European Tyre Makers

Transcription

1 Europe Equity Research Tires & Rubber (Automobiles & Components) Research Analysts Erich Hauser, CFA Arndt Ellinghorst George Galliers Specialist Sales: David Arnold European Tyre Makers SECTOR REVIEW Advance thinking - not advance worrying Tyre labelling is here European brands still perform best: Ahead of the introduction of tyre labels on 1 November, Europe s largest tyre dealer Delticom started to publish labeling information last week having conducted a survey of >40,000 tyre customers to establish the most relevant criteria affecting purchase considerations. Based on this survey, it has constructed a rating system which we use to analyse data for key tyre sizes. We show that EU and US players dominate the Top10 rankings, with respect to tyre ratings for each tyre size, and see little risk of Asian competitors taking market share post the introduction of tyre labels. Minimum cost advantage for Asian tyre makers on a highly rated tyre: Whilst Asian tyre makers, such as Hankook, rank highly in certain product categories, we believe that cost advantages relative to European players are minimal. Asian producers lower labour costs are offset in absolute terms by transportation costs and in relative terms by lower revenue per unit. More importantly, where Asian makers product competes at the higher end of the rankings, raw material costs are in line with those of European competitors. This view is supported by our conversations with Lanxess, which believes Asian producers will need to procure more expensive raw materials as they seek to take their product up-market. Hence, taking cost as a percentage of revenue, we see no natural cost advantage for Asian players in Europe, particularly when FX moves are making Europe a less attractive market to compete in and EU tyre makers Tier2 and Tier3 brands are becoming increasingly competitive. Mining Capex vs Opex risks containable: Specific to Michelin, mining companies capex and opex plans suggest that concerns related to the outlook for Michelin s SR3 business are unmerited. We believe that the company s direct mining capex exposure is only c2% of sales while mining opex accounts for 4%. The Credit Suisse mining team is not forecasting a decline in global mining capex until We believe that our forecast of only 0.5% sales growth in SR3 in 2013 is suitably conservative given stillsupportive end market trends. We still like tyre exposure Conti is our top pick Outperform, TP 90: Across our coverage universe we believe the tyre space is the most likely source of organic earnings growth in 2013E, thanks to volumes bottoming out in 2012E. Within the space we believe that Conti still offers the strongest combination of low multiples (7.5x 2013E PE and 4.1x EBITDA) and structural growth. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Tyre labelling is here: No reason to assume big market share shifts From 1 November 2012 all tyres sold in Europe which were produced after 30 th June 2012 will need to carry a label indicating the tyre s specific impact on rolling resistance, wet grip and noise emission. While this label only captures a very small spectrum of a tyre s relevant performance characteristics, we believe it will be a major driver of consumer behaviour. The experience in the Japanese tyre market suggests that labeling should help the premium tyre makers in the market by highlighting the performance benefits. For a more detailed discussion please refer to our report on Michelin from 8 th June 2011 (Michelin Getting to grips with a new era). As a rough rule of thumb, in terms of rolling resistance every efficiency class represents a fuel consumption delta of 0.1 to 0.15l per 100km (so l consumption difference between an A and a G rated tyre). For wet grip the difference between an A- and a G- rated tyre is a breaking distance of 18-21m on a wet surface when travelling at a speed of 80km/h. Tyre labels highlight product performance and should push the overall market towards a better product mix Figure 1: EU tyre label Source: European Commission Will greater transparency on a tyre s performance help Asian competitors more than the established European players? One of the most debated points in the market with respect to tyre labeling is whether greater transparency on product performance will allow Asian competitors to take market share from their European counterparties, provided that these new entrants could offer a product with similar performance characteristics versus a typically more expensive European tyre. While European tyre makers have so far maintained that the quality and the breath of their product offering should shield them from the Asian competition, the value of a brand is clearly less relevant in a world when the attributes of a tyre are summarised in a label. In Labels could also help budget tyres if product performance was similar to a more expensive brand European Tyre Makers 2

3 such an environment it should also be more complex to defend a price premium if there really is no performance differential versus a cheaper tyre any longer. Figure 2: Market shares in the EU market have been remarkably stable over the past 10 years we do not believe that labelling will change this EU PC Tyre market share data no 2011 data available as of yet Europe PC Tire market share 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Michelin Conti Goodyear Bridgestone Pirelli Other Source: Continental AG Factbook To assess whether such concerns are justified we went through labeling information for key tyre sizes in Europe and ranked this information using a performance index developed by Delticom. What matters to consumers: Mostly wet grip and rolling resistance To understand the relative importance and the likely impact of this legislative change, Europe s largest tyre retailer Delticom has conducted a survey amongst more than 40,000 tyre customers in 15 European countries. The result of this survey was that most tyre customers put the greatest emphasis on wet grip (>50%) ahead of rolling resistance and noise emission. The company has taken this information and weighted the attributes measured on a tyre label accordingly to develop a tyre performance index (Delticom Effizienzklassen Index: DEX) which now allows us to rank individual tyres based on the information provided by the tyre label. European tyre makers tend to score very well and seem price competitive Since last week, Delticom has shown labeling information on summer tyres on its German tyre shop site: Taking Delticom s index, we show the top 10 tyres for key tyre sizes and vehicle classes. We also show the cheapest available tyre to illustrate the customer s savings potential by going for a budget brand. Where the tyre brand differs from the tyre OEM s name we have provided information on the tyre manufacturer to highlight Tier2 and Tier3 brands in Europe. We have tried to choose tyres for vehicles which were introduced c4 to 5 years ago, in order to provide a better indication for demand trends in the replacement market at the current point in time. European Tyre Makers 3

4 Figure 3: Highest scoring tyres for a Ford Fiesta/ Opel Corsa Tyre Size 175/65 R14 82T, Ford Fiesta 1.4 MY 2008 onwards Rank Tyre brand Tyre name Rolling Resistance Wet Grip Noise emission DEX Price (EUR) Manufacturer 1 Continental Premium Contact 5 C A Continental EcoContact 5 B B Michelin Energy Saver + C B Bridgestone Ecopia EP25 C B Fulda EcoControl E C Goodyear 6 Goodyear DuraGrip E C Michelin Energy Saver E B Uniroyal Rain Expert E B Continental 9 Continental Premium Contact 2 E B Dunlop SP Street Response C C Goodyear Cheapest Tyre 21 Nankang RX615 E C Source: Reifendirekt.de; 1 st September 2012; Credit Suisse Research Figure 4: Highest scoring tyres for a VW Golf VI, Audi A4 Tyre Size 195/65 R15, Golf VI 1.4 MY Rank Tyre brand Tyre name Rolling Resistance Wet Grip Noise emission DEX Price (EUR) Manufacturer 1 Fulda EcoControl HP C B Goodyear 2 Michelin Energy Saver C A Continental Premium Contact 5 C A Hankook Ventus Prime 2 B B Hankook Kinergy Eco B B Continental Eco Contact 5 B B Vredestein Sportrac 5 C B Apollo Tyres 8 Vredestein Sportrac 3 E C Apollo Tyres 9 Goodyear Excellence E C Goodyear 10 Uniroyal Rain Expert E B Continental Cheapest Tyre 27 HighPerformer HS-3 E B Nankang Source: Reifendirekt.de; 1 st September 2012; Credit Suisse Research European Tyre Makers 4

5 Figure 5: Highest scoring tyres for a Peugeot 308 Tyre Size 225/45 R17 94W, Peugeot onwards Rank Tyre brand Tyre name Rolling Resistance Wet Grip Noise emission DEX Price (EUR) Manufacturer 1 Michelin Primacy 3 C A Goodyear Eagle F1 Asymmetric2 E A Fulda SportControl C B Goodyear 4 Dunlop SP Sport Fast Resp C B Goodyear 5 Continental Sport Contact 5 C A Hankook Ventus Prime 2 B B Sava Intensa UHP E B Goodyear 8 Goodyear OptiGrip E B Dunlop SP Sport 01 ROF E B Goodyear 10 Kleber Dynaxer HP3 E B Michelin Cheapest Tyre 23 Nankang NK Comfort Eco2 C B Source: Reifendirekt.de; 1 st September 2012; Credit Suisse Research Figure 6: Highest scoring tyres for a BMW 535d Tyre Size 245/40 R18 93Y, BMW 535d Rank Tyre brand Tyre name Rolling Resistance Wet Grip Noise emission DEX Price (EUR) Manufacturer 1 Dunlop Sport Maxx RT E A Goodyear 2 Continental Sport Contact 5 C A Hankook Ventus S1 evo2 B B Michelin Pilot Sport 3 E A Goodyear Eagle F1 Asymmetric2 E A Pirelli P Zero E A Michelin Pilot Super Sport E A Hankook Ventus V12 Evo C B Goodyear Efficient Grip C B Pirelli Cinturato P7 C B Cheapest Tyre 12 Nankang NK Comfort Eco2 C B Sunny SN3970 C C Source: Reifendirekt.de; 1 st September 2012; Credit Suisse Research European Tyre Makers 5

6 Figure 7: Highest scoring tyres for a Mercedes ML 320 CDI Tyre Size 255/55 R18 105V, Mercedes ML 320 CDI Rank Tyre brand Tyre name Rolling Resistance Wet Grip Noise emission DEX Price (EUR) Manufacturer 1 Goodyear Efficient Grip SUV C B Continental Sport Contact 5 C A Dunlop SP Sport 01 ROF * E B Dunlop Sport Maxx E B Goodyear Eagle F1 SUV C C Pirelli P Zero * C B Michelin Latitude Sport C B Pirelli Scorpion Verde C B Nokian Hakka Z SUV C B Michelin Latitude Tour HP B C Cheapest Tyre 31 Barum Bravuris 4x4 E C Continental * runflat tyres Source: Reifendirekt.de; 1 st September 2012; Credit Suisse Research Figure 8: Highest scoring tyres for a Porsche 997 C2S, rear tyre only Tyre Size 295/30 R19 100Y, Porsche 997 C2S rear axle Rank Tyre brand Tyre name Rolling Resistance Wet Grip Noise emission DEX Price (EUR) Manufacturer 1 Hankook Ventus S1 evo C B Michelin Pilot Sport PS2 E A Pirelli P Zero Rosso E A Michelin Pilot Super Sport E A Dunlop SP Sport Maxx GT E B Continental Sport Contact 5P G A Bridgestone Potenza RE 050 A E C Continental Sport Contact 3 G A Toyo Proxes T1 Sport F C Nokian Z G2 F B Cheapest Tyre 9 Toyo Proxes T1 Sport F C Source: Reifendirekt.de; 1 st September 2012; Credit Suisse Research In all the examples above, not one budget brand has managed to place a tyre within the top10 of the respective segment. The best result we could find was the Nankang NK Comfort Eco2 on a BMW 535d which would have ranked 12 th. What is however noteworthy is that Hankook has managed to have a tyre in the Top10 for almost every vehicle we have been looking at. Yet at the same time the Hankook tyres are not notably cheaper than a European tyre. Furthermore we note that Tier2 and Tier3 brands of established tyre makers such as Goodyear s Sava brand or Conti s Uniroyal/Barum tyres perform reasonably well and seem to offer a better price/performance ratio than a Chinese budget tyre. Not one budget brand places in the top10 established tyre makers Tier2 and Tier3 brands perform better than Chinese budget competitors European Tyre Makers 6

7 Figure 9: Price differential between a European tyre and a budget tyre is minimal for smaller tyre sizes while premium car customers should be less price sensitive Ford Fiesta Tyre Rank Price Discount Cheapest tyre in top 10 Uniroyal Rain Expert Cheapest tyre overall Nankang RX % VW Golf VI Tyre Rank Price Discount Cheapest tyre in top 10 Vredestein Sportrac Cheapest tyre overall HighPerformer HS % Peugeot 308 Tyre Rank Price Discount Cheapest tyre in top 10 Sava Intensa UHP Cheapest tyre overall Nankang NK Comfort Eco % BMW 535d Tyre Rank Price Discount Cheapest tyre in top 10 Hankook Ventus V12 Evo Cheapest tyre overall Sunny SN % Mercedes ML 320 Tyre Rank Price Discount Cheapest tyre in top 10 Pirelli Scorpion Verde Cheapest tyre overall Barum Bravuris 4x % Porsche 997 C2S Tyre Rank Price Discount Cheapest tyre in top 10 Toyo Proxes T1 Sport Cheapest tyre overall Toyo Proxes T1 Sport Source: Reifendirekt.de; 1 st September 2012; Credit Suisse Research We also think it is interesting to note that the price difference between the overall cheapest tyre and the cheapest tyre within the Top10 of each segment is only minimal for smaller tyre sizes while it becomes more meaningful for tyres on premium cars. Yet we believe that customers in the market for high performance tyres are typically less price sensitive and more brand loyal than those looking for an already lower priced tyre to fit on a smaller vehicle. With that in mind we struggle to see the consumer case for budget tyres in Europe and do not expect these tyres to start taking market share after the introduction of tyre labels. If anything we could see a situation where consumers treat buying a better performing tyre similarly to buying an insurance policy, i.e. diminished risk outweighs incremental spend. This assumption seems to be supported by the fact that in the Delticom survey wet grip (i.e. breaking distance) was rated as the most relevant performance indicator. We do not see a consumer case for budget tyres in Europe and do not expect Asian tyre makers to start taking share thanks to labeling Tyre labels won t affect winter tyre business in 2012E expect to see impact for summer tyre sales in 2013E We believe it is important for investors to bear in mind that any effects from tyre labelling will only really start to be felt in 2013 when summer tyres produced in Q and Q will go on sale. Most winter tyres which are about to be shipped into the retail network would have been produced pre June 30 th, so will not be carrying a label. On top of this our conversations with Delticom also suggest that the label information on winter tyres might not be all that relevant to the performance of the product and that tyre makers and retailers are looking for an alternative way/characteristics to describe the performance of a winter tyre. European Tyre Makers 7

8 No natural cost advantage for Asian tyre makers on competitive tyres Given our discussion above, we have decided to look at the cost structure and profitability metrics of Hankook, which seems to be the one Asian competitor that has come closest to its European/US competition with respect to product performance. Hankook has recently entered an OE contract with Mercedes, which implies that the inroads the company has made with regards to quality have not just had an impact on tyre labeling scores but have also been noted by OE customers. In Figure 10 we show information from Hankook s and Michelin s financial statements where the two businesses split up major cost items. Hankook has a historical cost advantage with respect to labour costs. However the business has also historically faced higher transportation costs as well as higher raw material costs relative to the selling price. We believe that the latter is merely a result of the fact that a highly performing tyre will require roughly the same type and amount of raw material input, irrespective of where the tyre is being produced, so a lower pricing point will lead to higher relative raw material costs and a reduced gross margin. A highly rated tyre will require expensive material inputs irrespective of where it is being manufactured Figure 10: Hankook and Michelin s major operating cost items in % of sales Operating Expenses as % of sales 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5.4% 4.5% 5.9% 5.5% 16.8% 15.9% 22.2% 22.6% 24.2% 9.7% 26.7% 10.3% 41.3% 46.0% 49.8% 53.6% Michelin Hankook Hankook's labour cost advantage is largely compensated by higher raw material and transportation costs Raw materials Employee costs Transportation / other D&A and impairments Source: Company data, Credit Suisse research So from this perspective, there seems to be no natural cost advantage for an Asian tyre company as soon as it seeks to enter developed markets with a fully competitive product. Furthermore the margin differential between a pure-play European tyre company such as Michelin and Hankook seems to be non-existent based on reported numbers if anything the recent strength of the Won has impacted Hankook s relative performance while Michelin has at least recently benefitted from a weaker euro. European Tyre Makers 8

9 Figure 11: Subsequently Michelin s margins are on par Michelin Margins (%) 35% 30% 25% 20% Gross margin Op margin 15% Figure 12: with Hankook s returns Hankook Margins (%) 35% 30% 25% 20% Gross margin 15% op margin 10% 10% 5% 5% 0% 0% Source: Company data More demand from Asian tyre makers for higher grade polymers Source: Company data Our conversation with Lanxess, one of the few suppliers of high performance polymers used for the tyre production (mainly tyre in-liners) supports our initial assumption that tyre makers in Asia are generally moving towards higher grade raw material inputs. The push towards labelling in Europe but also in Korea and Japan has led to a situation that requires tyre makers to start procuring higher grade synthetic rubber. This in turn raises the input costs even for a lower cost producer to a level where the competitive advantage versus a European company is continuously eroded. This to our mind draws into question the validity of the low-cost tyre business model in developed markets and supports our argument that tyre labelling is unlikely to lead to market share losses by European players to Asian competitors. Let s not forget about the currency: Europe is becoming an unattractive market in which to be price aggressive Finally, the strengthening Won and Yen means that Europe is becoming an increasingly unattractive market for Asian tyre makers to compete in. These businesses need to sell a product that is technologically on-par with European competitors yet the above mentioned pressures on input costs and the rising currency headwinds make it increasingly difficult to achieve returns that would not be dilutive to the overall operations of the business. Asian tyre companies are starting to buy higher grade synthetic rubber cost advantages continue to shrink European Tyre Makers 9

10 Figure 13: The Euro has lost >20% against the Korean Won and the Yen since 2009 this should make Europe an unattractive place for Asian tyre makers to be price aggressive EUR Cross Rates KRW and JPY (indexed) EURKRW EURJPY 50 02/01/09 02/03/09 02/05/09 02/07/09 02/09/09 02/11/09 02/01/10 02/03/10 02/05/10 02/07/10 02/09/10 02/11/10 02/01/11 02/03/11 02/05/11 02/07/11 02/09/11 02/11/11 02/01/12 02/03/12 02/05/12 02/07/12 Source: the BLOOMBERG PROFESSIONAL service Hence: The cheapest tyre is not necessarily manufactured in China European Tier3 brands highly price competitive We believe the above arguments strengthen the case for Tier2 and Tier3 brands produced by European tyre makers, such as the Uniroyal brand for Conti or the Kleber/BF Goodrich brand for Michelin. This is particularly true for smaller diameter tyres and we note that the Uniroyal brand has managed to achieve a Top10 rating for the two smallest tyre sizes we have collected data for (14 and 15 tyres for the Ford Fiesta and the VW Golf). While Michelin s Kleber brand had a Top10 rating on the 17 tyres for a Peugeot 308 a tyre class where Goodyear s Tier2 Sava brand achieved a Top10 ranking with a tyre that was also amongst the cheapest we could find. Note that Uniroyal, Kleber and Sava brands all have tyres within the top10 for smaller diameter tyres Climbing the wall of worries mining capex fears overplayed for Michelin Using data from our mining research team, we show that mining capex forecasts for UK listed mining companies (Rio Tinto, BHP Billiton and Antofagasta) have been cut by 4% for Interestingly Figure 15 shows that global capex forecasts for the top 20 companies under the team s coverage continue to show positive growth for 2013E and 2014E. For a full discussion of these figures please refer to the team s report Cash is king capex cycle peaking published 9 th August European Tyre Makers 10

11 Figure 14: 3 Majors capex guidance down 4% in 13 ($mn) Figure 15: CS global capex proxy vs. EBITDA ($mn) 200, , , , , ,000 80,000 60,000 40,000 20, E 2013E 2014E 2015E EBITDA CS Global Capex prox y Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates In this context we would also like to point out that while prices for iron ore and coal have indeed seen substantial corrections recently, other metals such as gold and silver have witnessed price increases. We also note that, as we show in Figure 16, the lead time for most mining equipment, most notably mining tyres, is still substantially longer than what would have been the case in the past somewhat deflating any fears of an immediate decline in mining tyre demand. Figure 16: Rio still indicates that lead times for mining tyres are too long Lead times for mining tyres remain elevated Source: Rio Tinto Company Presentation May 2012 European Tyre Makers 11

12 Rio s Mine of the Future programme: minimising the downtime for trucks Last year Rio Tinto announced that rather than buying manually operated trucks for its Pilbara mine, it will buy 150 automated trucks up from the original estimate of only 10 such trucks. As part of its Mine of the future programme, Rio is trying to minimise the downtime for trucks due to driver change and ensure full availability of trucking resources within the mine, even if drivers might not be available. In this context we believe it is sensible to assume that mining companies will continue to put greater emphasis on the avoidance of truck down-time hence procuring higher quality earthmover tyres. Such a move away from Chinese competitors towards technology leaders was already recently indicated by Bridgestone. The scale of the problem: We believe that c6.2% of Michelin group revenue is mining exposed of which only 35% (orc 2%) is dependent on mining capex We believe that within the SR3 segment at Michelin, 64% of sales come from earthmover tyres, 68% of which are directly related to mining activities and mining linked construction, hence 37% of SR3 revenues depend on mining operations. However if we assume that similar to the agricultural business only 35% of these revenues are exposed to the OE market with the remainder coming from the replacement market, we are left with 2% of group revenues that are dependent on total mining capex. And while this business is likely to be a higher margin business than the group overall, we still struggle to see this segment accounting for more than 4% of group earnings in total. Figure 17: Total Mining exposure is 37% of SR3 or 6.2% of group sales but only 2% come from OE Mining capex: no more than 2% of group sales and 4% of group earnings in total Aircraft / 2-Wheel / Other 11% Earthmover, 64% Mining 37% Mining linked construction 6% Agricultural 25% Other Construction 11% Quarry / Cement 10% Source: Company data, Credit Suisse estimates European Tyre Makers 12

13 What really matters to a cyclical business: Volume recovery Following a much longer than expected period of poor volume demand for replacement tyres across developed, and to some extent emerging, markets we believe that we are now close to the volume inflection point. We base this view on 3 key observations. Firstly, as shown in Figure 18, we will start running against easy year-on-year comps from September. This means that at the very least the market will see positive demand indications from Q3. Figure 18: From September, we will be running against easy volume comps in key replacement tyre end markets 20.0% 15.0% 10.0% high comps low comps YoY Volume change (%) 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% EU RT NA RT -25.0% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Source: Company data, Credit Suisse research Of greater relevance to us however is not just the year-on-year comp effect that we expect to see developing over the next months, but predominantly the end of the destocking cycle in the tyre distribution network. We, in line with most tyre makers, expected this destocking to be complete by the end of Q1 following the unusually warm winter weather. Yet in the face of weak consumer demand, tyre distributors and retailers decided to bring inventories down by more than usual meaning that tyre maker production volumes continued to decline well into the summer. Below we show data from the association of German tyre retailers which shows two important aspects of the current tyre market. Firstly, sell-out rates to end-customers are consistently better than sell-in rates from tyre makers to their retailers Destocking should be over Winter tyre sales growing again in Germany Secondly, winter tyre sales are up yoy indicating that the situation of overstocking at the end of 2011 is now fully addressed and that we should see more normal demand patterns in this higher margin product group. European Tyre Makers 13

14 Figure 19: Dealer de-stocking in pictures: Sales to customers (sell-out) is consistently better than distributor sell-in during H1 12 YoY Volume change 5% -5% -15% Sell-in Sell-out -25% -35% PC Summer tyres PC Winter tyres SUV tyres Light Truck Tyres Heavy Truck Tyres Source: WdK The above seems to make sense intuitively when bearing in mind that volumes shipped to the distribution network in Europe and NAFTA are close to the lows we have seen in 2008/09 in absolute terms. Figure 20: How much lower can EU tyre demand go? Figure 21: NAFTA demand saw big declines during Q2 EU Tyre volume index (Mar 06 = 100) OE RT weighted tyre volume index Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 North Am Tyre volume index (Mar 06 = 100) OE RT weighted tyre volume index Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Source: Michelin, Credit Suisse research Recent business trends unchanged volumes versus Q2 but pricing is stable Source: Michelin, Credit Suisse research Unfortunately, we have not yet seen the tyre market data for July or August (due for release in the next ten days), yet our conversations with both Lanxess and Delticom suggest that the activity in tyre endmarkets and indeed tyre production levels are similar to that seen at the end of Q2. We would not have expected to see any deviations at the current point in time, however, and can only point to our conversation with Delticom during which the company stated that pricing in the market has remained stable over the summer months. We believe that this should alleviate some of the concerns on the outlook for endmarkets while we are waiting for easy comps to start pushing up tyre statistics from September. European Tyre Makers 14

15 Tyre sector still a good place to be Conti remains our top pick We believe that all of the above supports our positive stance on the tyre makers in Europe and we cannot follow some commentators views that there are risks to the market share of European tyre makers in the wake of the introduction of tyre labelling. To us the key attraction of the industry from a shareholder perspective into 2013 is that we see the greatest likelihood of earnings growth for this particular subset of our coverage universe while OEMs and parts suppliers all face much greater uncertainty with respect to sales and production volumes, particularly in Europe. By contrast, tyre makers have arguably already been through the low-point in the demand curve and we would hope that easier volume comps together with the need to replace tyres on vehicles sold under various cash-for-clunkers schemes in 2008/09 should all help to bring investors attention back to this sector. While Michelin is the obvious way to play the above mentioned trends, we maintain our view that Conti is the top-pick within the space. We base this relative preference on the cheaper valuation of Conti when taking the entire capital structure into account (4.1x 2013E EV/EBITDA vs. 4.4x at Michelin), the better margin profile and the seemingly more durable growth story for the German player thanks to structural growth drivers in its components business. While we appreciate the appeal of Michelin, particularly with respect to it being the biggest pure-play tyre name in Europe we find its valuation less appealing relative to Conti. We maintain our view that H2 12 should be another good period for the name and hope that, this time around, the company does deliver on our FCF forecast of 411m for H2 12. Figure 22: Conti Valuation Summary, m A 2012E 2013E 2014E EV/Sales 158% 79% 77% 77% 58% 71% 65% 60% EV/EBITDA 9.9x 6.5x 6.3x 5.4x 4.0x 4.6x 4.1x 3.7x EV/EBIT 14.3x 10.9x 13.3x 8.0x 5.8x 6.5x 5.8x 5.2x P/E 12.9x 7.7x 17.0x 13.4x 6.2x 7.7x 7.5x 7.0x FCF Yield 6.6% 3.2% 24.6% 4.3% 4.8% 5.3% 9.8% 11.2% Dividend yield 2.1% 0.0% 0.0% 0.0% 3.1% 2.5% 2.5% 3.2% Source: Company data, Credit Suisse estimates Figure 23: Michelin Valuation Summary, m e 2013e 2014e EV/Sales 110% 86% 85% 72% 67% 75% 69% 63% EV/EBITDA 7.2x 7.2x 7.0x 4.8x 4.8x 4.8x 4.4x 3.7x EV/EBIT 10.8x 13.9x 14.9x 7.7x 7.2x 7.0x 6.3x 5.3x P/E 11.4x 16.4x 20.6x 7.7x 5.6x 6.9x 6.3x 5.4x FCF Yield 3.1% -5.5% 22.0% 4.4% -5.8% 3.0% 7.3% 9.9% Dividend yield 1.9% 2.1% 2.3% 3.3% 4.6% 4.0% 4.6% 5.3% EV/CE 1.49x 1.11x 1.06x 0.92x 0.93x 1.01x 0.94x 0.86x Source: Company data, Credit Suisse estimates European Tyre Makers 15

16 Figure 24: Conti P&L Summary, m 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E Revenues 16,619 24,239 20,096 26,047 30,505 32,938 33,840 34,739 Cost of sales -12,596-19,485-16,082-20,268-24,108-25,245-25,820-26,204 Gross Profit 4,024 4,754 4,014 5,779 6,397 7,693 8,021 8,535 R&D ,498-1,356-1,450-1,609-2,141-2,200-2,258 Selling and logistics ,180-1,123-1,311-1,433-1,547-1,590-1,632 Administrative expenses Other income and ,627-1, expenses Income from investments EBIT 1, ,040 1,935 2,587 3,175 3,379 3,770 Margin, % 10.1% -1.2% -5.2% 7.4% 8.5% 9.6% 10.0% 10.9% Net interest PBT 1,522-1,003-1,761 1,238 1,851 2,705 2,854 3,260 Tax ,076 Tax rate (%) -31% 7% -9% -48% -29% -32% -33% -33% Equity Income Minority interests Reported Net Income 1,021-1,124-1, ,232 1,760 1,832 2,094 EPS (basic), EPS pre PPA deprn, Clean EPS (ex restruct & PPA), Source: Company data, Credit Suisse estimates European Tyre Makers 16

17 Figure 25: Conti Divisional Summary, m 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E Revenues Brake, Chassis & Safety 4,649 5,134 4,374 5,775 6,511 7,058 7,127 7,241 Powertrain 1,177 4,040 3,399 4,731 5,842 6,438 6,729 7,065 Interior & Infotainment 1,532 5,857 4,363 5,518 6,111 6,494 6,655 6,787 Passenger Tires 4,976 5,100 4,696 5,821 6,958 7,561 7,788 7,983 Commercial Tires 1,452 1,404 1,066 1,428 1,854 1,996 2,075 2,120 ContiTech 3,064 3,007 2,406 3,095 3,583 3,744 3,819 3,896 Others Total 16,619 24,239 20,096 26,047 30,505 32,938 33,840 34,739 EBIT (Underlying) Brake, Chassis & Safety Powertrain Interior & Infotainment Passenger Tires ,031 1,083 1,357 1,419 1,469 Commercial Tires ContiTech Others TOTAL UNDERLYING EBIT 1,842 1,747 1,166 2,517 3,043 3,600 3,799 4,000 Clean EBIT Margin (%) Brake, Chassis & Safety 12.5% 10.0% 8.1% 10.9% 11.0% 10.0% 9.5% 9.6% Powertrain -0.5% -4.7% -6.4% 0.5% 4.1% 5.4% 6.7% 7.6% Interior & Infotainment 5.0% 8.6% 1.3% 7.5% 8.4% 9.0% 9.2% 9.3% Passenger Tires 15.4% 12.6% 16.5% 17.7% 15.6% 17.9% 18.2% 18.4% Commercial Tires 7.7% 1.9% 1.9% 6.0% 6.1% 9.8% 10.2% 10.3% ContiTech 11.9% 10.9% 10.1% 12.8% 12.5% 13.1% 13.3% 13.6% Total 11.1% 7.2% 5.8% 9.7% 10.0% 10.9% 11.2% 11.5% Source: Company data, Credit Suisse estimates European Tyre Makers 17

18 Figure 26: Michelin P&L Summary, m 2006A 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E Net sales 16,384 16,867 16,408 14,807 17,891 20,719 21,665 22,929 24,203 Cost of Sales -11,653-11,760-12,024-10,527-12,403-14,821-15,309-16,226-17,192 Gross Margin 4,731 5,107 4,384 4,280 5,488 5,898 6,356 6,702 7,010 Sales & Marketing -1,799-1,738-1,730-1,650-1,847-1,942-1,891-1,947-2,003 R&D General & Administrative ,069-1,161-1,113-1,237-1,385-1,428-1,503-1,582 Other Income (Expense) EBIT (pre-exceptional) 1,338 1, ,695 1,945 2,351 2,526 2,915 Margin, % 8.2% 9.8% 5.6% 5.8% 9.5% 9.4% 10.9% 11.0% 12.0% Non recurring items Operating Income (reported) 1,118 1, ,695 1,945 2,351 2,526 2,915 Margin, % 6.8% 7.8% 5.1% 3.0% 9.5% 9.4% 10.9% 11.0% 12.0% Net interest expense PBT 942 1, ,498 1,996 2,161 2,376 2,775 Tax rate -39% -28% -31% -50% -30% -27% -31% -31% -31% Tax Net income before minorities ,049 1,462 1,491 1,640 1,915 Reported Net Income ,048 1,462 1,491 1,640 1,915 Reported EPS, Diluted and adj EPS, DPS, Source: Company data, Credit Suisse estimates European Tyre Makers 18

19 Figure 27: Michelin Group Operating Assumptions, m 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E Group Net Sales FX -3.3% -3.8% 0.2% 4.8% -1.8% 3.0% 0.0% 0.0% Volumes 3.2% -2.9% -14.8% 13.4% 6.7% -4.2% 4.1% 4.1% Mix 0.5% 0.5% 3.0% -0.8% -0.1% 0.5% 0.5% 0.5% Price 2.7% 3.7% 2.7% 2.5% 10.6% 4.6% 1.3% 1.0% Price/mix 3.2% 4.2% 5.7% 1.7% 10.5% 5.1% 1.8% 1.5% Sales Growth 2.9% -2.7% -9.8% 20.8% 15.8% 4.6% 5.8% 5.6% Net sales 16,867 16,408 14,807 17,891 20,719 21,665 22,929 24,203 Cost of Sales -11,760-12,024-10,527-12,403-14,821-15,309-16,226-17,192 Gross Margin 5,107 4,384 4,280 5,488 5,898 6,356 6,702 7,010 Sales & Marketing -1,738-1,730-1,650-1,847-1,942-1,891-1,947-2,003 R&D General & Administrative -1,069-1,161-1,113-1,237-1,385-1,428-1,503-1,582 Other Income (Expense) EBIT (pre-exceptional) 1, ,695 1,945 2,351 2,526 2,915 Margins, % Cost of Sales -69.7% -73.3% -71.1% -69.3% -71.5% -70.7% -70.8% -71.0% Gross Margin 30.3% 26.7% 28.9% 30.7% 28.5% 29.3% 29.2% 29.0% Sales & Marketing -10.3% -10.5% -11.1% -10.3% -9.4% -8.7% -8.5% -8.3% R&D -3.3% -3.0% -3.4% -3.0% -2.9% -2.9% -2.9% -2.9% General & Administrative -6.3% -7.1% -7.5% -6.9% -6.7% -6.6% -6.6% -6.5% Other Income (Expense) -0.5% -0.6% -0.6% -0.6% -0.6% -0.6% -0.6% -0.6% EBIT (pre-exceptional) 9.8% 5.6% 5.8% 9.5% 9.4% 10.9% 11.0% 12.0% Source: Company data, Credit Suisse estimates European Tyre Makers 19

20 Continental CONG.DE Price (31 Aug 12): Eu79.06, Rating: OUTPERFORM, Target Price: Eu90.00 Income statement (Eu m) 12/11A 12/12E 12/13E 12/14E Sales revenue 30,505 32,938 33,840 34,739 EBITDA 4,228 5,099 5,401 5,697 Depr. & amort. (1,631) (1,924) (2,022) (1,927) EBIT (CS) 2,597 3,175 3,379 3,770 Net interest exp. (736) (470) (525) (510) Associates Other adj, PBT (CS) 1,861 2,705 2,854 3,260 Income taxes (536) (866) (942) (1,076) Profit after tax 1,325 1,839 1,912 2,184 Minorities (83) (79) (80) (90) Preferred dividends Associates & other Net profit (CS) 1,560 2,049 2,114 2,248 Other NPAT adjustments (318) (289) (281) (154) Reported net income 1,242 1,760 1,832 2,094 Cash flow (Eu) 12/11A 12/12E 12/13E 12/14E EBIT 2,597 3,175 3,379 3,770 Net interest (736) (470) (525) (510) Cash taxes paid Change in working capital (639) (834) (231) (235) Other cash & non-cash items 674 1,138 1, Cash flow from operations 1,897 3,009 3,733 3,905 CAPEX (1,813) (2,141) (2,132) (2,084) Free cash flow to the firm ,601 1,821 Acquisitions Divestments Other investment/(outflows) 15 Cash flow from investments (1,798) (2,141) (2,132) (2,084) Net share issue/(repurchase) (0.40) Dividends paid (38) (314) (414) (414) Issuance (retirement) of debt (401) Other 838 Cash flow from financing 399 (314) (414) (414) Effect of exchange rates Changes in Net Cash/Debt ,187 1,407. Net debt at start 7,519 7,021 6,467 5,280 Change in net debt (498) (554) (1,187) (1,407) Net debt at end 7,021 6,467 5,280 3,873 Per share data 12/11A 12/12E 12/13E 12/14E No. of shares (wtd avg) CS adj. EPS (Eu) Prev. EPS (Eu) Dividend (Eu) Dividend payout ratio Free cash flow per share Key ratios and 12/11A 12/12E 12/13E 12/14E valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) EV/sales EV/EBITDA EV/EBIT P/E P/B Asset turnover ROE analysis (%) ROE stated-return on ROIC Interest burden Tax rate Financial leverage Credit ratios (%) Net debt/equity Net debt/ebitda Interest coverage ratio Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates. Balance sheet (Eu m) 12/11A 12/12E 12/13E 12/14E Assets Cash and cash equivalents 1,541 2,095 3,282 4,689 Accounts receivable 5,342 5,595 5,841 6,091 Inventory 2,990 3,249 3,338 3,521 Other current assets 1,091 1,091 1,091 1,091 Total current assets 10,963 12,029 13,551 15,392 Total fixed assets 6,609 6,825 6,936 7,093 Intangible assets and goodwill 7,058 7,058 7,058 7,058 Investment securities Other assets 1,409 1,409 1,409 1,409 Total assets 26,038 27,322 28,954 30,953 Liabilities Accounts payable 4,111 3,790 3,894 4,093 Short-term debt 2,514 2,514 2,514 2,514 Other short term liabilities 3,733 3,785 3,804 3,823 Total current liabilities 10,359 10,089 10,212 10,430 Long-term debt 6,048 6,048 6,048 6,048 Other liabilities 2,088 2,115 2,125 2,135 Total liabilities 18,495 18,252 18,385 18,613 Shareholders' equity 7,146 8,607 10,040 11,736 Minority interest Total equity & liabilities 26,038 27,322 28,954 30,953 Net debt (Eu m) 7,021 6,467 5,280 3, Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Price Price relative The price relative chart measures performance against the GERMAN SE XETRA DAX INDEX which closed at on 31/08/12 On 31/08/12 the spot exchange rate was Eu.8 /US$1 European Tyre Makers 20

21 Michelin MICP.PA Price (31 Aug 12): Eu57.05, Rating: OUTPERFORM, Target Price: Eu70.00 Income statement (Eu m) 12/11A 12/12E 12/13E 12/14E Sales revenue 20,719 21,665 22,929 24,203 EBITDA 2,878 3,351 3,606 4,072 Depr. & amort. (933) (1,000) (1,079) (1,157) EBIT (CS) 1,945 2,351 2,526 2,915 Net interest exp. 51 (190) (150) (140) Associates Other adj, PBT (CS) 1,996 2,161 2,376 2,775 Income taxes (534) (670) (737) (860) Profit after tax 1,462 1,491 1,640 1,915 Minorities Preferred dividends Associates & other Net profit (CS) 1,462 1,491 1,640 1,915 Other NPAT adjustments Reported net income 1,462 1,491 1,640 1,915 Cash flow (Eu) 12/11A 12/12E 12/13E 12/14E EBIT 1,945 2,351 2,526 2,915 Net interest 51 (190) (150) (140) Cash taxes paid Change in working capital (894) (189) (16) (117) Other cash & non-cash items 577 1,190 1,229 1,297 Cash flow from operations 1,679 3,162 3,590 3,955 CAPEX (1,668) (1,993) (1,949) (1,936) Free cash flow to the firm 11 1,168 1,641 2,019 Acquisitions (11) Divestments Other investment/(outflows) 908 Cash flow from investments (713) (1,883) (1,899) (1,886) Net share issue/(repurchase) 12 Dividends paid (138) (357) (414) (476) Issuance (retirement) of debt (323) Other (210) (860) (887) (1,000) Cash flow from financing (659) (1,217) (1,301) (1,476) Effect of exchange rates 4 Changes in Net Cash/Debt Net debt at start 2,557 2,246 2,184 1,794 Change in net debt (311) (62) (390) (592) Net debt at end 2,246 2,184 1,794 1,202 Per share data 12/11A 12/12E 12/13E 12/14E No. of shares (wtd avg) CS adj. EPS (Eu) Prev. EPS (Eu) Dividend (Eu) Dividend payout ratio Free cash flow per share Key ratios and 12/11A 12/12E 12/13E 12/14E valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) EV/sales EV/EBITDA EV/EBIT P/E P/B Asset turnover ROE analysis (%) ROE stated-return on ROIC Interest burden Tax rate Financial leverage Credit ratios (%) Net debt/equity Net debt/ebitda Interest coverage ratio (38.1) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates. Balance sheet (Eu m) 12/11A 12/12E 12/13E 12/14E Assets Cash and cash equivalents 1,593 1,655 2,045 2,637 Accounts receivable 3,075 3,383 3,518 3,713 Inventory 4,602 4,689 4,837 5,039 Other current assets 1,048 1,048 1,048 1,048 Total current assets 10,318 10,775 11,447 12,438 Total fixed assets 7,889 8,772 9,592 10,321 Intangible assets and goodwill 2,157 2,157 2,157 2,157 Investment securities Other assets Total assets 20,888 22,228 23,720 25,439 Liabilities Accounts payable 2,024 2,097 2,223 2,355 Short-term debt 1,361 1,361 1,361 1,361 Other short term liabilities 2,216 2,349 2,490 2,638 Total current liabilities 5,601 5,807 6,073 6,354 Long-term debt 2,478 2,478 2,478 2,478 Other liabilities 4,708 5,063 5,063 5,063 Total liabilities 12,787 13,348 13,614 13,895 Shareholders' equity 8,099 8,878 10,104 11,543 Minority interest Total equity & liabilities 20,888 22,228 23,720 25,439 Net debt (Eu m) 2,246 2,184 1,794 1, Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Price Price relative The price relative chart measures performance against the CAC 40 INDEX which closed at on 31/08/12 On 31/08/12 the spot exchange rate was Eu.8 /US$1 European Tyre Makers 21

22 Companies Mentioned (Price as of 31 Aug 12) Antofagasta (ANTO.L, 1107 p, NEUTRAL, TP 1, p) BHP Billiton (BLT.L, 1836 p, NEUTRAL, TP 2, p) Bridgestone Corp. (5108, 1,815) Continental (CONG.DE, Eu79.06, OUTPERFORM, TP Eu90.00) Lanxess (LXSG.DE, Eu60.32, NEUTRAL, TP Eu65.00) Michelin (MICP.PA, Eu57.05, OUTPERFORM, TP Eu70.00) Rio Tinto (RIO.L, 2736 p, OUTPERFORM, TP 3, p) Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for CONG.DE CONG.DE Closing Target Price Price Initiation/ 88 Date (Eu) (Eu) Rating Assumption 18-Jan O Mar-10 X Oct Nov Mar Sep Feb-12 X O Mar May Mar-10 Eu Feb Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered 3-Year Price, Target Price and Rating Change History Chart for MICP.PA MICP.PA Closing Target Price Price Initiation/ Date (Eu) (Eu) Rating Assumption 18-Jan Feb Mar-10 X 18-Oct Jun-11 X 08-Jun O 09-Sep Eu Mar Jun-11 O 70 Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stock s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. European Tyre Makers 22

23 Underperform (U): The stock s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29 th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the % and % levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analyst s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 45% (52% banking clients) Neutral/Hold* 42% (49% banking clients) Underperform/Sell* 11% (38% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (CONG.DE) Method: Our E90 target price is based on applying a c9x forward earnings multiple to our 2012 forecast - a multiple which is slightly below the historical valuation range for the stock. We believe this is justified given the changed ownership structure and the associated potential share overhang Risks: A capital increase from Continental and/or a sale of Schaeffler's shareholding and/or a decline in global vehicle production levels could prevent the shares from reaching our target price. Price Target: (12 months) for (MICP.PA) Method: Our primary valuation uses a multiples approach, consistent with the company's historical valuation range, supported by a DCF model with an 9.5% terminal margin and 2.5% perpetuity growth, yielding a price target of EUR70per share. Risks: Key risks to our target price include a sharp decline in tyre replacement demand, a contraction in economic activity or an unorderly and faster than expected increase in natural rubber prices. Also a breaking down of the pricing discipline in the tyre space would have negative consequences for Michelin. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (CONG.DE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. European Tyre Makers 23