 5.4 5.8 5.9 5.5 Module and Core-parts 71 84 (15.8) 27 158.5 OP margin(%) 1.0 1.3 0.4 A/S Parts 404 409 (1.0) 423 (4.3) OP margin(%) 22.9 25.1 24.2 Recurring Profit 731 690 5.9 615 18.9 RP Margin (%) 8.3 8.3 7.5 Tax 190 208 149 Tax rate(%) 26.0 30.1 24.2 Net profit 541 606 (10.8) 482 12.2 466 16.1 NP margin(%) 6.1 6.8 5.8 5.7

Source: Bloomberg, Company, Daiwa forecasts

Mobis: major assumption changes 2018E 2019E Previous Revised Chg (%) Previous Revised Chg (%) Revenue 37,831 35,526 (6.1) 40,052 37,326 (6.8) Module and Core parts 30,784 28,444 (7.6) 32,776 29,961 (8.6) A/S Parts 7,048 7,082 0.5 7,276 7,365 1.2 Operating profit 2,761 2,169 (21.5) 3,049 2,631 (13.7) Operating profit margin (%) 7.3 6.1 7.6 7.0 Module and Core-parts 1,058 479 (54.7) 1,311 922 (29.7) Segment operating margin (%) 3.4 1.7 4.0 3.1 A/S Parts 1,703 1,689 (0.8) 1,738 1,709 (1.7) Segment operating margin (%) 24.2 23.9 23.9 23.2 Recurring Profit 4,039 3,017 (25.3) 4,382 3,593 (18.0) Recurring profit margin (%) 10.7 8.5 10.9 9.6 Tax 1,040 763 (26.6) 1,139 934 (18.0) Tax rate (%) 25.8 25.3 26.0 26.0 Net profit 2,999 2,253 (24.9) 3,253 2,669 (17.9) Net profit margin (%) 7.9 6.3 8.1 7.2

Source: Daiwa forecasts

Source: Daiwa forecasts Note: target multiple applied to our average 2018-19E EBITDA

Hyundai Mobis (012330 KS): 4 July 2018

Mobis: PER valuation gap vs. global auto parts makers (PER,x) 25 Mobis has been trading on a discount of 53.0% 40% vs. global peers since 2010 20 20% 0% 15 (20%) 10 (40%)

Source: Bloomberg, Daiwa

Korea Consumer Discretionary 4 July 2018

GMB Korea Corp (013870 KS)

GMB Kor ea C orp

Target price: n.a. Share price (3 Jul): KRW8,100 | Up/downside: -

Looking to satisfy the growing appetite for FCEVs Sung Yop Chung (82) 2 787 9157  Transmission, water pump and chassis auto-parts supplier [email protected]  Exposed to expansion of HMG’s eco-friendly line-up Josh Rhee (82) 2 787 9124  Expects to record stronger earnings growth from 2019E [email protected]

Background: GMB Korea (GMB) was established in 1979 as a supplier of Share price performance water pump, clutch, bearing, and auto transmission parts. Transmissions, (KRW) (%) engines and chassis respectively contributed 28.9%, 35.1%, and 22.3% of 11,500 195 9,875 169 the company’s revenue in 2017; high-margin eco-friendly electric water 8,250 143 pumps (EWPs) contributed 5.4%. Japan’s GMB Corporation (7214 JP, NR) 6,625 116 currently holds a 54.4% stake in the company. 5,000 90 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 GMB Korea (LHS) Highlights: seeking to benefit from expansion of HMG’s eco-friendly Relative to KOSPI (RHS) line-up. The company supplies EWPs for use in HMG’s HEV, EV, and FCEV line-up, including for the Niro, Ioniq, and Nexo. We expect HMG to 12-month range 5,330.00-11,350.00 expand its eco-friendly line-up to 38 models by 2025 from 13 in 2017, and Market cap (USDbn) 0.14 3m avg daily turnover (USDm) 1.43 GMB is targeting a marked rise in its eco-friendly revenue to KRW30-40bn Source: FactSet, Daiwa forecasts (7% of its revenue) in 2018E (vs. KRW25bn and 5% of its revenue in 2017). We expect global eco-friendly vehicle shipments to reach 6.5m units by 2020E, from 3.3m in 2017. Thus, considering GMB’s water-pump ASPs of KRW10,000-20,000 for ICEs, KRW30,000-40,000 for HEVs, and KRW 400,000-800,000 for FCEVs, GMB expects to record stronger earnings growth from 2018-20E. Also, it is mulling ways to diversify its customer base and expand its footprint by winning new orders for eco-friendly vehicles. As part of this effort, GMB has an agreement with Honda to supply EWPs for use in Honda’s new Clarity FCEV.

Company expects earnings to rebound in 2018E, strengthen from 2019E. After recording revenue and operating-profit contractions of 6% YoY and 44% YoY to KRW467bn and KRW13.5bn for 2017, the company is targeting YoY earnings growth in 2018. Although it did not provide details, the company said it would be difficult to deliver a strong rebound in 2018 due to non-contractual pricing pressure in China. As the company derives 86% of its revenue from Asia, stronger-than-expected domestic and China shipments by HMG would likely be positive for GMB. GMB expects stronger earnings growth from 2019E, driven by: 1) normalisation of China operations, 2) product-mix improvements (a rising proportion of revenue from eco-friendly vehicles), and 3) a rise in new orders from Fiat Chrysler, Honda, and Ssang Yong. Longer term, the company aims to further broaden its client base to global OEMs and accelerate its eco-friendly vehicle revenue growth.

Valuation: The stock is trading currently on actual 2017 multiples of 13.4x PER and 0.7x PBR, with an ROE of 5.25%.

See important disclosures, including any required research certifications, beginning on page 88

GMB Korea Corp (013870 KS): 4 July 2018

GMB Korea: financial Summary GMB Korea: revenue breakdown by product (2017) (KRW bn) 2015 2016 2017 Others Revenue 468 495 467 13.74% Operating profit 17 24 14 Transmission Operating profit margin (%) 3.6 4.9 2.9 Parts Net profit 7 12 5 28.88% Net profit margin (%) 1.4 2.4 1.0 PER (x) 7.5 4.8 13.4 Chassis Parts PBR (x) 0.4 0.4 0.7 22.29% ROE (%) 5.8 9.1 5.3

Engine Parts 35.11% Source: Company, Daiwa Source: Company, Korea

GMB Korea: revenue breakdown by customer (2017) GMB Korea: revenue breakdown by region (2017)

A/S North America Others 4% 2% 5% Europe 8%

Peugeot/China Local 35%

HMG 60%

Asia 86%

Source: Company, Daiwa Source: Company, Korea

GMB Korea: transmission valve GMB Korea: ownership status (end-2017)

Others 42.58% GMB Cooperation 54.37%

KOO KS 1.05% KOO BJ 2.01%

Source: Company, Daiwa Source: Company, Korea

GMB Korea: electric water pump (EWP) GMB Korea: water pump

Source: Company, Daiwa Source: Company, Korea

Pan-Asia Automobiles and Components: 4 July 2018 GMB Korea Corp (013870 KS): 4 July 2018

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Josh RHEE (82) 2 787 9124 [email protected] Craig CORK (852) 2848 4463 [email protected] Chemicals Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] Consumer/Retail Chief Strategist for Asia Pacific; Strategy (Regional) SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Olivia XIA (852) 2773 8736 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Macro Economics (Regional/China) Kelvin LAU (852) 2848 4467 [email protected] TAIWAN Head of Automobiles; Transportation and Industrial (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Jay LU (852) 2848 4970 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Automobiles and Components (Hong Kong/China) (Regional) Leon QI (852) 2532 4381 [email protected] Nora HOU (886) 2 8758 6249 [email protected] Regional Head of Financials; Banking; Diversified financials; Insurance Banking; Diversified financials; Insurance (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Automation & PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] John CHOI (852) 2773 8730 [email protected] Small/Mid Cap Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Fiona LIANG (852) 2532 4341 [email protected] INDIA Industrial (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Dennis IP (852) 2848 4068 [email protected] Head of India Research; Strategy; Banking/Finance Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE Saurabh MEHTA (91) 22 6622 1009 [email protected] (Hong Kong/China) Capital Goods; Utilities Daniel YANG (852) 2848 4443 [email protected]

Power, Utilities, Renewable and Environment (PURE) – Solar and Nuclear (China) SINGAPORE Don LAU (852) 2848 4469 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong) Head of Singapore Research; Telecommunications (China/ASEAN/India) Jonas KAN (852) 2848 4439 [email protected] David LUM (65) 6228 6740 [email protected] Head of Hong Kong and China Property Banking; Property and REITs Cynthia CHAN (852) 2773 8243 [email protected] Royston TAN (65) 6228 6745 [email protected] Property (China) Oil and Gas; Capital Goods Carlton LAI (852) 2532 4349 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Small/Mid Cap (Hong Kong/China) Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore) Michelle WANG (852) 2773 8842 [email protected]

Transportation (Hong Kong/China) JAPAN

Yukino YAMADA (81) 3 5555 7295 [email protected] PHILIPPINES Strategy (Regional) Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy

Pan-Asia Automobiles and Components: 4 July 2018 GMB Korea Corp (013870 KS): 4 July 2018

Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

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Pan-Asia Automobiles and Components: 4 July 2018 GMB Korea Corp (013870 KS): 4 July 2018

Hyundai Mobis: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 07/11/15 290,000 Buy 13/01/17 280,000 Hold 16/01/18 250,000 Hold 13/01/16 280,000 Outperform 11/04/17 230,000 Hold 03/04/18 360,000 Buy 15/04/16 270,000 Outperform 21/06/17 220,000 Sell 04/07/18 235,000 Outperform 27/04/16 290,000 Outperform 12/09/17 200,000 Underperform

11/10/16 270,000 Hold 27/11/17 265,000 Hold 360,000 360,000

340,000

320,000

300,000 290,000 290,000 280,000 280,000 280,000 270,000 270,000 270,000 260,000 265,000 250,000 250,000 240,000 235,000 230,000 220,000 220,000

200,000 200,000

180,000 Jul-15 Jul-16 Jul-17 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Hyundai Motor: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 09/09/15 175,000 Outperform 30/05/16 170,000 Buy 17/10/17 165,000 Outperform 09/10/15 185,000 Outperform 06/10/16 160,000 Buy 14/11/17 180,000 Outperform 07/11/15 190,000 Buy 11/01/17 180,000 Buy 08/01/18 165,000 Outperform 06/01/16 170,000 Buy 21/06/17 190,000 Buy 10/04/18 170,000 Outperform

05/04/16 185,000 Buy 19/07/17 180,000 Buy 04/07/18 160,000 Buy 190,000 190,000 190,000 185,000 185,000 180,000 180,000 180,000 180,000 175,000 170,000 170,000 170,000 170,000 165,000 165,000 165,000 160,000 160,000 160,000

150,000 145,000 140,000

130,000

120,000

110,000 Jul-15 Jul-16 Jul-17 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Pan-Asia Automobiles and Components: 4 July 2018 GMB Korea Corp (013870 KS): 4 July 2018

Kia Motors: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 07/09/15 57,000 Outperform 01/04/16 58,000 Buy 17/07/17 30,000 Sell 12/10/15 60,000 Outperform 23/06/16 51,000 Outperform 20/10/17 30,500 Underperform 07/11/15 68,000 Buy 19/10/16 47,000 Outperform 16/01/18 29,000 Underperform 13/01/16 58,000 Buy 13/01/17 45,000 Outperform 13/04/18 28,000 Underperform

02/03/16 55,000 Buy 11/04/17 31,000 Underperform 09/05/18 38,000 Outperform 70,000 68,000 65,000

60,000 60,000 57,000 58,000 58,000 55,000 55,000 52,000 50,000 51,000 47,000 45,000 45,000 43,000 40,000 38,000 35,000

30,000 31,000 30,000 30,500 29,000 28,000 25,000 Jul-15 Jul-16 Jul-17 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Hanon Systems: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 07/11/15 12,000 Buy 23/09/16 15,000 Buy 24/10/17 15,000 Outperform 17/02/16 13,000 Buy 09/12/16 13,000 Buy 23/04/18 14,000 Buy 23/06/16 15,000 Buy 14/02/17 11,000 Buy 22/06/18 13,000 Buy

10/08/16 14,000 Buy 02/08/17 12,500 Buy 04/07/18 16,000 Buy 16,000 16,000 15,000 15,000 15,000 15,000 14,000 14,000 14,000 13,000 13,000 13,000 13,000 12,500 12,000 12,000 11,000 11,000

10,000 9,800 9,000 9,000 8,000 7,000 6,000 Jul-15 Jul-16 Jul-17 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Pan-Asia Automobiles and Components: 4 July 2018 GMB Korea Corp (013870 KS): 4 July 2018

Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc., its subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures.

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Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: PT Totalindo Eka Persada Tbk (TOPS IJ), PT Integra Indocabinet Tbk (WOOD IJ), PT Buyung Putera Sembada (HOKI IJ), Cromwell European REIT (CERT_SP), Beijing Enterprises Water Group Ltd (371 HK), Mirae Asset Daewoo Co Ltd (006800 KS).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

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Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst : Sung Yop Chung

Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to:

1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets.

Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report:

1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity.

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The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated. “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated.

Additional information may be available upon request.

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Pan-Asia Automobiles and Components: 4 July 2018 GMB Korea Corp (013870 KS): 4 July 2018

Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

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Pan-Asia Automobiles and Components: 4 July 2018 GMB Korea Corp (013870 KS): 4 July 2018

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 68.4% Hold** 21.2% Sell*** 10.4% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

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