7 February 2019 EQUITIES Global Auto Top Picks AUTOS HSBC Top 10 Buys in Global Autos in 2019 Global Leveraging the expertise of HSBC’s auto analysts across six Horst Schneider* markets, this report features our Top 10 Buy ideas for 2019 Global Head of Automotive Research HSBC Trinkaus & Burkhardt AG [email protected] Global Autos has re-rated 9% YTD on earnings cuts but also +49 211 910 3285 with genuinely improved sentiment – which could be premature Henning Cosman* Analyst HSBC Bank plc Relief really could be short-lived: with negative global volumes in [email protected] H1 2019e and cyclical/structural risks, stock picking is key +44 20 7991 0369 Giulio Pescatore*, CFA Analyst Top 10 Buys from Europe, Asia and selected EMs HSBC Trinkaus & Burkhardt AG [email protected] For the first time, we present our top ideas within HSBC’s Global Autos coverage, +49 211 910 3018 spanning Europe, Asia and Emerging Markets. We include carmakers and suppliers with Pushkar Narendra Tendolkar* high implied upside to our target prices and tangible catalysts, selecting 10 companies Associate Bangalore with self-help potential, structural tailwinds, defensive characteristics and attractive valuations – our relative preference in this difficult environment for global Autos. * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations EMEA – Ferrari, Michelin, Renault and Ford Otosan: In Europe we like the defensive characteristics of Ferrari (p42) and Michelin (p46), and the attractive valuation of Renault (p50). In Turkey, despite the difficult domestic market conditions, we see Ford Otosan (p68) as a long-term sustainable export growth story at an attractive valuation. Asia – Brilliance, Bajaj Auto, Escorts and Hyundai Mobis: In China we like Brilliance’s (p34) focus on the premium market, and the structural growth profile of Minth Group (p38). In India we look for exposure to the domestic market with Bajaj Auto (p54) and Escorts (p58). In Korea we pick Hyundai Mobis (p61) for its exposure to electric mobility. LatAm – Livent: Despite FX volatility in LatAm, we like Livent (p65) as a lithium pure-play uniquely positioned to benefit from EV growth. Ratings, target prices and valuation summary Market cap Current Upside/ 2018e 2019e 2020e Implied 2020e Company Bloomberg RRC Rating Currency (USDm) price New TP Old TP Downside PE PE PE PE (at TP) Livent LTHM US Buy USD 1,838.1 12.6 22.0 22.0 74.6% 14.0x 12.3x 10.2x 17.9x Escorts ESCO IN Buy INR 1,177.0 689.0 980.0 980.0 42.2% 13.1x 12.4x 11.2x 15.9x Ford Otosan FROTO TI Buy TRY 3,763.6 56.0 68.8 70.5 22.8% 10.8x 9.8x 7.9x 9.8x Michelin ML FP Buy EUR 19,316.5 94.0 115.0 115.0 22.4% 10.0x 8.9x 7.8x 9.5x Renault RNO FP Buy EUR 20,325.3 60.1 73.0 73.0 21.4% 4.3x 4.0x 3.6x 4.4x Minth Group 425 HK Buy HKD 4,302.2 29.5 35.1 35.1 19.2% 14.4x 11.4x 9.6x 11.5x Bajaj Auto BJAUT IN Buy INR 10,931.7 2,710.6 3,200.0 3,200.0 18.1% 17.4x 15.3x 14.0x 16.5x Ferrari RACE IM Buy EUR 23,790.8 110.4 130.0 125.0 17.8% 29.5x 28.0x 25.3x 29.8x Hyundai Mobis 012330 KS Buy KRW 19,490.5 224,000 250,000 250,000 11.6% 11.2x 7.7x 7.5x 8.3x Brilliance Auto 1114 HK Buy HKD 5,015.3 7.8 8.5 8.5 9.0% 4.8x 4.4x 4.0x 4.4x Source: HSBC estimates, Refinitiv Datastream, share prices as of 4 February 2019. The PE in the above table is calculated using reported EPS and hence differs from the F&V pages where PE is calculated on adjusted EPS. Disclosures & Disclaimer Issuer of report: HSBC Trinkaus & Burkhardt AG This report must be read with the disclosures and the analyst certifications in View HSBC Global Research at: the Disclosure appendix, and with the Disclaimer, which forms part of it. https://www.research.hsbc.com EQUITIES ● AUTOS 7 February 2019 Contents HSBC Global Automotive Research team 3 Executive Summary 4 Regional outlook 19 China 20 Europe 24 India 26 Korea 29 Turkey 31 Company Profiles 33 Brilliance 34 Minth Group 38 Ferrari 42 Michelin 46 Renault 50 Bajaj Auto 54 Escorts Limited 58 Hyundai Mobis 61 Livent 65 Ford Otosan 68 Appendix 85 Disclosure appendix 91 Disclaimer 95 2 EQUITIES ● AUTOS 7 February 2019 HSBC Global Automotive Research team Europe Horst Schneider* Henning Cosman* Global Head of Automotive Research Equity Analyst European OEMs and Suppliers European Auto Suppliers and Tyremakers [email protected] [email protected] +49 211 910 3285 +44 20 7991 0369 Giulio Pescatore*, CFA Equity Analyst European OEMs and Luxury OEMs [email protected] +49 211 910 3018 China Wei Sim* Tracy Li*, CFA Equity Analyst Equity Analyst Chinese OEMs Chinese Auto Suppliers and Car Dealerships [email protected] [email protected] +852 2996 6602 +852 2996 6751 India Yogesh Aggarwal* Vivek Gedda* Head of Research, India Equity Analyst Indian OEMs Indian OEMs HSBC Securities and Capital Markets (India) Private Limited [email protected] [email protected] +91 22 6164 0693 +91 22 2268 1246 South Korea Turkey Paul Choi* Cenk Orcan* Equity Analyst Co-Head of Turkey Equity Research South Korean OEMs & Suppliers Turkish OEMs [email protected] [email protected] +82 2 3706 8758 +90 212 376 46 14 Americas Alexandre Falcao Global Head of Ag/EV Materials & LatAm Industrials Analyst [email protected] +1 212 525 4449 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations 3 EQUITIES ● AUTOS 7 February 2019 Executive Summary Leveraging the expertise of HSBC’s auto analysts across Developed and Emerging Markets, this report features our Top 10 2019 Buy ideas Global Autos has re-rated 9% YTD on earnings cuts but also with genuinely improved sentiment – which could be premature With negative global volumes in H1 2019e and cyclical and structural risks, stock-picking is key as the relief rally in the sector could be short- lived Reasons for YTD bounce in 2019 – premature? 2018 was a bad year for the auto sector in all regions with the respective regional MSCI auto Market sentiment has recently clearly improved – indices showing double-digit falls. While the global Autos & Auto Component index de-rated possibly too soon in our view 26% in 2018, it has re-rated 9% in 2019-YTD. This performance pattern has been directionally similar across all relevant regional indices, with the exception of India where the de-rating has strongly accelerated in 2019. Turkey has re-rated the most in 2019 YTD, ahead of the Korean, European and Chinese indices. Similarly to Europe, the US and Japanese auto markets both experienced a positive re-rating YTD after a significant de-rating in 2018. But unlike Europe, earnings revisions have been flat YTD for both regions. The two key reasons for the 2019 YTD re-rating in our view are: Mechanical re-rating due to sell-side consensus earnings cuts Genuinely improved sentiment anticipating normalisation of the negative factors of 2018 Global auto stocks rebounded strongly YTD from the December 2018 lows – too early for further re-rating? 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 STOXX Global 1800 / Automobiles & Parts - SS Linear (STOXX Global 1800 / Automobiles & Parts - SS) Source: Factset at 4 February 2019 4 EQUITIES ● AUTOS 7 February 2019 De-rating and re-rating of Global Autos & Components by region in 2018 and 2019 YTD MSCI Autos & Parts ___ World ____ __ Europe ___ ____ US _____ ___Japan ___ __ China ____ ___ India ____ ___ Korea ____ ___ Turkey ____ NTMA PE EPS PE EPS PE EPS PE EPS PE EPS PE EPS PE EPS PE EPS 2012 12% 12% 27% 9% 24% (3%) 3% 36% 25% (1%) 31% 11% (9%) 6% 23% 3% 2013 13% 15% 27% 10% 35% 2% (5%) 65% (9%) 41% (7%) 11% 10% (1%) 6% 10% 2014 (5%) 1% (8%) (1%) (6%) 10% (5%) 16% (18%) 14% 12% 17% (10%) (8%) 16% 13% 2015 (4%) 1% 1% (2%) (18%) 17% (4%) 8% (1%) (1%) 18% (24%) 7% (14%) (9%) 15% 2016 1% (6%) (12%) 5% (3%) (1%) 15% (19%) (4%) 17% (7%) 17% 4% (8%) (2%) 19% 2017 5% 16% (1%) 29% 25% (4%) (5%) 16% 45% 28% 31% (2%) 20% (16%) 13% 42% 2018 (26%) 2% (30%) (1%) (26%) 5% (27%) 9% (44%) (2%) (3%) (23%) (3%) (20%) (42%) 18% 2019 YTD 9% (1%) 14% (1%) 11% (0%) 5% 0% 12% (8%) (6%) (2%) 19% (7%) 20% (3%) Source: MSCI, Factset at 4 February 2019 Chinese Autos & Components have re-rated 12% in 2019 YTD after de-rating 44% in 2018 Chinese market most Chinese Autos & Components have only recovered around a quarter of their over 40% de-rating controversial for 2019 with in 2018, as weekly (wholesale) sales and production declines remain in double-digit negative low visibility – but recent territory even ahead of the Chinese New Year in February and as: inventory contraction a small positive 1.