Arndt Ellinghorst CEO Evercore ISI Europe
Arndt Ellinghorst; CEO Evercore ISI Europe Equity Research; arndt.ellinghorst@evercoreisi.com +44 20 7847 3501 Automotive New Europe Congress 2015 10 June
W.Europe NAFTA China S.America Global YoY % Change We are BULLISH on the Automotive Industry STEADY improvement in Europe to continue We forecast global light vehicle sales will grow >3% this year and >4% in 2016 We expect a steady improvement in European volumes, c18% below peak, despite a bounce back in consumer confidence 7.5% 8.0% 3.5% 3.0% 3.4% 0.8% 3.0% 3.1% 4.2% -3.6% 2015 2016
BMW Daimler VW PSA Renault FCA Ford GM Tesla Honda Nissan Toyota BMW Daimler VW PSA Renault FCA Ford GM Tesla Honda Nissan Toyota -5% 1% 10% 18% 15% 12% 11% 20% 24% -21% -40% -6% 20% 22% 25% 36% 28% 29% 20% 52% 46% 41% 74% 62% Investments in Auto stocks have yielded significant RETURNS We see room for further UPSIDE, particularly in European names European OEM equity prices have rallied year to date, with BETA performing strongest We see further upside for European names, and expect German OEMs to make up ground on European peers Return YTD Evercore ISI Projected Return
BMW Daimler VW PSA FCA Ford GM Tesla Local Currency (Bn) However, not all is good. OEMs are not effective at passing COSTS to the end customer 50% of OEMs in Europe are NOT profitable. Equity markets place little value on their investments 50% of OEMs in Europe are not profitable, as OEMs have failed to pass investment and content costs to customers Market puts little value on OEMs investments yielding returns. PSA valued at <5 years R&D, but Tesla at 33x 80 81 50% Audi, BMW Dacia Hyundai, Kia Jeep Land Rover Lexus Mazda Mitsubishi M-B, Mini Skoda, Toyota VW Alfa Romeo Chevrolet Chrysler Citroen, Fiat Ford, Honda Jaguar, Lancia Opel, Peugeot Nissan Renault Seat Suzuki Volvo 49% 19 50 27 46 11 11 15 34 29 56 37 60 1 32 1% Loss Breakeven Profit R&D Expenditure, since 2010 Ind. Value
Cost curve for internal combustion engines is heading in one direction: UP Cost curve for alternative powertrains is heading in one direction: DOWN Heading to a place of no contest with respect to gasoline Elon Musk OEMs face an additional 1,000 in direct manufacturing costs to meet 2020 European CO2 regulations For VW Group this equates to c 3.7bn. For PSA this equates to c63% of 2016 forecasted EBIT Source: ICCT, Evercore ISI Research
GLOBAL TOP OEMs (GTOs) are set to continue to prosper and have the means OEMs need to act SMARTER to generate better capital returns - new business model The 7 GTOs are best placed to prosper going forward, with substantial cash positions and the ability to generate cash Disruptive entrants pose a greater risk than in the past due to their speed to market & willingness to adopt new trends Source: Tesla, Evercore ISI Research AMPE d Autonomous Safety All Tesla Model S fitted with autonomous features, which can be purchased post delivery increasing future revenue potential Mobility/Connectivity Tesla uses connectivity to update and improve car during car s lifetime at minimal cost Powertrain Tesla can also perform powertrain updates remotely, e.g. addition of Creep Electrical Tesla targeting c30% reduction in battery costs from scale alone common format
Select suppliers seen as structurally BETTER businesses than OEMs CONTENT PER VEHICLE growth gives good suppliers volume growth and pricing power Whilst regulation and content is a headwind for OEMs it represents a business opportunity for suppliers Investors pay more for stronger growth. Suppliers set to outgrow global unit production as CPV grows A M P E d
European OEM US OEM European Supplier US Supplier Select suppliers are delivering on the 3 M s which drive Auto ALPHA Suppliers generate > cash returns and the market is prepared to pay HIGHER multiples Certain suppliers, those with secular growth, are delivering on the 3 Ms and as a result generate Alpha for investors Investors are willing to pay c50% more for suppliers where cash conversion is >40% higher 9x 9x 53% 56% 14x 84% 13x 72% Share Price to 2016 Earnings FCF to Net Income
SUMMARY We are BULLISH on the Automotive Industry Investments in Auto stocks have yielded significant returns OEMs have to absorb costs to cope with future CO2 standards Crucial to understand what technology content can be priced to consumers 50% of cars sold in Europe are not sold at a profit Global Top OEMs and those who look to differentiated business models likely to prosper Suppliers are seen as structurally better businesses than OEMs Investors should focus on the tangible vs. the intangible, keep your feet on the ground
Any QUESTIONS?