automotive news congress 2018, turin...see disclosure appendix of this report for important...

See Disclosure Appendix of this report for important Disclosures and Analyst Certifications

Automotive News Congress 2018, Turin

All time record profits! So why are investors so worried about

the auto industry?

Max Warburton

Head of Global Automotive Research

+44-207-170-0544

[email protected]

June 6, 2018

mailto:[email protected]

GLOBAL AUTOS | 3

You’ve never had it so good!

The historic perception

▪ The auto sector is historically low margin, incredibly capital intense, value destructive

▪ State influence, family influence, poor investment decisions, cyclical and volatile

▪ Most long standing investors have had bad historic experiences and lost money in these stocks

▪ ‘Early cycle’ stocks – buy them when in financial distress, ahead of upturn - then sell quickly

The reality this decade

▪ One of the longest periods of economic expansion in history (9 years and counting)

▪ US industry restructured in 2008-09 – reset pricing; European industry also subtly reshaped

▪ China: like finding another planet on which to sell cars, totally transformed many OEMs’ economics

▪ OEMs far more focused, more capital disciplined

The result

▪ Almost a decade of profit expansion – total OEM industry earnings now over $120bn p.a.

▪ Vast premium segment earnings, NAFTA profits at record, European margins highest in 30 years

▪ Supplier margins the highest in modern history

▪ Huge cashflows, many being returned to shareholders

▪ But stock valuations imply investors believe it simply won’t last much longer

GLOBAL AUTOS | 4

Let the good times roll: 9 years of global expansion

-8%-6%-4%-2%0%2%4%6%8%10%12%14%

0

10

20

30

40

50

60

70

80

90

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018E

Mil

lio

n U

nit

s

Global Passenger Car Unit Sales(2006-2018E)

Global PV Unit Sales Growth % YoY

Source: IHS Markit and Bernstein analy sis

8

10

12

14

16

18

20

Jan-0

6

Sep

-06

May

-07

Jan-0

8

Sep

-08

May

-09

Jan-1

0

Sep

-10

May

-11

Jan-1

2

Sep

-12

May

-13

Jan-1

4

Sep

-14

May

-15

Jan-1

6

Sep

-16

May

-17

Jan-1

8

SA

AR

(M

n U

nit

s)

US Light Vehicle Sales Seasonally Adjusted Annual Rate (2006-present)

Source: Autodata and Bernstein analy sis

10,000

11,000

12,000

13,000

14,000

15,000

16,000

200

6

200

7

200

8

200

9

201

0

201

1

20

12

20

13

201

4

201

5

201

6

201

7

201

8

Un

its (000)

Western Europe: Passenger Car Market SAAR (2006-present)

Western Europe SAAR Rolling 6m Average

Source: LMC and Bernstein analy sis

0

5

10

15

20

25

30

Sale

s V

olu

me (M

n U

nit

s)

China Domestic Passenger Vehicle Sales(2006-2018E)

Source: CAAM and Bernstein analy sis

GLOBAL AUTOS | 5

China has been hugely transformative: profitability under-reported

10%

15%

20%

25%

30%

35%

40%

2012 2013 2014 2015 2016 2017

% o

f to

tal u

nit

sale

s

China unit sales as % of total(2012-2017)

Mercedes

VW Group

BMW

Source: Company reports and Bernstein analy sis

0

10

20

30

40

50

60

70

2013 2014 2015 2016 2017

€k

BMW Global vs China ARPU(2013-2017)

BMW China ARPU BMW Global ex China ARPU

Source: Company reports and Bernstein analy sis and estimates

20%

30%

40%

50%

60%

70%

80%

2013 2014 2015 2016 2017

China as % of Net Income*(2013-2017)

VW Group BMW Mercedes Audi

* assuming 30% tax rate

Source: Company reports and Bernstein estimates and analy sis

10

12

14

16

18

20

22

24

26

28

Jan-1

0

Jul-

10

Jan-1

1

Jul-

11

Jan-1

2

Jul-

12

Jan-1

3

Jul-

13

Jan-1

4

Jul-

14

Jan-1

5

Jul-

15

Jan-1

6

Jul-

16

Jan-1

7

Jul-

17

Jan-1

8

SA

AR

(m

n u

nit

s)

China passenger vehicle SAAR(2010-present)

Source: CAAM, Bernstein estimates and analy sis

GLOBAL AUTOS | 6

Global pricing: significant discipline, at last

1.2%

1.5%

2.0%

0.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2014 2015 2016 2017

Peugeot (PCD): pricing effect to Auto revenue growth

(2014-2017)

Price growth


0.8%

2.1%

3.9%

1.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2014 2015 2016 2017

Renault: pricing effect to Auto revenue growth

(2014-2017)

Price growth


$24,000

$26,000

$28,000

$30,000

$32,000

Ford North America - ARPU(2010-2017)

ARPU ($m)


€15,000

€17,500

€20,000

€22,500

€25,000

VW brand - ARPU(2010-2017)

ARPU (€m)


GLOBAL AUTOS | 7

Global mix: everyone wants to drive an SUV (heading to 100% share?)

11%14%

16%18%

21%23%

26%

30%

33%

0%

5%

10%

15%

20%

25%

30%

35%

SU

V %

of P

C s

ale

s

Western Europe: SUV % of pass. car sales(2010-2018E)

Source: IHS Global Insight and Bernstein analy sis

10%12%

14%

17%

21%

28%

34%

38%39%

0%

5%

10%

15%

20%

25%

30%

35%

40%

SU

V %

of s

ale

s

China: SUV % of sales(2010-2018E)


44% 46% 44% 46% 48%51%

55%59% 60%

0%

10%

20%

30%

40%

50%

60%

70%

SU

V &

PU

P %

of s

ale

s

US: SUV and Pickup % of LV sales(2010-2018E)

SUV PUP


6%8% 7% 8%

9%

12%

15%

19%20%

0%

5%

10%

15%

20%

25%

SU

V %

of s

ale

s

Brazil: SUV % of sales(2010-2018E)


GLOBAL AUTOS | 8

All time record profits – in nearly every region

0

25,000

50,000

75,000

100,000

125,000

2010 2011 2012 2013 2014 2015 2016 2017$m

Global Auto EBIT(2010-2017)

European American Chinese Japanese Korean

Source: Company reports, Bloomberg and Bernstein analy sis

0%

2%

4%

6%

8%

10%

12%

0.0

3.0

6.0

9.0

12.0

15.0

Ford GM FCA

Op

era

ing

marg

in

EB

BIT

($m

)

North America earnings by OEM(2017)

EBIT Operating margin


0

4,000

8,000

12,000

16,000

20,000

€m

Auto EBIT for European OEMs(2017)

Auto EBIT (€m)


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Kia Hyundai Toyota Nissan Honda

$m

Auto EBIT for Japanese/Korean OEMs(2016)

Auto EBIT ($m)


GLOBAL AUTOS | 9

Capital discipline: spending control is evident in the core businesses

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2012 2013 2014 2015 2016 2017

Cap

ex a

s %

of s

ale

s

To

tal c

ap

ex s

pen

d (€m

)

Combined capex spend of European OEMs(2012-2017)

Capex Capex as % of sales


3%

4%

5%

6%

7%

8%

BMW Daimler FCA PSA Renault Volkswagen

Capex as % of sales by group(2012-2017)

2012 2013 2014 2015 2016 2017


GLOBAL AUTOS | 10

Awash with cash: flush after a decade of recovery – but what will it be spent on? Cyclical

protection? Restructuring? Technology?

0

2

4

6

8

10

12

14

16

Toy

ota

VW

For

d

GM

Honda

Daim

ler

FC

A

Nis

san

BM

W

SA

IC

Hyu

ndai

Suzu

ki

Renaul

t

PS

A

Kia

$b

n

FCF of top 15 OEMs(2018E)

FCF ($m)

Source: Company reports, Bloomberg L.P. and Bernstein analy sis

(10)

0

10

20

30

40

50

60

Toy

ota

VW

GM

BM

W

Daim

ler

SA

IC

Hyu

ndai

Nis

san

For

d

PS

A

Honda

Renaul

t

Kia

Suzu

ki

FC

A

$b

n

Net Industrial Cash of top 15 OEMs(2017)

Net Industrial Debt ($m)

Source: Company reports, Bloomberg L.P. and Bernstein analy sis

GLOBAL AUTOS | 11

So why are investors so worried?

45%

50%

55%

60%

65%

70%

75%

80%

85%

SXAP P/E rel to SXXP(2013-present)

SXAP P/E rel to SXXP

Source: Bloomberg L.P. and Bernstein analy sis

32

.5x

28

.7x

27

.0x

26

.6x

23

.3x

22

.3x

22

.1x

19.3

x

19.0

x

18

.2x

18

.2x

18

.1x

15

.1x

7.8

x9.4

x

8.8

x

7.4

x

7.1

x

6.9

x

6.7

x

6.2

x

6.0

x

5.5

x

4.6

x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

Nest

le

Google

Fac

ebook

Mic

roso

ft

AB

InB

ev

Unile

ver

Exx

on M

obil

Johnso

n &

Johnso

n

Roya

l Dutc

h S

hell

Pro

cter &

Gam

ble

Walm

art

Apple

Genera

l Ele

ctric

Peugeot

Toy

ota

Sam

sung E

lectronic

s

Volk

swagen

Daim

ler

For

d

BM

W

Honda

Nis

san

Genera

l Moto

rs

Renaul

t

Current P/E ratio

Source: Bloomberg L.P. and Bernstein analy sis

GLOBAL AUTOS | 12

No. 1: Old fashioned cyclical fears

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Gro

wth

Yo

Y

(%)

Re

tail

vo

lum

e ('0

00

un

its)

China mass market retail volume & growth(Jan 2017 - present)

Mass retail vo lume Growth YoY

Source: C.A.D. and Bernstein analy sis

8%

9%

10%

11%

12%

13%

14%

0

10

20

30

40

50

60

70

H1

2015

H2

2015

H1

2016

H2

2016

H1

2017

H2

2017

Pre

-ta

x m

arg

in (%

)

Pre

-ta

x p

rofi

t (R

MB

bn

)

China international mass JV pre -tax profit & margin (2015-2017)

Aggregate pre-tax profit Aggregate pre-tax marg in

Source: Company reports, Bernstein estimates and analy sis

R² = 0.3431

8

10

12

14

16

18

20

0 5 10 15 20

US

lig

ht ve

hic

le s

ale

s S

AA

R (m

)

Effective Federal Funds Rate (%)

Interest rates vs US light vehicle sales SAAR*(1976-present)

*Excluding interest rates below 0.5%

Source: Federal Reserv e and Bernstein analy sis

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

5

10

15

20

2009

2010

2011

2012

2013

2014

2015

2016

2017

Mil

lio

n U

nit

s

US Passenger Vehicle Sales (2009-2017)

Unit Sales % Growth YoY

Source: IHS Markit and Bernstein analy sis

GLOBAL AUTOS | 13

No.2: Regulatory driven powertrain change enormously expensive

35%

40%

45%

50%

55%

Jan-1

5

Apr-

15

Jul-15

Oct-15

Jan-1

6

Apr-

16

Jul-16

Oct-16

Jan-1

7

Apr-

17

Jul-17

Oct-17

Jan-1

8

Apr-

18

W. Europe Diesel share of new car sales (%)(Jan'15 to present)

Diesel share of new car sales (%)

Rolling 12m average

Source: LMC and Bernstein analy sis

Source: Industry reports and Bernstein analysis

10% by 2019

12% by 2020

no post-2020 targets,

speculated 15%-20% by 2025

RMB108,000 subsidy

for EV with range >250km

EV / NEV

targets

Other rules

China electrification targets

0%

5%

10%

15%

20%

25%

30%

EU - % decrease in Fleet CO2 neededto meet 2021 target

Source: PA Consulting and Bernstein analy sis4.5

% 7.0

% 9.5

% 12.0

%

14.5

%

17.0

%

19.5

%

22.0

%

22.0

%0%

5%

10%

15%

20%

25%

30%

2018 2019 2020 2021 2022 2023 2024 2025 After2025

California electrification - ZEV credit targets (as % of sales)

min. ZEV max. TZEV

Source: Calif ornia Air Resources Board and Bernestein analy sis

GLOBAL AUTOS | 14

No. 3: Profound new technology, huge spending, uncertain impact

Intelligent co-operation: BMW / Intel / Mobileye

Source: Company website

Leagues ahead of core industry rivals?

Source: Company website

0

500

1,000

1,500

2,000

2,500

3,000

Conti Bosch Denso Autoliv Mobileye

€m

Supplier revenue from ADAS(2016 v 2020E)

2016 2020E

Source: Conti and Bernstein analy sis

338

339

343

362

370

380

402

439

516

958

Google

Daimler

Volkswagen

Toyota

BMW

GM

Ford

Continental

Audi

Bosch

Number of autonomous driving patent filings (Jan 2010 - Jul 2017)

Source: IW Köln, WIPO and Bernstein analy sis

GLOBAL AUTOS | 15

No. 4: Outside of the core business, capital discipline now at risk

0

5,000

10,000

15,000

20,000

Capex U

S$m

VW's annual Gigafactory spend vs. Group Capex Targets (2018E - 2025E)

Estimated Gigafactory Spend Remaining Capex


Non-core, loss-making, management distraction

Source: Wikimedia commons

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2012 2013 2014 2015 2016 2017

$b

n

Tesla's capex on PPE(2012-2017)

Huge spending: Auto tech centres in CA

Source: IDG, Carmaker data and Bernstein analysis

GLOBAL AUTOS | 16

Modelling the impact

47.0%43.3%

19.3%

0%

10%

20%

30%

40%

50%

60%

Daimler BMW Tesla

Daimler / BMW real gross marginv Tesla gross margin

(2017)


$0

$1,000

$2,000

$3,000

$4,000

$5,000

Cost per unit for fuel saving technologies by manufacturer - Combined Fleet (2025)

Costs (2010$)

Source: EPA, Department of Transportation and Bernstein analy sis

10.0% 10.0%

9.6%

8.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

2015 2016 2017 2020E

Mercedes-Benz Cars EBIT margin(2015-2020E)

Source: Company reports and Bernstein estimates and anay sis

EV impact guidance

0

5

10

15

20

25

30

35

US

D $

k

Powertrain Cost Comparison for 80kWh(2012-2035E)

BEV ICE

Source: SNE Research, and Bernstein estimates and analy sis

GLOBAL AUTOS | 17

Winning investor confidence

The cycle may well prove extended

▪ Interest rate hikes likely modest, employments trends still strong, licensed driver numbers growing

▪ Financial services risk control firm, loss ratios modest, upside in EMs

Pricing and capital discipline remain within the industry’s control

▪ Industry has a record of damaging margins even with stable volumes – this time it’s different?

▪ Encouraging evidence from US market; consistent pricing discipline in EU, China uncertain

Managing powertrain shift and regulatory pressure

▪ Name any regulatory driven content that has ever helped margins?

▪ Diesel share shift surprising manageable so far; lobbying still effective, regulators pragmatic (even in China)

Demonstrating that EV technology is easily mastered; remaining in the race on AV

▪ Many investors worry traditional OEMs ‘don’t get it’ – new products will prove otherwise (but will hurt margins)

▪ OEMs assembling resources to pursue AV – JVs/consortiums, start-up investments (Aurora etc.)

Barriers to entry greater than understood, manufacturing as a ‘moat’

▪ Some concern about Chinese OEMs going global (Lynk & Co, GAC) and pushing tech (NIO, Byton etc.)

▪ But Tesla’s problems are resetting expectations about the complexities of this industry

▪ Average life of an S&P500 company now 19 years….many OEMs now 100 years old and still thriving

Source: Company reports and Bernstein analysis.

automotive news congress 2018, turin...see disclosure appendix of this report for important...

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