Completed 01 Jun 2018 04:40 AM EDT Disseminated 01 Jun 2018 05:00 AM EDT North America Equity Research 01 June 2018 China Auto Trip Takeaways Big Opportunities: Takeaways from Our Meetings with GM, Goodyear, Aptiv & Magna in Shanghai We recently returned from our annual Asia Pacific Auto Tour, hosted jointly over the Autos & Auto Parts course of five days by four J.P. Morgan automotive analysts from around the world AC Ryan Brinkman (including Jose Asumendi out of Europe, Nick Lai out of China, Sangmyeong Kim out (1-212) 622-6581 of South Korea, and ourselves), visiting 26 firms (13 automakers, 5 auto parts [email protected] suppliers, 4 dealers, 2 tiremakers, 1 battery manufacturer, and 1 auto finance Bloomberg JPMA BRINKMAN <GO> company). Jose Asumendi has already written on meetings with European automakers J.P. Morgan Securities LLC and suppliers (see research here). This note provides our thoughts on the China market David L Kelley generally as it affects our coverage and summarizes key takeaways from meetings we (1-212) 622-8657 hosted with the managements of US (and Canada)-based General Motors, Goodyear [email protected] Tire & Rubber, Aptiv, and Magna International, in and around Shanghai. J.P. Morgan Securities LLC Aayush Gupta Relative to the market overall in China, automakers, auto parts suppliers, dealers, (91-22) 6157-3363 and tiremakers we met with forecast moderate (low single digit) growth in 2018 and [email protected] going forward, expect substantially faster growth for New Energy Vehicles J.P. Morgan India Private Limited (“NEVs”), SUVs, and luxury vehicles, foresaw domestic Chinese automakers continuing to gain market share, and were overall very bullish on the long-term growth of the market, supported by the burgeoning ranks of the Chinese middle class. Automakers reported continued pricing pressure, although several noted this may now be moderating from -5-6% previously to -4-5% currently, with the prospect of further amelioration upon likely consolidation of domestic competitors. Key Takeaways from Our Meeting with General Motors (GM, OW): Rising Volume + Improved Mix + Lower Costs - Regulation - Pricing = Steady China Profits. We met with GM China President Matt Tsien and Shanghai GM CFO Loek Beckers at GM’s International Operations and China headquarters in Shanghai, in the process gaining greater insight into the likely drivers of market share and (relative) margin resilience. GM’s market share in YTD 2018 has reached an all- time record high of 16%, supported by the growth of its Cadillac and Baojun brands, making GM the largest automaker in China. A walk-through of the various puts and takes impacting profitability include positive factors such as: (1) Volume (on steady share amidst market growth); (2) Mix (rising percent of models sold being SUVs, MPVs, and luxury vehicles; and rising Cadillac sales as a percent of total); (3) Cost apart from investments in electrification / regulatory (increased localization of supply chain); and (4) Greater exploitation of “downstream” activities (finance, insurance, OnStar, AC Delco, etc.). Negative factors include: (1) Continued pricing pressure, albeit not quite as harsh as before; and (2) Investments in electrification and uncertainty of regulatory cost burden. GM China management was of the opinion that the net of the above positive and negative factors likely translates into roughly steady to slightly better than ~$2.0 bn of China profits going forward. Equity Ratings and Price Targets Mkt Cap Rating Price Target Company Ticker ($ mn) Price ($) Cur Prev Cur Prev General Motors GM US 61,061.00 42.70 OW n/c 58.00 n/c Goodyear GT US 5,875.38 24.43 OW n/c 36.00 n/c Aptiv APTV US 25,496.61 97.50 OW n/c 107.00 n/c Magna International Inc. MGA US 26,794.07 64.07 OW n/c 72.00 n/c Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 31 May 18. See page 69 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com Ryan Brinkman North America Equity Research (1-212) 622-6581 01 June 2018 [email protected] GM reported on 7 key trends shaping the auto market in China: (1) Consumers are moving toward larger families — this is driving demand for more 3-row SUVs and MPVs, benefitting mix; (2) Consumers are pursuing prestige — this is driving the move toward luxury vehicles, benefitting mix; (3) Consumers have increasing purchasing power — this is driving overall auto sales (especially in Tier 3 / Tier 4 cities) and benefitting mix; (4) Consumers are increasingly connected and digitally empowered — this is driving the increasingly connected nature of vehicles; (5) Consumers are ageing and diversifying — this is benefitting mix and diversifying auto market demographics; (6) Consumers are increasingly urbanized — this is driving the need for solutions to solve for crashes, emissions, and congestion; and (7) Consumers are increasingly globalized — this is causing Chinese consumers to be aware of the global positioning of brands and of what vehicles are available in other countries and at what price points. Each of these trends is expanded upon in the report that follows. Key Takeaways from Our Meeting with Goodyear Tire & Rubber (GT, OW): High Visibility into Explosive Aftermarket & Faster than Industry OE Growth. We met with Goodyear President of Asia Pacific Ryan Patterson, Chief Financial Officer of Asia Pacific Oliver Gloe, China Managing Director Ian McDaniels, and Vice President of Corporate Financial Planning & Analysis Christina Zamarro at the firm’s Asia Pacific headquarters in Shanghai. Key takeaways include: (1) The car parc in China is growing very quickly — upwards ~+25 mn units per year, or ~+15%, vs. just a fraction of a percent in developed markets; (2) EVs are expected to grow very quickly in China, perhaps +900% through 2020 — these vehicles are heavier and have more torque, leading to faster tread wear; (3) The market for consumer replacement tire shipments is expected to explode higher in China — Despite China selling 28.5 mn new light vehicles in 2017 vs. 17.2 mn in the US and 14.3 mn in Western Europe, the number of consumer replacement tire shipments in China (~95 mn) significantly lags that of the US (243 mn) and Western Europe (242 mn)... these figures will eventually need to converge; (4) As attractive as the aftermarket opportunity in China is, Goodyear also sees high visibility into sharply improving OE volumes, forecasting a +3% CAGR for industry-wide OE shipments but +12% for Goodyear, due to company-specific factors including backlog; (5) We expect large increases in Goodyear’s Asia Pacific profit going forward, supported by a rebound in its heavily Off-the-Road (“OTR”) non- China business (disproportionately mining tires in Indonesia) at the same time as structural growth in the China aftermarket heats up and the firm gains share in the China OE market. Key Takeaways from Our Meeting with Aptiv (APTV, OW): Meeting Takeaways: Alignment with Secular Trends Drives High Single Digit Growth Over Market. We met with Simon Yang (President of Aptiv Asia Pacific), Director of Investor Relations Kyle Rollins, and multiple key members of Aptiv’s China and Asia Pacific leadership team at the firm’s Asia Pacific and China headquarters in Shanghai. Key takeaways include: (1) Aptiv expects strong growth in the market — 28.5 mn light vehicle sales in 2017 rising to 32 mn in 2020 and 35 mn in 2025; (2) Aptiv had amongst the strongest outlooks for domestic Chinese automakers of any firm we visited with this year, forecasting they increase their share from 44% in 2017 to 50% in 2020; (3) Aptiv is aggressively targeting NEVs in China, given both its expectation they will grow in assembly +160% from 2017 to 2020 and because of the greater content per vehicle opportunity afforded by NEV’s requirement for heavier duty and higher voltage electrical architectures; (4) Aptiv expects the market to grow at a +2.6% CAGR over time and that it can generate growth above the market in China in the high single digit range, suggesting a high single digit to low double digit sustainable long-term growth 2 Ryan Brinkman North America Equity Research (1-212) 622-6581 01 June 2018 [email protected] rate for Aptiv in China; (5) Aptiv differs from some other companies in truly embracing all China has to offer — relying upon China for a source of global talent, global tooling, and as a design, research, development, and engineering center; (6) We toured an Aptiv assembly facility producing connectors, finding it to be amongst the most highly automated facility of any we have toured anywhere in the world. Key Takeaways from Our Meeting with Magna International (MGA, OW): Backlog to Drive >+20% China Revenue CAGR Through 2020. We met with Fred Kao (Vice President of Magna International China) and other members of Magna International’s China team at the firm’s Asia Pacific and China headquarters in Shanghai. Key takeaways include: (1) Magna management forecasts extremely strong growth in China — considering consolidated and non-consolidated revenue combined, sales are forecast to rise from $3.9 bn in 2017 to $6.7-$7.3