TheChek News Flow

For 2016, we are remaining selectively cautious on EU Autos. Valuation is not stretched

but we do see some earnings risk. The one bright spot to us remains French OEMs and

we remain Buyers of Renault / Peugeot but we stay cautious on German OEMs (no Buy

ratings) still seeing China over supply and margins as a meaningful tail risk. We now take

a more cautious stance on the suppliers / tyres (U/P on four of seven names). We also

deepen our Trucks caution moving Volvo to Underperform.

Autos 2016 consensus EPS growth (ex-VW), stands at 9.3% vs BofAML of 3.6% ( inc VW,

cons 11% vs BofAML -0.6%) and slightly above the 7% EU market consensus growth. EPS

growth for Autos in 2015 was 13.6%, a very healthy premium to the market’s 0% however

the SXAP re-rated sharply into higher earnings which is not entirely logical to us. As the

demand cycle slows and cost pressures grow we see downside to cons EPS on German

OEMs, Suppliers (in line Conti) and also Trucks. Only for the French OEMs do we see EPS

upside. The SXAP relative valuation is undemanding (P/E rel of 67% vs L-T 70%), but at

the same time our EU Auto Fund Manager Survey sits at its highs on 21% overweight.

RATING CHANGES: Volvo to U/perform from Neutral (Global Truck markets to fall),

Autoliv to U/perform from Neutral (Takata over estimated, valuation). KEY REITERATED

VIEWS: Renault (Buy) (model cycle), Peugeot (Buy) (cost savings), VW (U/perform) (vol

and price risk), Daimler (Neutral) (risks to S Class and Trucks), BMW (Neutral) (too early

for model cycle). Conti (Buy) (cash gen) Michelin (U/perform) (commodity risks), Valeo

(U/perform) (valuation, growth), Nokian (Underperform) (non-Russia growth, valuation).

Consensus appears relaxed regarding China exposure but recent growth is coming at the

wrong end of the market for the European OEMs in our view. We expect a continuation

of the ‘decline’ of China margins. BofAML sees a potential RMB depreciation of 10% in

2016 which we don’t model but see as a sector tail risk. We see no upside to W.EU and

US consensus unit growth. We also cut our view on Truck growth, with EU carrying risk.

Suppliers trade on near record high 0.88x EV/Sales on 1 year forward consensus

estimates, a significant 57% or nearly 3 standard deviations above the long run average

of 0.56x. Production outperformance (higher content /vehicle) has driven this but we see

the pace of growth slowing as key markets move into later stages in the cycle.

We are sceptical that Michelin will realise its targeted 3% price growth in a deflationary

environment - we prefer Conti over Michelin (mining also a risk). In Trucks, key markets (EU,

US, LATAM) likely. -8% in 2016 with EU flat. Consensus Volvo EPS looks too optimistic.