company in-depth · landi renzo (lr.mi) compounding risks and growth ... political risks, given...

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Citigroup Global Markets | Equity Research

Europe | Italy Auto Parts & Equipment

Company In-Depth

14 August 2007 | 68 pages

Landi Renzo (LR.MI) Compounding Risks and Growth

A Nice Niche — Landi Renzo is the world leader in the niche of alternative fuel system kits for vehicles (23% share). Independent industry research estimates the market for gas conversion kits is set to accelerate from 9.9% over the past two years to 18% annually to 2012. But it should remain a market of just 8m units in 2012 – a drop in the auto sector ocean, likely keeping big names out.

Sound Business Model — Landi’s business model hinges on two main elements: i) a focus on R&D and innovation, and ii) a lean production base. Also very important is its local presence in its key markets via extensive distribution channels. The combination of these elements coupled with the relatively small size of the niche makes Landi’s business relatively well protected.

Double-Digit Growth to Continue — In 2006-09 (CAGR) we forecast sales EBITDA and net profit growth of 21.3%, 24.7% and 26.3%. We see the EBITDA margin topping 23.8% while ROI should be well above 50%. Operating cash flow should reach 9.6% of sales in 2009. However, growth will come with political risks, given most of it will be generated in Pakistan, Iran and India.

Off To A Slow Start – H1 07 results were disappointing, with growth well below the full year guidance given prior to the IPO. In our view the company has to work harder to improve its forecasting ability to regain the confidence of the financial community. However, following the recent de-rating and bullish H2 07 guidance, we think the shares trade near a floor considering attractive long-term prospects.

Valuation range — Based on DCF and peer valuations, pointing at €4.11 and €3.60 respectively, we reach a fair value of €3.60 per share. Accordingly, we initiate coverage on Landi Renzo, with a Hold/ High Risk (2H) rating and a price target of €3.60 per share. We think that the key driver for the stock price will be the capability of management to deliver on guidance.

Landi Renzo (EUR)

Year to 31 Dec 2005A 2006A 2007E 2008E 2009E

Sales (€M) 92.3 138.7 162.6 203.4 247.6

Net Income (€M) 11.1 16.7 19.7 26.5 33.7

Diluted EPS (€) 0.10 0.15 0.17 0.24 0.30

PE (x) 33.6 22.4 19.0 14.2 11.1

EV/EBITDA (x) 19.6 12.5 10.1 7.1 5.4

DPS (€) 0.00 0.00 0.00 0.07 0.09

Net Div Yield (%) 0.0 0.0 0.0 2.1 2.8

Hold/High Risk 2HPrice (13 Aug 07) €3.33Target price €3.60Expected share price return 8.1%Expected dividend yield 2.1%Expected total return 10.2%Market Cap €375M US$513M

See Appendix A-1 for Analyst Certification and important disclosures.

Mauro Baragiola1 +39-02-8648-4703 [email protected]

Alberto Checchinato1 +39-02-8648-4749 [email protected]

Landi Renzo (LR.MI) 14 August 2007

Citigroup Global Markets | Equity Research 2

Fiscal year end 31-Dec 2005 2006 2007E 2008E 2009E

Valuation RatiosP/E adjusted (x) 33.6 22.4 19.0 14.2 11.1EV/EBITDA adjusted (x) 19.6 12.5 10.1 7.1 5.4P/BV (x) 11.5 8.6 3.5 3.0 2.5Dividend yield (%) 0.0 0.0 0.0 2.1 2.8Per Share Data (€)EPS adjusted 0.10 0.15 0.17 0.24 0.30EPS reported 0.10 0.15 0.17 0.24 0.30BVPS 0.29 0.39 0.96 1.13 1.33DPS 0.00 0.00 0.00 0.07 0.09

Profit & Loss (€M)Net sales 92 139 163 203 248Operating expenses -75 -111 -132 -162 -196EBIT 17 27 31 41 52Net interest expense 0 -1 1 1 1Non-operating/exceptionals 0 0 0 0 0Pre-tax profit 17 27 32 42 53Tax -6 -10 -12 -16 -20Extraord./Min.Int./Pref.div. 0 0 0 0 0Reported net income 11 17 20 26 34Adjusted earnings 11 17 20 26 34Adjusted EBITDA 19 30 35 47 59Growth Rates (%)Sales 43.1 50.3 17.2 25.1 21.8EBIT adjusted 173.9 62.8 12.8 32.4 27.1EBITDA adjusted 118.6 56.8 16.1 32.8 26.1EPS adjusted 243.0 50.1 17.5 34.5 27.5

Cash Flow (€M)Operating cash flow 16 10 11 23 30Depreciation/amortization 3 3 4 6 7Net working capital 3 -10 -13 -8 -9Investing cash flow -3 -10 -9 -14 -6Capital expenditure -4 -10 -9 -14 -6Acquisitions/disposals 1 0 0 0 0Financing cash flow -5 -5 47 -6 -9Borrowings 1 1 2 2 2Dividends paid 0 0 0 -8 -11Change in cash 9 -5 49 3 15

Balance Sheet (€M)Total assets 79 102 170 191 216Cash & cash equivalent 9 10 59 62 77Accounts receivable 18 21 27 31 35Net fixed assets 19 26 29 37 36Total liabilities 46 59 61 64 66Accounts payable 24 28 28 29 30Total Debt 12 17 17 17 17Shareholders' funds 33 44 108 127 150

Profitability/Solvency Ratios (%)EBITDA margin adjusted 21.0 21.9 21.7 23.0 23.8ROE adjusted 37.2 44.0 26.0 22.5 24.4ROIC adjusted 28.4 36.4 29.5 31.2 34.7Net debt to equity 7.3 17.0 -38.4 -35.4 -39.9Total debt to capital 26.2 28.3 13.7 11.9 10.3

For further data queries on Citigroup's full coverage universe please contact CIR Data Services Europe at [email protected] or +44-207-986-4050



Contents Investment Thesis 4

Valuation 6

Group overview 11

The Reference Market 17

Group Strategy 33

Key Global Market Opportunities 38

Financial Forecasts 2006A-2009E 41

Appendix 1: Countries Analysis 52

Appendix 1: Oil Data 58

Appendix A-1 65



Investment Thesis Landi Renzo (Landi) – the world leader in the niche of gas conversion kits for passenger vehicles – has been growing sales at 46% per year since 2004 on the back of new product launches, opening manufacturing facilities in main markets and a growing reference market (+9.9% 2004-06 CAGR). Further, growth of this market is forecast to accelerate (+18% 2006-12 CAGR), fuelled by increasing concerns over environmental issues and climate change, the high cost of traditional fuels and growing national and international eco-friendly regulation. Leveraging a business model hinged on strong R&D, a growing local presence in its main markets, strong coverage of its distribution channels and a lean production base, we believe there is still room for growth in the coming years: we estimate 21.3% sales growth and 26.3% net profit (06-09 CAGR) – despite a disappointing H1 07 showing little growth on one-offs. Although H1 was a slow start – both in terms of market communication and fundamental results – we think that there’s still room to achieve FY07 targets on the basis of Q3 guidance. Our DCF points to €4.11 per share while peer multiples suggest a range between €3.20 and €3.60 per share. Accordingly, we initiate with a Hold/High Risk (2H) rating and a target price of €3.60 per share.

Investment positives Landi is the global leader with a 23% share of the highly fragmented world market of Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG) alternative fuel systems for vehicles. Although niche markets, these are expected to keep on growing at a healthy pace on the back of rising costs of traditional fuels, increasing environmental (climate change) concerns, stricter emission regulations and attempts to diversify energy supply. Indeed, LPG and CNG are an environmentally friendly alternative to traditional fuels.

With sales to over 50 countries world-wide and non-Italian sales representing 74% of group turnover (2006), Landi’s production structure is increasingly adopting an international manufacturing base: with subsidiaries in seven countries, the group is adding to its Italian and Brazilian (since 2004) production facilities, a manufacturing plant in Pakistan (2007), Iran (2008) and is looking to set up a plant in India in the near future.

Landi has experienced 46% sales growth between 2004 and 2006 (CAGR) and EBITDA growth of 84% (04-06 CAGR) and 128% net profit growth (04-06 CAGR) over the same period. This outperformance of Landi’s growth over its reference market (market share was up from 13% to 23% in the same period) was mainly due to product innovation and the group’s focus on expanding in the faster-growing markets of Pakistan, Iran, Brazil, Germany and Italy.

We are forecasting the main drivers of Landi’s sales growth to be the Asian markets, representing 39% of our total forecast sales growth to 2009, followed by the Italian market (estimated to hover around 25% of total sales). Whereas growth in western European markets is equally driven by environmental issues and cost consciousness, in emerging markets a combination of factors has been driving the implementation of these alternative fuel systems: reducing both dependency on oil and air pollution in urban areas (e.g. existing taxi and bus fleets have been converted to gas in Pakistan, India and Iran as this is cheaper than renewing the fleet). On top of the ‘public benefits’, demand is also driven by consumers seeking lower cost alternatives to petrol.

Focused on a fast-growing alternative energy market

Market leader with a global footprint

Rapidly-expanding group

Why the market is expected to boom



The group is a well-run business with a consolidated business model based on a strong focus on R&D (in which the group spends 4% of sales per year), a lean manufacturing base (with outsourcing of production of non-core/value added components), an emphasis on quality control and strong relationships with major clients. The combination of these elements makes Landi’s business relatively well protected by entry barriers.

Thanks to this business model, the group is already delivering circa 20% EBIT margins, cash generation (profit + D&A) of 14-15% of sales annually and a pre-tax ROCE of 50-60% (post-tax 35%-40%). Our 2009 projections point to CAGRs of 21.3%, 24.7% and 26.3% for sales EBITDA and net profit respectively. We see EBITDA margin topping 23.8% while ROI should be well above 50%. Operating cash flow should reach 9.6% of sales in 2009. Although attractive economics, the absolute figures (sales and EBITDA of €247.6m and €58.9m respectively in 2009) are small by auto industry standards. We thus believe that the modest size of the market might be one of the barriers preventing sector ‘gorillas’ from entering into GPL/CNG niche despite attractive margins and ROI.

Although long-term dynamics look attractive, Landi had a disappointing H1 07 mainly due to weaknesses in the after-market in Pakistan and sluggish demand in Brazil for CNG. This was not apparent at the time of the IPO, which suggests that management has limited visibility on revenues and may have to improve internal reporting and controls. Although it has been a slow start, management was very confident of achieving the guidance disclosed for 2007 during the conference call on the 9th of August – especially after a strong July and visibility on new important contracts in Iran.

In our view, DCF is the most suitable valuation approach for a company with revenues that are expected to increase by more than 17% CAGR between 2006 and 2012 while enjoying 22-25% EBITDA margins and ROI well above 50%. As a sanity check, we also value Landi using peer multiples, though we think that a peer comparison is hardly applicable due to Landi’s niche features. In applying the DCF to Landi estimates, we discounted the free cash flows from 2007-2013 using a WACC of 11.4% and a perpetuity growth of 3.0% – justified in our view by the high growth of Landi’s reference markets. Under such assumptions, we value the enterprise value of Landi at around €420m, or €4.11 per share. Multiples (PE ratio and EV/EBITDA) point to €3.20 per share on 2007 and €3.60 on 2009. Based on DCF and peer multiples, we value Landi Renzo at €3.60 per share and – accordingly – we initiate coverage with a 2H (Hold/ High Risk) rating and a target price of €3.60.

We rate Landi High Risk. Landi’s global reference market is small and little information is available. While analysing the company, we relied on information provided by either the company or Frost & Sullivan. Most of future growth is expected to come from emerging markets – notably Iran and Pakistan. Major sector players haven’t entered into Landi’s niche for the time being, considering the modest size of the market. However, should the market grow strongly larger players could decide to enter given i) low barriers to entry (for a major player, whereas barriers for smaller potential entrants are much higher) ii) very high returns on investments and iii) high margins. Other forms of alternative fuel systems can be introduced in the market while attracting more interest from consumers as well as car producers and governments. Although Landi's technologies are considered safe, there might be some resistance to their adoption as: i) LPG kits may occupy a large part of the space in the car boot/trunk; ii) possible difficulties in parking; iii) availability of refueling sites.

Well-run business, with a good model

Strong profitability and cash generation

What went wrong in H1 07?

Valuation

Highlighting some risks



Valuation Although the Landi group has a c.50 year history, it is far from being an established business – especially now that the group is increasingly targeting emerging markets and Western countries are increasingly in search of eco-friendly solutions.

In our view, DCF is the most suitable valuation approach for a company with revenues that are expected to increase by more than 17% CAGR between 2006A and 2012 while enjoying 22-25% EBITDA margins and ROI well above 50%. DCF requires a host of sensitivity assumptions if applied to high-growth companies exposed to emerging markets like Landi. Nevertheless, we like the DCF approach because it allows us to better understand and value the business model.

As a sanity check, we also value Landi using peer multiples, although we think that a peer comparison is hardly applicable due to Landi’s niche features.

We would like to stress that this valuation section is based on our CIR forecasts while relying on both company guidance and market expectations provided by Frost & Sullivan, which has carried out an extensive analysis of the niche market in which Landi competes – on which very little public information is otherwise available.

DCF Valuation In applying the DCF valuation methodology to Landi estimates, we discounted the free cash flows from 2007-2013 while calculating the terminal value using a Gordon Growth model on 2013 NOPAT – assuming that from 2013 onwards capex will match depreciation and no additional working capital will be required.

Figure 1. Operating Cash Flows 2007E-2013 E €m

2007E 2008E 2009E 2010E 2011E 2012E 2013E Operating cash flows 2.2 9.0 23.8 33.1 37.9 43.2 47.0

Source: Citigroup Investment Research

Given that almost two-thirds of the sales growth to 2013 in absolute terms is due to come from emerging markets, we discounted the flows using a WACC of 11.4%, based on a required yield on equity weighted by sales split as shown in the table above. Finally, we applied a perpetuity growth of 3.0% – justified in our view by the high growth of Landi’s reference markets.

Under such assumptions, we value the enterprise value of Landi at around €420m, corresponding to an equity value of around €460m – once IPO proceeds are added back. Hence, our DCF values Landi’s share at €4.11 – broadly in line with the IPO price of €4.00 per share.



Figure 2. DCF Valuation €m

DCF valuation € m % PV of future cash flows 127.8 31.8% PV of Terminal value 293.3 68.2% Enterprise value 421.1 100.0% Net debt 41.6 Minorities/surplus assets 0.0 Equity value 462.6 number of share 112.5 Treasury shares 0.0% Fair Value per share 4.11


Whereas the terminal value accounts for around 70% of enterprise value – the combined cash-flows estimated for 2007-2009 account for just 7% of enterprise value. With such weightings and assumptions, the implied sensitivity to WACC and long-term growth is clearly rather large.

Figure 3. Landi Renzo - Valuation sensitivity to changes in WACC and perpetuity growth - € per Share

WACC Long term Growth 8.00% 9.00% 10.00% 11.00% 12.00% 13.00% 0.0% 4.94 4.37 3.92 3.55 3.25 2.99 1.0% 5.41 4.72 4.18 3.76 3.41 3.12 2.0% 6.04 5.17 4.51 4.00 3.60 3.27 3.0% 6.92 5.76 4.93 4.31 3.84 3.45 4.0% 8.24 6.59 5.50 4.71 4.13 3.68 5.0% 10.43 7.84 6.28 5.25 4.51 3.96


Peer group relative valuation In valuing Landi Renzo relative to a peer group, the central issue is that there is no clear direct comparable. After analysing several hypotheses, we have compared it to a set of Italian mid- and small-cap companies which are either automotive suppliers (Brembo and Sogefi), or which have similar growth trends (Nice and Saes Getters), or which operate in the engineering segment with similar margins (Sabaf, Interpump, IMA).

For the sake of comparison, we have also included Geox – a high growth stock which does not fall under any of the above categories but which has a growth profile much closer to Landi.



Figure 4. Italian Small/Mid Cap (Priced August 8)

Price (€) 2007E 2008E 2009E 2007E 2008E 2009E Sales CAGR

EBITDA CAGR

Earnings CAGR

Piaggio (*) 3.3 14.6 12.2 11.8 7.0 6.3 5.9 6.2% 8.0% 20.9% Brembo( 9.8 13.4 11.5 10.5 6.0 5.3 4.8 9.0% 9.5% 16.5% Sogefi 6.5 13.8 12.3 11.0 6.0 5.5 5.4 2.9% 4.1% 8.2% Interpump 7.5 14.0 12.9 12.4 8.5 7.8 7.3 11.2% 12.4% 14.1% IMA 16.0 19.6 17.0 15.4 9.3 8.5 7.9 6.2% 13.3% 20.5% Sabaf 27.9 17.7 15.6 13.3 7.7 6.9 6.1 12.4% 11.2% 14.0% Guala Closures (*) 5.7 15.6 13.6 11.9 7.5 6.9 6.3 10.4% 12.5% 17.8% Nice (*) 5.6 19.8 16.1 13.2 10.7 8.5 6.8 19.8% 20.7% 21.6% Saes Getters 27.3 16.0 14.6 14.1 6.7 6.2 6.0 7.6% 7.1% 9.6% Peer Group Average 16.1 14.0 12.6 7.7 6.9 6.3 9.5% 11.0% 15.9% Landi (*) 3.3 19.0 14.2 11.1 9.5 7.1 5.7 21.3% 24.8% 26.3% Geox (*) 13.8 29.6 24.3 19.6 17.0 13.4 10.8 22.0% 27.0% 23.8% Premium (discount) (**) 19% 1% -12% 23% 4% -10%

Source: (*) Citigroup Investment Research, Bloomberg (**) Geox not included in the sample

(PIA.MI - €3.42; 2M); (GCL.MI - €5.21; 2M); (NICE.MI - €5.83; 2M); (GEO.MI - €13.65; 1M)

Landi appears expensive on 2007E, fairly valued on 2008E and at discount on 2009, as shown also in the chart below.

Figure 5. EV/EBITDA 2009 vs. EBITDA CAGR 2006/2009E

Piaggio

Brembo

Sogefi

Interpump

IMA

Sabaf Guala ClosuresNice

Saes GettersLandi

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0 2 4 6 8 10 12

Source: Citigroup Investment Research, Bloomberg

Multiples suggest to us a valuation range of €3.20 to €3.60 per share.



Initiating with a 2H rating; target price €3.60 Based on our DCF and multiple comparison, we assess a fair value of €3.60 per share. Accordingly, we initiate with a 2H (Hold/ High Risk) rating and target price of €3.60 per share.

Stock Performance Landi’s shares have been having a disappointing performance since listing at €4.00 per share on June 26. After having traded above the IPO price in the early days of listing, the stock has started to decline while reaching a price as low as €3.29 in early August or -17.75% since the IPO.

Figure 6. Stock Performance Since IPO on June 26th

3.0

3.5

4.0

4.5

5.0

6/26/2

007

7/3/200

7

7/10/2

007

7/17/2

007

7/24/2

007

7/31/2

007

8/7/200

7

LR.MI Mibtel

Source: Datastream, Citigroup Investment Research

Risks We rate Landi Renzo as High Risk. The risk rating on the stock derives from a number of factors. These factors include an assessment of industry-specific risks, financial risk and management risk. In addition, we consider historical share price volatility, based on the input of the Citigroup Investment Research quantitative research team, as a possible indicator of future stock-specific risks that may potentially cause the shares to deviate from our target price.

Landi’s global reference market is small and little information is available. While analysing the company, we have relied on information provided by either the company or Frost & Sullivan. On the basis of such information, we have then made forecasts for each of the key markets and continents.

Most future growth is expected to be generated by emerging markets – notably Iran and Pakistan (where Landi is building local facilities). These two markets are associated with substantial volatility and a certain amount of political risks.



Future growth also depends on: i) the government pushing alternative fuel systems, ii) oil company deploying capillary network of refueling stations and iii) car producers adopting eco-friendly solutions. The management of Landi Renzo cannot influence any of the three forces.

Sector majors haven’t entered into Landi’s niche for the time being, given the modest size of the market. However, should the market expand sharply big players might decide to enter given: i) relatively low barriers to entry, ii) very high returns on investments and iii) high margins.

Other forms of alternative fuel systems could be introduced in the market while attracting more interest from consumers as well as car producers and governments (eg. hybrids cars) while reducing demand for LPG and CNG.

There is some risk of product copying by the competition despite existing product patents and a strong drive to make products more technologically advanced. This could contribute to more price competition and an erosion of the group’s high profitability and cash generation.

Technological advances have done away with most of the dangers, mostly related to the high pressure (of up to 200bar) at which gas is stored, of LPG and CNG systems as far as Landi Renzo products and some of its more advanced competitors are concerned. Nevertheless, lower quality competitor products could still be exposed to the risk of explosion, thereby potentially negatively affecting the overall reputation of alternative gas fuel systems.

Although LPG/CNG are considered safe technologies, there might be still some psychological resistance to their adoption (especially in Western Europe) due to: i) LPG (but also CNG) kits occupying a large part of much-needed boot/trunk space, ii) possible difficulties in parking and iii) availability of refueling stations.

Though Landi has been experiencing rapid growth since 2004, it achieved only modest growth rates during its first 50 years (despite being market leader). There is no certainty that, following a short period of sharp increases, the growth rate could return to its historic pace.

Management has been with the group for many years. Whereas this is a positive from many points of view, there could be concern that the company might not have the in-house expertise to implement a precise and efficient control and budgeting system while limiting the accuracy of future targets – especially those targeting rapid growth in emerging markets.

There is some acquisition risk, considering that external growth is one of the avenues company management envisages, either of a new technology, or of a player in an unexplored key market or of a distributor of Landi products. Indeed, the company has little proven track record on making acquisitions, with only one acquisition (that of software division MED) undertaken in 1999-2000, which took several years to turn-around but is now a key element of success of the Landi group.



Group Overview

Group snapshot With €138.7m in sales and an EBITDA of €27.5m in 2006, Landi is the world market leader in the high-growth niche of systems to convert vehicles to run on gas, either Compressed Natural Gas (CNG) or Liquefied Petroleum Gas (LPG). Indeed, this is a lower-cost and environmentally-friendly alternative to petrol and diesel fuels, which is increasingly popular at a time of high oil prices and increasing awareness of environmental issues and climate changes.

Figure 7. Landi Renzo products – the complete system Figure 8. Landi Renzo products – the individual components

Source: Company Presentation Source: Company Presentation

The group was born during the 1950s in Italy, which at the time was the first market to adopt gas as an alternative to petrol as a vehicle fuel and since then Landi has built on its technological leadership which it defends through significant efforts in research and development.

Based in central Italy near Reggio Emilia, Landi designs, produces, customizes and distributes alternative fuel system kits for vehicles allowing them to run on both petrol and gas, either LPG or CNG. Its product range includes pressure reducers, electronic control units and injectors for systems which can be sold as individual components or as complete kits inclusive of the gas tank which Landi does not produce, as it consists of more basic products.

Distributing its products in over 50 countries, today over half of its sales are in Europe, Italy absorbs 26%. Southwest Asian markets – Iran, Turkey and Pakistan – absorb 34% of sales. Future growth is forecast to come from high-growth emerging markets such as these, where conversion of vehicles to gas is seen as a low-cost solution to environmental pollution. For this reason, Landi and the overall market for gas conversion kits have been growing more strongly in emerging countries than in developed ones, where environmental problems have been tackled by imposing increasingly stricter emission rules on vehicles, thereby encouraging a renewal of the existing vehicle (private and public) population.



Figure 9. Landi Renzo – geographical breakdown of sales (2006, €138.7m) Figure 10. Landi Renzo – sales breakdown by product category (2006, €138.7m)

Othe r Europe25%

South W est A s ia34%

A merica6%

Italy26%

Res t o f the W orld3%

Othe r A s ia6%

LPG e quipm ent42%

Othe r3%

Natural Gas Equipm ent

55%

Source: Company Reports Source: Company Reports

Landi sells to both Original Equipment vehicle Manufacturers (OEM) and to the After Market (AM), with AM sales representing the largest share of revenues, 70%, and OEM sales the remaining 30%.

In the OEM world, Landi has established relationships with car manufacturers, customizing parts for their individual vehicle models. It supplies a wide range of manufacturers including the VW group, Renault, Opel, PSA and Suzuki, all of which are increasingly promoting dual-fuel vehicles (petrol and gas) as part of their product range. Landi also customizes components for individual vehicle models.

It sells complete conversion kits in the after market (the AM channel) to distributors and installers, which typically mount the kits on used or zero kilometer vehicles (retro-fitting). In this case it is Landi which certifies the performance and security characteristics of the equipment.

Individual components are instead exclusively sold to car manufacturers (the OEM channel) which mount them on some of their models whilst the vehicle is still in the production phase. In this case, it is the OE manufacturer which certifies the performance and security characteristics of the whole fuel conversion system (to gas).

Landi is particularly exposed to the OEM segment (this represents 15% of the world market, whilst for Landi it represents 30% of sales), representing an advantage for Landi; growing public concerns and awareness of environmental issues are fueling stronger sales growth to the OE market than to the AM and Landi is set to benefit from this given its higher than average exposure to OEM sales. Indeed, the OEM segment is forecast (Frost & Sullivan estimates, 06-12 CAGR) to grow at 30% to 2012 versus 15% for the after market, for a total market growth of 18.2%.

Also, having developed the components for specific car models in the production phase, Landi has technological advantages also in the aftermarket for kits of those same vehicle models.

Exposed to both OE and AM segments



Global leader gradually adopting an international manufacturing base In the overall market for gas fuel conversion kits world-wide, Landi is the global leader with a share of 23%, with a top presence in key markets.

Its competitors are mainly Italian manufacturers, with the exception of Fuel Systems Solutions – a US company – which also controls the second largest player in the Italian market BRC.

Landi has subsidiaries in seven countries and production facilities in its main markets: in Italy (2 plants), Brazil and Pakistan (one factory each), a factory in Iran is expected to come on line in late 2007 or early 2008, and distribution facilities in Holland, Poland and China.

Figure 11. Landi Renzo group structure and production facilities

(1) Remaining 4% stake is owned by local partners. (2) Remaining 30% stake is owned by local partners. (3) Landi Renzo committed to transfer a 25% stake to Iranian company Iran Carburettor. Source: Company presentations

The Pakistani plant is due to start production in 2H07, manufacturing parts and systems for the local market where Landi has a 49% share of this market and it is by far the strongest player.

The Iranian plant should start production in late 2007 or early 2008, but the group’s presence in this market is already well consolidated with a market share of 20%. The Brazilian manufacturing base has been supplying the local market for several years and the group has a 20% market share there.

The Italian production base is used both for the local market and as a main production base to sell the group’s products worldwide. In both Germany and Italy, the two main markets in Europe, Landi has a market share of above 50% in the CNG market.

In the future Landi might consider opening a production plant in India, where there is an opportunity to exploit the expected high growth of the gas conversion kit market.



Figure 12. Landi Renzo’s positioning in its main markets and overall globally

Market Market share* Market position Germany (LPG/CNG) 12%/50% #2/1 Italy 35% #1 Brazil 20% #3 Pakistan 49% #1 Russia 18% #2 Global 23% #1

Source: Frost and Sullivan, (*) – based on number of units sold

Experiencing ongoing strong growth (H1 07 Apart) Landi experienced impressive growth over the past two years: between 2004 and 2006 the group has more than doubled its sales, increasing its market share from 13% to 23%, raising its profitability from 13.8% to 21.9% at the EBITDA level, with EBITDA growing by 84% and net profit by 128% (04-06 CAGR). This growth came after a few years of relative stagnation: sales hovered at €46m per year between 2001 and 2003, and EBITDA in the three years was €8m, €3.1m and €2.4m respectively.

Figure 13. Landi Renzo – 2004A-2006A €m

(€ m) 2004A 2005A 2006A 04-06 CAGR Turnover 64.5 92.3 138.7 46.6% % yoy growth 43.1% 50.3% EBITDA 8.9 19.4 30.3 84.4% As % of sales 13.8% 21.0% 21.9% EBIT 6.2 16.9 27.5 110.3% As % of sales 9.6% 18.3% 19.8% Net profit 3.2 11.1 16.7 128.1% As % of sales 5.0% 12.0% 12.0% Cash flow (net profit + D&A) 5.9 13.6 19.5 81.8% As % of sales 9.2% 14.7% 14.1% World Market size (m units) 2.4 2.6 2.9 9.9% Landi world market share (units)

13% 23%

Source: Company data, Frost & Sullivan, and Citigroup Investment Research calculations

More importantly, this growth is expected to continue in the foreseeable future – Frost and Sullivan estimates that the growth rate of the combined market of CNG and LPG kits will grow by 18.2% to 2012 in units sold terms (2006-12 CAGR), versus a growth of 9.9% per annum between 2004 and 2006. Partly, this is due to increasing momentum in the underlying market, pushed by growing concerns for the environment, government incentives which target an increase in penetration of cleaner “alternative fuels”. This is also thanks to a general effort to diversify sources of energy away from petroleum-based ones, and as consumers look for cheaper ways to fuel their independent means of transportation (more information on the reference market is provided in the next chapter).

However, the growth experienced by Landi has also stemmed from two company-specific drivers, as indicated by the increase in market share from 13% to 23% experienced by the group between 2004 and 2006.

Strong sales growth and expanding margins

Market growth rate of 9.9% per year between 2004 and 2006 is forecast to almost double in the coming years

Landi’s market share up from 13% to 23%



The first important company-specific driver has been new product launches, particularly intense in 2003-4, that have benefited the group both in terms of market share and also, strongly, in terms of price/mix, thus also boosting margins.

The second important group-specific growth driver was the strategy to focus on markets with high growth potential, such as Pakistan, Iran, Brazil, Poland, Germany and Italy, thereby outpacing average growth of the world market as a whole. By establishing subsidiaries in many key markets and developing relationships with OE manufacturers in those countries, Landi was able to post higher-than-average market growth. Indeed, the Brazilian subsidiary started production in 2003-04, and the group started to benefit from the local production in 2005 – Landi products were no longer subject to import duties and the group started to work more intensely with local car manufacturers thanks to its newfound proximity to their production base. By the same token, the Pakistani plant is due to start production in 2H07 and the Iranian one in late 2007 or early 2008.

Figure 14. Landi Renzo’s Market-Specific growth drivers in LPG and CNG (volumes)

04-06 CAGR CNG LPG Pakistan 18.2% 62.6% Iran 20.6% Germany 416.4% 138.0% Italy 29.1% 6.5% World average 15.5% 6.5%

Source: Frost and Sullivan

Low capital intensity From the outset in the 1950’s, Landi’s business has been based on a light production structure, outsourcing all the phases of production of those components and parts which were not considered strategic, choosing to keep in-house only the manufacturing of those components which were considered to be the heart of the product. Today, thanks to this philosophy, 60% of operating costs are variable in nature, leaving the group with a very flexible cost structure.

This strategy of outsourcing of large parts of the manufacturing has enabled Landi to maintain a light fixed tangible asset base, representing 23-25% of total assets, and has resulted in the group achieving high levels of ROCE.

The low investment requirement (both maintenance and growth) which results from this strategy has further strengthened the sound cash generation of the group.

Industrial model based on significant outsourcing of production...

... Resulting in a light tangible asset structure



Figure 15. Landi Renzo – Light tangible asset structure and solid balance sheet

(€ m) 2004 2005 2006 Net fixed assets 24.4 24.7 31.5 - Tangible 17.1 18.3 24.6 - Intangible 0.5 0.9 1.7 - Goodwill 3.0 3.0 3.0 - Financial and other 3.9 2.5 2.2 Current assets 38.4 44.8 61.1 - Stocks 14.2 22.3 32.2 - Trade receivables 19.8 17.5 21.4 - Other receivables 4.4 5.0 7.6 Current liabilities 20.1 28.9 35.3 - Trade payable 17.5 23.5 27.6 - Other payables 2.6 5.4 7.6 Net working capital 18.3 15.9 25.8 Net capital employed 42.7 40.5 57.3 Shareholders' funds 27.3 33.0 43.6 Long-term liabilities incl. TFR

4.4 5.2 6.3

Net debt (cash) 11.0 2.3 7.4 Asset rotation 1.5 2.3 2.4 ROCE 14.5% 41.7% 47.9% ROCE after tax 8.8% 26.9% 35.3% Net financial gearing 40% 7% 17%Net debt / EBITDA 123% 12% 24%

Source: Company reports and Citigroup Investment Research



The Reference Market Landi’s reference market is the global market for alternative fuel systems using LPG and CNG, for which it manufactures both single components as well as complete fuel systems, and where it is the number one player with an estimated market share of 22-24% (2006, Frost & Sullivan). Aside from the presence of two other global players – BRC (part of the US-listed US company Fuel Systems Solutions) and Lovato – both Italian, this is a very fragmented market, comprising numerous local players which have lower prices but also technologically simpler products.

Figure 16. Market Share of LPG and CNG Conversion Kit Manufacturers (World), 2006

BRC16-18%

Others49-51%

Lovato8-10%Lan di

22-24%

Source: Company Presentations

LPG, liquid petroleum gas, is a by-product of oil refining, mainly consisting of a mixture of butane and propane. At room temperature it takes the gaseous form, while at low temperatures or high pressures it takes a liquid form.

CNG – compressed natural gas, CH4 – is not derived from petroleum but can be found in its natural state in underground reserves and is produced in nature by the decomposition of organic material. It is the real eco-fuel in that, although in its natural form it is considered a greenhouse gas, if burned it produces up to one third of the quantity of CO2 and particulate matter combined (see Figure 17) produced by other fuels, including LPG.

Systems using LPG are less expensive (on average 30/40% less, although the price depends on economic conditions in each country; in Europe they cost €800-1000 per kit) and are less sophisticated than those using CNG in that the former may be stored in liquid form at lower pressures than the latter (CNG is stored at 200 bar while LPG is stored at less than 30 bar), thus the storage tank and pressure reducer are less sophisticated.

Figure 17. Environmental Impact of Different Fuels (Greenhouse Gases & Particulate)

0%

50%

100%

Diesel Petrol LPG CNG

Specific analysis is based on Euro IV Light Duty

Vehicles.

Source: Company presentations



Global market for LPG and CNG alternative fuel systems Europe is presently the largest market worldwide for systems employing LPG and CNG as alternative fuels, absorbing 38% of the 2.9m units sold annually (2006 data, Frost & Sullivan). Most of these systems are used to convert used vehicles from petrol fuel to either LPG or CNG, but a rapidly growing portion is being mounted directly on newly assembled vehicles before they leave the assembly line by the OE manufacturers themselves (15% of kit markets and c.30% of Landi’s sales). Car dealerships sometime adapt new cars before they are sold. Although still in limited numbers, some municipalities have began to convert public transport to LPG or CNG fuel.

Other large markets for these products are Southwest Asia – defined as Iran, Pakistan and Turkey – representing the second-largest market with 27% of total units sold in 2006, followed by Latin America (15%) and the rest of Asia (13%) which comprises India and China. In these countries, a combination of factors has driven the growing implementation of these alternative fuel systems in these areas: partly it is a need to reduce dependency from oil (CNG is not oil-derived), partly it is a need to reduce air pollution in urban areas (existing taxi and bus fleets have been converted to gas in Pakistan, India and Iran as this is cheaper than renewing the fleet), finally it is in part due to consumers seeking lower cost alternatives to petrol.

Figure 18. World market of LPG and CNG kit sales in 2006 (approximate data) Figure 19. World market of LPG and CNG kit sales in 2006 (global split)

LPG CNG Latin America 0 448,000 Europe* 450,000 81,000 Russia 345,000 5,000 Australia 75,000 0 Asia 1,000 27,000 SE Asia 299,000 434,000 Iran 0 147,000 Turkey 265,000 0 RoW 287,000 75,000

Australia3%

Russia13%

Latin America17%

Europe*20%

SE Asia16%

Iran6%

Asia1%

Turkey10%

RoW14%

* Europe is comprised of: Germany, Italy, France, Poland

Source: Citigroup Investment Research based on Frost & Sullivan and Company

presentation

* Europe is comprised of: Germany, Italy, France, Poland

Source: Citigroup Investment Research based on Frost & Sullivan and Company

presentation

In 2006, global sales of LPG conversion kits amounted to 1.7m units, 59% of total kit sales (both OE and AM), growing by 6.5% per year from 2004, while annual sales of CNG kits reached 1.2m kits, growing at 15.5% per year in the two-year period.

LPG is the predominant gas used in EU countries and in Russia and Turkey. In Italy LPG kit sales represented the majority of sales (73% of total LPG and CNG kits sold); in France, Russia, Turkey and Poland they were the exclusive form of gas used, while in Germany they represented 80% of kit sales. The global LPG industry is extremely fragmented, with a large number of companies operating in different markets around the world.

Main market world wide, Europe

But emerging markets are growing faster

LPG is a larger market but CNG is growing faster



Latin American countries instead moved to a wider utilization of CNG, this region holding wide reserves of natural gas and where LPG is almost banned and not used as an automotive fuel. Argentina and Brazil use almost exclusively CNG kits.

Thanks to the higher growth in the use of CNG globally, annual sales of kits are forecast to be split 52%-48% in favour of CNG by 2012E, with the main drivers of CNG growth being the markets of India, Pakistan and Iran, as public transportation is being gradually converted to CNG on a mandatory basis in these countries as well as other Asian countries.

Market growth is forecast to accelerate Forecasts by Frost & Sullivan estimate growth of the market for LPG and CNG fuel systems to accelerate from 9.9% in 2004-06 to 18.2% up to 2012 (CAGR unit sales of LPG and CNG fuel systems) on the back of four main drivers: 1) growing global concern over environmental issues; 2) consumer increasing attention to the running costs of vehicles; 3) resource usage and security of supply; and 4) growing environmentally friendly legislative and regulatory constraints.

Figure 21. Global Market Drivers & Restraints

Attention to the running costs of vehicles

Growing environmentally friendly legislative and regulatory constraints

Development of service station network

Growing global environmental issues

Low number of CNG stations

Low understanding of CNG &LPG benefits by population worldwide

Insufficient promotion by Industry & Governments

Insufficient support of CNG & LPG development by OEMs

STRENGTHS

WEAKNESSES

Attention to the running costs of vehicles

Growing environmentally friendly legislative and regulatory constraints

Development of service station network

Growing global environmental issues

Low number of CNG stations

Low understanding of CNG &LPG benefits by population worldwide

Insufficient promotion by Industry & Governments

Insufficient support of CNG & LPG development by OEMs

STRENGTHS

WEAKNESSES

Source: Citigroup Investment Research based on Company Presentation

On top of these, a further driver to the growth in the market for LPG and CNG fuel systems is the increase in the number of service stations where car owners are able to refuel their vehicles, as a consequence of incentives by national governments and local authorities.

Figure 20. Global market for LPG and CNG fuel systems for vehicles forecast sales (units)

2.62.9

7.9

2.4

2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E

CAGR: 9.9%

CAGR: 18.2%

m

m mm

Source: Company Presentation



Re-fuelling stations are relatively limited in number if compared to standard fuel stations. Among the reasons of the limited number of LPG/CNG refueling stations, there is their need to be located at a minimum distance away from buildings or populated areas. The distance varies according to factors like the design of storage tanks, but mainly on local rules and regulations. For this last reason, in some cities it is possible to find LPG/CNG refueling stations within city centres.

Figure 22. CNG statistics, 2005-2006.

Source: The GVR (Gas Vehicle Report), March 2007

LPG refueling sites look and operate much like a normal petrol or diesel pump. To fuel up with LPG, the customer simply needs to attach and lock on a bayonet-type connection to the tank nozzle, then push a button to start the flow of gas from the dispenser to the vehicle.

CNG refueling stations, having no limits to location, have a double approach: public fuelling stations and private fuelling stations. Public fuelling stations are accessible for anyone who wants to refuel their vehicle, just like a normal gasoline station. Private fuelling stations are generally associated with large fleets (buses, garbage trucks, delivery vans, etc). There are two basic methods of fueling compressed natural gas vehicles: slow-fill and fast-fill. Public fueling stations using a fast-fill system that work like normal stations for gasoline and diesel. NGVs can be fuelled in about the same time or a bit longer than normal liquid fuel vehicles. Slow fill systems take gas directly from the compressor into the vehicle (as opposed to using fuel storage tanks normally associated with fast filling systems). Slow fill systems are typical of fleet fuelling but depend upon the fuel requirements of each fleet and whether or not there is space enough to park vehicles at multiple fuelling points. Often a combination of fast and slow fill systems are installed by fleet operators so that vehicles returning only for a short time can fuel but also those left overnight can be fuelled and be ready for operation the following morning.

Re-fuelling stations



But let us take a closer look at the main three drivers of market growth mentioned above.

Environmental drivers Exhaust gases from cars contribute significantly to two major environmental problems:

Local air quality – as carbon monoxide (CO), nitrogen oxides (NOx), unburnt hydrocarbons (HCs) and particulates (PMs) lead to human ill health (notably respiratory and cardio-pulmonary disease and lung cancer). This is a particular problem in the rapidly growing mega-cities of the developing world.

Climate change – as the CO2 emissions from transport contribute c. 14% of global greenhouse gas emissions (with this expected to rise both absolutely and relative to other GHG sources).

Local air quality As Figure 23 shows, many of the cities in the world face serious problems with their local air quality. (Although the data is old, the fundamental drivers behind the problem remain in place.)

Figure 23. Overview of ambient air quality

Source: Data assembled by the World Bank from various sources

CNG and LPG both have a role to play in reducing the impact of urban air pollution as they reduce CO, NOx, HCs and PMs. Although finding precise figures for the reductions is difficult (as it depends on the comparators chosen and the scope of the value chain selected), the following table is, we think, representative:



Figure 24. Emissions benefits of replacing conventional diesel with CNG

Fuel CO NOx PM Diesel 2.4 g/km 21 g/km 0.38 g/km CNG 0.4 g/km 8.9 g/km 0.012 g/km %age reduction 84 58 97

NB: Medium duty diesel buses, central business district test cycle

Source: Frailey et al, 2000 / Citigroup Investment Research

Climate change With respect to greenhouse gas reduction, the benefits of LPG and CNG are more balanced and complex as follows.

Throughout the fuel cycle, LPG and CNG are c.15% more CO2-efficient than petrol/gasoline. However, diesel is c.20% more efficient than gasoline. So, at first glance, diesel would appear likely to become the fuel of choice in a carbon-constrained world. However, this conclusion ignores:

The structural shortages of diesel in Europe, which is likely to increase diesel cracks over coming years;

The hydro cracking process needed to improve the diesel yield from a barrel of oil is an energy (and therefore carbon) intensive process;

The forthcoming tightening of local emissions regulations (to Euro 5) that will increase the cost of diesel cars;

The fact that a diesel engine cannot be retrofitted into a gasoline car in the same way as LPG/CNG technology can be retrofitted.

Hence, further diesel penetration in Europe may be limited and LPG and CNG may have an ongoing role in the reduction of CO2 emissions from the European automotive fleet.

Environmental benefits - general Overall, we see local air quality considerations continuing to support the penetration of both CNG and LPG. Likewise, albeit to a lesser extent, we see both technologies playing a role as part of the portfolio of technologies that will be needed to mitigate the greenhouse gas emissions of the road transport sector.

Cost drivers Part of the growing demand for LPG and CNG kits is derived from cost issues: studies indicate gas fuel costs to be as much as 50% cheaper than petrol and diesel fuels.

Indeed, with the spike in the oil price in past years, and with prices having remained at very high levels, consumers have increasingly been looking for fuel alternatives to petrol and diesel for running their vehicles.



Alternative fuels such as bio-diesel, bio-ethanol and ethanol have become increasingly popular alongside LPG and CNG. All these alternative fuels cost less than petrol, and require minor investments to adapt the vehicles engine to run on the alternative fuel as opposed to just on petrol. In the case of gas fuel, the cost of a complete aftermarket system inclusive of the installation cost, is typically amortised between 6 and 24 months depending on the type of product and the local installation cost.

Figure 25. Natural Gas, Ethanol, Petrol prices: a Study Case in Brazil (cost per unit in Brazilian Real)


On the other hand, factory and dealer-fitted systems are typically priced with a similar price premium as that of diesel vehicles compared to petrol-fuel vehicles.

The advantage LPG and CNG have over these other alternative fuels is that their price is lower still and, particularly compared to bio-ethanol and bio-diesel, they are not subject to fluctuations tied to the seasonality of their production (bio-ethanol is derived from sugar cane in Brazil, which is a seasonal crop).

Payback of kit 6-24 months

Figure 26. Cost of running vehicles with different fuels

DIESEL PETROL LPG CNG Cost for 1Lt/1Kg 1.13 1.23 0.65 0.58 Consumption to run 10 Km with 1 Lt/1Kg Lt 0.75 Lt 1 Lt 1.2 Kg 0.6 Total cost to run 10 Km €0.79 €1.23 €0.78 €0.35 Savings compared to petrol to run 10Km 35.70% - 36.60% 71.70% Km run with €1 13 9.5 14 26

Source: Company Presentation and Quattroruote periodical magazine, Dec. 2006.



Aside from being cheaper, CNG is also believed to be more energy-efficient than both petrol and diesel, and also considerably more than LPG, thus significantly reducing the running cost of a CNG-powered vehicle. The economic convenience of natural gas and LPG is even higher if we consider that installation costs are lowered considerably by the fiscal incentives introduced by governments. In Italy for example, fiscal incentives are of €1,500 on a new vehicle purchased with either CNG or LPG dual fuel systems, and of €650-€1000 for a system retro-fitted on a used vehicle, depending on the type of vehicle (incentives for 2007 ended in H1).

Resource usage and security of supply Some countries are driven by energy security and diversity factors. For example:

Gas-rich countries such as Iran are keen to use their own abundant resources;

Resource-poor countries, by contrast, might look to technologies that can help them diversify their energy supply chains and prevent them having to build a dependence on any single country.

Legislative, fiscal and regulatory drivers For the environmental and security of supply reasons mentioned above, governments are likely to continue to support technology through a variety of mechanisms, most notably:

Emissions regulations;

Tax incentives and rebates;

Public purchasing decisions.

Figure 27. Key Regulatory and Legislative Mechanisms Driving Gas Vehicle Demand

Source: Landi Renzo

In the EU and increasingly elsewhere, emission regulations are becoming stricter. Euro 5 standards will be introduced by 2009.

Fiscal incentives lower payback of kit further



Tax incentives and rebates which partially recover the cost of conversion to gas-powered and dual fuelled vehicles (petrol and gas), thereby lower the initial investment required by the car-owner, and thus the payback period. On the other hand in London such vehicles receive an exemption from the congestion charge.

In some countries, governments have required all public transport and taxis to be converted to gas propulsion on a mandatory basis. This is the case of India in Delhi and Pakistan, but also of several local authorities in Italy.

In New Delhi, where the Supreme Court required a conversion to CNG of all public transportation on 2001, with a transition period allowed only for <8 year old vehicles, the number of vehicles running on CNG was boosted from 10,000 in 2000 to 85,000 in 2004 (reaching a 2000-04 CAGR of 71%) and CNG refueling stations moved from 30 to 135 in four years. The successful case of New Delhi has been followed by Pakistan, requiring a mandatory conversion by 2008.

A case study carried out in Turin (Italy) has concluded that the conversion of 10% of passenger and commercial vehicles in to gas propulsion would decrease the emission of particulates by 45%, those of benzene by 18%, those of NOx by 20% and those of CO2 by 3%.

Growth is faster for CNG than for LPG Growth of the CNG kit market has been faster than that of LPG in the 2004-2006 period, 15.5% versus 6.5% CAGR, mainly because methane is more readily available in the faster growing economies, but also because these economies often attempt to diversify their energy requirements away from the expensive petroleum based fuels.

CNG kit sales are forecast to continue growing faster than those for LPG, although generally acceleration is expected in both: CNG sales are forecast to grow by 22.2% whilst those of LPG are estimated to grow by 14.3% (2006-2012 CAGR).

Figure 28. Breakdown of LPG Kits Sales by Country (World) in %, 2004-2012E Figure 29. Breakdown of CNG Kits Sales by Country (World) in %, 2004-2012E

Source: Citigroup Investment Research based on Frost & Sullivan Source: Citigroup Investment Research based on Frost & Sullivan

The main countries expected to drive this growth are India and Iran for the CNG kits and the Indian and German markets for LPG kits.



Figure 30. Gaseous Fuel Systems

GAS (CNG& LPG)

Biodiesel / Bioethanol (1st & 2nd

Generation)

Gas to Liquid/ Coal to Liquid

Hydrogen / Full Cell

Hybrid Technology

Environmentally Friendly √ X / √ √ √ √ Availability of Technology √ √ √ X √ Affordability √ √ X X X Short-Term Outlook √ √ X X X Long-Term Potential √ √ X √ √ Infrastructure √ X X X √ Public Perception √ √ X √ √

Source: Landi Renzo



Growth is faster in the OE segment although the AM is larger LPG and CNG kit sales are channeled through the aftermarket as well as through OE manufacturers. In the aftermarket, specialized vehicle repair shops fit the conversion kits (either CNG or LPG) onto used vehicles; in the OE segment it is the car manufacturer which mounts the kits during the assembly phase of the vehicle. Car dealerships which have the kits mounted on the vehicles before these are sold are also considered OE sales.

As reported by Frost and Sullivan, the aftermarket is currently dominating the scene with 85% of global market share. The aftermarket is benefiting from both a low percentage of vehicles with gas as a factory-fitted option, and governments’ gas regulations on existing vehicles which are retrofitted.

Notwithstanding, OEM sales are experiencing strong growth driven by the increasing availability of new vehicle models in all markets, mainly the emerging ones. Forecasts by Frost & Sullivan show OEMs unit sales moving from 15% in 2006 to 27% 2012E, thus gaining ground on the aftermarket.

2006-2012E CAGR for the aftermarket is reported to reach 15.2%, while is calculated to be 30.3% for OEMs.

Even if the aftermarket will still be dominating the global scene, OEM sales of LPG kits are expected to increase from 12% in 2006 to 25% in 2012E, while OEM sales of CNG is forecast to move from 15% to 33%.

Figure 31. LPG - World Aftermarket and OEM (Conversion Kit Sales), 2006-2012E

Figure 32. CNG - World Aftermarket and OEM (Conversion Kit Sales), 2006-2012E

Source: Citigroup Investment Research based on Frost & Sullivan Source: Citigroup Investment Research based on Frost & Sullivan



Landi Renzo’s Products As mentioned earlier, Landi designs, produces and distributes “ready to go” LPG and CNG alternative fuel systems for cars, including fuel injections, pressure reducers and electronic devices through a multi-brand strategy in different markets worldwide.

Figure 33. Landi Renzo – Production Process


LPG and CNG systems include pressure reducers and vaporizers (LPG, only), valves (electrical valves included), electronic control units, injectors, switches and air & fuel mixers. Landi Renzo’s products are installed on top of the existing fuel system, thus allowing the vehicle to use both petrol and LPG or CNG fuel. Tanks are not produced by the company.

In the LPG system, the gas flows from the tank and, running along the high-pressure piping, passes through an on-off solenoid valve, that is closed when the car is running petrol or when turned off, and reaches the reducer-vaporiser. In the reducer-vaporiser, the LPG, heated by the engine water to ensure perfect gasification, changes from gas to liquid and thus at atmospheric pressure enters a special device that injects the gas into the engine according to demand.



Figure 34. The LPG system Figure 35. The CNG system

Source: Company Reports Source: Company Reports

In the CNG system the gas flows from the tank and, running along the high pressure piping, reaches the reducer, where its pressure is decreased and it passes through the reduction stages. The water from the engine cooling system provides the heat needed to prevent the reducer from freezing. The gas leaves the reducer at atmospheric pressure and flows to a special device that injects the gas into the engine according to demand.

Landi systems for LPG include the following products:

Omegas multipoint sequential injection system represents a new generation of bifuel (gasoline – LPG) gaseous LPG or conversion system.

IGSystem: it enables the conversion of a continuous gaseous LPG injection in petrol injection engines that are provided with a lambda sensor (oxygen sensor) and three-way catalytic converter. The IGSystem has been designed and developed to integrate with the most recent petrol injection systems.

LPG System with SE 81 Step motor regulator and Lambda Control System / 2 for cars with catalytic injection: The SE 81 step-motor reducer is located in the engine compartment. Lambda Control System/2 is a self-adjusting electronic system. LCS/2 electronically manages the gas flow adjustment, allowing the Lambda factor to reach the required value at all engine rpm thanks to two electromechanical actuators.



LPG System with SE 81 SIC or SE 81 regulator and Lambda Control System V05 for cars with catalytic injection: The air/fuel mixture is constantly kept in a stoichiometric ratio by the LCS-V05 computer that is activated by the signal of the lambda sensor. A linear electromechanical actuator, controlled by the LCS-V05 computer, continuously changes the flow of gas to the engine so as to ensure optimum carburetion in terms of driving, consumption and emissions. The LCS-V05 computer, besides its other functions, allows an engine to start on petrol automatically passing over to gas and, by means of the LCS-V05 switch/gauge, allows the user to select the desired fuel at any time, displaying the level of LPG in the tank.

Landi systems for CNG include the following products (apart from the already described Omegas and IGSystem):

Natural Gas System with TN1 Step Motor regulator and Lambda Control System/2 for cars with catalytic injection: The TN1/B step-motor reducer is installed in the engine compartment where the pressure of the incoming natural gas is reduced from 220 Bar to the engine supply pressure. The Lambda Control System/2 computer electronically manages the gas flow adjustment, allowing the Lambda factor to reach the required value at all engine rpm thanks to two electromechanical actuators.

Natural Gas System with TN1 SIC or TN1 regulator and Lambda Control System V05 for cars with catalytic injection: The air/fuel mixture is constantly maintained at a stoichiometric ratio by the LCS-V05 computer that is activated by the signal from the lambda sensor and continually adapts the rate of flow of gas to engine by means of the linear electromechanical actuator so as to ensure optimum carburation in terms of driving, consumption and emission. The LCS-V05 computer, besides its other functions, always allows starting on petrol automatically and then passes over to gas and, by means of the LCS-V05 switch/gauge, allows the user to select the desired fuel at any time, displaying the level of natural gas in the tank.

Figure 36. Landi Renzo – LPG System Figure 37. Landi Renzo – CNG System

Source: Company Presentation Source: Company Presentation



Relatively well protected by high barriers to entry Over time Landi has built on a series of strengths which have made its position particularly strong in the current competitive environment.

These strengths consist of the close relationship with major clients and the higher technology of its products, which result in high safety standards and superior brand value of its products.

In terms of its relationship with major clients, Landi has strong relations with all major car manufacturers in the OE segment and with installers in the aftermarket channel.

As a supplier of specifically developed gas components for several models of major car manufacturers of the likes of VW, Skoda, Opel, Renault and PSA in Europe, Suzuki, Tata, Daihatsu, Chevrolet, Chery, Brilliance China Automotive and Weichai Perterson in Asia-Pacific, Landi has consolidated relationships with these automotive players, as increasingly they are introducing dual fuel (petrol/gas) vehicles in their product range.

This strong presence in the OE channel, which involves developing components for car models in conjunction with car manufacturers before they are launched, also favours Landi in the aftermarket where it is often the first gas kit manufacturer to have developed kits for newly-launched vehicles. This close collaboration with car makers helps Landi in its relationship with installers, which often see its products as more reliable for this reason.

Landi’s breadth of product range also constitutes a major competitive advantage, as it gives Landi bargaining power vis-à-vis the installer client base over new comer competitors with a more limited product range. Finally, the fact that there are a myriad of different clients in the aftermarket makes it an uphill struggle for competitors wishing to increase their penetration. This is further strengthened by the support Landi supplies its AM clients both in the installation process and also in after-sales, with the introduction of a system of remote assistance, which enables Landi R&D engineers to remotely aid installers in the installation process, reducing installation time and improving accuracy of the newly-installed kits and also after-sales maintenance required on new systems.

Landi has 20% of its workforce employed in R&D. This function is responsible for product innovation, product development and more recently (as of the start of 2007) also for product validation. Initially focused in mechanical engineering, since the acquisition of MED Spa in 2001 the R&D function has significantly enhanced its know-how in electronics. MED has extensive experience in electronics through its application in the car alarm business, a business to which it has exposure but that represents a marginal part of the group’s business (3% of sales in 2006).

Landi Renzo’s strengths…

… Strong client relationships…

… Focus on technology…



R&D is mainly based in Italy, within the headquarters of Landi, but also at local branches in those markets in which the group has a manufacturing or a distribution presence, like in Brazil, China, Holland and Poland. The local branches for R&D are mainly responsible for adapting the group’s products to comply with the specific requirements of the local/regional market and to harmonise products to the specifics of the local markets as well as give technical assistance to local distributors and installers.

The Chinese and Brazilian branches also are responsible for the development of projects specific to the local market’s needs. As an example of this, the Chinese branch is working on projects to convert diesel engines to mono-fuel CNG, also on conversion kit applications to hybrid engines as well as on hydrogen projects. The Brazilian branch is working on flexible fuel applications – i.e. applications which allow petrol/ethanol engines to work on CNG.

This strong focus on Research and Development – spending 4% of sales per year on R&D –gives its products a high degree of innovation and sophistication. This also makes products more difficult to copy (protected by 41 patents currently), and helps put the group at the cutting edge of technology in this market niche. This technological edge has also allowed Landi to master the whole gas fuel system, making it a system manufacturer as opposed to being a mere manufacturer of components, allowing it to add even more value to its client base, both in the OE and AM.

Being the only player in the gas kit industry to be certified with the top quality certification ISO/TS 16949, as well as ISO 9001, Landi has the prerequisites to remain a long-term supplier of OE manufacturers. These high quality standards also imply that Landi products abide to the highest safety standards available in the industry.

…High safety standards…



Group Strategy

In a nutshell Landi Renzo’s strategy is based on four main pillars.

The first is an aggressive focus on product innovation and on research and development, to continuously build on its ‘first comer’ know-how in this business.

The second is to maintain a light manufacturing base, outsourcing the manufacturing of all components and products which are not critical or of high value-added.

The third is to maintain control of quality control and purchasing, keeping these in-house despite the strong drive to outsource production.

The fourth and final pillar is the coverage of distribution channels, which consists of a strong relationship with OEM’s (absorbing 30% of group sales) and a global aftermarket distribution network (absorbing the remaining 70% of sales).

Technological leadership Landi’s focus on Research and Development helps give its products a high degree of innovation, putting the group at the leading edge of technology in this market niche.

Figure 39. Landi Renzo – Research and Development Department

Number of employees as of April 6, 2007. Since January 2007, two new divisions (Hand-book and Testing) have been created in the Technical Assistance and System Applications area. (1) Includes one employee of Landi Renzo operating in China. (2) Includes one employee of Landi Renzo operating in MED. (3) Consultant.


Figure 38. Lean business model




The R&D department employs 69 of the 396 employees (17% of employees at end April 07) the group has around the world across business functions. On a yearly basis the group spends 4% of sales in R&D (fully expensed at P&L), an amount which has doubled in absolute terms between 2004 and 2006, in line with sales.

The R&D function is performed out of five centres in Italy, China, Brazil, Holland and Poland, with the Italian facility representing the coordination centre and the site where the main research effort is made.

Light manufacturing base From the outset in the 1950’s, Landi’s business has been based on a light production structure, outsourcing all the phases of production of those components and parts which were not considered strategic, choosing to keep in-house only the manufacturing of those components which were considered to be the heart of the product. Today, thanks to this philosophy, 60% of operating costs are variable in nature, leaving the group with a very flexible cost structure.

Aside from the production of key components, the company has also maintained testing and quality control functions internally, thus not sacrificing control over quality despite the high degree of outsourcing. Further on this note, all of Landi’s suppliers are required to have quality certifications of the highest standards, and Landi itself is the only player in this segment to have ISO/TS 16949 as well as being compliant with ISO 9001 standards.

This strategy based on heavy outsourcing of production has been possible thanks to the fact that Landi operates in an industrial district, around Reggio Emilia and Bologna in central Italy, which is extremely rich in mechanical engineering know-how. Indeed, there are a myriad of small shop-houses and factories producing components for the packaging, utensil manufacturing industries. As Landi expands its manufacturing base in other countries, this philosophy is not fully applicable, given the absence of similar industrial districts in the markets where the group has decided to focus its expansion efforts. In countries like Brazil, Iran and Pakistan, Landi’s manufacturing base is thus necessarily a more integrated structure, where manufacturing is almost entirely kept in-house, requiring slightly more capital. Nevertheless, the more basic nature of products required by these markets means that the technological level is relatively simpler at the production level and thus far the capital required to set up production sites in these markets has been relatively low: the Pakistani site cost a total of €1m.

This outsourcing strategy and the resulting low capex requirement has possibly freed up resources which the group is able to focus on more valuable areas, such as R&D and product innovation, quality control and in building stronger relationships with its customer base both in the OE and AM channels. Indeed, in 2007 and 2008 the group is planning to spend as much as €10m in the R&D function, increasing capacity in Italy and a structure in China to better serve the local OE manufacturers.

Figure 40. Landi Renzo – Number of Patents and Year of Registration

1 1 1 1 2

15

7

2 13

7

1989 1991 1992 1997 1998 1999 2000 2001 2002 2003 2004


... without sacrificing control over product quality...

Industrial district strong in mechanical engineering know-how



Quality control and purchasing One of the functions over which Landi has maintained strict control, is the quality control function. Managed with 18 employees (5% of group total), the function controls the quality of materials and outsourced components and defines with other departments the parameters of efficiency and effectiveness of processes.

Coverage of distribution channels Landi has two main distribution channels, that of the OE where its clients are the automotive manufacturers and the AM where the main counterparts are the distributors and installers.

The main effort in the OE channel is to develop new products in conjunction with car manufacturers to be employed in bi-fuel vehicles (gas and petrol), which have recently experienced an increase in demand.

In the AM channel, Landi Renzo has built an extensive after-sales service centre, where group technicians may be contacted by installers to provide assistance both in the installation phase and in providing the required adjustments. This has been an important competitive edge for the company, particularly in providing assistance in remote areas.

Thus aside from having a product range covering the widest number of vehicle models in circulation in any specific market, the key effort in the AM channel for Landi Renzo is to facilitate the installment of gas kits by installers through training to reduce installation time, improve product quality perceived by the end consumer and reduce costs to the installer.

Figure 41. Landi Renzo – Distribution Channel


On this front, thanks to their strong electronic and technological content, Landi Renzo has just introduced an innovative system in the Brazilian market, due to be rolled out to other main markets. This system allows installers both in the European and more remote end-markets to receive live support in the installation phase from Landi Renzo technicians.

Collaboration with OE clients in new product development

AM - emphasis on after sales service

Strong support to installers



Figure 42. Remote assistance – an important competitive advantage


The system provides significant advantages to Landi Renzo clients, improving the accuracy with which its products are set up, but also significantly reducing installation time for products, from about one hour to a mere 15 minutes.

This system also presents significant advantages to the Landi Renzo group, providing it with some quality control of how the kits are set up even in remote areas, simultaneously reducing costs of training local installers. Also it helps it to build an important data base with an extensive list of installed vehicles with feedback from installers. It is also an important tool differentiating group products from those of the competition.

Landi Renzo’s brand-positioning and products The company sells its products to OEMs and in the aftermarket, each representing 30% and 70% of its sales.

OEMs include major car manufacturers, such as Renault, Opel, Volkswagen, Suzuki and PSA, which do install factory-fitted systems. New targeted OEMs could include Fiat (FIA.MI - €19.33; 2H) and Ford (F.N - US$8.23; 2S).

The aftermarket is channeled through independent installers, which are in charge of placing retro-fitting of kits in old vehicles (average time for placing is between 15 days and one month).

Landi is operating worldwide through a multi-brand strategy carried by:

Landi Renzo is the global brand for CNG and LPG products for OEMs and Aftermarket, in the premium-end of the market;

Eurogas is the brand for Western Europe (Benelux-France-UK) for LPG products in both OEM and Aftermarket, in the high-end of the market;

Landi is the mass-market brand for Italy and Eastern Europe for aftermarket LPG products.



Since 2004, Landi has been gaining market share from 13% to 23%, particularly vis-à-vis BRC in Brazil, at the expense of Lovato in Russia and mainly versus small competitors such as Tartarini and Lovato in Italy.

Landi Renzo CNG systems sales grew by 47% (2004-06 CAGR), versus 15% growth by the market. LPG system sales grew by 42% for Landi Renzo vs. market growth of 5%.



Key Global Market Opportunities Landi is the global market leader for CNG and LPG alternative fuel systems for cars and light commercial vehicles with a global market share of around 23% - implying a market of just around €600m. Currently, the four key markets are Italy, Pakistan, Iran and Brazil.

Figure 43. Landi Renzo - Geographic Footprint and Positioning, Y2006 Summary

Market Overview Italy Pakistan Iran Brazil Market Size (Units & Conversions p.a.) 218,768 385,000 147,000 258,300 Market Value ~$219m ~$154m ~$49m ~$90m Average Price of Kit $1,000 $400 $330* $350 OEM/Aftermarket 11% / 89% 33% / 67% 22% / 78% 1% / 99% LPG/CNG 77% / 23% 30% / 70% 30% / 70% 0% / 100% Landi Renzo Positioning Market Share*** 35% 49% 31%** 20% Products - Complete CNG Kits

- Complete LPG Kits - Complete CNG Kits - Complete CNG Kits - Complete Conversion Kits

Application - Passenger Cars - LCVs

- Passenger Cars - 3 Wheelers

- Passenger Cars - Taxi Fleets

- Passenger Cars - Taxi Fleets

Highlights - #1 Distribution Network - Strong OEM Relationships

- Strong Distribution Network - Good Reputation

- High Quality Products

- Strong OEM Relationships - Local Presence

- Strong Brand Value - High Technology Products

* According to management guidance. **Landi Renzo and Other Importers.***Based on 2006A revenues.

Source: Citigroup Investment Research on Company Presentation

Revenue growth drivers for Landi have been: i) the increasing average price of unit; ii) the powerful distribution in the emerging and fast growing markets through big players; iii) the favorable business mix. Landi’s geographical breakdown of sales in 2006 was the following.

Figure 44. 2006 Geographical Breakdown

25%

8%

9%3%7%

33%

6%6% 3%

Italy Germany Rest of Western EuropePoland Rest of Eastern Europe South-West Asia €mRest of Asia €m Latam €m RoW €m

Source: Company Reports



To summarise, LPG main markets are (in alphabetical order): Italy, Poland, Russia, SW and SE Asia, representing around 77% of global sales in 2006. Emerging markets have been identified in India, Turkey and Germany. LPG growth will be lower than CNG’s, as most countries seem to favour the conversion to methane, avoiding petroleum-derived fuels.

CNG’s main markets are Argentina and Brazil, just followed by Iran and Pakistan, all representing 68% of global sales in Y06A. Iran, India and Pakistan are indicated as the leading countries providing a boost in the CNG market in the near future.

The World in 2012 According to Frost & Sullivan, the global reference market is expected to reach 7.9m units’ sales in 2012 – with India, Pakistan and Iran accounting for more than 50% of total market. Frost & Sullivan also expect CNG to increase its weight from 39% in 2006 to 52% by 2012 while OEM should weigh in at 30% compared to 15% now.

As previously said, Landi’s reference world-wide market is small and little information is available. While analysing the company, we relied on information provided by either the company or Frost & Sullivan. On the basis of such information, we have then made forecasts for each of the key markets and continents (see Appendix 1).

Where Potential Pitfalls Might Lie As mentioned above, the creation of legal incentives to develop alternative fuels, the promotion of LPG/CNG conversions from governments and industries, the increased public awareness and attitude toward cleaner, cheaper and safe products encourage a further move to LPG and CNG. Being eco-friendly and offering a cheaper solution to cost-conscious people, LPG/CGN might definitely have many reasons to shine. But there are also some potential concerns to bear in mind:

LPG (but also CNG) kits might occupy a large part of much-needed boot/trunk space.

There are limited capillarity of gas stations offering LPG/CNG.

Parking difficulties and psychological barriers. Traditionally, cars equipped with LPG couldn’t be parked in public parking areas. Now restrictions apply only to parking below the first underground level. No matter how eco-friendly people might be, we believe that many potential users might still harbour concerns by messages appearing at parking entrances.



Living in an Ideal World Landi currently accounts for approximately 23% of global market share and the group is targeting to maintain its global leadership in a market estimates to be growing at 18% per annum from 2006A to 2012E. Could an even bluer scenario exist?

A much larger market than envisaged by Frost & Sullivan may exist, as more and more governments become eco-friendly. The consultancy firms mention Iran, Pakistan, Russia or India. We would wonder why Egypt, Ukraine or Indonesia shouldn’t also follow this path on both environmental and cost-consciousness grounds. Landi recently mentioned Venezuela as a very promising candidate. But such countries are not even considered by Frost & Sullivan. So there might be a bigger geographical market.

Frost & Sullivan estimates a 3.5% weight of LPG/CNG on total car produced in 2012. Mass-market consumers could suddenly catch the trend for alternative fuels or car producers might raise demand for Landi’s products.

Would a Bluer Sky scenario be a bonanza for Landi? We are afraid not. Such a blue sky scenario for the industry might not actually be a bonanza for Landi. We believe a larger market, growing at double-digits while offering high margins and strong returns on capital invested might well eventually attract the interest of an larger player.

And we fear that the competitive advantages of Landi could then quickly evaporate is Bosch or Siemens decide to gain leaderships – also considering that most of production cycle is outsourced. So we believe that ‘small is beautiful’ for a company like Landi, along the lines envisaged by Frost & Sullivan.

Bigger market

Mass-market eco-trendy



Financial Forecasts 2006A-2009E Based on company guidance and Frost & Sullivan expectations, we are forecasting:

Sales growth of 21.3% 06-09 CAGR, with the main drivers of this growth to be Southwest Asia, India and the Italian market.

We forecast 24.7% EBITDA 06-09 CAGR, with profitability increasing from 21.9% to 23.8%.

We forecast net profit growth of 26.3% 06-09 CAGR.

Given that Landi is a high sales growth story, the effort of our modelling exercise went into estimating sales. We have built our market growth assumptions to 2009 based on Frost & Sullivan estimates of market growth to 2012, for both LPG and CNG kit sales.

In LPG kits, the Indian and the German market are the ones forecast by Frost & Sullivan to grow most, 35% and 39% respectively (06-12 CAGR), with India forecast to become the largest market by far world wide with 1.026 million kits sold per year by 2012.

Significantly China does not ever appear as a significant market in either LPG or CNG kits, perhaps an indication of the low priority given by the Chinese authorities on environmental issues.

In CNG kits, India again appears as a major growth driver with 45% growth (06-12 CAGR), Pakistan grows less (25% 06-12 CAGR) but from a much larger base thereby also representing a major driver of growth. Iran also sticks out as a major growth driver in this market, with a forecast growth of 33% from a relatively high base, whilst Brazil is forecast to grow by a mere 6% CAGR but from a base that ranks it the largest market world-wide alongside Pakistan.

Sales forecasts We are forecasting the main drivers of Landi’s sales growth to be the Asian markets, representing 39% of our total forecast sales growth to 2009, followed by the Italian market (estimated to hover around 25% of total sales).

LPG market to double growth – 14% 06-12 CAGR versus 6.5% 04-06 CAGR

CNG market to accelerate already high growth – 22% 06-12 CAGR versus 16% 04-06 CAGR



Figure 45. Landi Renzo Sales 2005A-2009E €m

Total Sales 2005A 2006A 2007E 2008E 2009E Italy 25.1 35.9 43.5 53.3 63.0 Germany 6.8 11.1 13.8 17.3 20.0 Rest of Western Europe 9.7 12.6 14.8 17.1 19.4 Poland 5.5 3.6 4.7 5.8 6.9 Rest of Eastern Europe 6.6 10.0 12.5 15.4 18.0 SouthWest Asia €m 27.0 47.4 45.9 57.9 71.8 Rest of Asia €m 5.3 7.8 12.1 17.3 24.7 Latam €m 5.6 8.8 11.2 14.8 18.8 RoW €m 2.1 3.6 4.1 4.5 5.1 Total Landi 93.7 140.8 162.6 203.4 247.6 Total Sales 2005A 2006A 2007E 2008E 2009E Italy 26.8% 25.5% 26.7% 26.2% 25.4% Germany 7.3% 7.9% 8.5% 8.5% 8.1% Rest of Western Europe 10.4% 8.9% 9.1% 8.4% 7.8% Poland 5.9% 2.6% 2.9% 2.8% 2.8% Rest of Eastern Europe 7.0% 7.1% 7.7% 7.6% 7.3% SouthWest Asia €m 28.8% 33.7% 28.2% 28.5% 29.0% Rest of Asia €m 5.7% 5.6% 7.5% 8.5% 10.0% Latam €m 6.0% 6.2% 6.9% 7.3% 7.6% RoW €m 2.2% 2.6% 2.5% 2.2% 2.1% Total Landi 100.0% 100.0% 100.0% 100.0% 100.0% Total Sales YoY growth 2005A 2006A 2007E 2008E 2009E Italy 41.8% 43.0% 21.0% 22.6% 18.3% Germany 65.9% 63.2% 24.6% 24.8% 16.0% Rest of Western Europe 29.3% 29.9% 17.8% 15.4% 13.1% Poland 14.6% -34.5% 30.8% 22.4% 19.9% Rest of Eastern Europe 32.0% 51.5% 25.2% 22.8% 16.9% SouthWest Asia €m 54.3% 75.6% -3.3% 26.3% 23.9% Rest of Asia €m 20.5% 47.5% 55.1% 43.1% 42.2% Latam €m 43.6% 57.1% 27.3% 32.1% 27.0% RoW €m 31.3% 71.4% 13.3% 11.2% 13.1% Total Landi 40.9% 50.3% 15.5% 25.1% 21.8%

Source: Company reports and Citigroup Investment Research estimates

For key markets such as Italy, Southwest Asia and India, our sales model is based on market estimates, based on both the LPG and CNG kit markets, Landi’s market share growth in each of these (where applicable) and a price/mix component of sales (see Appendix 1).

Landi Renzo management targets a market share of 30% by 2009 from one of 23% in 2006, after raising it from 13% in 2004. Our forecasts are compatible with this hypothesis, believing that with the new product launches the company has in the pipeline in the coming years and with the opening of plants in Pakistan and Iran, this target should be achievable.



Operating cost structure and margins Gauging operating costs is a more complex issue with Landi. Company guidance is that they will be able to improve profitability starting with gross industrial margin, which implies EBITDA margin should grow even faster. We have been more cautious, and incorporated only a marginal improvement in margins at EBITDA level – reaching 23.8% in 2009 from 21.9% in 2006.

Figure 46. Margins 2005-2009E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2005A 2006A 2007E 2008E 2009E

Gross Margin EBITDA margin EBIT Margin Net Margin


We have come to this conclusion in terms of margin expansion considering the several issues impacting Landi margins both positively and negatively.

On the positive side, margins should benefit from:

The transfer of production to Pakistan and Iran respectively in 2H07 and in 2008, which should reduce costs of goods sold (the start of production of the Brazilian plant in 2003-04 was part of the reason for the sharp rise in margins in 2005);

The gradual increase of sourcing of materials and components from low cost countries, Pakistan and Iran most of all;

Product innovation, with the introduction of the electronic control box in 2H07 and of the electronic pressure reducer in 2008, new products with higher profitability, in the European markets;

Given that we estimate high double-digit sales growth, Landi Renzo accounts appear set to benefit from economies of scale effects;



There are still substantial efficiency gains which can be achieved in the Italian production facilities particularly in logistics, in purchasing and with the in-sourcing of the development of software;

As product mix shifts in favour of CNG at the expense of LPG kits, this should benefit margins given the higher value added of CNG products;

Experience curve effects, which are however partly shared with OE manufacturers.

The issues affecting profitability of Landi on the negative side are the following:

As contribution to group sales shifts in favour of emerging markets, product mix deteriorates given the lower unit margin of these products;

The rise in the market price of raw materials (copper, aluminium and steel) – although the actual rise in the price of raw materials impacted only €3mln in 2006, mitigated by the fact that the materials acquired by Landi Renzo are not the basic materials found on the market but have significant value added;

Price competition on older and more basic products, for which the patent protection has expired – although we have estimated price/mix to improve with product innovation more than offsetting erosion on older products;

A shift in product mix towards OE channel. Although at present there is no substantial difference in profitability with products sold through the aftermarket channels, it is possible that over time OE manufacturers will apply more pricing pressure on Landi Renzo as sales volumes with individual large manufacturers rise (the same has happened to Brembo);

Exposure to weaker currencies – it is possible that as the contribution to group sales of emerging markets rises, that the company will have to lower prices in the event of weakening of the local currencies. This is mostly offset by a proportionate lowering of costs in those countries where Landi Renzo has a local production base.

Based on the above issues, we forecast the following economics for Landi.



Figure 47. Income statement 2004A-2009E €m

2004A 2005A 2006A 2007E 2008E 2009E LPG 27.8 42.1 59.0 74.7 92.4 110.4 CNG 32.9 45.6 75.0 80.1 102.2 127.4 others 3.8 4.6 4.7 7.8 8.8 9.8 Revenues 64.5 92.3 138.7 162.6 203.4 247.6 COGS -43.3 -58.8 -89.3 -105.2 -128.8 -153.9 OPEX -6.3 -5.4 -5.9 -9.3 -11.8 -15.3 Personnel Costs -6.8 -9.7 -14.1 -15.9 -17.0 -18.2 Other Costs and Income 0.8 0.9 0.9 3.0 1.0 -1.3 Operating cost -55.6 -73.0 -108.4 -127.4 -156.6 -188.7 EBITDA 8.9 19.3 30.3 35.2 46.8 58.9 EBITDA margin 13.7% 21.0% 21.9% 21.7% 23.0% 23.8% Depreciation -1.9 -2.0 -2.3 -3.3 -4.7 -5.7 Amortisation -0.8 -0.5 -0.6 -1.0 -1.1 -1.1 Provisions 0.0 0.0 0.0 0.0 0.0 0.0 EBIT 6.2 16.8 27.4 31.0 41.0 52.1 EBIT margin 9.5% 18.3% 19.8% 19.0% 20.2% 21.0% Interests &Other Financials -0.6 0.1 -0.6 0.7 1.2 1.4 Margin before exceptionals 5.6 16.9 26.8 31.7 42.2 53.5 Non operating items 0.0 0.0 0.0 0.0 0.0 0.0 Associate 0.0 0.0 0.0 0.0 0.0 0.0 Profit before taxes 5.7 17.0 26.9 31.7 42.2 53.5 PBT margin 8.8% 18.5% 19.4% 19.5% 20.8% 21.6% Taxes -2.4 -5.7 -10.2 -12.0 -15.8 -19.7 Profit after taxes 3.3 11.3 16.7 19.7 26.5 33.8 Minorities 0.0 -0.2 0.0 0.0 0.0 0.0 Net income 3.3 11.1 16.7 19.7 26.5 33.8 Net margin 5.0% 12.1% 12.1% 12.1% 13.0% 13.6%


We expect a tax rate in the region of 37%.

Balance sheet and cash generation Landi enjoys a very lean structure with a surprisingly low capital invested. Worth reminding that Landi has pushed outsourcing to boost flexibility and margins.

Figure 48. Capital invested 2004A-2009E €m

2004A 2005A 2006A 2007E 2008E 2009E Net working capital 18.4 15.9 26.0 38.5 46.7 56.2 Net Fixed assets 24.4 24.5 31.3 35.5 43.6 42.8 Total Net assets 42.8 40.4 57.3 74.1 90.3 99.0 M/L term funds 4.5 5.0 6.3 7.4 8.4 8.8 Capital employed 38.3 35.4 51.0 66.7 81.9 90.1 covered by Shareholders' funds 27.4 33.0 43.6 108.3 126.9 150.0 Net financial position (cash) 10.9 2.4 7.4 -41.6 -45.0 -59.9


ROI is expected to remain extremely high. However, the limited size of the niche in the overall car industry should keep the ‘800-pound sector gorilla’ out of the market.



Figure 49. ROI 2004A-2009E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2004A 2005A 2006A 2007E 2008E 2009E


Balance sheet pre-IPO and primary issue was already underleveraged. We now estimate a positive net financial position in the range of €40m at year-end 2007, indicating that the company has ample room to make acquisitions and also finance further internal expansion.

Figure 50. Cash Flows Statements 2005A-2009E €m

2005A 2006A 2007E 2008E 2009E Net income 11.1 16.7 19.7 26.5 33.7 Depreciation & amortisation 2.5 2.9 4.3 5.7 6.8 Interest Charges -0.1 0.6 -0.7 -1.2 -1.3 Cash from operations 13.5 20.2 23.2 31.0 39.2 Change in working capital 2.5 -10.1 -12.5 -8.2 -9.5 Trading cash flow 16.0 10.1 10.7 22.8 29.8 Capex -3.9 -10.1 -8.5 -13.8 -6.0 Operating cash flow 12.1 0.0 2.2 9.0 23.8 Changes in other sources -3.8 -4.9 46.8 2.3 1.8 Free cash flow to equity 8.3 -4.9 49.0 11.3 25.5 Dividends 0.0 0.0 0.0 -7.9 -10.6 change in cash 8.3 -4.9 49.0 3.4 14.9




The company has plans to invest some €10mn in two R&D centres, one in Italy and the other in China. The one in Italy targets further expand capacity, whilst the one in China aims to better service its local client base. This investment has been spread between 2007 and 2008 and is on top of the €5mn yearly capex plan to fuel growth, including the opening of the Pakistani and Iranian plants between 2H07 and 1H08. We have thus included cumulated capex of €29m between 2007 and 2009. Finally, we believe the company would also have room to pay significant dividends – in our forecasts we have assumed a payout of 40%.

A look at H1 07 Results Although investors should not pay too much attention to individual quarters, Landi did have a disappointing H1 07 mainly due to weaknesses in the after-market in Pakistan and sluggish demand in Brazil for CNG. This was not apparent at the time of the IPO, which suggests that management has limited visibility on revenues and may have to improve internal reporting and controls.

Although it has been a slow start, management was very confident of achieving the guidance disclosed for 2007 as disclosed during the conference call on 9th August – especially after a strong July and visibility on new important contracts in Iran.

Key results of H1 are summarised below.



Figure 51. A Look At H1 07 €m

Breakdown by Product 2Q 06A 2Q 07A 1H 06A 1H 07A LPG 18.1 19.9 33.5 39.3 CNG 19.4 15.7 36.2 33 Other 1 1.2 1.9 2.4 Revenues 38.5 36.8 71.6 74.7 % on Revenues LPG 47.0% 54.1% 46.8% 52.6% CNG 50.4% 42.7% 50.6% 44.2% Other 2.6% 3.3% 2.7% 3.2% Revenues 100.0% 100.0% 100.0% 100.0% YoY LPG 9.9% 17.3% CNG -19.1% -8.8% Other 20.0% 26.3% Revenues -4.4% 4.3% Geographical Breakdown 2Q 06A 2Q 07A 1H 06A 1H 07A Italy 9.4 12.5 20 25.2 Europe (ex Italy) 9.5 8.6 17.5 16.1 SW Asia 13.8 11.5 23.7 24.2 Rest of Asia 2.9 1.9 4.5 4.1 America 2.1 1.1 4.5 2.6 Other 0.7 1.1 1.5 2.4 Revenues 38.4 36.7 71.7 74.6 % on Revenues Italy 24.5% 34.1% 27.9% 33.8% Europe (ex Italy) 24.7% 23.4% 24.4% 21.6% SW Asia 35.9% 31.3% 33.1% 32.4% Rest of Asia 7.6% 5.2% 6.3% 5.5% America 5.5% 3.0% 6.3% 3.5% Other 1.8% 3.0% 2.1% 3.2% Revenues 100.0% 100.0% 100.0% 100.0% YoY Italy 33.0% 26.0% Europe (ex Italy) -9.5% -8.0% SW Asia -16.7% 2.1% Rest of Asia -34.5% -8.9% America -47.6% -42.2% Other 57.1% 60.0% Revenues -4.4% 4.0%


Results in H1 07 differ from trends envisaged by both the company and Frost & Sullivan: i) LPG is growing/CNG is declining; ii) Italy is extremely strong while LATAM and Asia are weak; iii) OEM is growing faster than the aftermarket. Although we are fully aware that a single quarter is not a clear indicator, we should note this discrepancy as it could pose problems for the company in building credibility in the financial community in its forecasting ability.



Figure 52. A Disappointing H 1 07 €m

Q1 06A Q1 07A delta YOY sales 33.1 37.9 14.5% EBITDA 7.3 8.1 11.0% EBITDA margin 22.1% 21.4% Q2 06A Q2 07A delta YOY sales 38.5 36.8 -4.3% EBITDA 8.1 8.9 9.9% EBITDA margin 21.1% 24.2% H1 06A H1 07A delta YOY sales 71.6 74.7 4.4% EBITDA 15.4 16.5 10.4% EBITDA margin 21.5% 22.8%

Source: Company reports and Citigroup Investment Research

We note that in order to achieve our FY estimates (pointing at 17% growth in 2007), sales in H2 07 should experience a major acceleration.

Figure 53. Looking at Implied H2 07 €m

H1 06A H1 07A Delta YOY H2 06 A H2 07E Delta YOY sales 71.6 74.7 4.4% 67.2 87.9 30.9% EBITDA 15.4 16.5 10.4% 14.9 18.2 21.3% EBITDA margin 21.5% 22.8% 22.0% 21.4%


In order to achieve our FY07 forecast, sales in H2 07 should grow by c.30% despite the Italian market not benefiting from incentives (fully exploited in H1) and Pakistan’s recent social unrest could potentially slow down growth. However, Landi has stated that Iran should start generating some €4-5m sales per month, Brazil should recover from its H1 nosedive while Germany should help Europe to recover. Finally, Pakistan should recover in both OEM and the aftermarket.

Figure 54. Seasonality in 2006-07 Assuming FY Estimates

% 2006 2007 H1A H2A H1A H2E SALES 51% 49% 46% 54% EBITDA 51% 49% 48% 52%


If 2006 seasonality should be replicated in 2007 (51% in H1-49% in H2), Landi sales and EBITDA for FY 2007 would be lowered to €147.1m and €32.5m – respectively some 10% and 8% below our forecasts. However, we see such a scenario as pretty unlikely on the basis of the information provided by the management on July of sound performance and on new contracts stepping-in.



Finally, we note that Landi had been experiencing strong growth between 2004 and 2006 – after having achieved much lower growth for more than 40 years. All of the top management have been in the group for several years, including the CFO who started his career in Landi in 1988 while becoming CFO 17 years later in 2005 when Landi started experiencing healthy growth. Whereas we view such loyalty as positive, we note that budgeting skills within the group might be somewhat limited by the absence of external training and experience.



Appendix



Appendix 1: Countries Analysis Based on both company’s guidance and Frost & Sullivan forecasts, we have run analysis on a country-region basis.

Figure 55. Click here to add title

LPG sales 2006A 2007E 2008E 2009E 2010E 2011E 2012E Italy LPG €m 26.3 31.3 37.6 43.2 45.2 45.4 45.5 Germany LPG €m 5.8 7.8 10.5 12.7 14.4 15.9 17.1 Western Europe LPG €m 9.9 11.6 13.3 15.0 16.6 18.1 19.3 Poland LPG €m 3.5 4.5 5.5 6.6 7.8 9.0 10.1 Eastern Europe LPG €m 7.2 9.1 11.4 13.4 15.1 16.3 17.7 SouthWest Asia LPG €m 1.4 2.2 2.9 3.8 4.8 5.7 6.6 Rest of Asia LPG €m 1.7 4.7 7.3 11.2 16.8 24.5 33.6 Latam LPG €m 0.7 0.8 1.0 1.1 1.2 1.3 1.4 RoW LPG €m 2.5 2.7 2.9 3.3 3.6 4.0 4.4 Total LPG 59.0 74.7 92.4 110.4 125.6 140.2 155.7 CNG sales 2006A 2007E 2008E 2009E 2010E 2011E 2012E Italy CNG €m 7.6 10.2 13.7 17.8 21.8 24.6 26.6 Germany CNG €m 5.3 6.0 6.7 7.3 7.6 7.4 6.9 Western Europe CNG €m 0.3 0.3 0.4 0.4 0.5 0.5 0.5 Poland CNG €m 0.1 0.3 0.3 0.3 0.3 0.3 0.3 Eastern Europe CNG €m 0.4 0.5 0.6 0.7 0.8 0.8 0.9 Southwest Asia CNG €m 46.0 43.7 55.0 68.0 80.6 89.0 97.3 Rest of Asia CNG €m 6.1 7.4 10.1 13.5 17.4 21.0 25.3 Latam CNG €m 8.1 10.4 13.8 17.7 21.3 24.1 26.1 RoW CNG €m 1.1 1.4 1.6 1.8 2.0 2.2 2.4 Total CNG 75.0 80.1 102.2 127.4 152.2 169.9 186.2 Total Sales (*) 2006A 2007E 2008E 2009E 2010E 2011E 2012E Italy 35.9 43.5 53.3 63.0 69.0 72.0 74.1 Germany 11.1 13.8 17.3 20.0 22.0 23.3 24.0 Rest of Western Europe 12.6 14.8 17.1 19.4 21.5 23.5 25.3 Poland 3.6 4.7 5.8 6.9 8.1 9.3 10.4 Rest of Eastern Europe 10.0 12.5 15.4 18.0 20.3 22.0 23.9 SouthWest Asia €m 47.4 45.9 57.9 71.8 85.3 94.7 103.8 Rest of Asia €m 7.8 12.1 17.3 24.7 34.3 45.5 58.9 Latam €m 8.8 11.2 14.8 18.8 22.5 25.4 27.5 RoW €m 3.6 4.1 4.5 5.1 5.6 6.2 6.8 Total Landi 140.8 162.6 203.4 247.6 288.7 321.9 354.7 Total Sales YoY growth 2006A 2007E 2008E 2009E 2010E 2011E 2012E Italy 43.0% 21.0% 22.6% 18.3% 9.6% 4.3% 2.8% Germany 63.2% 24.6% 24.8% 16.0% 9.7% 6.0% 3.0% Rest of Western Europe 29.9% 17.8% 15.4% 13.1% 11.0% 9.1% 7.7% Poland -34.5% 30.8% 22.4% 19.9% 17.3% 14.6% 11.9% Rest of Eastern Europe 51.5% 25.2% 22.8% 16.9% 12.8% 8.7% 8.5% SouthWest Asia €m 75.6% -3.3% 26.3% 23.9% 18.9% 10.9% 9.7% Rest of Asia €m 47.5% 55.1% 43.1% 42.2% 38.8% 32.8% 29.5% Latam €m 57.1% 27.3% 32.1% 27.0% 20.0% 12.8% 8.3% RoW €m 71.4% 13.3% 11.2% 13.1% 10.0% 9.7% 9.7% Total Landi 50.3% 15.5% 25.1% 21.8% 16.6% 11.5% 10.2%

Source: Company reports and Citigroup Investment Research estimates (*) total sales include Other Sales accounting for c.4% of total sales in 2007E

Key markets include Italy, Southwest Asia (notably Pakistan, Iran and Turkey) and India. We forecast the following geographical breakdown for Landi.



Figure 56. Geographical Breakdown of Sales 2006A-2012E

Total Sales 2006A 2007E 2008E 2009E 2010E 2011E 2012E Italy 25.5% 26.7% 26.2% 25.4% 23.9% 22.4% 20.9% Germany 7.9% 8.5% 8.5% 8.1% 7.6% 7.2% 6.8% Rest of Western Europe 8.9% 9.1% 8.4% 7.8% 7.4% 7.3% 7.1% Poland 2.6% 2.9% 2.8% 2.8% 2.8% 2.9% 2.9% Rest of Eastern Europe 7.1% 7.7% 7.6% 7.3% 7.0% 6.8% 6.7% SouthWest Asia €m 33.7% 28.2% 28.5% 29.0% 29.6% 29.4% 29.3% Rest of Asia €m 5.6% 7.5% 8.5% 10.0% 11.9% 14.1% 16.6% Latam €m 6.2% 6.9% 7.3% 7.6% 7.8% 7.9% 7.8% RoW €m 2.6% 2.5% 2.2% 2.1% 2.0% 1.9% 1.9% Total Landi 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


Italy The Italian CNG and LPG alternative fuel market accounts for an approximate value of US$219m and 218,768 units and conversion per annum sold in 2006. Overall, LPG controls the scene with 77% market share.

The Italian OE arena totals a share of 11% and is dominated by CNG (Italy was the first country to use CNG as alternative fuel), while the aftermarket has an 89% share and is led by LPG.

Refueling stations are widespread within the country, LPG stations accounting for 2,300 facilities and CNG for 566 ones.

On the legislative side, the government – adhering to the EU laws requiring reduction in CO2 emissions – consistently supports the penetration of alternative fuels through tax incentives (reduction in excise duties) and subsidies (up to €1,500). As far as 2007 is concerned – tax incentives were fully utilized in H1.

The Italian market is forecast to increase the penetration of conversion kits for LPG/CNG direct injection and the average price of conversion kits thanks to the spread of GDI engines.

As for CIR assumptions, the Italian market – currently accounting for 7.6% global market share – should experience a 06A-12E CAGR of 13%, moving from 213m units to 442.39m in 2012E. In line with the global trend, CNG is expected to reach a higher consumption by 2012E vs. LPG. Currently CNG stands out for only 28.2% of the whole Italian market and is supposed to attain a 41.3% market share in Italy by 2012E. LPG, instead, is believed to shift from the actual 71% market share to almost 58.7% in the same period.

Figure 57. Landi Renzo – Positioning in Italy*, Y06

Landi Renzo, 35%

Others, 65%

*Based on 2006A revenues.




Figure 58. Italy Sales and Gross Profit 2006A-2009E €m

Italy 2006A 2007E 2008E 2009E 2010E 2011E 2012E LPG units/000

153.0

174.0

201.4

225.3

243.3

253.1

263.3 volume growth YOY 13.7% 15.8% 11.9% 7.9% 4.0% 4.0% CNG units/ 000

60.0

72.5

89.6

112.8

136.9

159.8

179.1 volume growth YOY 20.9% 23.5% 26.0% 21.4% 16.7% 12.1% Total market units/000

213.0

246.5

291.0

338.2

380.2

412.9

442.4 volume growth YOY 15.7% 18.0% 16.2% 12.4% 8.6% 7.1% Landi Market share LPG 37.4% 37.0% 36.5% 36.5% 34.6% 32.8% 31.0% CNG 32.5% 33.9% 35.2% 35.2% 34.6% 32.8% 31.0% LPG units/000

57.3

64.3

73.5

82.2

84.2

83.0

81.5 volume growth YOY 19.8% 12.3% 14.3% 11.7% 2.5% -1.5% -1.8% CNG units 000

19.5

24.6

31.6

39.8

47.4

52.4

55.5 volume growth YOY 21.9% 26.0% 28.4% 26.0% 19.2% 10.5% 5.8% Landi Total Units 76.77 88.9 105.1 121.9 131.6 135.4 136.9 volume growth YOY Average revenues per LPG 0.46 0.49 0.51 0.53 0.54 0.55 0.56 YOY growth 6.0% 5.0% 3.0% 2.0% 2.0% 2.0% Average revenues per CNG 0.39 0.41 0.43 0.45 0.46 0.47 0.48 YOY growth 6.0% 5.0% 3.0% 3.0% 2.0% 2.0% Italy LPG €m

26.3

31.3

37.6

43.2

45.2

45.4

45.5 YOY growth 57.5% 19.0% 20.1% 15.1% 4.6% 0.5% 0.2% Italy CNG €m

7.6

10.2

13.7

17.8

21.8

24.6

26.6 YOY growth 18.8% 33.6% 34.9% 29.8% 22.8% 12.7% 7.9% Other

2.0

2.0

2.0

2.0

2.0

2.0

2.0 Italy 35.9 43.5 53.3 63.0 69.0 72.0 74.1 YOY growth 43.0% 21.0% 22.6% 18.3% 9.6% 4.3% 2.8% Cost of Good Sold

(18.50)

(21.78)

(26.51)

(31.27)

(34.15)

(35.53)

(36.42) Gross Profit 17.40 21.68 26.76 31.75 34.89 36.52 37.66 YOY growth 50.0% 24.6% 23.4% 18.6% 9.9% 4.7% 3.1% Gross margin 48.5% 49.9% 50.2% 50.4% 50.5% 50.7% 50.8%


Southwest Asia Southwest Asia – including Iran, Pakistan and Turkey – represents the second-largest market for alternative fuels, followed by Latin America and the rest of Asia which comprises India and China.



Pakistan The Pakistani CNG and LPG alternative fuel market accounts for an approximate value of US$154m and 385,000 units and conversion per annum sold in 2006. Overall, the Pakistani alternative fuel market is stable thanks to high cost-savings, fast pay-back period and supportive laws. Aftermarket totals a share of 67% and CNG controls the scene with 70% market share.

CNG Refueling stations are widespread within the country, LPG stations accounting for 800 facilities, which are forecast to reach 1,700 by 2012E.

On the legislative side, the government supports the penetration alternative fuels through mandatory requirements of conversion for public transportation (buses and taxis) by 2008 and by favouring imported conversion kits by disclaiming import duties.

In this respect, Landi Renzo takes advantage over local players by providing high-quality and technologically advanced products, currently focused on complete CNG kits for passenger cars and three wheelers. Overall Landi Renzo owns 49% market share as of 2006 and holds a strong distribution network and good brand recognition. The company is currently opening a subsidiary in Pakistan which the management expects to be fully operational in 2H07.

Iran The CNG and LPG alternative fuel market in Iran accounts for an approximate value of US$49m and 147,000 units and conversion per annum sold in 2006. Overall, CNG controls the scene with 70% market share and is dominated by the Aftermarket, owning 78% share.

Refueling stations are widespread within the country, CNG stations accounting for 328 facilities, which are forecast to more than double by 2012E to 750 stations.

On the legislative side, the government is deeply influencing the market: it set a target of 280,000 for units to be sold by 2008 from the current 147,000 and requiring a 50:50 split in terms of OEM and Aftermarket sales. Government is also supporting alternative fuel by keeping kit prices relatively low and by reimbursing 50% cost for the conversion of vehicles to OEMs. As well, the government is encouraging alliances between foreign companies and local OEMs by reducing import restrictions.

In this respect, Landi and other imports, owning a 32% market share as of Y06, are currently finalizing bureaucratic agreements with the local government (which are believed by the management to be reached by 2H07) for a plant in Iran.

In Iran Landi Renzo provides, through its partner Iran Khodro and Renault Pars (the major automotive manufacturer in Iran), complete CNG kits for both taxi fleets and passenger cars. Because of the strong demand for its products locally, the company is opening a subsidiary in Iran which the management expects to be fully operational in late-2007/early 2008.

Figure 59. Landi Renzo – Positioning in Pakistan*, Y06

Landi Renzo, 49%

Others, 51%



Figure 60. Landi Renzo – Positioning in Iran*, Y06

Local Brands,

68%Landi

Renzo & Other

Importers, 32%



.



Turkey LPG is the exclusive form of gas used in Turkey with 119m units sold in Y06A, a third of LPG vehicles being commercial ones. Currently converter kits used in Turkey are carburetor ones and LPG converter kits range between US$100 and US$1,000. As reported by Frost and Sullivan, the OEM market is virtually nonexistent in this country. The Turkish market amounted to 255m kits sold in 2006, or had a share of 9.1% in respect to the worldwide market.

Figure 61. South West Asia Sales and Gross Profit $m

2006A 2007E 2008E 2009E 2010E 2011E 2012E LPG units/000

5.0

7.5

9.4

11.6

13.8

15.7

17.2 volume growth YOY 199.5% 49.0% 25.5% 23.4% 18.8% 14.1% 9.5% CNG units 000

316.0

300.0

360.0

415.3

459.8

487.8

512.2 volume growth YOY 62.6% -5.1% 20.0% 15.4% 10.7% 6.1% 5.0% Landi Total Units 321.05 307.5 369.4 426.9 473.6 503.5 529.4 volume growth YOY Average revenues per LPG 0.28 0.38 0.40 0.42 0.43 0.44 0.46 YOY growth 5.0% 5.0% 5.0% 3.0% 3.0% 3.0% Average revenues per CNG 0.15 0.19 0.20 0.21 0.22 0.22 0.23 YOY growth 5.0% 5.0% 5.0% 5.0% 2.0% 2.0% SouthWest Asia LPG $m 1.4 2.8 3.8 4.9 5.9 7.0 7.9 YOY growth 250.0% 103.3% 31.8% 29.6% 22.3% 17.6% 12.8% Southwest Asia CNG $m

46.0

56.8

71.5

86.6

100.7

109.0

116.7 YOY growth 72.9% 23.4% 26.0% 21.1% 16.3% 8.2% 7.1% Other

-

-

-

-

-

-

- South West Asia $m 47.4 59.6 75.3 91.5 106.7 116.0 124.6 YOY growth 75.6% 25.8% 26.3% 21.5% 16.6% 8.7% 7.4% Cost of Good Sold

(32.70)

(34.58)

(41.40)

(49.07)

(57.21)

(62.20)



Rest of Asia In India, as well as other Asian countries, public transportation is being gradually converted to CNG on a mandatory basis. Forecasts by Frost & Sullivan estimate the passenger car demand in India to be directly proportional to the availability of CNG and the lead CNG fuel system market to be among the largest one worldwide, occupying approximately 22% global market share by 2012E.



Figure 62. Rest of Asia Sales and Gross Profit $m

2006A 2007E 2008E 2009E 2010E 2011E 2012E LPG units/000

10.6

28.0

41.0

58.8

82.8

112.4

143.8 volume growth YOY 122.1% 164.9% 46.4% 43.6% 40.7% 35.8% 28.0% CNG units 000

34.0

41.1

53.3

66.7

80.4

93.1

107.9 volume growth YOY 67.9% 20.9% 29.8% 25.1% 20.5% 15.8% 15.8% Landi Total Units 44.57 69.1 94.3 125.6 163.2 205.5 251.7 volume growth YOY Average revenues per LPG 0.16 0.22 0.23 0.24 0.25 0.27 0.28 YOY growth 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Average revenues per CNG 0.18 0.23 0.25 0.26 0.27 0.28 0.28 YOY growth 5.0% 5.0% 5.0% 5.0% 2.0% 2.0% Rest of Asia LPG $m

1.7

6.1

9.4

14.2

21.0

30.0

40.3 YOY growth 13.3% 261.5% 53.7% 50.7% 47.7% 42.5% 34.4% Rest of Asia CNG $m

6.1

9.6

13.1

17.2

21.8

25.7

30.4 YOY growth 61.1% 57.2% 36.2% 31.4% 26.5% 18.2% 18.2% Rest of Asia $m 7.8 15.8 22.6 31.5 42.8 55.7 70.7 YOY growth 47.5% 101.6% 43.1% 39.5% 36.1% 30.1% 26.9% Cost of Good Sold

(4.30)

(8.53)

(11.90)

(16.60)

(22.01)

(28.64)





Appendix 1: Oil Data Figure 63. Oil: Proved Reserves, Production, Consumption, Trade Movements (2005).

Thousand m illion barre ls 2005 Share Thousand barrels daily 2005 share Thousand barrels daily 2005 share Thousand barrels daily 2005 share of total of to tal o f total Im ports of total

U SA 6,830 8.0% US A 20,655 24.6% USA 13,525 27.1%USA 29.3 2.4% C anada 3,047 3.7% Canada 2,241 2.6% Europe 13,261 26.6%Canada 16.5 1.4% M exico 3,759 4.8% Mexico 1,978 2.3% Japan 5,225 10.5%Mexico 13.7 1.1% Total N orth Am erica 13,636 16.5% Total North Am erica 24,875 29.5% Rest of W orld 17,895 35.8%Total N orth Am erica 59.5 5.0% TO TAL W O RLD 49,906 100.0%

A rgentina 725 0.9% Argentina 421 0.5% ExportsArgentina 2.3 0.2% B razil 1,718 2.2% Brazil 1,819 2.2% USA 1,129 2.3%Brazil 11.8 1.0% C olom bia 549 0.7% Chile 257 0.3% Canada 2,201 4.4%Colom bia 1.5 0.1% E cuador 541 0.7% Colom bia 230 0.3% Mexico 2,065 4.1%Ecuador 5.1 0.4% P eru 111 0.1% Ecuador 148 0.2% South & Central Am erica 3,528 7.1%Peru 1.1 0.1% Trinidad & Tobago 171 0.2% Peru 139 0.2% Europe 2,149 4.3%Trin idad & Tobago 0.8 0.1% V enezuela 3,007 4.0% Venezue la 553 0.7% Form er Soviet Un ion @ 7,076 14.2%Venezuela 79.7 6.6% O ther S . & Cent. Am erica 142 0.2% O ther S . & Cent. Am erica 1,208 1.5% Midd le East 19,821 39.7%Other S . & C ent. Am erica 1.3 0.1% Total S . & Cent. Am erica 6,964 9.0% Total S. & Cent. Am erica 4,776 5.8% North A frica 3,070 6.2%Total S . & Cent. Am erica 103.5 8.6% W est A frica 4,358 8.7%

A zerbaijan 452 0.6% Austria 294 0.4% Asia Pac ific £ 2,967 5.9%Azerbaijan 7.0 0.6% D enm ark 377 0.5% Azerbaijan 103 0.1% Rest of W orld 1,542 3.1%Denm ark 1.3 0.1% Ita ly 118 0.2% Belarus 137 0.2% TO TAL W O RLD 49,906 100.0%Ita ly 0.7 0.1% K azakhstan 1,364 1.6% Belg ium & Luxem bourg 809 1.0%Kazakhstan 39.6 3.3% N orway 2,969 3.5% Bulgaria 109 0.1%Norway 9.7 0.8% R om ania 114 0.1% Czech Republic 211 0.3%Rom ania 0.5 R ussian Federation 9,551 12.1% Denm ark 189 0.2%Russ ian Federation 74.4 6.2% Turkm enis tan 192 0.2% Fin land 233 0.3%Turkm enistan 0.5 U nited K ingdom 1,808 2.2% France 1,961 2.4%United K ingdom 4.0 0.3% U zbekis tan 126 0.1% G erm any 2,586 3.2%Uzbekis tan 0.6 O ther Europe & Euras ia 463 0.6% G reece 429 0.5%Other Europe & Euras ia 2.2 0.2% Total E urope & Eu rasia 17,534 21.7% Hungary 151 0.2%Total E urope & Eurasia 140.5 11.7% Iceland 19

Iran 4,049 5.1% Republic o f Ireland 196 0.2%Iran 137.5 11.5% Iraq 1,820 2.3% Italy 1,809 2.2%Iraq 115.0 9.6% K uwait 2,643 3.3% Kazakhstan 208 0.3%Kuwait 101.5 8.5% O m an 780 1.0% Lithuan ia 57 0.1%Om an 5.6 0.5% Q atar 1,097 1.3% Netherlands 1,071 1.3%Qatar 15.2 1.3% S audi A rabia 11,035 13.5% Norway 213 0.3%Saudi A rabia 264.2 22.0% S yria 469 0.6% Poland 478 0.6%Syria 3.0 0.2% U nited Arab Em irates 2,751 3.3% Portuga l 320 0.4%United Arab E m ira tes 97.8 8.1% Y em en 426 0.5% Rom ania 240 0.3%Yem en 2.9 0.2% O ther M iddle E ast 48 0.1% Russian Federation 2,753 3.4%Other M iddle E ast 0.1 Total M iddle E ast 25,119 31.0% Slovak ia 73 0.1%Total M iddle E ast 742.7 61.9% Spain 1,618 2.1%

A lgeria 2,015 2.2% Sweden 315 0.4%Algeria 12.2 1.0% A ngola 1,242 1.6% Switzerland 262 0.3%Angola 9.0 0.8% C am eroon 58 0.1% Turkey 650 0.8%Chad 0.9 0.1% C had 173 0.2% Turkm enistan 110 0.1%Rep. o f Congo (Brazzaville) 1.8 0.1% R ep. of Congo (Brazzaville) 253 0.3% Ukraine 294 0.4%Egypt 3.7 0.3% E gypt 696 0.9% United K ingdom 1,790 2.2%Equatorial Gu inea 1.8 0.1% E quatorial Gu inea 355 0.5% Uzbekistan 161 0.2%Gabon 2.2 0.2% G abon 234 0.3% O ther E urope & E urasia 502 0.6%Libya 39.1 3.3% Libya 1,702 2.1% Total Europe & Eurasia 20,350 25.1%Nigeria 35.9 3.0% N igeria 2,580 3.2%Sudan 6.4 0.5% S udan 379 0.5% Iran 1,659 2.0%Tunis ia 0.7 0.1% Tunis ia 74 0.1% Kuwait 280 0.4%Other A frica 0.6 O ther A frica 72 0.1% Q atar 98 0.1%Total Africa 114.3 9.5% Total Africa 9,835 12.0% Saudi A rab ia 1,891 2.3%

United A rab Em irates 376 0.5%Australia 4.0 0.3% A ustralia 554 0.6% O ther M iddle East 1,436 1.8%Brunei 1.1 0.1% B runei 206 0.3% Total M idd le East 5,739 7.1%China 16.0 1.3% C hina 3,627 4.6%India 5.9 0.5% India 784 0.9% Algeria 254 0.3%Indones ia 4.3 0.4% Indones ia 1,136 1.4% Egypt 616 0.8%Malaysia 4.2 0.3% M alaysia 827 0.9% South Africa 529 0.6%Thailand 0.5 Thailand 276 0.3% O ther A frica 1,363 1.7%Vietnam 3.1 0.3% V ietnam 392 0.5% Total Africa 2,763 3.4%Other As ia P ac ific 1.0 0.1% O ther Asia Pac ific 199 0.2%Total Asia Pacific 40.2 3.4% Total Asia P acific 8,000 9.8% Austra lia 884 1.0%

Bangladesh 82 0.1%TO TAL W ORLD 1,200.71 100.0% TOTAL W O RLD 81,087.54 100.0% China 6,988 8.5%Of which OECD 80.6 6.7% O f which O ECD 19,763 23.8% China Hong Kong SAR 285 0.4% OPEC 902.4 75.2% OPEC 33,836 41.7% Ind ia 2,485 3.0% Non-O PEC £ 175.4 14.6% Non-O PE C £ 35,408 43.4% Indonesia 1,168 1.4% Form er Soviet Union 122.9 10.2% Form er Soviet Union 11,844 14.8% Japan 5,360 6.4%

Malaysia 477 0.6%New Zealand 152 0.2%Pak is tan 353 0.5%Philippines 314 0.4%Singapore 826 1.1%South Korea 2,308 2.7%Taiwan 884 1.1%Thailand 946 1.2%O ther A sia Pacific 445 0.5%Total Asia Pacific 23,957 29.1%

TO TAL W ORLD 82,459 100.0%O f which European Union 25 14,772 18.3% OE CD 49,254 59.2% Form er Soviet U nion 3,936 4.9% O ther E MEs 29,270 36.0%

O il: Proved reserves O il: Production O il: Consum p tion O il: T rade m ovem ents

OECD (Organization For Economic Co-operation and Development) members in: i) Europe: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece,

Hungary, Iceland, Republic of Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, Turkey, United Kingdom; ii)

Other member countries: Australia, Canada, Japan, Mexico, New Zealand, South Korea, USA.

Source: Citigroup Investment Research based on BP Statistical Review 2006



Natural Gas Data

Figure 64. Natural Gas Proved Reserves, Production, Consumption (2005).

S h a re s h a re s h a reT r il l io n C u b ic M e tre s 2 0 0 5 o f to ta l B ill io n c u b ic m e tre s 2 0 0 5 o f to ta l B ill io n c u b ic m e tre s 2 0 0 5 .0 o f to ta lU S A 5 .4 5 3 .0 % U S A 5 2 5 .7 0 1 9 .0 % U S A 6 3 3 .5 0 2 3 .0 %C a n a d a 1 .5 9 0 .9 % C a n a d a 1 8 5 .5 0 6 .7 % C a n a d a 9 1 .4 0 3 .3 %M e x ic o 0 .4 1 0 .2 % M e x ic o 3 9 .5 0 1 .4 % M e x ic o 4 9 .6 0 1 .8 %T o ta l N o rth A m e ric a 7 .4 6 4 .1 % T o ta l N o rth A m e ric a 7 5 0 .6 0 2 7 .2 % T o ta l N o r th A m e r ic a 7 7 4 .5 0 2 8 .2 %

A rg e n tin a 0 .5 0 0 .3 % A rg e n t in a 4 5 .6 0 1 .7 % A rg e n tin a 4 0 .6 0 1 .5 %B o liv ia 0 .7 4 0 .4 % B o liv ia 1 0 .4 0 0 .4 % B ra z il 2 0 .2 0 0 .7 %B ra z il 0 .3 1 0 .2 % B ra z il 1 1 .4 0 0 .4 % C h ile 7 .6 0 0 .3 %C o lo m b ia 0 .1 1 0 .1 % C o lo m b ia 6 .8 0 0 .2 % C o lo m b ia 6 .8 0 0 .2 %P e ru 0 .3 3 0 .2 % T rin id a d & T o b a g o 2 9 .0 0 1 .0 % E c u a d o r 0 .2 0T rin id a d & T o b a g o 0 .5 5 0 .3 % V e n e z u e la 2 8 .9 0 1 .0 % P e ru 1 .6 0 0 .1 %V e n e z u e la 4 .3 2 2 .4 % O th e r S . & C e n t. A m e ric a 3 .5 0 0 .1 % V e n e z u e la 2 8 .9 0 1 .1 %O th e r S . & C e n t. A m e ric a 0 .1 7 0 .1 % T o ta l S . & C e n t. A m e ric a 1 3 5 .6 0 4 .9 % O th e r S . & C e n t. A m e ric a 1 8 .3 0 0 .7 %T o ta l S . & C e n t. A m e ric a 7 .0 2 3 .9 % T o ta l S . & C e n t. A m e r ic a 1 2 4 .1 0 4 .5 %

A z e rb a ija n 5 .3 0 0 .2 %A z e rb a ija n 1 .3 7 0 .8 % D e n m a rk 1 0 .4 0 0 .4 % A u s tr ia 1 0 .0 0 0 .4 %D e n m a rk 0 .0 7 G e rm a n y 1 5 .8 0 0 .6 % A z e rb a ija n 8 .8 0 0 .3 %G e rm a n y 0 .1 9 0 .1 % Ita ly 1 2 .0 0 0 .4 % B e la ru s 1 8 .9 0 0 .7 %Ita ly 0 .1 7 0 .1 % K a z a k h s ta n 2 3 .5 0 0 .9 % B e lg iu m & L u xe m b o u rg 1 6 .8 0 0 .6 %K a z a k h s ta n 3 .0 0 1 .7 % N e th e rla n d s 6 2 .9 0 2 .3 % B u lg a ria 3 .2 0 0 .1 %N e th e rla n d s 1 .4 1 0 .8 % N o rw a y 8 5 .0 0 3 .1 % C z e c h R e p u b lic 8 .5 0 0 .3 %N o rw a y 2 .4 1 1 .3 % P o la n d 4 .3 0 0 .2 % D e n m a rk 5 .0 0 0 .2 %P o la n d 0 .1 1 0 .1 % R o m a n ia 1 2 .9 0 0 .5 % F in la n d 4 .0 0 0 .1 %R o m a n ia 0 .6 3 0 .3 % R u s s ia n F e d e ra tio n 5 9 8 .0 0 2 1 .6 % F ra n c e 4 5 .0 0 1 .6 %R u s s ia n F e d e ra tio n 4 7 .8 2 2 6 .6 % T u rk m e n is ta n 5 8 .8 0 2 .1 % G e rm a n y 8 5 .9 0 3 .1 %T u rk m e n is ta n 2 .9 0 1 .6 % U k ra in e 1 8 .8 0 0 .7 % G re e c e 2 .5 0 0 .1 %U k ra in e 1 .1 1 0 .6 % U n ite d K in g d o m 8 8 .0 0 3 .2 % H u n g a ry 1 3 .4 0 0 .5 %U n ite d K in g d o m 0 .5 3 0 .3 % U z b e k is ta n 5 5 .7 0 2 .0 % Ic e la n d - -U z b e k is ta n 1 .8 5 1 .0 % O th e r E u ro p e & E u ra s ia 9 .8 0 0 .4 % R e p u b lic o f Ire la n d 3 .9 0 0 .1 %O th e r E u ro p e & E u ra s ia 0 .4 6 0 .3 % T o ta l E u ro p e & E u ra s ia 1 ,0 6 1 .1 0 3 8 .4 % I ta ly 7 9 .0 0 2 .9 %T o ta l E u ro p e & E u ra s ia 6 4 .0 1 3 5 .6 % K a z a k h s ta n 1 7 .8 0 0 .6 %

B a h ra in 9 .9 0 0 .4 % L ith u a n ia 3 .2 0 0 .1 %B a h ra in 0 .0 9 0 .1 % Ira n 8 7 .0 0 3 .1 % N e th e rla n d s 3 9 .5 0 1 .4 %Ira n 2 6 .7 4 1 4 .9 % K u w a it 9 .7 0 0 .4 % N o rw a y 4 .5 0 0 .2 %Ira q 3 .1 7 1 .8 % O m a n 1 7 .5 0 0 .6 % P o la n d 1 3 .6 0 0 .5 %K u w a it 1 .5 7 0 .9 % Q a ta r 4 3 .5 0 1 .6 % P o rtu g a l 3 .0 0 0 .1 %O m a n 1 .0 0 0 .6 % S a u d i A ra b ia 6 9 .5 0 2 .5 % R o m a n ia 1 7 .3 0 0 .6 %Q a ta r 2 5 .7 8 1 4 .3 % S y ria 5 .4 0 0 .2 % R u s s ia n F e d e ra tio n 4 0 5 .1 0 1 4 .7 %S a u d i A ra b ia 6 .9 0 3 .8 % U n ite d A ra b E m ira te s 4 6 .6 0 1 .7 % S lo v a k ia 5 .9 0 0 .2 %S y ria 0 .3 1 0 .2 % O th e r M id d le E a s t 3 .4 0 0 .1 % S p a in 3 2 .3 0 1 .2 %U n ite d A ra b E m ira te s 6 .0 4 3 .4 % T o ta l M id d le E a s t 2 9 2 .5 0 1 0 .6 % S w e d e n 0 .8 0Y e m e n 0 .4 8 0 .3 % S w itz e r la n d 3 .1 0 0 .1 %O th e r M id d le E a s t 0 .0 5 A lg e r ia 8 7 .8 0 3 .2 % T u rk e y 2 7 .4 0 1 .0 %T o ta l M id d le E a s t 7 2 .1 3 4 0 .1 % E g y p t 3 4 .7 0 1 .3 % T u rk m e n is ta n 1 6 .6 0 0 .6 %

L ib y a 1 1 .7 0 0 .4 % U k ra in e 7 2 .9 0 2 .6 %A lg e ria 4 .5 8 2 .5 % N ig e ria 2 1 .8 0 0 .8 % U n ite d K in g d o m 9 4 .6 0 3 .4 %E g y p t 1 .8 9 1 .1 % O th e r A fr ic a 7 .0 0 0 .3 % U z b e k is ta n 4 4 .0 0 1 .6 %L ib y a 1 .4 9 0 .8 % T o ta l A fr ic a 1 6 3 .0 0 5 .9 % O th e r E u ro p e & E u ra s ia 1 5 .3 0 0 .6 %N ig e ria 5 .2 3 2 .9 % T o ta l E u ro p e & E u ra s ia 1 ,1 2 1 .9 0 4 0 .8 %O th e r A fr ic a 1 .2 0 0 .7 % A u s tra lia 3 7 .1 0 1 .3 %T o ta l A fr ic a 1 4 .3 9 8 .0 % B a n g la d e s h 1 4 .2 0 0 .5 % Ira n 8 8 .5 0 3 .2 %

B ru n e i 1 2 .0 0 0 .4 % K u w a it 9 .7 0 0 .4 %A u s tra lia 2 .5 2 1 .4 % C h in a 5 0 .0 0 1 .8 % Q a ta r 1 5 .9 0 0 .6 %B a n g la d e s h 0 .4 4 0 .2 % In d ia 3 0 .4 0 1 .1 % S a u d i A ra b ia 6 9 .5 0 2 .5 %B ru n e i 0 .3 4 0 .2 % In d o n e s ia 7 6 .0 0 2 .8 % U n ite d A ra b E m ira te s 4 0 .4 0 1 .5 %C h in a 2 .3 5 1 .3 % M a la y s ia 5 9 .9 0 2 .2 % O th e r M id d le E a s t 2 7 .0 0 1 .0 %In d ia 1 .1 0 0 .6 % M y a n m a r 1 3 .0 0 0 .5 % T o ta l M id d le E a s t 2 5 1 .0 0 9 .1 %In d o n e s ia 2 .7 6 1 .5 % N e w Z e a la n d 3 .7 0 0 .1 %M a la y s ia 2 .4 8 1 .4 % P a k is ta n 2 9 .9 0 1 .1 % A lg e ria 2 4 .1 0 0 .9 %M y a n m a r 0 .5 0 0 .3 % T h a ila n d 2 1 .4 0 0 .8 % E g y p t 2 5 .5 0 0 .9 %P a k is ta n 0 .9 6 0 .5 % V ie tn a m 5 .2 0 0 .2 % S o u th A fr ic a - -P a p u a N e w G u in e a 0 .4 3 0 .2 % O th e r A s ia P a c if ic 7 .3 0 0 .3 % O th e r A fr ic a 2 1 .6 0 0 .8 %T h a ila n d 0 .3 5 0 .2 % T o ta l A s ia P a c ific 3 6 0 .1 0 1 3 .0 % T o ta l A fr ic a 7 1 .2 0 2 .6 %V ie tn a m 0 .2 4 0 .1 %O th e r A s ia P a c if ic 0 .3 7 0 .2 % T O T A L W O R L D 2 ,7 6 3 .0 0 1 0 0 .0 % A u s tra lia 2 5 .7 0 0 .9 %T o ta l A s ia P a c ific 1 4 .8 4 8 .3 % O f w h ic h E u ro p e a n U n io n 2 5 1 9 9 .7 0 7 .2 % B a n g la d e s h 1 4 .2 0 0 .5 %

O E C D 1 ,0 7 9 .4 0 3 9 .1 % C h in a 4 7 .0 0 1 .7 %T O T A L W O R L D 1 7 9 .8 3 1 0 0 .0 % F o rm e r S o v ie t U n io n 7 6 0 .3 0 2 7 .5 % C h in a H o n g K o n g S A R 2 .2 0 0 .1 %O f w h ic h : E u ro p e a n U n io n 2 5 2 .5 7 1 .4 % O th e r E M E s 9 2 3 .2 0 3 3 .4 % In d ia 3 6 .6 0 1 .3 % O E C D 1 4 .9 5 8 .3 % In d o n e s ia 3 9 .4 0 1 .4 % F o rm e r S o v ie t U n io n 5 8 .3 2 3 2 .4 % J a p a n 8 1 .1 0 2 .9 %

M a la y s ia 3 4 .9 0 1 .3 %N e w Z e a la n d 3 .6 0 0 .1 %P a k is ta n 2 9 .9 0 1 .1 %P h ilip p in e s 3 .0 0 0 .1 %S in g a p o re 6 .5 0 0 .2 %S o u th K o re a 3 3 .3 0 1 .2 %T a iw a n 1 0 .7 0 0 .4 %T h a ila n d 2 9 .9 0 1 .1 %O th e r A s ia P a c if ic 8 .9 0 0 .3 %T o ta l A s ia P a c ific 4 0 6 .9 0 1 4 .8 %

T O T A L W O R L D 2 ,7 4 9 .6 0 1 0 0 .0 %O f w h ic h E u ro p e a n U n io n 2 5 # 4 7 1 .2 0 1 7 .1 % O E C D 1 ,4 1 6 .8 0 5 1 .5 % F o rm e r S o v ie t U n io n 5 9 5 .9 0 2 1 .7 %

N a tu ra l G a s : C o n s u m p tio nN a tu ra l G a s : P ro d u c t io nN a tu ra l G a s : P ro v e d re s e rv e s

Source: Citigroup Investment Research based on BP Statistical Review 2006



Fuel Properties

Figure 65. Fuel Properties

Gasoline No. 2 Diesel* Compressed Natural

Gas(CNG)

Liquefied Petroleum Gas (LPG)

Biodiesel(B20) Ethanol(E85) Hydrogen

Chemical Structure C4 to C12 C10 to C20 CH4 C3H8 Methyl esters of C16 to C18 fatty acids

CH3CH2OH H2

Main Fuel Source Crude Oil Crude Oil Underground reserves

A by-product of petroleum refining or natural gas

processing

Soy bean oil, waste cooking oil, animal fats, and rapeseed

oil

Corn, Grains, or agricultural waste

Natural Gas, Methanol, and

other energy sources.

Energy Content per Gallon

109,000 - 125,000 Btu**

128,000 - 130,000 Btu

33,000 - 38,000 Btu @ 3000

psi***; 38,000 - 44,000

@ 3600 psi

~84,000 Btu 117,000 - 120,000 Btu (compared to

diesel #2)

~ 80,000 Btu Gas: ~6,500 Btu@3,000 psi;

~16,000 Btu@10,000 psi Liquid: ~30,500

Btu Energy Ratio Compared to Gasoline

3.94 to 1 or 25% at 3000 psi;

3.0 to 1 @ 3600 psi

1.36 to 1 or 74% 1.1 to 1 or 90% (relative to diesel)

1.42 to 1 or 70%

Physical State Liquid Liquid Compressed Gas Liquid Liquid Liquid Compressed Gas or Liquid

Types of Vehicles Available today

All types of vehicle classes

Many types of vehicle classes

Many types of vehicle classes

Light-duty vehicles, which can be fueled with

propane or gasoline, medium and heavy-duty

trucks and buses that run on propane

Any vehicle that runs on diesel -no

modification is needed for up to

5% blends. Many engines also

compatible with up to 20% blends

Light-duty vehicles, medium and heavy-

duty trucks and buses - these vehicles are

flexible fuel vehicles that can be fueled

with E85 (ethanol), gasoline, or any

combination of the two fuels

No vehicles are available for

commercial sale yet, but some

vehicles are being leased for

demonstration purposes

Environmental Impacts of Burning Fuel

Produces harmful

emissions; however,

gasoline and gasoline

vehicles are rapidly

improving and emissions are being reduced

Produces harmful

emissions; however, diesel

and diesel vehicles are

rapidly improving and emissions are being reduced

especially with after-treatment

devices

CNG vehicles can demonstrate

a reduction in ozone-forming

emissions compared to

some conventional

fuels; however, HC emissions

may be increased

LPG vehicles can demonstrate a 60% reduction in ozone-forming emissions

compared to reformulated gasoline.

Reduces particulate matter and global

warming gas emissions

compared to conventional diesel;

however, NOx emissions may be

increased

E85 vehicles can demonstrate a 25% reduction in ozone-forming emissions

compared to reformulated gasoline

Zero regulated emissions for

fuel cell-powered

vehicles, and only NOx

emissions possible for

internal combustion

engines operating on

hydrogen Energy Security Impacts

Manufactured using oil, which is not an energy

secure option

Manufactured using oil, which is not an energy

secure option

Worldwide vast natural gas

reserves

LPG is the most widely available alternative fuel.

The disadvantage of LPG is that a high percentage

of the fuel is derived from oil

Biodiesel has a fossil energy ratio of 3.3 to 1, which

means that its fossil energy inputs are similar to those

of petroleum

Ethanol is produced domestically and it is

renewable

Hydrogen can help reduce

dependence on oil by being produced by

renewable resources

Fuel Availability All fueling stations

Select fueling stations

CNG stations LPG Stations Suppliers Fueling stations Hydrogen stations

Safety Issues (Without exception, all alternative fuel vehicles must meet today's OEM Safety Standards)

Gasoline is a relatively safe

fuel since people have learned to

use it safely. Gasoline is not biodegradable

though, so a spill could

pollute soil and water

Diesel is a relatively safe

fuel since people have learned to

use it safely. Diesel is not

biodegradable though, so a

spill could pollute soil and

water

Pressurized tanks have been

designed to withstand severe

impact, high external

temperatures, and automotive

environmental exposure

Adequate ventilation is important for fueling an

LPG-fueled vehicle due to increased flammability of

LPG. LPG tanks are 20 times more puncture

resistant than gasoline tanks and can withstand

high impact

Less toxic and more biodegradable than

conventional fuel, can be transported,

delivered, and stored using the

same equipment as for diesel fuel

Ethanol can form an explosive vapor in fuel

tanks. In accidents; however, ethanol is

less dangerous than gasoline because its

low evaporation speed keeps alcohol

concentration in the air low and non

explosive

Hydrogen has an excellent

industrial safety record; codes

and standards for consumer

vehicle use are under

development

* In the US, No. 2 is the diesel that trucks and some cars run on, leading to the name "road diesel". **BTU (British Thermal Unit) is a measurement of the energy in heat. It has been replaced by the international unit of energy, the joule (J). 1Btu is approximately 1,054-1,060 Joules. *** PSI (Pounds per Square Inch) is a measurement for pressure. Source: Citigroup Investment Research based on US Department of Energy



Fuel Consumption

Figure 66. Fuel Consumption, 2004-2005

M illio n tonn es o il eq u iv a le n t O il N a tu ra l

G a s C oa l N uc le a r E ne rgy

H yd ro e lec tric 2 004 O il

N a tu ra l G a s C oa l

N uc le a r E ne rgy

H yd ro e le c tr ic 20 05

U S A 9 48 .8 5 80 .5 56 6 .2 187 .8 61 .4 2 ,344 .7 9 44 .6 5 70 .1 57 5 .4 18 5 .9 60 .6 2 ,33 6 .6C ana da 1 00 .6 83 .4 3 0 .5 20 .5 76 .4 311 .4 1 00 .1 82 .3 3 2 .5 2 0 .8 81 .7 31 7 .5M exic o 85 .2 43 .8 7 .0 2 .1 5 .7 143 .8 87 .8 44 .6 6 .0 2 .4 6 .3 14 7 .2T o ta l N o rth Am erica 1 ,1 34 .6 7 07 .7 60 3 .7 210 .4 143 .5 2 ,799 .9 1 ,1 32 .6 6 97 .1 61 3 .9 20 9 .2 1 48 .6 2 ,80 1 .3

A rgen tin a 18 .7 34 .1 0 .8 1 .8 6 .9 62 .2 20 .1 36 .5 0 .8 1 .6 7 .9 6 6 .8B raz il 81 .9 17 .1 1 2 .8 2 .6 72 .6 187 .0 83 .6 18 .2 1 3 .5 2 .2 77 .0 19 4 .5C h ile 11 .3 7 .5 2 .9 - 4 .8 26 .5 11 .9 6 .8 2 .4 - 5 .9 2 7 .0C o lom b ia 10 .1 5 .7 2 .0 - 9 .0 26 .8 10 .4 6 .1 2 .3 - 9 .0 2 7 .8E c ua do r 6 .4 0 .2 - - 1 .7 8 .2 6 .6 0 .2 - - 1 .7 8 .4P e ru 7 .2 0 .8 0 .6 - 4 .0 12 .4 6 .4 1 .4 0 .6 - 4 .3 1 2 .8V e nezue la 24 .2 25 .3 0 .1 - 15 .9 65 .4 25 .4 26 .1 0 .1 - 17 .6 6 9 .2O th e r S . & C e n t. A m e ric a 58 .1 15 .4 1 .4 - 17 .8 92 .7 58 .8 16 .4 1 .4 - 18 .3 9 5 .0T o ta l S . & C en t. Am erica 2 17 .9 1 05 .9 2 0 .4 4 .4 132 .6 481 .2 2 23 .3 1 11 .7 2 1 .1 3 .7 1 41 .7 50 1 .4

A u s tria 13 .8 8 .5 2 .4 - 9 .0 33 .7 14 .2 9 .0 2 .5 - 9 .0 3 4 .6A zerb a ijan 4 .6 7 .7 ^ - 0 .6 12 .9 5 .1 7 .9 ^ - 0 .7 1 3 .7B e la rus 7 .5 16 .6 0 .1 - ^ 24 .2 6 .7 17 .0 0 .1 - ^ 2 3 .8B e lg ium & Luxe m b ourg 38 .4 14 .9 6 .4 10 .9 0 .6 71 .1 39 .5 15 .2 6 .4 1 1 .1 0 .6 7 2 .7B u lga ria 4 .7 2 .6 7 .7 3 .8 0 .7 19 .6 5 .0 2 .9 7 .4 4 .2 0 .8 2 0 .3C zec h R ep ub lic 9 .5 7 .8 2 0 .5 6 .0 0 .6 44 .3 9 .9 7 .7 2 0 .5 5 .6 0 .7 4 4 .4D enm ark 9 .1 4 .7 4 .6 - ^ 18 .3 9 .1 4 .5 3 .6 - ^ 1 7 .2F in land 10 .6 3 .9 5 .3 5 .5 3 .4 28 .6 11 .0 3 .6 2 .5 5 .5 3 .1 2 5 .6F ranc e 94 .0 40 .1 1 2 .8 101 .7 14 .7 263 .4 93 .1 40 .5 1 3 .3 10 2 .4 12 .8 26 2 .1G erm any 1 24 .0 77 .3 8 5 .4 37 .8 6 .2 330 .7 1 21 .5 77 .3 8 2 .1 3 6 .9 6 .3 32 4 .0G reec e 21 .3 2 .2 9 .0 - 1 .2 33 .8 20 .9 2 .3 9 .0 - 1 .3 3 3 .5H ung ary 6 .3 11 .7 3 .1 2 .7 ^ 23 .8 7 .0 12 .1 2 .7 3 .1 ^ 2 4 .9Ic e la nd 1 .0 - 0 .1 - 1 .6 2 .7 0 .9 - 0 .1 - 1 .6 2 .6R epu b lic o f Ire la nd 8 .9 3 .6 1 .8 - 0 .2 14 .6 9 .4 3 .5 1 .9 - 0 .2 1 4 .9Ita ly 89 .7 66 .2 1 7 .1 - 11 .3 184 .3 86 .3 71 .1 1 6 .9 - 9 .6 18 3 .9K a zak h s ta n 9 .0 13 .9 2 6 .5 - 1 .8 51 .2 10 .0 16 .0 2 7 .2 - 2 .0 5 5 .2L ith uan ia 2 .6 2 .8 0 .2 3 .4 0 .2 9 .2 2 .7 2 .9 0 .2 2 .3 0 .2 8 .3N ethe rland s 46 .2 37 .0 9 .1 0 .9 ^ 93 .1 49 .6 35 .5 8 .7 0 .9 ^ 9 4 .7N orw a y 9 .6 4 .1 0 .6 - 24 .7 39 .0 9 .8 4 .0 0 .5 - 30 .9 4 5 .2P o land 21 .1 11 .8 5 7 .3 - 0 .8 90 .9 21 .9 12 .2 5 6 .7 - 0 .9 9 1 .7P o rtuga l 15 .4 2 .8 3 .9 - 2 .3 24 .3 15 .3 2 .7 3 .8 - 1 .1 2 3 .0R om an ia 10 .9 15 .7 7 .4 1 .3 3 .7 39 .0 11 .3 15 .6 7 .1 1 .3 4 .6 3 9 .8R us s ian F e de ra tion 1 28 .5 3 61 .7 10 6 .8 32 .7 40 .8 670 .5 1 30 .0 3 64 .6 11 1 .6 3 3 .9 39 .6 67 9 .6S lo vak ia 3 .2 5 .5 4 .1 3 .9 1 .0 17 .6 3 .5 5 .3 4 .3 4 .0 1 .1 1 8 .2S p a in 77 .6 24 .7 2 1 .0 14 .4 7 .8 145 .5 78 .8 29 .1 2 1 .4 1 3 .0 5 .2 14 7 .4S w e den 15 .3 0 .7 2 .3 17 .3 12 .7 48 .4 15 .1 0 .7 2 .2 1 6 .3 15 .5 4 9 .7S w itze rlan d 12 .0 2 .7 0 .1 6 .1 8 .0 29 .0 12 .2 2 .8 0 .1 5 .3 7 .5 2 7 .9T u rk ey 32 .0 19 .9 2 3 .0 - 10 .4 85 .3 30 .0 24 .6 2 6 .1 - 9 .0 8 9 .7T u rk m en is tan 4 .6 13 .9 - - - 18 .5 4 .9 14 .9 - - - 1 9 .8U k ra ine 13 .9 65 .6 3 8 .1 19 .7 2 .7 139 .9 13 .9 65 .6 3 7 .4 2 0 .1 2 .8 13 9 .7U n ited K in gdo m 81 .7 87 .3 3 8 .1 18 .1 1 .7 227 .0 82 .9 85 .1 3 9 .1 1 8 .5 1 .7 22 7 .3U zbe k is ta n 7 .5 40 .3 1 .2 - 1 .6 50 .5 7 .8 39 .6 1 .1 - 1 .6 5 0 .1O th e r E u rope & E u ra s ia 23 .3 12 .9 2 0 .9 1 .8 16 .8 75 .7 24 .3 13 .8 2 1 .3 1 .9 16 .9 7 8 .1T o ta l E u ro p e & E u ras ia 9 57 .6 9 91 .1 53 6 .7 287 .9 187 .3 2 ,960 .6 9 63 .3 1 ,0 09 .7 53 7 .5 28 6 .3 1 87 .2 2 ,98 4 .0

Ira n 74 .6 77 .9 1 .1 - 2 .7 156 .2 78 .4 79 .6 1 .1 - 2 .8 16 2 .0K u w a it 13 .7 8 .7 - - - 22 .5 14 .4 8 .7 - - - 2 3 .1Q ata r 3 .3 13 .4 - - - 16 .7 3 .8 14 .3 - - - 1 8 .1S a ud i A ra b ia 83 .7 59 .1 - - - 142 .8 87 .2 62 .6 - - - 14 9 .8U n ited A rab E m ira te s 17 .4 36 .2 - - - 53 .5 18 .3 36 .4 - - - 5 4 .6O th e r M idd le E as t 68 .1 22 .8 8 .0 - 1 .1 99 .9 69 .2 24 .3 7 .9 - 1 .1 10 2 .5T o ta l M id d le E a s t 2 60 .7 2 18 .1 9 .1 - 3 .8 491 .7 2 71 .3 2 25 .9 9 .0 - 3 .9 51 0 .2

A lg e ria 10 .6 19 .8 0 .8 - 0 .1 31 .3 11 .2 21 .7 0 .9 - 0 .1 3 3 .9E g yp t 26 .8 23 .6 0 .5 - 3 .1 54 .0 29 .2 23 .0 0 .5 - 3 .1 5 5 .8S o u th A fric a 24 .8 - 9 4 .5 3 .4 0 .8 123 .6 24 .9 - 9 1 .9 2 .9 0 .8 12 0 .5O th e r A fric a 61 .9 18 .3 7 .0 - 15 .4 102 .7 64 .0 19 .4 7 .0 - 15 .9 10 6 .3T o ta l A frica 1 24 .2 61 .8 10 2 .9 3 .4 19 .4 311 .7 1 29 .3 64 .1 10 0 .3 2 .9 19 .9 31 6 .5

A u s tra lia 38 .8 22 .8 5 2 .4 - 3 .6 117 .6 39 .7 23 .1 5 2 .2 - 3 .7 11 8 .7B a ng lad es h 3 .9 12 .0 0 .4 - 0 .3 16 .4 4 .0 12 .8 0 .4 - 0 .3 1 7 .4C h ina 3 18 .9 35 .1 97 8 .2 11 .4 80 .0 1 ,423 .5 3 27 .3 42 .3 1 ,08 1 .9 1 1 .8 90 .8 1 ,55 4 .0C h ina H on g K ong S A R 15 .3 2 .0 6 .6 - - 23 .8 13 .8 1 .9 7 .2 - - 2 2 .9Ind ia 1 20 .2 29 .5 20 3 .7 3 .8 19 .0 376 .1 1 15 .7 33 .0 21 2 .9 4 .0 21 .7 38 7 .3Ind one s ia 54 .7 33 .2 2 2 .1 - 2 .1 112 .1 55 .3 35 .5 2 3 .5 - 2 .1 11 6 .4J ap an 2 41 .4 70 .9 12 0 .8 64 .7 23 .1 520 .8 2 44 .2 73 .0 12 1 .3 6 6 .3 19 .8 52 4 .6M ala ys ia 22 .8 30 .5 5 .7 - 1 .4 60 .4 22 .0 31 .4 6 .3 - 1 .5 6 1 .2N ew Z ea land 7 .0 3 .3 2 .0 - 6 .2 18 .4 7 .0 3 .2 2 .1 - 5 .5 1 7 .8P a k is ta n 16 .0 24 .2 3 .5 0 .5 5 .5 49 .8 17 .4 26 .9 4 .1 0 .6 6 .9 5 5 .9P h ilipp in es 15 .8 2 .1 5 .0 - 1 .9 24 .9 14 .7 2 .7 5 .9 - 1 .9 2 5 .2S in gapo re 38 .1 5 .9 - - - 44 .1 42 .2 5 .9 - - - 4 8 .1S o u th K o rea 1 04 .9 28 .4 5 3 .1 29 .6 1 .3 217 .3 1 05 .5 30 .0 5 4 .8 3 3 .2 1 .2 22 4 .6T a iw an 41 .7 9 .2 3 6 .8 8 .9 1 .5 98 .0 41 .6 9 .6 3 8 .2 9 .0 1 .8 10 0 .3T h a ilan d 44 .0 24 .6 1 0 .6 - 1 .4 80 .6 45 .6 26 .9 1 1 .8 - 1 .3 8 5 .6O th e r A s ia P a c ific 20 .3 7 .0 2 5 .4 - 9 .3 61 .9 21 .1 8 .0 2 5 .7 - 8 .9 6 3 .8T o ta l As ia P ac ific 1 ,1 03 .6 3 40 .6 1 ,52 6 .2 119 .0 156 .5 3 ,245 .9 1 ,1 16 .9 3 66 .2 1 ,64 8 .1 12 5 .0 1 67 .4 3 ,42 3 .7

T O T AL W O R L D 3,7 98 .6 2 ,4 25 .2 2 ,79 8 .9 625 .1 643 .2 10 ,291 .0 3 ,8 36 .8 2 ,4 74 .7 2 ,92 9 .8 62 7 .2 6 68 .7 10 ,53 7 .1O f w h ic h E u ro pea n U n io n 25 6 97 .3 4 17 .0 30 5 .7 223 .7 75 .4 1 ,719 .1 7 00 .4 4 24 .1 29 9 .0 22 0 .9 70 .8 1 ,71 5 .1 O E C D 2,2 67 .3 1 ,2 70 .4 1 ,15 9 .9 529 .9 296 .1 5 ,523 .5 2 ,2 70 .7 1 ,2 75 .1 1 ,16 8 .5 53 1 .3 2 96 .8 5 ,54 2 .4

F o rm er S o v ie t U n ion 1 83 .2 5 29 .3 17 3 .7 56 .4 57 .0 999 .7 1 86 .3 5 36 .3 17 8 .2 5 6 .9 56 .5 1 ,01 4 .3 O the r E M E s 1 ,3 48 .1 6 25 .6 1 ,46 5 .2 38 .8 290 .1 3 ,767 .8 1 ,3 79 .9 6 63 .2 1 ,58 3 .1 3 8 .9 3 15 .3 3 ,98 0 .4

*In this Review, primary energy comprises commercially traded fuels only. Excluded, therefore, are fuels such as wood, peat and animal waste, though important in many countries, are unreliably documented in terms of consumption statistics. Also excluded are wind, geothermal and solar power generation, as well as biofuels. ^Less than 0.05 Source: Citigroup Investment Research based on BP Statistical Review 2006



Approximate Conversion Factors

Figure 67. Conversion Table

Totonnes US tonnes/

Crude oil* (metric) kilolitres barrels gallons year *Based on worldwide average gravity.From Multiply byTonnes (metric) 1 1.165 7.33 307.86 –Kilolitres 0.8581 1 6.2898 264.17 –Barrels 0.1364 0.159 1 42 –US gallons 0.00325 0.0038 0.0238 1 –Barrels/day – – – – 49.8

To convertbarrels tonnes kilolitres tonnes

Products to tonnes to barrels to tonnes to kilolitres

LPG 0.086 11.6 0.542 1.844Gasoline 0.118 8.5 0.740 1.351Kerosene 0.128 7.8 0.806 1.24Gas oil/ diesel 0.133 7.5 0.839 1.192Residual fuel oil 0.149 6.7 0.939 1.065

Tobillion cubic billion cubic million tonnes million tonnes trillion British million barrels

Natural gas and LNG metres NG feet NG oil equivalent LNG thermal units oil equivalent

From1 billion cubic metres NG 1 35.3 0.90 0.73 36 6.291 billion cubic feet NG 0.028 1 0.026 0.021 1.03 0.181 million tonnes oil equivalent 1.111 39.2 1 0.805 40.4 7.331 million tonnes LNG 1.38 48.7 1.23 1 52.0 8.681 trillion British thermal units 0.028 0.98 0.025 0.02 1 0.171 million barrels oil equivalent 0.16 5.61 0.14 0.12 5.8 1

Units1 metric tonne = 2204.62 lb. = 1.1023 short tons1 kilolitre = 6.2898 barrels1 kilolitre = 1 cubic metre1 kilocalorie (kcal) = 4.187 kJ = 3.968 Btu1 kilojoule (kJ) = 0.239 kcal = 0.948 Btu1 British thermal unit (Btu) = 0.252 kcal = 1.055 kJ1 kilowatt-hour (kWh) = 860 kcal = 3600 kJ = 3412 Btu

Calorific equivalentsOne tonne of oil equivalent equals approximately:

10 million kilocalories42 gigajoules40 million Btu1.5 tonnes of hard coal3 tonnes of lignite

Gaseous fuels See Natural gas and LNG table Electricity 12 megawatt-hoursOne million tonnes of oil produces about 4500 gigawatt-hours (=4.5 terawatt hours) of electricity in a modern power station.

Multiply by

Multiply by

Heat units

Solid fuels

Source: Citigroup Investment Research based on BP Statistical Review 2006.



Landi Renzo Company description Landi Renzo is world market leader with a 23% share of the highly fragmented world market of Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG) alternative fuel systems for vehicles. With sales to over 50 countries and non-Italian sales representing 74% of group turnover (2006), Landi Renzo’s production structure is growingly adopting an international manufacturing base.

Investment thesis Landi Renzo – the world leader in the niche of gas conversion kits for passenger vehicles – has been growing sales at 46% per year since 2004 on the back of new product launches, opening manufacturing facilities in main markets and a growing reference market (+9.9% 2004-06 CAGR). Further, growth of this market is forecast to accelerate (+18% 2006-12 CAGR), fuelled by increasing concerns over environmental issues and climate change, the high cost of traditional fuels and growing national and international eco-friendly regulation. Leveraging a business model hinged on strong R&D, an expanding local presence in its main markets, strong coverage of its distribution channels and a lean production base, we think there is still room for growth in the coming years: we estimate 21.3% sales growth and 26.3% net profit (06-09 CAGR). Our DCF points to €4.10 per share while peers suggest €3.60 per share. Accordingly we have a 2H (Hold/High Risk) rating and a target price of €3.60 per share.

Valuation In our view, DCF is the most suitable valuation approach for a company with revenues that are expected to increase by more than 17% CAGR between 2006 and 2012 while enjoying 22-25% EBITDA margins and ROI well above 50%. As a sanity check, we also value Landi using peer multiples, though we think that a peer comparison is difficult due to Landi’s niche features. In applying the DCF to Landi Renzo estimates, we discounted the free cash flows 2007-2013 while calculating the terminal value on 2013 NOPAT – assuming that from 2013 onwards capex will match depreciation and no additional working capital will be required. Given that almost two-thirds of the sales growth to 2013 is due to come from emerging markets, we discounted the flows using a WACC of 11.4%, based on a required yield on equity weighted by sales by region. Finally, we applied a perpetuity growth of 3.0% - justified by the high growth of Landi’s reference markets. Under such assumptions, we value the enterprise value of Landi at around €420m, or €4.11 per share. Multiples point to €3.20 - €3.60. We set our target price as the low end of this range: €3.60 per share.



Risks We rate Landi Renzo High Risk based on the following factors that could cause the shares to deviate from our target price. Landi’s reference world-wide market is small and little information is available. While analysing the company, we relied on information provided by either the company or Frost & Sullivan. Most of future growth is expected to come from emerging markets – notably Iran and Pakistan. A major sector player has yet to enter in Landi’s niche – given the modest size of the market. However, should the market grow strongly – a bigger players could decide to enter given i) low relative barriers to entry ii) very high returns on investments and iii) high margins. Other forms of alternative fuel systems can be introduced in the market while attracting more interest from consumers as well as car producers and governments. Although Landi technologies are considered safe, there might be still some resistance to their adoption i) LPG kits might occupy a large part of much-needed boot/trunk space, ii) difficulties in parking due to parking lot restrictions and iii) the availability of refueling stations.



Appendix A-1 Analyst Certification We, Mauro Baragiola and Alberto Checchinato, research analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

IMPORTANT DISCLOSURES

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

S O N D J2005

F M A M J J A S O N D J2006

F M A M J J A S O N D J2007

F M A M J J A

# Date RatingTargetPrice

ClosingPrice

*Indicates change.

Landi Renzo (LR.MI)Ratings and Target Price History - Fundamental Research EUR

CoveredNot covered

Chart current as of 12 A

ugust 2007

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© 2007 Citigroup Global Markets Inc. (© Nikko Citigroup Limited, if this Product was prepared by it). Citigroup Investment Research is a division and service mark of Citigroup Global Markets Inc. and its affiliates and is used and registered throughout the world. Citigroup and the Umbrella Device are trademarks and service marks of Citigroup or its affiliates and are used and registered throughout the world. Nikko is a registered trademark of Nikko Cordial Corporation. All rights reserved. Any unauthorized use, duplication, redistribution or disclosure is prohibited by law and will result in prosecution. The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient. The Firm accepts no liability whatsoever for the actions of third parties. The Product may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the Product refers to website material of the Firm, the Firm has not reviewed the linked site. Equally, except to the extent to which the Product refers to website material of the Firm, the Firm takes no responsibility for, and makes no representations or warranties whatsoever as to, the data and information contained therein. Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document. Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of, or in connection with, any such referenced website.

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