future mobility - ubibanca.com mobility 15 october 2019.pdf...further. we see diesel still at 20% of...

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FUTURE MOBILITY

Sector report

29 October 2019 – 5:30 PM

Automotive – Mobility - Infrastructures

Massimo Vecchio Senior Analyst [email protected] Tel. +39 02 62753016

Dario Fasani Analyst [email protected] Tel. +39 02 62753014

www.ubibanca.com/equity-research We thank CESI Group for the very valuable support in preparing this report

CASE: what will change for OEMs

CASE (Connectivity, Autonomous, Sharing and Electric) will change the way consumers see mobility and will dramatically transform the industry. Quarterly results will be useful to assess short-term price reactions but, we believe, how every company is positioned in a fast-changing environment cannot be ignored for long-term returns.

The industry transformation doesn’t necessarily mean “shrinking”: we believe that the overall size of the profit should rise. But a large amount of business centred on ownership models will be transacted in the future through mobility providers (i.e. services) and current incumbents may not be the winners. We initiate coverages on CNH (NEUTRAL, TP EUR10.3) that aims to be a disruptor in its sector thanks profiting from future mobility trends but it is witnessing an unpredictable AG cycle, Ferrari (BUY, TP EUR163.0) which will use the hybrid technology at its advantages and Piaggio (BUY, TP EUR3.20) where electric will support a new replacement cycle.

> Regulators are forcing the transition to electric but pick-up will be

slowed down by the lack of infrastructure: EU CO2 targets are

forcing carmakers to introduce EVs despite they are still losing money on

it and consumers are wobbling. However, slow deployment of charging

infrastructure, lack in electricity storage and grids last mile capacity,

constraints on battery production and recycling should limit PHEV and

BEV to 16% of total registrations by 2025. We believe that electric is a

perfect technology for 2 wheelers where “range anxiety” doesn’t apply

and could trigger a long-awaited replacement cycle. Hybrid supercar are

a different thing altogether and we believe this technology will be a plus

both for carmakers profitability and consumers tastes.

> Heavy Trucks/tractors: gas a mid-term bridge, hydrogen the end

point. While we don’t see electric as an option on those products, gas is

a reality. Hydrogen fuel cells is the future, probably 10 years from now.

> Diesel is not dead, in our view: driven by public opinion, governments

and local municipalities attacked heavily diesel engines. However diesel

emits less than petrol and new technologies are reducing emissions

further. We see diesel still at 20% of total sales by 2025.

> Autonomous vehicles will dramatically change the landscape…in a

faraway future. AD will be crucial to the birth of robo-taxi, will impact the

component makers industry and will modify the business models by

adding the usership option to the ownership one. But we don’t see this

happening before 2030. Trucks and tractors autonomous instead is more

short term and incumbent will not be “attacked” by new comers.

>

Stocks, ratings and target prices

CNH Ferrari Piaggio

Rating NEUTRAL BUY BUY

Target price (EUR) 10.3 163 3.20

Upside/(Downside) 6.5% 16.4% 19.4%

Market cap (EURm) 13,000 26,458 960

P/E Adj. 2020 11.3 31.9 14.3

YTD performance 27.1% 46.9% 45.3%

Dividend yield 2020 2.6% 0.9% 3.9%

Source: Company data, UBI Banca estimates

mailto:[email protected]

http://www.ubibanca.com/equity-research

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Index

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EXECUTIVE SUMMARY

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NEW TRENDS AND EMERGING TECHNOLOGIES

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3

FOCUS ON: DIESEL – WILL ONLY DECLINE OR IT WILL DISAPPEAR?

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FOCUS ON: ELECTRIC VEHICLES

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5 FOCUS ON: ALTERNATIVE FUELS 41

6 FOCUS ON: CONNECTED VEHICLES 46

7 FOCUS ON: AUTONOMOUS DRIVING AND SHARING 49

8 APPENDIX A – DEFINITION OF AUTONOMOUS DRIVING LEVELS 55

9 APPENDIX B – A BRIEF DESCRIPTION OF CESI 49

10 APPENDIX C – GLOSSARY 56

11 CNH – MONOGRAPHIC REPORT

12 FERRARI – MONOGRAPHIC REPORT

13 PIAGGIO – MONOGRAPHIC REPORT

Future Mobility 15 October 2019

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Executive Summary

We believe that the mobility industry is at the beginning of an epical transformation that cannot be ignored when assessing investment

strategies. Alternative fuels, autonomous driving coupled with connected vehicles and the evolution of smart cities could change the way we see mobility. Upcoming quarterly results will be useful to assess short-term market price reactions but how every company is positioned in a fast-changing environment cannot be ignored as a driver of long-term returns;

The overall industry profit should grow, but the split between incumbent and new comers will be key. The overall size of the profit of

the automotive industry should rise at a 3.6% 2015-30 CAGR. But a large amount of business centered around ownership models will be transacted in the future through mobility providers (i.e. services) and it is not a given that current incumbents will be the winners. There could be several mitigating factors that would “soften” the revolution that incumbents are going to face: a) Outsiders do not appreciate the sheer complexity of developing a mass market vehicle (I.e. Tesla example); b) Changes will happen unevenly around the world; c) Consumers might even invest more in their vehicles as a new era of customization dawns;

Electric vehicles growth, required by regulations, could be slowed down by lack of infrastructure. We see BEV (Battery Electric Vehicles)

and PHEV (Plug-in Hybrids) representing 16% of yearly new registrations in 2025 (4% and 12% respectively). While this revolution is inevitable, our estimates are probably below market consensus. We believe that the slow deployment of the charging infrastructure is one of the two major factors consumers cites for not to buy a BEV/PHEV. The other factor, price, is a consequence of volumes and therefore interrelated with infrastructure. While, ideally, the infrastructure has to anticipate a product to allow a rapid uptake, in this specific case, the infrastructure development is not keeping the pace of EVs volume growth already in 2018 (see next graph). And this before taking into account that volume growth is accelerating in 2019 and should pick up from 2021-22.

Figure 1 – EV car parc vs. EV public charging infrastructure

Source: Global EV Outlook 2018, Statista, Insideevs, Technologyreview, Global China Association of Auto Mfrs, ALixPartners analysis


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In our view this is because car makers themselves didn’t put emphasis on EV deployment but then had to change their minds and recover the lost ground once diesel sales fall and regulators didn’t delay the introduction of stricter emission limits. This is evident when looking at the number of new EVs to be introduced (next graph): very few until 2019 and then a ramp-up shortly before 2021 emission targets kick-in.

Figure 2 – Total number of available EV models on the market in Europe

Source: T&E

Issues like grid surcharge risks, re-modulation in electricity prices, batteries production capacity and re-cycling need to be addressed.

On top of the slow down caused by charging stations other factors have to be taken into account to evaluate the potential ramp-up speed of EVs (in order of importance): o Grid surcharge risks: in our view there are no risks at national

level of being short in electricity capacity. However, the challenges are centered at local network level where there is a risk of overloading residential transformers. Smart charging systems are expected to reduce these risks and, to the extent the grid will become more digital, even be a source of power rather than a drain;

o Electricity prices: today in Italy, for instance, the charging cost

may reach the EUR511/MWh mark (non-residential private charging point). This reduces the savings, when compared to ICE, to 0.4 EUR/KWh per km in some cases. A remodeling of electricity prices would be needed to incentivize EVs uptake. On the other hand, governments could lose part of the taxes on fuel that they get (EUR73 billion p.s. in Italy alone);

o Battery production capacity: T&E (European Federation for

Transport & Environment) has calculated that the total lithium-ion battery demand from EV (and hybrid) production volumes within the

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EU is expected to reach 112 GWh in 2023 and 176 GWh in 2025 according to the forecasted battery sizes provided by carmakers. The European Battery Alliance, launched by the EU Commission as part of its ‘new industrial policy strategy’ materialized into plans for at least a dozen cell manufacturing factories in Europe which should result in a manufacturing capacity to be at least 131 GWh in 2023 and 274 GWh in 2028 (i.e. enough to cover the demand mentioned in the point above);

o Battery recycling: recycling will begin to be an issue from 2035

onwards (i.e. assuming a pick-up in EVs from 2025 and a life expectancy of 10 years) and to become a sizeable issue from 2040 onwards. In the long run the question has to be posed given that, as of today, there are no clear solutions in terms of recycling technologies. The issue however has a short term implication too, which is more commercial than environmental: granting a residual values to battery will reduce the TCO of vehicles and ease the leasing/renting of cars/batteries.

E-scooters and e-bikes are a key part of the micro-mobility rise.

While electric doesn’t seem the answer for Heavy trucks and tractors, it is a promising development for 2 wheelers. Penetration of electric-2Wheels is lagging behind cars, in our view because there was no regulation push. But, from our analysis, it seems that we are at the beginning of a growth story: “range anxiety” doesn’t apply to 2W which, on average, run 15Km/day and micro-mobility trends are supportive too. While demography plays against 2W, at least in Europe, marketing electric 2W as “tech-toys” could attract a new breed of customers thus rejuvenating the client base. The old circulating park (around 18 years old in Italy) coupled with incentives and traffic bans are behind the current replacement cycle. ACEM (the European Association of motorcycles producers) reports that in 1H2019 in Europe 5,812 electric motorbikes were registered, an 82% increase YoY.

Electric luxury sport cars and motorbikes are a different item all together: they attracts tech-fans and command a higher pricing than

petrol version in many cases, making the business model potentially more viable. While many may see electrification as a price to pay in terms of cars performances to reduce emissions, this is not the case for sport cars. The performances of the Ferrari SF90 Stradale, for instance, are quite peculiar: a) two of the three electric engines mounted on the front wheels transforming the car into a 4WD at times, with obvious benefits on the acceleration (2.5 second from zero to 100Km/h) and road handling; b) every electric engine can also rotate at different speed. This phenomenon, known as torque vectoring, gives an un-parallel control during turns. In the sport motorbikes industry instead the main topic of discussion between pro-electric and against, is weights distribution. The expected reduction in batteries weight may help to sort out this issue and, in our view, incumbent players will enter the sector too but at a later stage;

The development of alternative fuels like Bio-methane and hydrogen are underestimated in public debates, in our view. On top of the fact

that diesel technological development may be such that its emissions could be massively reduced, we point out how there are other very promising alternative fuels (gas in the short term and hydrogen in the long run ), which are extremely relevant if we move from looking at cars to trucks, tractors and 2 wheelers.


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Figure 3 – Well-to-Whell (WTW) GHG emissions (CO2 g/km)

Source: CNH Industrial (Thinkstep Study 2017 and JEC WTW study v4 2014)

We understand that gas is a viable solution in the short term for heavy trucks as their emissions are much lower than diesel, their costs are comparable, making the payback time reasonable. Additionally, we understand that the circulating park can be retro-fitted, thus reducing fleet operator’s costs. As far as tractors are concerned, farmers would have the advantage that gas could be produced from manure, an energy source that can be defined “in-house” and at zero cost. Considering that the gas propulsion technology is not very well developed in the US, this could be a massive technological advantage for European OEM players like CNH;

We don’t believe diesel is dead. Still today, despite the fall in sales,

diesel represents one third of new car sales in Europe (source: ACEA – January/May registrations). In fact, there are some reasons why we believe diesel will not die: a) Infrastructures are not yet ready for a massive growth in EVs; b) Diesel reduces the fleet overall emissions for car makers; c) Assets (plants, technologies/patents, etc) have yet a sizeable value in companies balance sheet and need time to be depreciated; d) Technologies evolutions (already under development at the time of the dieselgate) may further reduce diesel emission levels. Our conclusion is that diesel will not represent less than 20% of new car sales in the next 10/15 years. Still, it need (and will be) improved as a technology going forward.

Autonomous driving will bring a paradigm shift: from number of vehicles sold to number of kilometers travelled. Tech giants, thanks to

developments in AI and vehicles connectivity are trying to transform the automotive sector in favor of service/content provider rather than OEMs. The overall of cars sold should decline but their lifecycle should be shortened from around 7 years to less than half addressing the issue that cars are empty 96% of the time. This will also change the customer’s habits from a ownership model in favor of an user-ship one. While AD doesn’t apply to 2 wheelers, strangely enough, trucks and tractors may test this technology before cars. Trucks platooning reduces emissions and TCO and is supported by governments in Europe. Autonomous tractors will probably be the first ones to come to the market, as the low density of their operating environment reduces the associated risks.


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Sector like tractors protected from AD revolution, to a lesser extent also trucks are. In terms of business model (and therefore investment

strategies) trucks and tractors are a nice segment to be when looking at AD impacts: a) there are only few players worldwide (Deere and CNH with AGCO third, lagging well behind); b) customers are professional ones, strictly loyal to the brand they have been using for ages, difficult to imagine they would change for a product sold by a startup; c) highly capital intensive sector with limited visibility on returns due to point a) and b); The same is true for the trucks manufacturing sector although competition is wider and fleet/app operators may emerge on Light Commercial Vehicles operating in cities and over the last mile. Still truck-makers are much less exposed than carmakers to the future mobility revolution.

We selected a number of Italian stocks that will be impacted (positively or negatively) by at least one of the trends above: In

studying the above macro-trends we came across a number of industry players listed and non-listed which will be discussed in the report. On some of the listed ones we are initiating the coverage: CNHI (NEUTRAL, TP EUR10.3): the company is in the position to

benefit from the mobility of the future but the visibility on the AG cycle is very low. CNH has a stronghold in LNG/CNG engines while heavily involved in developing alternative fuels, autonomous driving and connectivity. The latter will increase the weight of services and aftermarket revenues and this doesn’t seem to be included in consensus figures (UBI est. 10% above). Furthermore, CNH end-markets are more protected than cars from the entrance of tech giants and the company sell to professional operators which are mostly driven by Total Cost of Ownership and should accept price increases to satisfy their future mobility needs;

Ferrari (BUY, TP EUR163.0): we like the uniqueness of the brand

that still has meaningful space for growth (0.05% penetration on the 18 million HNWI). This will be enhanced by the development of hybrids cars which, in our view, will be accretive to profitability margins. We believe this is not the consensus view which, in fact, is below our long term estimates. We also believe that, while meaningful revenues from the electrification will materialize only from 2021-22, the P&L is already taking the brunt of the associated costs. Therefore, once again, consensus is not appreciating the full effect on profitability of the price/mix increase of the past two years;

Piaggio (BUY, TP EUR3.20): we like the wide portfolio of

technologies that differentiate it from its peers and are significant advantage looking at the evolution that the mobility is having. Penetration of electric-2Wheels is lagging behind cars, in our view because there was no regulation push. In our view, we could be at the beginning of a growth story: “range anxiety” is not an issue when dealing with 2W drivers which, on average, run 15Km/day and micro-mobility trends are supportive too. The old circulating park (around 18 years old in Italy) coupled with incentives and traffic bans are behind the current replacement cycle. Piaggio top line growth in EU should compound with an under-utilized production base in Italy, a significant operating leverage and a fiscal advantage in growing its European sales/profits.

We are already covering two companies which are impacted by the advent of electric cars: Agatos (BUY, TP EUR0.17) and Elettra Investimenti (BUY, TP

EUR15.20). Other listed companies mentioned include Askoll EVA, BMW, Energica Motor Company, FCA, Lion-E Mobility, Landi Renzo and Tesla.


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New Trends and Emerging Technologies

Mobility is going to change rapidly in the coming years as electric vehicles (EV) proliferate, ride sharing continues to grow, and eventually autonomous vehicles (AV) enter urban fleets. This is especially true in cities where new forms of mobility are concentrated and where investment in supporting infrastructure is needed to accommodate this growth. These changes coincide with the evolution towards cleaner, more decentralized and digitalized energy systems and services, and increasing electrification.

The mobility industry transformation doesn’t necessarily mean “shrinking”,

actually in this case is the opposite: according to several market researches, the overall size of the profit of the automotive industry should rise. But a large amount of business centered around ownership models will be transacted in the future through mobility providers (i.e. services) and it is not a given that current incumbents will be the winners:

Figure 4 – Automotive global profit pool 2015-2030 evolution

Source: Roland Berger

There could be several mitigating factors that would “soften” the revolution that

incumbents are going to face: Outsiders do not appreciate the sheer complexity of developing a mass

market vehicle (I.e. Tesla example); Changes will happen unevenly around the world; Consumers might even invest more in their vehicles as a new era of

customization dawns. The main driver of this new sustainability effort came from governments and public authorities: the issuance of the 17 sustainable development goals (SDG) by the United Nations which are incorporated in the 2030 agenda for the sustainable development, the Paris 2015 agreement and the increased weight of ESG-compliant investment funds are some of the factors that are driving the change. The EU, by agreeing to comply to the Paris 2015 climate agenda (which requires net zero emissions by the middle of the century), targets to cut its greenhouse gas (GHG) emissions by at least 80-95% by 2050.

Today, public and private sector stakeholders deploy policy, infrastructure and business models based largely on current patterns of mobility and vehicle ownership. But this is going to change and stakeholders should question how it could evolve.

We began our across-sector work by summarizing the new trends/technologies that emerged but without repeating basic concepts that should be already well known but rather focusing on how the interaction of all those novelties could, by itself, transform the world we live in and also focusing on the issues that still need to be addressed.

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OEM Ind. FinCo Carsharing OES Digitalservices

P-t-P mobility After sales Taxis Robocabs

2015: EUR332 billion 2025: EUR474 billion 2030: EUR545 billion

2015 2025 2030

FUTURE MOBILITY 15 October 2019

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The ultimate scope of this process is to discover how those trends may affect some of the listed Italian stocks, for the worst or for the good. Let’s deep dive into the trends/technologies that could affect tomorrow’s mobility.


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Focus on: Diesel will only decline or it will disappear?

While Diesel sales have fallen and its share on total cars registration have gone from 49.5% in 2016 to 31.3% in 2Q 2019, still diesel emits less than petrol and in our view it will not disappear at least for the next 10-15 years. It all started with the dieselgate….

While the focus on the cut in carbon emissions began long time ago and has grown in importance in the last decade, undoubtedly the dieselgate accelerated the move to electric engines both from a regulator standpoint and, consequently, for the automotive industry. Regulators, supported by the public opinion complains over the dieselgate, reinforced the already strict emission rules and didn’t allow for meaningful delay in the implementation. On the other hand OEs, in order to balance the stricter emission targets with the increase in their fleet average emission due to the fall in diesel sales, had to speed-up the electric engines development (which they had not tackle seriously, in our view, before).

Figure 5 – Regulatory environment for cars

Source: FCA

Figure 6 – UE deadline and CO2 emission targets

Source: European Commission

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Penalties for non-compliance will increase and add to the alternative-fuel switch need:

Figure 7 – Penalty payments for excess emissions from passenger cars

Source: European Commission

On top of the nation-wide regulations to cut emissions, cities including Athens, Madrid, Mexico City, Paris and Stuttgart have announced plans to ban diesel cars by 2030 or earlier. London by 2032. If we put that info in the context of regulatory requirements in terms of emission reductions (showed in the previous two graphs) alternative fuels are the only possible answer for cars and trucks makers.

However, don’t give diesel dead for granted….

Let’s be clear: a Diesel engine emits less CO2 than a petrol one (see table N.° 3). This is true both on a well-to-wheel basis than simply by looking at the engine emissions. By the same token, it emits more NOx but, overall, it is not dirtier than a petrol engine. Newly launched diesel engines reduced NOx levels up to 80%, as a result of technological innovation born after the dieselgate (software updates, according to Daimler for instance, reduced NOx by 25/30%. Industry players sees further space for improvement thanks to an increase in gas re-circulation, new hardware like SCR catalytic converter and new engine-management systems). This is rejuvenating the diesel look, for now mainly in the eye of carmakers but, we believe, soon also in the eye of regulators and consumers.

Figure 8 – NOx emissions from road traffic and total number of vehicles in Germany

Source: Daimler

Still today, despite the fall in sales, diesel represents one third of new car sales in Europe (source: ACEA – January/May registrations). In fact, there are some reasons why we believe diesel will not die: Infrastructures are not yet ready for a massive growth in EVs; Diesel reduces the fleet overall emissions for car makers; Assets (plants, technologies/patents, etc.) have yet a sizeable value in

companies balance sheet and need time to be depreciated to zero; Technologies evolutions (already under development at the time of the diesel

gate) may further reduce diesel emission levels.

Recently BMW’s head of development stated he believes diesel will survive at least 20 more years and, while investing in electrification, BMW will continue to


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invest heavily in ICE as well for the near future. For trucks and, even more, for tractors diesel is still a viable option. Our conclusion is that diesel will not represent less than 15% of new car sales in the next 10/15 years. Still, it need (and will be) improved as a technology going forward. In our estimates, we assume diesel to remain in the 20% range in terms of share of new registrations in Europe by 2025.


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Focus on: Electric Vehicles

While, in our view, diesel should survive, there is no doubt that electrification is the

name of the game in the automotive industry nowadays. But the fact that the regulators have not been “technology neutral”, by forcing the adoption of EVs instead of leaving the market to decide when and how reduce emissions is creating issues on the economic sustainability of electric cars production (for instance, China counts 432 local car makers, a number inflated by the subsidies given to EVs production. The Darwinian process of natural selection will be painful). Let’s have a look at what’s behind it in greater details. A little bit of history: electric cars were born before petrol ones did…

Cars with electric batteries were within the first kind to be invented: between 1832 and 1839 the Scottish entrepreneur Robert Anderson invented the first electric coach and the Dutch professor Christopher Becker built the first electric car in 1835. The improvement in electric batteries, thanks to the French Plantè and Faure allowed electric vehicle to flourish. At the time, electric vehicles held many speed records (the first to pass the 100 Km/h limit was Camille Jenatzy on 29 April 1899 with its rocket-shape car). At the beginning of the XXth century, electric cars sold outnumbered the petrol ones. Then, due to high battery costs, lack of technologies to control charge and power of the batteries and lack of technology in general petrol cars surpassed electric ones. Electric were sold as town cars, fit to women (due to their simple operating needs) and to wealthy classes. The first Italian electric car was produced by STAE in 1909. FIAT launched, in 1974, the electric version of the City Car. In our view the reason why the first vehicles were electric is that this kind of engine is simpler to produce and to maintain/service. Today this could play against the incumbent car makers given that any producer of electric engine could build an electric car. In fact many are doing so: Dyson announced a EUR2.5 billion plan (which recently has been scrapped, because not commercially viable. But technology-wise the company didn’t have any doubt it was capable). Askoll EVA, a producer of electric bikes and scooters listed on AIM Italia, is born from Askoll S.p.A., a company leader in the production of electric engines for home appliances. Market estimates: pick-up could be slowed down by lack of infrastructure

Electric mobility continues to grow rapidly: in 2018, the global electric car fleet exceeded 5.1 million worldwide, up 2 million from the previous year and almost doubling the number of new electric car registrations. China remained the world’s largest electric car market, followed by Europe and the United States. Norway was the global leader in terms of electric car market share (46%). The global stock of electric two-wheelers was 260 million by the end of 2018 and there were 460 000 electric buses. As for passenger cars however, the overall penetration is quite low. The same goes for 2 Wheelers in Europe and for trucks, as can be seen in the next graph:


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Figure 9 – Electric Chargeable Vehicles (ECV) and Hybrid Electric Vehicles (HBV) registrations market share

Source: ACEA, ACEM, Tesla, CNH Industrial

The majority of the market estimates expect a rapid pick-up in the number of hybrid-BEV (Battery Electric Vehicles) models broadly around 2022 (as can be seen in the next graph). This is no coincidence given that 2020-21 is the year when mandatory EU CO2 targets of 95 g/Km is kicking in:

Figure 10 – Total number of available EV models on the market in Europe

Source: T&E

As a consequence of a marked macro-economic slowdown we project the overall cars demand down in 2019 and then stable:

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Figure 11 – Expected PC + LCV worldwide registrations breakdown by region (units million)

Source: UBI Banca estimates

In Europe alone we project more than 3 million EVs (BEV plus plug-in hybrids) by 2025 on top of 2.5 million mild-hybrids (which however do not need to be charged). This would mount to 16% of total registrations for EV which goes to 32% if mild hybrids are added:

Figure 12 – Expected European units breakdown by powertrain


However, we would like to point out that a massive infrastructure improvement is needed in the next couple of years from the current situation to achieve something close to the level assumed in our EVs penetration estimates. In fact, the global EV fleet consumed an estimated 58 terawatt-hours (TWh) of electricity in 2018, similar to the total electricity demand of Switzerland in 2017. Two-wheelers continued to account for the largest share (55%) of EV energy demand, while LDVs witnessed the strongest growth of all transport modes in 2017-18. China accounted for 80% of world electricity demand for EVs in 2018. Electricity demand from EVs in the IEA base case scenario is projected to reach almost 640 terawatt-hours (TWh) in 2030 (1 110 TWh in the EV30@30 Scenario),

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with LDVs as the largest electricity consumer among all EVs. The issue here is not the overall electricity production capacity but, as it happens in many cases, the load profile in specific timing of the day when it is more likely that an EV will be charged. Retrofitting technologies are emerging but they will not sort out OEMs issues

French startup Transition-One has developed retrofitting technology that adds an electric engine, batteries and a connected dashboard into older models of FCA, Volkswagen, Renault and PSA for about EUR8,500 (or EUR5,000 after government subsidies) in France. The company expects French and European regulators approval by the end of the year and will start pre-orders in September to test demand. This will be a viable option to access zero-emission zones to people who cannot afford to buy a brand new >EUR25,000 electric car. However, while this will reduce the emission of the circulating car park, it will not sort out automotive manufacturers issues on the new cars sold. There are also products to retrofit tractors with electric engines. For instance, Autonomous Tractors is a US company that claims it can reduce fuel consumption by 30% while increasing service life by 5 times. Charging stations: a business per-se (price is two or three times the one paid by households)

Since EVs are expected to become more relevant for power systems, charging stations are an integral part of the topic. In fact, customers now cite a lack of public charging infrastructure as their main reason for not buying an EV (source: Roland Berger – Automotive Disruption Radar 5 – a survey of 16,000 people across 17 markets). Top management at major Italian Utilities with whom we spoke (and EV enthusiast too) say that this topic is overestimated by consumers. However, perception or fact, this is what is holding some people to become customers. According to ACEA that cites the “European Alternative Fuels Observatory”, as of August 2019, there were 175,000 charging points in Europe (referring not to the number of stations but to the number of plugs). 72% of all the charging points were located in 4 countries (Netherlands, Germany, France and UK):

Figure 13 – European charging point breakdown (units)

Source: ACEA

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The infrastructure development is not keeping the pace of EVs volume growth already in 2018 (see next graph). And this before taking into account that volume growth is accelerating in 2019 and should pick up from 2021-22:

Figure 14 – EV car park vs. EV public charging infrastructure

Source: Global EV Outlook 2018, Statista, Insideevs, Technologyreview, Global China Association of Auto Mfrs, ALixPartners analysis

In the future, we estimate that at least 2 million charging stations will be needed by 2025 (according to very conservative estimates by the European Commission). At the last Frankfurt car show, ACEA stated that 3 million charging points are needed by 2030 to satisfy the need driven by CO2 emission targets. The topic is also impacted by negotiation tactics: carmakers message is that the regulators, after imposing the deployment of EVs, have to incentivize the growth of the infrastructure. Otherwise emissions target will not be reached and not because carmakers were not ready/willing. The definition of charging point varies a lot (rapid, slow, fast for instance) but the main item of confusion is, in our view, if one considers a single station as 1 charging point or if one consider a station with, say, 5 plugs as 5 charging points. Other sources considered by industry players as reliable (http://ccs-map.eu/stats/) cites 7,763 charging points in Europe as of September 2019. Considering that, on average, a charging point as 10 plugs the resulting figure is half of what the EU says. Italy, which has of now lags well behind (fourth last, out of the 17 countries analyzed in Roland Berger ADR 5), issued the “Italian Plan on electric charging infrastructures” (PNIRE) which aims at installing between 4.500-13.000 low-powered public charge stations and between 2.000-6.000 high-powered 5 public charge stations. In order to reach these targets: The plan sets a minimum number of charge stations to be installed on a 2-

year basis by 2020; A public fund has been established, in 2017, by the PNIRE to finance local

charging infrastructure projects (the Ministry of Transport and the Regions/Autonomous Provinces co-financed a EUR72 million fund to finance their regional programs for e-mobility infrastructure).

ENEL X, a division of the incumbent player ENEL, has a plan to install 7,000 charging points (with 2 plugs each) by 2020 and 14,000 by 2022 (EUR100/300


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million investment). It has signed, together with another utility called Engie, a partnership with FCA to co-develop (and we presume co-finance) the network growth. ENEL X plan envisages also charging points directly at the driver premise (the hardware price is around EUR1,000). Usually they are purchased together with the car as Enel X has signed agreement with car makers and prepares the house infrastructure to fit-in the charger.

As a testament of how much ENEL X believes in the charging station business, the company acquired a 12.5% stake in Hubject, an electric charging infrastructure platform that connects 200 thousand columns in the world. Hubject is a Berlin-based electric mobility company, which includes among the partners leading companies in the technology sectors, such as BMW Group, Bosch, Daimler, EnBW, Innogy, Siemens and the Volkswagen Group. Hubject has developed an interoperable platform that allows charging the electric car through a network of over 200,000 public recharging points worldwide by using its own electricity-service provider. The interoperability, or e-roaming, is a structural component in ENEL X's business model to create top-up solutions for all types of use (home, office, public area) with a single access point. ENEL X’s goal is to increase its charging infrastructure from 60,000 to 455,000 charging points by 2021.

Regulation: How the final price is built-up

Regulated prices of fuel give birth to little volatility on the expected running costs, the wide span of electricity tariffs might vary significantly depending on the charging modes and ownership of the charging infrastructure. The tariff regulation plays an increasingly significant role in the uptake of electric mobility. In a landscape of higher purchase price, the adoption of electric vehicles by consumers will depend on the possibility to lower the Total Cost of Ownership of the vehicle by keeping retail electricity prices under control. Today, Italian electric vehicle owners have numerous options to recharge their vehicles and these options are associated with different charging prices.

In the Italian regulation, the final user (i.e. the EV driver) is entitled to have a contractual relation only with a Mobility Service Provider (MSP) that provides the charging service, the payment platform and manage the transaction. The MSP is the actor that makes the final price to the customer, which can be expressed in:

Cost per kWh of withdrawn electricity; Cost per time unit of connection to the infrastructure; Pure service cost; The MSP can have a contractual agreement with one or more Charging Point Operators (CPOs) that manage the operations of the infrastructure as well as its maintenance and, most importantly, manages the purchase of electricity from an energy retailer. The tariff payed by the CPO to the retailer has a regulated structure defined by the Italian Regulation Authority (ARERA). The contractual relation between the MSP and the CPO settles the purchase of electricity and it is schematically pictured in the next figure along with the typical components of the electricity tariff.


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Figure 15 – Italian regulation and contractual relations between MSP and CPO – Electricity purchases

Source: CESI

Public infrastructure tariffs In 2010 the Italian Regulation authority (ARERA) with the ARG/elt 242/2010 resolution first introduced a dedicated tariff for public charging points operators under the name of BTVE (Bassa Tensione Veicoli Elettrici). Such incentivizing tariff, applicable on a voluntary basis to charging infrastructure operators, has been designed by the ARERA to be fully variable over consumed electricity (only charged in €/kWh). The absence of fixed components (€ / point / year or € / kW / year) makes this rate particularly favorable for new public charging points in areas with scarce penetration of electric vehicles as it eliminates the burden of annual fixed costs for the top-up service provider. On the other hand, to cover the costs of network services and general system charges such variable tariff structure is significantly higher than those applicable to domestic users. This tariff structure is therefore advantageous if the volume of energy withdrawn remains overall low. The next Figure shows the components of a typical cost of public charging that relies on BTVE tariff including the “non-energy costs” (i.e. installation, maintenance, software and mark-up) charged by the charging infrastructure operators. The cost for a MWh of electricity lays in a range between 400 and 500 €/MWh depending on charging point capacity (power) and different mark-up choices by the operators that impact the “non-energy costs” components.

Figure 16 – Public charging cost components (EUR/MWh) price range depending on power

Source: CESI

Private infrastructure tariffs Private charging, that today represent ca70% of the charging needs of Italian EV drivers (PoliMi), sees different tariff structures. The cost of private charging is made from the electricity supply cost, that includes the energy cost, the network and system charges and taxes, plus the cost of the charging infrastructure along with its maintenance (non-energy costs). The tariff paid by the EV owner is not specifically dedicated to electric mobility as in the case of public charging and is heavily dependent on contractual power and contractual pertinence.

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The usual electric tariff for an Italian user is made of three components, one variable component depending on withdrawn electricity (accounted in €/kWh) and two fixed components (accounted in €/kW and €/point of delivery). As reported in the next figure we can consider 3 reference case to evaluate the real cost of EV charging in private space. 3 kW residential charging: private charging connected to the same Point of

Delivery (PoD) of the housing with no need for an increase in contractual power. The tariff result is EUR/kwh 276;

6 kW residential charging: private charging point connected to the same Point of Delivery (PoD) of the housing with need for an increase in contractual power.The tariff result is EUR/kwh 326;

3 kW non-residential: a private charging point connected a newly installed Point of Delivery (PoD) different from the housing one (eg. car box in apartment block). The tariff result is EUR/kwh 416;

Figure 17 – Private charging cost components (EUR/MWh)

Source: CESI

Private infrastructure for public use tariffs The B2B and B2B2C charging infrastructure falls in this category. This kind of users might be commercial users, businesses, petrol stations etc. The tariff structure is similar in values and components to the private non-residential example above but charging costs might be lower if the infrastructure is included in an existing PoD and no variation are made on the contractual power of the user. In the next graph, we consider 2 reference case to evaluate costs for Private infrastructure for public use tariffs: Comm no extra power: a commercial site providing clients with EV charging

services that does not need any contractual power adjustment to its present tariff. The tariff result is EUR/kwh 250;

Comm +10kW: a commercial site providing clients with EV charging services

that needs additional 10 kW of contractual power in order to be able to host the charging stations (e.g. fast charge >= 22kW). The tariff result is EUR/kwh 378;

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Figure 18 – Private infrastructure for public use charging cost components (EUR/MWh)

Source: CESI

Final considerations Charging costs for Italian EV user may vary significantly with the charging location and contractual condition. The next figure summarizes the use cases presented above. The tariffs vary from 250€/kWh to 511€/kWh. With the exception of the 3 kW non-residential case, the private charging tariffs result in a lower €/kWh cost for the EV owner. The biggest difference among tariffs lays in the system charges and in connection and network cost that burden the infrastructure developer or owner that have the necessity to increase the contractual power and/or to set up a dedicated PoD for the charging infrastructure.

Figure 19 – Charging cost components (EUR/MWh)

Source: CESI

To put such values in perspective, the next figure shows the cost per kilometer of a traditional, diesel fueled, and internal combustion engine vehicle and compares it with that of an EV charged by a private 3kW residential charging point and one charged at a public charging station. For the comparison, a 50kWh battery EV with a consumption of 13 kWh/100km is considered. With the current public charging tariffs, the convenience expected from an electric fueled vehicle is nearly vanished.

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Figure 20 – Cost per km of ICE and EV in different charging stations (EUR/KWh)

Source: CESI

In order to remove such cost disparities, the Authority is ongoing a review of the e-Mobility electricity tariff. The process, started in July 2019 (DCO 318/2019) with the issuing of a consultation document, aimed to level the electricity tariffs for different kind of charging conditions. The main actions proposed by ARERA are:

A review of the present BTVE tariff aimed to lower the cost for users to level closer to private charging tariffs. ARERA has proposed as much as 4 hypotheses to reach the former target without creating issues and overloads on the distribution grids;

A review of the actual mechanism for pertinence for private non-residential tariffs to reduce the gap between nonresidential and residential tariffs.

The EV charging value chain and the most common business models

As can be seen in the following graph, electric mobility involves a complex and cross-sectorial value chain. The integration among the electric system ad markets, the infrastructure manufacturers and operators, the automotive sectors and the digital services industry creates a dynamic environment and multiple business module opportunities.

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Diesel ICE Public (high) 3kW residential


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Figure 21 – E-mobility public charging – Players and their inter-relations

Source: CESI

The main constituent operators involved in the e-mobility public charging business are: Charging point developer: is the provider and developer of the electric

vehicle supply equipment. Such players are mainly electromechanical OEMs that have the know-how and technology to develop charging station technologies (eg. ABB, Schneider, Siemens, Fimer, Bitron etc);

Charging point operator (CPO): manages the charging infrastructure from a

technical and operational standpoint. The CPO control the access to the infrastructure, the maintenance and the purchase of electricity from the energy retailer. The CPO has the direct physical connection with the end user but does not handle the contractual relation with it. (eg Ionity);

Mobility Service Provider (MSP): sells the e-mobility charging service to the

final user. Generally, an MSP manages the authentication of the client, the payment system and transactions and additional services related to the charging service. An MSP might have a contractual relation with one or more CPOs for the provision of the electricity supply and is entitled to have a contractual relation with the end user (eg. EVWay).

The former constituent roles in the EV charging business are conceptually separated but might be vertically integrated in a single player. In the Italian landscape, in particular, the MSP and CPO role are often integrated. Such integrated players might be utilities (Alperia, A2A, ACEA, Iren, HERA, Edison etc.) or EV dedicated players (such as BeCharge). Some players might be able to further integrate the development of Charging points (eg. EnelX) or the whole value chain including the EV and Battery (Eg. Tesla, Daimler/Ionity etc.).


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Most of the infrastructure is commissioned either by a local authority or by a Point of Interest (PoI), i.e. big commercial activities (shopping centres, cinemas, supermarkets, etc.) who wish to attract customers. In recent years, local authorities have commissioned around two thirds of the Italian e-charging infrastructure projects, while around 20% of projects are allocated by Points of Interest. The remaining 20% of the commissions are split between corporate clients (who have been very recently increasing their share) and other dedicated subjects, such as oil supply companies. (Source: PoliMi 2018) Regardless of whether the client is public or private, in most cases all aspects concerning the infrastructure are managed by an integrated MSP, who plays an “extended” role by dealing with all the technical and maintenance aspects. This is by far the main business model occurring in Italy, and the MSP involved is very often a utility such as EnelX, A2A and Hera. This model makes it, on one hand, easier for the buyer (especially for a local authority) to deal with just one counterpart; on the other hand, it also makes access and charge terms still highly fragmented, as each buyer can demand different terms and conditions and this causes uniformity issues. Less spread out business models in Italy take into consideration a more fragmented scheme, where the technology provider and the Charging Point Operator (CPO) are separated and well specialized. In order for these models to successfully deploy their extensiveness potential, a stronger policy is needed to overcome interoperability issues, so to allow players to develop their own service business models. On the power system side of the value chain, the operators are the regulated network operators (Distribution Network Operators and Transmission Network Operators) such as e-distribuzione, Areti, UNARETI and Terna that guarantee the connection to the grid and energy measurement, the energy traders and retailers that set up supply contracts with the CPOs and the power generation utilities that supply electricity to the power system.

Grid capacity: surcharge in specific timing/locations? Apparently a

manageable issue

The charging requirements of a growing EV fleet are a source of increased electricity demand on power systems. High EV uptake, with uncoordinated charging, can pose a challenge for power systems if this demand coincides with peak demand periods and pushes the peak demand on a system, which could

translate to the need for additional generation capacity. On aggregate data, the grid capacity could reach full utilization in a relative short period of time. As an example take the UK data:

On the highest demand day, which was February 28th 2018, the overnight demand trough was about 150 GWh;

Assuming charging times can be managed, there is thus enough spare capacity to charge 2 million BEVs a night without investing in new capacity, and even more in the summer (though it is hard to imagine entitled Tesla drivers waiting until the summer).

There are 32m vehicles in the UK. Using the RB global model as a guide, we believe that 2 million BEVs will be adopted well within a decade, after which, even with continued energy efficiency gains, we will need more grid capacity. Electric bus depots, increasingly the norm in China, and now trialed in Waterloo, will also accelerate this trend.


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Figure 22 – 24h UK power demand, 28 Feb-2018 (GW)

Source: DECC, National Grid, SMMT, Roland Berger

In our view, there are no risks at national infrastructure level: across Europe, for example, our analysis indicates that total power consumption will increase by around 5%, and 4% by 2050. A manageable increase.

Instead, the challenges are centered at a local network level where there is a risk of overloading residential transformers: a single plug-in electric vehicle (PEV) with a 240V, Level 2 charging system consumes about 7kVA. With most residential transformers only built to manage between 10 and 50 kVA, there are concerns that several EVs charging simultaneously could overload the transformer – or even take it offline. Residential transformers are particularly at risk of overload during peak hours, especially if there are multiple EVs in a neighborhood. With annual EV sales expected to be in the tens of millions by 2030 around the globe, uncontrolled EV charging (i.e. where there are no controls/incentives in

place to modify load scheduling) is likely to coincide with evening peak demand – users will tend to charge their vehicles as soon as they get home from work – which would add to the pre-existing peak load and may take distribution voltages outside the acceptable range. For instance, 30-50% of charging sessions in the Netherlands occur in the evening peak hours (16:00-20:00), while cars are parked four-times longer than the required charging time, allowing for time to shift the charging sessions to off-peak times. Slow chargers can provide flexibility services to power systems. Since buses account for the largest share of fast charging demand, concentrating these consumption patterns to low demand periods such as at night can constructively affect the load profile in a power system.

How smart-charging and a digitalized network can turn the problem into an

opportunity Smart charging systems are expected to play a key role in the de-carbonization of transport and energy systems. Connecting millions of EVs and coordinating their charging and discharging would minimize the costs of EV charging while allowing the grid to balance the integration of high levels of variable renewable energy sources. There are two main different types of smart charging technologies: Unidirectional chargers (V1G) which allow a time-shifting of charging

enabling an optimization of charging costs and provision of demand response services;

Bidirectional chargers (Vehicle to Grid, V2G) which enable energy stored in


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electric vehicles to be fed back into the electricity network. By varying its charge level, unidirectional controlled charging can provide any ancillary service, including frequency regulation but it can only provide grid value during the times that the vehicle is charging or available for charging. Bidirectional capabilities entail a higher infrastructure cost but allow a larger capacity and longer duration resource than V1G. A vehicle that can discharge its battery to the grid can provide grid services whenever it is plugged-in and able to communicate with the grid (see following figure).

Figure 23 – Smart charging technologies

Source: CESI

US National Household Travel Survey states that an average vehicle spends only 4% of the day driving and this suggests a considerable amount of flexibility for drivers to shift charging to different times of the day and/or to extract value from the battery of their vehicle providing benefits to the power system.

Battery production capacity: another constrain, at least in the short term

To meet 2025 emission limits consensus between market participants believes that 20-25% of new car registrations should be BEV/PHEV. For Europe alone, this would mean around 3.0 million to 3.5 million batteries. Carmakers are currently securing their supply from various battery manufacturers but concerns were raised as to whether the supply will be sufficient. Other critical factors are, in our view, the dependency on few foreign supplier for the key component of the electric car and


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the low priority these batteries producers will give to low volume manufacturers (Ferrari, CNH for tractors and also high volume but low-ticket products like 2-3 wheelers). Based on the IHS dataset, T&E (European Federation for Transport & Environment) has calculated that the total lithium-ion battery demand from EV (and hybrid) production volumes within the EU is expected to reach 112 GWh in 2023 and 176 GWh in 2025 according to the forecasted battery sizes provided by carmakers. The average battery size of the vehicles (BEV, PHEV and full HEV) has a direct impact on the battery demand needed. According to talks we had with industry players, the average battery capacity of electrified vehicles would increase between 2019 and 2025 a result of:

Consumer demand for longer ranges; Technological improvements in batteries (mainly the increase in energy

density of batteries which allows to carry more battery capacity with the same mass);

Decreasing battery costs. The average battery capacity of BEVs increases from about 50 kWh today up to 60 kWh in 2025 (+23%), the range of these vehicles thus also increases on average by more than 50 km. The issue of supplier-dependency and availability of batteries could be felt soon. Tesla, for instance, is conducting battery cell research at a "skunk works lab" near its Fremont plant, CNBC reported. Making the cells in-house could reduce Tesla's dependence on Panasonic. The European Battery Alliance, launched by the EU Commission as part of its ‘new industrial policy strategy’ materialized into plans for at least a dozen cell manufacturing factories in Europe (see Figure 23 below), where the largest battery value lies. The European Battery Alliance effort, according to Benchmark Mineral Intelligence, should result in a manufacturing capacity to be at least 131 GWh in 2023 and 274 GWh in 2028 (i.e. enough to cover the demand mentioned in the point above):


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Figure 24 – Battery production – Plants under development

Source: ACEA

More details in the list below:

1. Northvolt in Skellefteå, Sweden: an initial line of 16 GWh (2021), increasing to 32 GWh in 2023

2. Northvolt in Salzgitter, Germany: cooperation with Volkswagen to start in March 2020 with 12 GWh, potential to increase to 30 GWh (not included in the estimated capacity);

3. CATL in Erfurt, Germany: 14 GWh as of 2021, rising to 60 GWh from 2026 (and likely boosted further to 100 GWh);

4. German partnership (BMZ & others), Germany: formerly known as TerraE consortium, aiming at two factories and capacity of 34 GWh by 2028;

5. LG Chem in Wroclaw, Poland6: from 6 GWh today, to 70 GWh within 2-3 years

6. Samsung SDI in Göd, Hungary: 2-3 GWh from 2016, under expansion to reach 15 GWh in 2020;

7. Samsung SDI in Premstaetten, Austria: detail not know and not included in planned capacity;

8. SK Innovation (SKI) 1 in Komárom, Hungary: production to start in early 2020, up to 7.5 GWh in 2022;

9. SK Innovation (SKI) 2 in Komárom, Hungary: completed by 2021, production capacity unknown;

10. AESC in Sunderland, the UK: 2 GWh; 11. Farasis, Germany: 6 GWh from 2022 up to 10 GWh.

Five more battery production plans are likely but have not been officially confirmed


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at the time of writing (thus not included in the planned production capacity estimates):

SVOLT, Chinese Great Wall, location TBA, Europe with 20 GWh from 2022;

GSR Capital in Trollhättan, Sweden: not confirmed yet, but between 400,000 and 500,000 battery packs per year if goes through. Production at National Electric Vehicle Sweden (NEVS) facility;

PSA-Saft consortium, in France: project under review by the EU Commission;

LG Chem, location TBA, Europe (second factory);

BYD, location TBA, Europe. Unfortunately, none of this planned capacity is in Italy. The list above includes major plants in terms of capacity and may not include some initiatives tailored more to supply niches. In Italy, in fact, the one plant we are aware of is to be built by Seri Industrial in Teverola with an initial capacity of 200MW (upgradable to 600MW).

Batteries recycling: not an issue in the short term, but long term a solution

needs to be developed

Simply throwing away battery packs that are no longer fit for their original purpose is clearly a nonstarter for any sustainable technology. EV batteries are expensive, packed with scarce raw materials and are environmentally tricky to dispose of, and disposal economics are currently unattractive. Battery life cycle management is a huge emerging opportunity that could solve the issue of how to stop EV batteries ending up as expensive and toxic landfill waste. The average life of battery, or at least the duration guaranteed by many OEMs, is around 7-8 years. After that period the power loss is estimated being in the 20% region (in some case up to 25-30%) which means that the original car range will go down by a similar percentage. A car battery at 80% of its initial power has a “second life” which, after some re-working, may go from storage (at home for instance) or lighter or less performing vehicles (forklift, golf caddy grid stabilization, backup power supplies and even EV charging). After this second life an electric battery will need to be recycled (its components) or dismissed. So, batteries recycling should begin to be an issue from 2035 onwards (i.e. assuming a pick-up in EVs from 2025 and a life expectancy of 10 years) and to become a sizeable issue from 2040 onwards. In the long run the question has to be posed given that, as of today, there are no clear winners in terms of recycling technologies. The issue, however, has a short term implication too, which is more commercial than environmental: granting a residual values to battery will reduce the TCO of vehicles and ease the leasing/renting of cars/batteries. Although recycling presents a substantial opportunity, it is currently under-realized. Only around 5% of li-ion batteries are recycled at present, and some 11m tons of li-ion batteries will be discarded by 2030, according to Bloomberg NEF. The market for recycling holds huge potential, but it is constrained by several factors: not all battery chemistries are equally suited to recycling, and there is a wide range of different chemistries and battery pack types currently in use. Furthermore, the process itself is complex and expensive: commercial smelting produces a mixed product from which the vital lithium must then be extracted via


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further treatment at additional cost. The economics are therefore not favorable at present (the value of raw material reclaimed is approximately one-third of the cost). As the supply of EV batteries requiring recycling grows, the commercial incentive will result in overcoming many of the current costly complexities in recycling. Even now, there are startups and process innovators working on much-improved recycling technologies with 90%-plus retrieval rates for key minerals lithium and cobalt. However, to be most effective and efficient, the standardization of battery types will be required at an industry level, and batteries will need to be designed with recycling in mind from the start.

Storage: a niche of the market that has strategic importance to optimize the

usage of renewable energies

It is important to note that there will be other demands for li-ion batteries. For instance, similar lithium battery technology will be required for the growing demand from stationary storage applications to balance renewable generation or for distribution support at recharging sites or hubs at peak times (to avoid network reinforcements). However, demand for lithium-ion batteries for stationary storage plays a minor role in comparison to transport needs, or less than 10% of the total global li-ion battery demand. Additionally, second life EV batteries will be used for stationary storage after their first life in an EV28, and will reduce the amount of new batteries required in the future. A recent report commissioned by T&E and industry partners shows that 2.25 GWh of 2nd life battery capacity will be available in Europe by 2030. Overall, it is expected that no more than 10% of the total new li-ion battery capacity in the EU will go to stationary storage applications (or 13 GWh).

Rare hearths: the supply chain ownership may create geopolitical tensions

A topic that we only want to touch quickly is the potential lack of supply of rare hearths (a key component of batteries) were EVs to tamp up to the expected levels. As can be seen in the next graph Western World countries will have to tackle this issue now, if it is not already too late:

Figure 25 – Control over rare earths

Source: Benchmark Mineral Intelligence

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While oil implies dependence on Middle East countries, electric vehicles may move this dependency to China and Latin America. Furthermore, there are issue in terms of limited amount of resources available (Cobalt is the rarest of all, prices in fact went through the roof) and in many cases these resources are used for other uses (healthcare in the case of Cobalt for instance) for which there are no other alternatives. Finally yet importantly, the whole topic of EVs pick up is predicated on the idea that the batteries costs will decline. But this trend could be at least slowed down if rare hearths prices will continue to increase.

Mitigants to the threat posed by the scarcity of “rare hearths” are: The growth of fuel cell technologies (i.e. electricity produced from hydrogen); Technological innovation may lead to the use of other raw materials; Technological innovation may lead to reduce quantity needed of rare hearths

and/or to increase the life expectancy of a battery.

Another hurdle: Government/local municipalities will have to compensate for

the decline in taxes on petrol

The “Global EV Outlook 2019”, produced by IEA, explores two scenarios: 1) The base one (“New Policies Scenario”) where global EV sales reach 23

million and the stock exceeds 130 million vehicles (excluding two/three-wheelers);

2) The “EV30@30 Scenario” (assuming a 30% market share for EVs in all modes except two-wheelers by 2030) where sales reach 43 million and the stock numbering more than 250 million.

The projected EV stock in the base case scenario would cut demand for oil products by 127 million tons of oil equivalent (Mtoe) (about 2.5 million barrels per day [mb/d]) in 2030, while the EV30@30 Scenario the reduced oil demand is estimated at 4.3 mb/d. Taxes on petrol will decline at a time when local municipalities and government should ramp up infrastructure investments both for EVs and Autonomous driving. This is an issue that needs to be tackled and could dislocate capital from one sector (the one hit by new taxes) to others. Taxes on petrol are worth some EUR73 billion in Italy alone (and EUR430 billion at EU level). Assuming by 2025 a 16% penetration of BEV and another 16% of plug-in hybrids implies a reduction of the taxes on petrol in the EUR15-20 billion (worth one or two Italian budget laws). Obviously, this would have to be compensated with something else: theoretically an increase in taxes on electricity production/supply would make sense. But this would raise cost-of-living to millions of people and could create an intense social debate. Conclusions for cars: EVs will pick up from 2021-21 but break even should be after 2023 Car makers still lose money on EVs and this come in conjunction with a massive capex cycle ($225 billion announced in the 2019-23 period for electric alone) and at a time when worldwide car sales are decelerating:

Conclusions for cars: EVs will pick up from 2021-21 but break even should be after 2023

Car makers still lose money on EVs and this come in conjunction with a massive capex cycle ($225 billion announced in the 2019-23 period for electric alone) and at a time when worldwide car sales are decelerating:


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Figure 26 – Expected PC + LCV worldwide registrations breakdown by macroregion (units million)


However, from the conversations we had with car makers and suppliers OEs are still losing money on it (and this is not a secret). Volumes are not enough to bring the unitary costs of batteries below the breakeven point while technical capabilities are not such to reduce the size below the breakeven point. Despite batteries costs have been going down, we estimate that the parity with ICEs (USD100/kWh) will be reached not before 2023 on average:

Figure 27 – Battery pack cost evolution (USD/KWh)

Source: AlixPartners

Reaching the USD100/kWh implies a production output of at least 500,000 cars per year. Right now there are already suppliers on the market which are offering ranges of around 625 km and the goal of the automotive industry is 1,000 km. The following graph is taken from a presentation of a company we came across, LION E-Mobility (listed in Frankfurt) that shows how, by improving the energy density,

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better performances can be reached (despite the increase in weight):

Figure 28 – Examples of batteries ranges currently under development on the market

Source: Lion E-Mobility

So, while the profits attached to the automotive sector will be higher in 2030 and then what it is now, the transition period will be perilous due to the large investments required, the decline in profit margins and the abrupt change in the supplier landscape that EVs will bring. The magnitude of these changes will vary depending on the penetration rate of EVs and on the eventual delay in CO2 penalties from policy makers. But it doesn’t change the overall scenario and the 2030 end-point in our view: electric will become one of the major propulsion solutions, at least for cars. Other vehicles (trucks, tractors, 2 wheelers) may have different long term scenarios which will be dealt in the following paragraphs.

Electric trucks and tractors

After having dealt with electric cars and listed the hurdles that could slow down the inevitable pick-up in sales, we move now to look at the whole variety of electric vehicles, beginning with trucks and tractors. With fuel being the first cost item for truck fleets operators (see next graph) it is clear that OE and their customers had a look at alternative fuels.


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Figure 29 – Cost pie for a typical German Freight Carrier

Source: Daimler

However, we understand that electric is not the answer for medium-heavy trucks for the majority of the industry players: the market was small in 2018 compared with other type of vehicles. An estimated 1,000-2,000 trucks were sold in 2018 in China, where the circulating park is likely to exceed 5,000 units. In Europe a group of OEMs delivered electric medium trucks to selected fleet operators for commercial testing (including 50 units from MAN, DAF, Mercedes and Volvo). The reasons for the low penetration are multiple: range anxiety is an issue for long-haul operators, battery weight is a major hurdle and, assuming it would be sorted out in the very long run, and still it would occupy a meaningful part of the carrying space. According to industry players, those negatives will not moderate in the long run and this is why CNG/LNG is the short term solution envisioned while hydrogen is the end-point. The payback for a heavy electric truck in fact seems higher than the first-owner usage time of five years:

Figure 30 – Heavy Truck vs. Light Truck

Heavy Truck Light Truck

Range 750 miles (1,200 Km) 250 miles (400 Km)

Battery capacity required 1,500 KWh 300 KWh

Battery cost estimated in 2025 USD150,000 USD30,000

Annual fuel savings USD18,750 USD6,250

Payback period 8 years 4,8 years

Source: T&E

One additional complication needs to be considered, however. Used trucks make up a significant share of drayage trucks. While fleets typically replace their long-haul tractors every three to five years, a sizeable proportion of the drayage truck fleet is over ten years old. The economics of an electric truck only work when compared to a new diesel truck. The operating cost of a used dray truck is significantly lower as the equipment is largely depreciated. The electric truck would provide a lower fuel cost than the used, less fuel-efficient truck, but the investment does not typically achieve payback within the remaining lifetime of the truck. This further limits the potential of electric trucks. Light commercial vehicles instead should record a higher share of electric engines, being similar to cars in a way. Calculations on the payback are showed in table 30. That said some players are looking also into electric heavy trucks, in the context of exploring more than one technology. Daimler for instance is studying this option and recently announced an agreement with a supplier (the Chinese company Contemporary Amperex Technology Limited) targeting series production from

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3%12%

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2021. Products currently on the market and that moment confirm our theory that electric is not the answer (Daimler eActros has a 200 km range which compares with a gas-powered IVECO S-WAY’s 1,600 km). We understand instead that gas is a viable solution in the short term for heavy trucks as their emissions are much lower than diesel, their costs are comparable making the payback time reasonable. Additionally, we understand that the circulating park can be retro-fitted, thus reducing fleet operator’s costs. The next graph shows calculation made by CNH based on several (very technical and reliable) sources:

Figure 31 – Well-to-Whell (WTW) GHG emissions (CO2 g/km)


Tractors, for similar reasons of the one cited for heavy trucks, have very low change to go electric. On top of what we just said, farmers have easier access than many to bio-diesel and manure so, in our view, tractors will more likely move to CNG/LNG. This will be dealt in the paragraph on alternative fuels.

Electric motorbikes: batteries weight decline key to sales pick-up

According to Energica Motor Company (EMC IM), the high-performance electric motorcycle market reached 527,917 units in 2017, with an expected 2019-25 CAGR of 4.5%. ACEM (the European Association of motorcycles producers) reports that in 1H2019 in Europe 5,812 electric motorbikes were registered, an 82% increase YoY. Penetration of electric motorbikes, on a worldwide basis, is lagging behind cars, in our view because there was not regulation push. But, from our analysis, it seems that we are at the beginning of a growth story:

“Range anxiety” doesn’t apply to 2W which, on average, run 15Km/day and micro-mobility trends are supportive too;

While demography plays against 2W, at least in Europe, marketing electric 2W as “tech-toys” could attract a new breed of customers thus rejuvenating the client base;

According to market researches, at the moment, the typical buyer of an electric premium 2W is:

A wealthy individual (annual income >$200K); Focused on the environment;


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In love with technology and its recent trends; That wants to diversify itself from the mass-market.

One of the main topic of discussion in the motorbikes industry, between pro-electric and against, is weights distribution. Batteries concentrate the weight in a certain locations, which may not be ideal to obtain a perfect weight distribution and barycenter. The expected reduction in batteries weight may help to sort out this issue and, in our view, incumbent players will enter the sector too but at a later stage. A racing circuit for sport motorbikes, Moto-E, has been created by Dorna (the same entity which is managing the MotoGP) with the first ever championship running as we speak. Energica is the sole provider of the motorbikes chosen by Dorna and lap times are comparable to the ones booked by petrol motorbikes in the same circuits continuing to fuel the debate over who will win in this technological race.

Electric motor scooter (market demand, current offer, reasons why)

Electric motor scooter registrations are higher than that of motorbikes (obviously one may say): ACEM reported 28,577 mopeds registrations in 1H19 or a +75% YoY. The majority of the things we said for motorbikes apply to motor scooters too: range anxiety not an issue, penetration lagging behind but recovering fast, the description of the typical buyer matches for the high-end models. The major difference stands, in our view, that the compounded effect of an old circulating park (18 years old in Italy) coupled with incentives and traffic bans could be a nice “excuse” to speed up the replacement cycle. For a more detailed list of public incentives and bans please refer to the single-name report on Piaggio at the end of this report. On top of what we just said, electric motor scooter (if small displacement segments are considered) may well fall into the theme of micro-mobility which is dealt in the following paragraph. In this case, business models could be B-2-C (high margins, premium products) and B-2-B (selling to fleet operators, zero margin, high competition, low product differentiation).

The rise of micro-mobility (1): electric bikes

In recent years, we have seen a rapid rise in micro-mobility solutions such as e-bikes and e-scooters, in addition to traditional non-electric bike-share that is station-based. More recently, the rapid expansion of e-scooters and e-bikes has attracted significant investment from a fundraising perspective, through M&A and via new entrants. For the consumer, the benefits of using micro-mobility might include:

Greater convenience versus traditional taxis, public transport, or walking; A healthy way of transport, in large cities in particular where this would be

a time-efficient training/fitness; A green choice; The fun aspect of the trip.

Some of the current industry issues that still needs to be addressed include: Safety; Usability in adverse weather conditions; Curb space issues; Updated regulation; Vandalism/theft.

The worldwide bike market is sizeable:


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Figure 32 – Electric bike market (units sold million)

Source: Greyp

And while Italy has lost production volumes historically, its export volumes have remained broadly flat and the country focused on the top-end of the market (simply remember that LVMH purchased Pinarello some years ago). Still, Italy is a net importer of e-bikes although some local production exists: In this report we will deal with Piaggio, that produces and sells e-bikes and we will refer to Askoll EVA which produces e-bikes too. We believe that also this segment is split, in terms of business model, between B-2-C and B-2-B and players are usually extremely different. B-2-C are either premium bikes producers that sell few electric units at extremely high price tags or players like Piaggio, who stretch themselves down this segment, but for whom this is far from being a core business. B-2-B instead are volume players, typically producing bikes only and, at the moment, with low margins. We believe these producers are out of scope of this report, being mostly small non listed companies.

The rise of micro-mobility (2): electric Scooters. Questionable future

The rise of the e-scooter industry has been one of the biggest and most refreshing micro-mobility trends happened recently: in less than two years, e-scooter startups have collected more than USD1.5 billion in funding and their devices are in service in hundreds of cities worldwide. BCG estimates that in 2025 the sole European market will reach USD12-15 billion, while McKinsey forecasts the worldwide micro-mobility industry to overcome USD100 billion in 2030. This rapid market boom can be explained by a right market timing and a correct launch strategy. E-scooters have been introduced in urban areas which witnessed the rise of sharing mobility and whose consumers are eager of high tech, flexible ways to quickly get around increasingly congested cities, avoiding traffic jams. But even beyond the practicality of e-scooters is the element of fun that they offer: anyone - whether a manager in a suit or a student in jeans - can enjoy feeling like a little kid again. But there are some significant issues, which help to explain the industry in more details. It is a difficult business with tough economics, regulatory challenges on a city-by-city basis, and a ridiculous number of competitors vying for the micro-mobility services market share:

First issue: challenging profitability

Scooter companies have been struggling to turn a profit since bursting onto the scene. From a pure revenue-industrial cost structure standpoint, e-scooters are profitable,

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way more profitable than car sharing. The payback period of the two solutions gives the idea: a few months for the former compared to several years for the latter. This difference originates from broadly comparable rental fees in absolute terms but different acquisition costs:

Car sharing requires thousand euros just to buy the vehicle and is based on a 24-30 cents average rental revenue per minute (plus a one off subscription fee);

A performing e-scooter has an average cost of EUR400 and grants a 15-19 cents rental revenue per minute (plus 1 euro to unlock the scooter).

Figure 33 – Revenue and expense estimate per e-scooter ride (USD)

Source: McKinsey & Company

Taking into consideration just revenues, e-scooters solutions are positioned on a completely different level compared to public transport and sharing mobility solutions:

Figure 34 – Revenue comparison across urban mobility solutions per period of use

(EUR) E-scooter MoBike Electric BikeMi

Public transport

Scooter sharing Car sharing

10 minutes 2.50 0.30 0.25 2.00 3.50 2.50

20 minutes 4.00 0.30 0.25 2.00 7.00 5.00

30 minutes 5.50 0.30 0.25 2.00 10.50 7.50

1 hour 10.00 0.60 0.75 2.00 21.00 15.00


Assuming an EUR15 rental fee (low extreme of the range), 10 minutes time required to reach the office and 200 working days, the annual cost of a free floating e-scooter would be EUR1 thousand, higher than an yearly subscription to public transport, for instance, in Milan (EUR330 for urban area), and simply not comparable to the EUR136 needed for an electric bike on an yearly basis. But the revenue-cost analysis captures just a fraction of the overall figure and misses the weak point of the story: current e-scooters have a lifespan of just a few months due to heavy usage (originally designed for private use only) and vandalism. Therefore, given the 4 months payback period estimated above, in


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most cases the breakeven point is barely reached. However, dockless scooter companies are already solving the issue by rolling out new, more durable, powerful, and longer-lasting than previous versions scooters in the next months. Bird, for instance, will launch a second generation of its Bird One model, adding anti-tipping kickstands and anti-puncture tires and claiming an industry-leading battery. These improvements should increase the scooters lifespan of several providers to at least 10 months; taking into consideration also the potential economies of scale deriving from the increasing production, the profitability of e-scooters is going to increase, overcoming breakeven in the near future.

Second issue: Legislation and safety

As stated by the Executive Director at European Transport Safety Council (ETSC), “the rapid rise of e-scooters, especially through sharing schemes, has taken policymakers and city authorities by surprise”. E-scooter companies are under fire for moving too fast and placing the burden of safety on cities and riders. Despite some actions taken by these companies to prevent casualties (free helmets distribution, in-app safety tutorials and videos and features like dual suspension and extra rear brakes), e-scooter injury rates are still high with more than ten death already registered just in Europe. These accidents led European countries to define specific regulatory frameworks for micro mobility solutions, which vary across different countries. Unexpectedly, Italy has been one of the last European countries to define such framework, establishing a strict two years pilot period valid only in urban areas with the following rules:

Monowheels and hoverboards are permitted only in pedestrian zones and areas with speed limits of under 6 km/h. Segways and e-scooters can also circulate in pedestrian zones, always within the limit of 6 km/h, but will also be allowed on footpaths and cycle paths, in cycle lanes, in zones and on roads with a speed limit of 30 km/h, at speeds of no higher than 20 km/h. In any case, these devices have to be fitted with a speed regulator that can be adjusted according to the speed limits in force;

It is mandatory for scooters and Segways to have horns; to circulate after dark and before first light, all devices must be equipped with front lights and retroreflectors. In their absence, they will have to be pulled or transported by hand;

All devices can only be used by adults, while minors of 14 and above can use them only if they have an AM license, the permit required to ride 50 cc motorcycles. Finally, it is forbidden to carry passengers or pull anything behind.

These strict measures are explained by the acknowledged Italian traffic habits and the delay of e-scooters debut in Italian cities (in Milan are currently operating six international startups): Italian regulators had the time to see the solution adopted by their neighborhood and opted for a precautionary approach.

Third issue: Consolidation ahead

Currently e-scooters providers are willing to reach breakeven or even lose money in order to put their devices in the highest number of streets of US and European cities, aiming to increase their market share while waiting for the newest generations of scooters to become profitable. However, the number of competitors continues to be one the biggest challenge for all groups involved. As the number of e-scooter providers rises, it will become more difficult for such companies to differentiate themselves: consumers regard e-scooters as a commodity, so they typically pick the closest one available, not perceiving any significant difference among different devices.


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With differentiation being minimal, and as marketing and R&D expenses are going to rise to build consumers’ brand loyalty, we believe that the industry only has room to shrink, particularly as more prominent names like Uber and Lyft begin to invest. In line with this consideration, the industry leader Bird recently announced its acquisition of competitor Scoot for an estimated USD25 million. In conclusion, from the consumer stand point once the durability issues will be sorted out (which doesn’t seem unthinkable in our view) and within the legislation boundaries, these products will have a place on the market. However, from the producer point of view, the business could be loss-making for years. Only after a winner has emerged, following a long-lasting consolidation, this layer could make money. The issue in our view in fact, is that producers will not sell to customers but to app operators (i.e. is a B-2-B model and not B-2-C).


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Focus on: Alternative Fuels

Despite the enormous amount of money invested (or to be invested…) into electric engines, there is no unanimity on the idea that this will be the best or the only possible choice for the long term. Some industry participants do not see electric as the end point when different factors are taken into the equation:

Geopolitical: electric propulsion was “launched” by Chinese car makers/government and this probably has to do with the fact that the technological gap with Western makers on ICE engines was too wide to be closed. Furthermore, the owner of the majority of the raw materials needed for electric batteries is the Chinese government itself;

Disruption: the change required in Westerns’ mobility habits, in the refueling stations networks, in adapting/converting the circulating park would be enormous. Some believes that bridge technologies and the improvement of current ICE engines while waiting for the perfect long term solution would be better than electric.

Furthermore, the options in terms of propulsion changes depending on the sector we are looking at: choices on trucks, tractors and 2 wheelers are based on different criteria than cars. Last but not least, whichever will be the end solution it would require a transition period (which can be as long as 10/20 years) where other technologies could be used on a standalone basis or overlapping the long term one. In our view gas will play a role in the next decades and hydrogen will be a key “fuel” for the electric batteries. For all these reasons, in this chapter we will examine some options coming from alternative fuels. A list of interesting alternative fuels can be extrapolated by a slide presented by CNH (investor day – 3 September – New York):

Figure 35 – Well-to-Wheel (WTW) GHG emissions (CO2 g/km)


We believe that a brief summary of these alternative fuels (which basically we would complete by adding hydrogen) could be interesting:

Bio-Diesel (Hydrotreated Vegetable Oils): Hydro treating of vegetable

oils or animal fats is an alternative process to esterification for producing


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bio based diesel fuels that do not have the detrimental effects of ester-type biodiesel fuels, like increased NOx emission, deposit formation, storage stability problems, more rapid aging of engine oil or poor cold properties. One liter or gallon of HVO can power a vehicle about double the distance compared to an ethanol based fuel such as E85;

Compressed Natural Gas: composed exclusively by methane reduces

CO2 by more than 20% compared to petrol and PM/NOx up to 99%. Refueling infrastructure is widespread in Europe, India and Russia;

Liquefied Natural Gas: is obtained through CNG liquefaction (a process

that burns CO2), and needs to be stored at -160°. It allows efficient transportation so to make gas available in regions not reached by pipelines. Given its energy density is the preferred choice for long-range transportation;

Municipal Waste: The decomposition of organic waste in landfills

produces a gas, which is composed primarily of methane. Landfill gas can be recovered and utilized;

Synthetic Natural Gas (also known as Substitute Natural Gas or SNG):

can be produced from fossil fuels such as lignite coal, oil shale, or from biofuels (when it is named bio-SNG) or from renewable electrical energy. In the latter, it is obtained through the electrolysis of water. This process is CO2 negative (i.e. not only it does not create CO2 but also it consumes it during the production process. However, the production process is extremely costly in terms of electricity requirements).

Is gas an answer? For passenger cars probably not in the long run, for

trucks it is a viable mid-term bridge to hydrogen.

The EU has agreed to cut its greenhouse gas (GHG) emissions by at least 80-95% by 2050 and was the driving force behind the Paris Agreement which requires net zero emissions by the middle of the century. While gas, by definition, is not a carbon-free energy sources regulators and governments are considering what role gas could play in the long term and if it can help in decarbonizing transport in the medium term, as a bridge towards new forms of zero-carbon energy sources. The EU and several national governments support the use of methane in transport through regulations, tax breaks and subsidies. The gas industry - which is faced with stagnating or declining demand in other sectors in Europe – sees transport as a major growth market. CNG and LNG enjoy tax rates below the EU minimum in many EU countries, and well below the equivalent tax rates for diesel (on average for EU countries 9.51€/GJ or 76% lower than diesel and 16.21€/GJ or 85% lower than petrol). Italy is the country with the highest penetration of gas-powered vehicles and it consumes 60% of the methane used in European transport and accounts for 68% of CNG car sales. Snam (the leading gas utility in Europe) is aggressively deploying a plan to increase the number of refueling stations: in June 2019 it announced 101 new recharging points. Its business plan included also an investment of EUR50 million to realize 4 plants to liquefy gas and for the transportation finalized to the residential, transportation and industrial market segments.

The debate is open and we found different views within industry players, probably also biased depending on their exposure to gas or to electric. The main points of discussions are: Biomethane and power-to-methane can have (significantly) lower GHG

emissions than fossil gas; However, sustainable feedstocks for biomethane (wastes, residues) are very

limited right now and the question is if they could be sustainably scaled. According to “Transport & Environment” (a European federation whose mission is to promote a transport policy focused to sustainable development)


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assuming the maximum sustainable potential is produced and all of it is allocated to transport, biomethane could only cover 6.2-9.5% of transport’s energy needs;

Currently, only around 4% of gas consumed in the EU is renewable, and this is mainly produced from crops such as maize. The gas grid has just a 0.5% share of renewables. Less than 1% of biogas produced is currently used in transport.

In our view the main advantage of the current solutions for gas-mobility are: It is a technology which is ready-to-use for OEMs; It helps OEMs to immediately reduce emissions; It has a favorable TCO, so it is appealing for customers, above all if

professionals; A car can be retro-fitted (i.e. this technology is available also to the circulating

car park) thus speeding up the emission reduction. The main issue we see is that it is not clear if gas will be the end solutions and, as such, players (OEs, infrastructure operators, regulators) are not fully committed to ramp-up investments above all when starting from scratch. Other critical success factors that will drive the adoption are, in our view: OEMs offering: the number of models gas-powered is increasing but more

needs to be done: TCO: professional customers will continue to compare TCOs for different

technologies; Oil price: TCO comparison is more favorable to gas as oil price goes up and

vice versa;

Distribution infrastructure: availability/infrastructure is a fundamental element to enable a wider gas-adoption.

For sure gas technologies, like all the other technologies dealt in this report, need

to be improved. The scale of this improvement will drive long-term adoption. Currently gas penetration for passenger cars is quite low (1.7% in Western Europe in 2Q 2019) but we expect that starting from 2020, as a consequence of more stringent emission limits, it will grow. We expect it to reach the 5% threshold by 2025. As for Medium-Heavy trucks penetration in Europe is now around 2% and we expect it to reach the 20% mark by 2022. Growth should be sensible also in China, India and Russia although the technological specifications of the vehicles and the average price are well below the European ones (making those market somewhat less attractive/profitable for the time being). In this report we initiate the coverage on CNH, which is heavily involved in gas both for trucks and tractors, for specific info see the company report. Another company we found deeply involved is Landi Renzo, which is a component supplier in the area of LPG/CNG while studying hydrogen. The company is also active in building/growing the refueling infrastructure through its associated company SAFE & CEC.

Gas tractors: Europeans have a technological advantage

As we already said in the chapter on electric vehicles, an electric tractor is not a solution explored by any of the few industry players available nor by startups we are aware of. The average weight of a tractor coupled with the space that a battery should need seems to be the main reason to do not explore this option. For farmers gas instead would have the advantage that it could be produced from manure, an energy source that can be defined “in-house” and at zero cost. Considering that the gas propulsion technology is not very well developed in the


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US and that, out of the main three players (Deere, CNH and AGCO), CNH is the only one with European roots and has a strong foothold in this technology, we believe it has a significant competitive advantage. In fact, at its recent investor day (3 September 2019) it stressed to be the first player in the world to begin offering a CNG/LNG tractor as an alternative to diesel:

Figure 36 – CNG/LNG tractor – How circular economy could work in agriculture

Source: CNH Industrial

Obviously, things are not clear-cut also in this case: Methane is a potent greenhouse gas considered some 86 times more powerful than carbon dioxide over a 20-year time horizon, according to the USA Intergovernmental Panel on Climate Change. And agricultural animals—mostly dairy cows—are major source of methane, accounting for 22.5% of all methane released from human activities in the U.S., according to Environmental Protection Agency’s 2016 greenhouse gas inventory. Two ways of reading it (according to what it is the public debate on the topic in USA, where the largest farmers are and talking about the major exporter of agricultural commodities):

The pro-manure gas view: if we are thinking about farms that are already creating these methane emissions – which is a really potent climate pollutant – we see capturing those emissions and generating a revenue source for farmers as a really positive thing;

The “against” view: the dairy produces air pollutants, including particulate matter and volatile organic compounds, and water pollution. Cows also emit enteric methane—gut gas escaping primarily through belches, which amounts to about half of bovine methane emissions. Adding biogas to the pipeline would increase reliance on fossil fuel infrastructure, and selling offset credits would make it easier for other polluters to avoid reducing their emissions.


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Hydrogen: renewed interest on the technology after years of oblivion Fuel cells use hydrogen to create electricity for mobility and, from many, is considered the fuel of the future and a less impacting alternative to battery electric vehicles. The main advantages of hydrogen are:

Hydrogen gas does not contain any carbon and it is therefore the most efficient fuel for de-carbonization;

It can be produced using renewable energy (i.e. water electrolysis), and used as a fuel for transportation and energy production In terms of power/kg is 236 better than Li-ion batteries with its 40,000 Wh/kg rate);;

Stored in compressed form, it is a very efficient mean of conservation –and transport –of energy.

In 2018 there were 11,200 fuel cell passenger cars worldwide, more than half of that park was located in USA (6,200 cars) mainly in the state of California. Other countries with notable FCEV passenger car deployment include Japan and Korea. Europe lags behind with France and Germany reporting the highest stock.

The main limit of this technology is, as far as cars are concerned, the cost which is

way above that of hybrid vehicles (which, in turns, is higher than that of petrol). According to Toyota the price of fuel cell cars will match those of hybrids within 10 years. Also for the consumers hydrogen is more expensive, something in the 9x region (comparing a Model 3 with a Toyota Mirai, a similar

500km range needs $85 for the Mirai vs. $11 for a Tesla). The Fuel Cell technology has been used in various transport application like buses and Trucks. Heavy Duty Fuel Cell Vehicles are electric vehicles with range & fueling time equal to diesels today, according to Nikola (which produces only electric vehicles). Hydrogen has the same benefits of electric vehicles as they use the same electric motors (more horsepower, instant torque, zero emissions, etc.) while eliminating many issues derived from battery electric vehicles (long recharge times, limited range, cold start, added weight, etc.). In fact: In terms of refueling time hydrogen heavy trucks recharge in less than 15

minutes; The range is anywhere between 1,000/1,200 km; Weight: long range electric truck batteries are heavy and don’t start at low

temperatures. Hydrogen offers a significant weight advantage over comparable battery electric vehicles.

The limits of hydrogen are, in our view: The cost of the technology (including transport/logistic and storage), which

given the extremely low volumes, right now makes unfeasible any payback period comparison;

The refueling network (according to Nikola there should be 700 stations in the USA by 2028);

The fact the electrolysis process is energetically inefficient (the processes loses 30% of the input energy. Steam reforming and other production processes are inefficient too).

For these reasons, we believe that hydrogen for trucks would need at least ten years to become a contender.


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Focus on: Connected Vehicles

Vehicles currently on the market already have a certain degree of connectivity with the outside world and this is going to increase driven by two major forces, in our view: OEMs want to increase the share of sales coming from services and data

monetization; Connectivity is strictly interrelated with Autonomous Driving and Sharing. Nowadays vehicles are connected mostly to satisfy the needs in terms of safety/security (think about tyres pressure and wear and load), infotainment (music, tv, etc) and, for professionals like for instance farmers, to improve efficiency (weather, rainfall, soil scanning systems):

Figure 37 – Connected tractors and what their tasks

Source: CNH Industrial

Tomorrow the TaaS evolution will be mostly driven by services sold to connected cars and/or by services enabled thanks to connectivity (Autonomous Driving and Sharing). While the latter represents a risk for incumbent operators (we will deal with it later), the increase in the share of revenues coming from services is a plus, and is taking place as we speak. Data monetization is included in the benefits that OEMs and service suppliers will derive from interconnected cars: an Autonomous car, for instance, produces 40terabites of data in 1 hour. Not all of these data leave


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the car, but a bit will do and the revenues attached to selling this data to various users will be massive. Example of service enabled by an increase in connectivity capabilities is listed in the following graph and includes EV charging points, usage-based insurance, real time coaching on top of the well-known media streaming and navigation, traffic and weather:

Figure 38 – Connected cars and the TaaS as revenue source

Source: FCA

On top of cars, trucks and tractors connectivity is affecting also 2 wheelers. For instance Energica signed a partnership with Octo Telematics to develop services like real-time performance monitoring that will serve the OE, the owner (studying and reviewing the routes and roads travelled will be a plus for enthusiastic drivers).

Smart cities and the 5G: the Grand Slam

Let’s imagine for a moment that traffic lights’ sensors will detect traffic flows on the entire network so that traffic controllers, with a “clic” could decide where to direct flows and how long the green light should be. In the same city the underground trains, the buses and tramways could be speed up or slowed down depending on how many passengers are moving and based on where they are going. Waste management too will be impacted: algos could estimate how many garbage has been created in a specific bloc or even building and modify the collection of it. The same goes for the urban lighting, gas and heating. Hospitals will be interconnected and doctors will receive already from the ambulances the first detections through high-definition images. Police too could act in a targeted manner thanks to video cameras spread at every corner. Corporates and households will rationalize their processes or consumptions. The entire system could be more efficient saving money and resources. Now, as of today there are some cities, like Singapore, that moving into this direction and began by using ERP (Electronic Road Pricing System). It is used in managing road congestion and, based on a pay-as-you-use principle, motorists are charged when they use priced roads during peak hours. ERP rates vary for different roads and time periods depending on local traffic conditions. This encourages motorists to change their mode of transport, travel route or time of travel. 5G will make it much easier: a network able to generate and send, in real time, unthinkable quantity of data. 5G is a standard for mobile but to work properly it will be inter-connected with the landline thanks to thousands of antennas and kilometers of fiber optic. This infrastructure should send data to a centralized datacenter which, with the support of AI, could “order” what to do to many other devices installed. All this in real time.


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The cyber-security issue is self-evident: all the devices involved (router, antennas, etc), if properly instructed or designed, could send precious data to unwanted organization.

Driverless…or driving less?

The efficiency and efficacy of government and local municipalities in implementing this change will be key in assessing the results, which can be twofold: an improvement or a worsening of current living conditions:

In the bull case fleets of autonomous buses and shuttles effortlessly navigate through city streets to their designated stops. Ridesharing services dispatch shared autonomous vehicles (AVs) to pick up multiple passengers traveling along similar routes. Robo-taxis drop off passengers at subway stops for the next legs of their trips. Some traditional car owners decide that they no longer need personal vehicles because shared-mobility AVs fulfill their needs. Road congestion drops because there are fewer vehicles.

Now imagine an alternative future in which everyone who once owned a traditional car instead has an AV. Many people without licenses also purchase AVs for their personal use, even though they haven’t had a car for years or never owned one. Passenger-miles traveled increase by 25 percent.1 AVs circle while waiting for their owners to finish shopping or running errands if no parking spaces are available, or else they run a variety of errands, ranging from delivering groceries to picking up dry cleaning, themselves. City streets become even more gridlocked.

Which scenario will emerge around the world is difficult to assess as of now and is out of the scope of this report that aims to understand the 5-10 years impact on the financials of the automotive industry.


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Focus on: Autonomous Driving and Sharing

The digitalization of in-vehicle consoles that we just described in the previous chapter on connectivity is a pre-condition for the development of AD which, in terms of revenue pool, is a phenomenon bigger than connectivity itself. The development that Artificial Intelligence has had in the past couple of years was the other driving force behind the idea of AD. This new way of using vehicles, in our view, was not born in carmakers’ mind but from tech giants like Apple, Google and UBER. We believe in fact that no OEM wants to auto-destroy its own market and that technological capabilities were not so strong in the sector. AD will support the birth of robo-taxi which, as we saw in graph 4, will be one of the biggest revenues sources in the sector (and for sure the fastest growing one). AD will also change massively the component making industry in two ways:

It will reduce the average life of a car by increasing its usage (as can be seen in the following graph). The average age of the vehicle fleet in the US hit the 11.8 years in 2018 (hitting a record 278 million, source IHS Markit).

It will add a whole lot of components, mostly related to electronics rather than mechanic (as can be seen in graph 40):

Figure 39 – Car average life and usage in current and sharing mobility


Figure 40 – Autonomous car – System components

Source: FCA

Current mobility Sharing mobility

Vehicle utilization Vehicle duration


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However, we believe that, for technical and regulatory reasons, we will not see a share of AD cars much above 5% before 2040. The coming together of autonomous driving and shared mobility is expected to result in the convergence of e-hailing and car sharing business models. In this chapter we will deal with AD for cars but also for trucks and tractors while 2 Whelers AD is not envisaged yet.

Tech giants are not interested in selling cars: they go after miles travelled

Let’s assume for a moment that you are the CEO of a >20% EBIT margin company with sales growing visibly in the double-digit area. You generate so much cash that you don’t really know what to do with it. Why should you want to enter a highly competitive sector with EBIT margin in the single digit area and a return on capital employed below the cost of capital? There are only two possible option: the first one is that some sort of schizophrenia is hanging over you. The second option is that you do not really want to enter the market in its current form. Assuming we are dealing with rational people, the same way Adam Smith and David Ricardo used to think, we believe that tech giants are interested in the fact that, with autonomous cars, what used to be your driving time would become free time! Every year around the world people book an astonishing 10 trillion miles travelled (source: World Bank). According to Deloitte (“How transportation technology and social trends are creating a new business ecosystem”) the cost-per-mile travelled is around USD0.97 (and is due to decline to USD0.31 with the combination of AD and sharing). But what it is worth the, potential, revenues stream attached to this time? Whatever the value assigned to 1 hour of our time would be the end result will always be that this market is huge. Assuming in fact an average speed of 25 miles/h would imply, at worldwide level:

600 billion hours spent inside a car;

400 billion passengers, assuming what is thought to be the average occupancy rate (1.5 person per car).

AD growth comes with other positive factors attached, which will support the story

telling of this innovation: Cars nowadays are used 1 hour a day, remain empty 96% of the time and

the occupancy rate is 1.5 passenger out of 5 places (implying a 1% utilization rate);

The average petrol consumption in USA is 450 gallons per person per year. The consumption will remain more less unchanged if the occupancy rate would increase (assuming no major changes in the miles travelled);

Traffic fatalities have reached the 1.3 million people mark every year. This number, if anything, is probably understated due to non-reporting in under-developed countries. Roland Berger assumes a 50% increase in road safety with AD;

Insurance overall costs should go down, probably not a good news for the insurance industry but surely a good news for consumers.

Another key source of revenues for AD vehicles operators (whomever they will be, car makers, ride handling, etc.) is the monetization of data: today a mobile phone produces 40 gigabits per year of wireless data, an AD car produces 40 terabytes of data in 1 hour. Not all of these data leave the car, but a bit does.


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Business models: from ownership to user-ship

While the alternative some years ago was between owning and not-owning a private car (with the alternative to do not own a car was public transportation), when AD will be ready there would be 3 different ways of moving from A to B as can be seen in the next graph. Full ownership will be mostly driven by status (and will encompass, we believe, premium automotive brands) at the opposite spectrum, full user-ship will satisfy the need to move from one place to the other regardless of the vehicle brand:

Figure 41 – Customers purchasing habits and how they could evolve

Source: Frost & Sullivan (Global Autonomous Driving Outlook)

In terms actors the business models could be: Vehicles suppliers (i.e. OEM that don’t manage any service but prefer to

be branded or un-branded supplier to other actors); Suppliers (software, software platforms, cybersecurity, etc); Fleet managers; App manager/Service provider;

A single company may play more than one role (UBER can be both the fleet manager and the app manager/service provider). As for capital intensity involved, the business models could be split between:

Asset-free models: Platform/software operators, Ride-hailing, P2P car sharing, Carpooling;

Asset-managed models: managed fleet car sharing, subscription service/rentals.

We do not go as far as estimating the number of vehicles that will reach Level 5 AD but we point out that:

Market research institutes see it anywhere between 3% and 4% by 2030;

The metric unit has to change in the case of robo-taxi and hailing services: it will not be the number of cars that would matter but the revenues associated with the service (which will give an idea of how many opted for user-ship instead of ownership).

Autonomous trucks: 16% CO2 reduction with “Platooning”

Autonomous trucks are at the top of the pyramid for disruption in trucking, as they address the single biggest issue that the industry faces — the cost of employing drivers. Getting drivers out of trucks would be revolutionary from a cost perspective, as drivers are typically trucking companies’ largest operating expense, and we estimate a commercial level-5 autonomous truck would produce nearly 50% savings per mile (versus current long-haul tractors). The enabling factor obviously was technology and, as we already said, AI. Nvidia, for instance, is collaborating with Volvo trucks in order to co-develop an AI


52

software for AD. The deal to develop a self-driving system for commercial vehicles is a boost for Nvidia, which parted ways with Tesla last year. Options we are not even thinking about may open for business operators in terms of reducing not only the drivers cost but also the dependency from them which, in some cases, may be a growth-limiting factor. Domino Pizza for instance said that it started a self-driving pizza delivery test in Houston. The test is scheduled to start late this year and could expand in 2020. Domino’s has more than 6,000 restaurants in the U.S. and, with a tight labor market, the company is experiencing a driver shortage. We believe the financial benefits achieved by trucking companies operating level 3– 5 autonomous trucks will fall into four main categories: Safety: Insurance-related cost savings would come from an expected

reduction crash frequency, partially offset by an increase in crash severity (due to more expensive equipment);

Driver Headcount Reductions: Headcount reductions are trucking companies’ largest source of financial savings from autonomous trucks, but in a scenario where autonomous trucks are widely used by commercial fleets we assume all remaining drivers are paid more as they likely would perform more specialized tasks;

Fuel: We estimate that automated driving systems will be able to reduce long-haul trucks’ fuel consumption by 5% through fuel-efficient driving techniques alone, with potential additional savings coming from tractor design upgrades and the inclusion of “platooning” technology, which utilizes some autonomous driving features and requires vehicle-to-vehicle (V2V) technology;

Productivity Enhancements: We believe level 4 and level 5 autonomous trucks are capable of significantly increasing carriers’ capacity, given that they can theoretically operate up to 24/7 (conditions permitting) if a driver is not in the truck and remote control is not being used.

While full autonomous driving is far away (Step 4, if we want to compare it with Levels of cars’ AD) platooning (Step 1 and 2) is already available on same brand trucks and may be close on different brands trucks:

Figure 42 – Trucks Platooning - Definitions in Europe

Source: ACEA

Truck platooning is the linking of two or more trucks in convoy, using connectivity technology and automated driving support systems. These vehicles automatically maintain a set, close distance between each other when they are connected parts of a journey, for instance motorways. The truck at the head of the platoon acts as the leader, with the vehicles behind reacting and adapting to changes in its movement – requiring little to no action from drivers. In the first instance, drivers will remain in control at all times, so they can also decide to leave the platoon and drive independently. Taking into account also regulation, multi-brand platooning across countries will be possible in EU after 2023 while full AD trucks will be available a year later:


53

Figure 43 – Trucks Platooning – Introduction roadmap in Europe

Source: ACEA

The advantages of truck platooning are: CO2 emissions reduction up to 16% for trailing vehicles and up to 8% for the

lead vehicle (thanks to the air-drag friction reduction). This according to the recent ITS4CV study by Ertico);

Safety: the trucks following the lead only need one-fifth of the time a human would need;

Efficiency: platooning optimizes transport. It allows driver to undertake other tasks (administrative or making calls).

Autonomous tractors: the first one to come to market

Given that tractors operates mostly in low-human density areas (fields) we believe those kind of vehicles will be the first to come to market, using technologies similar to those of AD cars. Autonomous tractors have been in development since the idea of precision agriculture came about in the 1980s. To try and save fuel and become more efficient, growers began using GPS technologies to guide their tractors across fields. As new technologies made wireless communications easier and more reliable, these first steps toward self-driving tractors laid the groundwork for the autonomous vehicles that are now widely used in the large-scale farming industry. While completely autonomous tractors have not yet been approved for use in the field, that's not stopping manufacturers from developing them. As a result of the precise control that autonomous tractors and farm equipment will allow, growers can continue working well into the evening. Even when it’s too dark to see clearly, the sensors in place can deliver straight rows and accurate planting, which is especially important during the critical spring months. Growers can see a greater flexibility in managing time-sensitive growing tasks while reducing stress for workers. Not to mention, the guidance equipment used to navigate fields gives more accurate information during dense fog, dusty and windy weather and other conditions that can normally affect drivers’ visibility. Case IH presented, back in 2016, its Autonomous Concept Vehicle, we are not aware of the planned commercial availability of the product.

How AD and human-driven vehicles will co-exist?

On top of the regulation gap, a major question has to do with how the co-existence


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between AD and human-driven cars will play out. Regardless from the introduction date of AD for sure there will be a period (as long as several decades) in which the two technologies will co-exists. How this could be done? An idea is to have different lanes for AD and “human” cars. These both within cities and on highways. Some of that is already reality: China is building a highway that will accommodate lanes for AD (the future highway connecting Beijing and the Xiongan New Area). The highway’s creators are going to give it dedicated lanes for exclusive use by cars operating autonomously. It is supposed to have as many as eight lanes, two of which will solely accommodate self-driving automobiles. The highway’s length is planned to be 100 kilometers, and the road will have the imposed speed limit of between 100 and 120 km/h. The traffic infrastructure will be tasked with collecting data on vehicles moving up and down the highway. The data, in turn, will be used for improving driving safety and the overall traffic flow.


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APPENDIX A – Definition of Autonomous driving levels Figure 44 – Description of vehicle autonomy levels

Source: BMW

APPENDIX B – A brief description of CESI

This report has been developed with the support of Cesi, in particular for all the themes centered on energy. Cesi is an independent center of expertise and a global provider of technical and engineering services to customers throughout the energy value chain, including business and technical consultancy, engineering and operational support. It also act as owner's engineer and provide qualified third-party opinions to power utilities worldwide. Through modern testing facilities located in Milan, Berlin (IPH GmbH) and Mannheim (FGH GmbH), Cesi is among the leading international organizations providing measurements and inspection, testing & certification and design review services to the global power industry. Cesi has a network of more than 1000 highly experienced professionals around the world, working from offices and through representatives in 35 countries, dedicated to delivering customized solutions. These include providing innovative, yet practical, answers to meet the energy-related challenges of modern equipment and processes. The company has 3 business lines: Testing & Certification, Consulting, Solutions & Services and Engineering Environment. CESI was founded in 1956, and has more than 50 years of experience in testing and consulting services for the electrical industry. Its shareholders are Enel, Terna, Prysmian, ABB. Toschiba and Sediver.


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APPENDIX C - GLOSSARY

BEV: Battery Electric Vehicles Bio-diesel: Hydrotreating of vegetable oils or animal fats CASE: Connectivity, Autonomous, Sharing and Electric CNG: Compressed Natural Gas CPO: Charging Point Operator ICE: Internal Combustion Engine LEZ: Low Emissions Zones LNG: Liquified Natural Gas MSP: Mobility Service Provider NOx: Nitrogen Oxide OEM: Original Equipment Manufacturer PHEV: Plug-in Hybrid Platooning: Trucks that travel as a convoy Rare-hearths: prestigious raw materials used in electric batteries Robo-taxi: UBER-like sharing services where the car is unmanned Synthetic Natural gas: gas produced through electrolysis of water TCO: Total Cost of Ownership

1

CNH INDUSTRIAL

Initiation of Coverage NEUTRAL

15 October 2019 – 5:30 PM MARKET PRICE: EUR9.7 TARGET PRICE: EUR10.30

Capital goods

Data

Shares Outstanding (m): 1353.8

Market Cap. (EURm): 13,132

Enterprise Value (EURm): 14,624

Free Float (%): 72.9%

Av. Daily Trad. Vol. (m): 3.9

Main Shareholder: EXOR NV (27.2%)

Reuters/Bloomberg: CNHI.MI CNHI IM

52-Week Range (EUR) 7.6 10.5

Source: FactSet, UBI Banca estimates

Performance

1m 3m 12m

Absolute -4.2% 4.6% 0.3%

Rel. to FTSE IT -3.7% 5.5% -13.4%

Graph aerea Absolute/Relative 12M

Source: FactSet

Analysts



www.ubibanca.com/equity-research

Future-ready but AG cycle is weak

We initiate the coverage on CNH with a NEUTRAL rating based on the conviction that the company is in the position to benefit from the mobility of the future but that the visibility on the AG cycle is very low. CNH has a stronghold in LNG/CNG engines while heavily involved in developing alternative fuels, autonomous driving and connectivity. The latter will increase the weight of services and aftermarket revenues and this doesn’t seem to be included in consensus figures (UBI est. 10% above). Furthermore, CNH end-markets are more protected than cars from the entrance of tech giants and the company sell to professional operators which are mostly driven by Total Cost of Ownership and should accept price increases to satisfy their future mobility needs. The company recently announced the intention to spinoff its on-highway business: while this doesn’t bring upside due to multiples re-rating, in the long run will increase the strategic focus and could be preliminary to M&A. Our target price of EUR10.3 offers limited upside.

> LNG/CNG trucks registrations doubled YTD in 2019. Fuel is the largest

cost item for fleet operators (around 30% of TCO) and several OEM

believes LNG/CNG is the winning technology for trucks for the next 10

years. Although the overall share is still low (2%, from 1% the year before)

the sudden growth was such that we forecast the segment to represent

15/20% of the market by 2024 (also thanks to government incentives).

> IVECO is the European leader in LNG/CNG trucks. IVECO can boast a

>50% market share in the European LNG/CNG segment, in which Scania

and Volvo have recently entered. Range is not an issue (IVECO S-WAY

Natural Power offers a range of 1,600 Km with 460hp) while the initial

extra-cost is compensated by a TCO 20% lower. The order book, as of

2Q19, was +70% YoY (one out of five heavy trucks produced). IVECO

has a leading position in electric buses too, mostly with its Heuliez brand.

> Europeans are ahead on LNG/CNG vs. Americans. This will help also

on tractors. Some farmers are using the manure to produce bio-gas to

fuel their tractors. CNH is already offering on-road tractors and will

expand to off-road soon. We believe that Americans are way behind on

gas-powered engines and this is an advantage for CNH.

> We expect a 10.8% ‘18-22 Net Profit CAGR, and a flat AG market in

‘20. We are 10% above consensus and 3% below guidance (’20 EPS).

> Main risks. Trade wars; regulations changes, adverse weather.

Financials

2018 2019E 2020E 2021E

Revenues (USDm) 29,706 29,360 30,109 31,213

EBITDA (USDm) 2,671 2,639 2,787 3,007

EBITDA margin (%) 9.0% 9.0% 9.3% 9.6%

EBIT (USDm) 2,101 2,032 2,203 2,424

EPS (USD) 0.79 0.85 0.93 1.10

CFPS (USD) 1.56 1.50 1.33 1.42

DPS (USD) 0.198 0.232 0.275 0.325

Source: Company Data, UBI Banca Estimates

Ratios (priced on 14 October 2019)

2018* 2019E 2020E 2021E

P/E (x) 15.1 12.5 11.4 9.7

P/CF (x) 7.6 7.1 8.0 7.5

P/BV (x) 3.2 2.4 2.1 1.8

Dividend Yield 1.7% 2.2% 2.6% 3.0%

EV/EBITDA (x) 6.8 6.1 5.7 5.1

Debt/Equity (x) 0.12 0.05 0.01 (0.03)

Debt/EBITDA (x) 0.22 0.12 0.02 (0.09)

Source: UBI Banca Estimates * based on average 2018 prices

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10

11

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CNH Industrial NV FTSE Italia All-Share

CNH INDUSTRIAL 15 October 2019

2

Index

1

INVESTMENT CASE

4

2

SWOT ANALYSIS

5

3 FINANCIALS 6

3

VALUATION

10


3

Key Financials

(USDm) 2018 2019E 2020E 2021E

Revenues 29,706 29,360 30,109 31,213

EBITDA 2,671 2,639 2,787 3,007

EBIT 2,101 2,032 2,203 2,424

NOPAT 1,684 1,614 1,745 1,885

Free Cash Flow 606 616 685 791

Net Capital Employed 23,710 24,143 24,259 24,383

Shareholders’ Equity 5,068 5,976 6,953 8,094

Net Financial Position 600 314 42 (277)


Key Profitability Drivers

2018 2019E 2020E 2021E

Net Debt/Ebitda (x) 0.22 0.12 0.02 (0.09)

Net Debt/Equity (x) 0.12 0.05 0.01 (0.03)

Interest Coverage (%) 7.3 8.6 9.2 10.2

Free Cash Flow Yield (%) 3.8% 4.3% 4.8% 5.5%

ROE (%) 21.1% 19.3% 18.2% 18.3%

ROI pre-tax (%) 41.5% 34.0% 31.7% 29.9%

ROCE (%) 20.6% 18.0% 17.9% 17.7%


Key Valuation Ratios

2018 * 2019E 2020E 2021E

P/E (x) 15.1 12.5 11.4 9.7

P/BV (x) 3.18 2.42 2.08 1.78

P/CF (x) 7.6 7.1 8.0 7.5

Dividend Yield (%) 1.7% 2.2% 2.6% 3.0%

EV/Sales (x) 0.65 0.59 0.56 0.53

EV/EBITDA (x) 6.79 6.10 5.67 5.14

EV/EBIT (x) 11.45 10.39 9.23 8.03

EV/CE (x) 0.77 0.67 0.65 0.63

Source: Company data, UBI Banca estimates * Based on 2018 average price

Key Value Drivers

(%) 2018 2019E 2020E 2021E

Payout 25.2% 27.2% 29.4% 29.7%

NWC/Sales 6.1% 7.6% 7.6% 7.6%

Capex/Sales 2.0% 2.2% 3.5% 3.7%



4

INVESTMENT CASE

We are initiating the coverage on CNH with a NEUTRAL rating based on the

following:

The strong position the company gained overtime on CNG/LNG propulsion, a

small but fast growing segment of the European truck market and a promising

one on worldwide tractors;

The focus the company is putting in developing new technologies and

adapting to the mobility of the future (in particular in Fuel Cell trucks);

The self-help initiatives the company is aggressively pursuing;

The proposed spin off of the on-highway business which should increase

strategic focus and ease M&A;

All this balanced by the low visibility on the AG cycle…

Compounded by the trade war which sees in the agricultural commodities one

of the main threats that China could play against USA.

Our target price of EUR10.3 (or USD11.4 at the current exchange rate of 1.10) is

the average of different valuation methods:

A peer group comparison;

An EVA valuation;

A SoP which makes sense in this case in view of the proposed spin off.


5

SWOT ANALYSIS

Strengths

CNH is one of the two major worldwide player on AG (N.° 1 in Combines on a

WW basis, N.°1 in WE tractors and Latam Combines; N.° 2 in North American

HHP Tractors and Combines and in WE Combines) in a very concentrated

sector;

Strong market positioning in some key trucks segments: WE and LATAM

LCVs and Bus;

Strong and diversified product portfolio on powertrains, with an history of

delivering important innovations (common rail, direct injection, variable

geometry, hybrid natural gas, after-treatment systems; etc);

Management has a solid track record on cost optimization and on delivering

targets (above all those under management’s control);

Strong governance and clear incentives scheme;

Highly focused on ESG themes, one of the most useful “sustainability report”;

CNH is in an enviable position to further consolidate the market through bolt-

on acquisitions;

Having a long-term shareholder like Exor allows to weather short-term

turbulences to achieve long term strategic objectives.

Weaknesses

Profitability levels below peers in AG, CE and CV;

Delay in tackling the businesses portfolio lead to underinvestment in some

segments;

Below-the-line items, already reduced vs. the past, still contribute to earnings

volatility and lower visibility;

We perceive a certain level of operational and supply-chain complexity;

We perceive an overcapacity issue in certain segments.

Opportunities

Leadership position in CNG/LNG heavy trucks needs to be fully exploited to

improve brand positioning and price points;

US companies are lagging behind on gas-powered engines. This could be a

major competitive advantage on CNG/LNG tractors;

The spinoff of the “On-highway” from the “Off-highway” businesses will un-lock

value, currently trapped in the “conglomerate nature”;

In the past the company strategic focus was sometimes unclear in the past.

Management seems to be empowered to change.

Threats

Tariffs war is not under management control but could severely impact

farmers net income and, indirectly, AG machinery sales;

Adverse weather may impact commodities prices and farmers net income and,

indirectly, AG machinery sales;

Change in regulations, mostly on emissions, may adversely impact sales or

require higher investments.


6

Financials

We estimate the CNH Group to post:

Sales 2018-22 CAGR of 2.3% and of 2.6% for 2018-24;

EBIT 2018-22 CAGR of 6.1% and of 7.0% for 2018-24;

Adj Net Income 2018-22 CAGR of 10.8% and of 11.6% for 2018-24;

Our numbers are below company’s 2022 guidance (by 12.4% at Adj EPS level)

and 2024 guidance (by 21.3% at Adj EPS level). To put it simply we are not

factoring-in the USD700 million EBIT increase in 2024 vs. 2018 obtained thanks

to top line growth:

Figure 1 – UBI vs. Guidance

(USDmn) 2019 2022 2024

Guidance UBI UBI vs Gui Guidance UBI UBI vs Gui Guidance UBI UBI vs Gui

Sales - Industrial activities 27/27,500 27,474 0.8% 31,200 30,499 -2.2% 35,100 32,773 -6.6%

EBITDA Adj. n.a. n.m. n.a. 3,432 3,137 -8.6% 4,563 3,853 -15.6%

% n.a. n.m. n.a. 11.0% 10.3% -6.5% 13.0% 11.8% -9.6%

EBIT Adj. n.a. n.m. n.a. 2,496 2,157 -13.6% 3,510 2,671 -23.9%

% n.a. n.m. n.a. 8.0% 7.1% -11.6% 10.0% 8.1% -18.5%

EPS - Adj f.d. 0.84/0.88 0.85 -1.6% 1.4 1.2 -12.4% 2.0 1.6 -21.3%

Operating cash flow n.a. n.m. n.a. 2,000 1,952 -2.4% 3,000 2,570 -14.3%

Net (Debt)/Cash (200)/(400) -314 -4.3% 300 560 -46.4% 1,700 1,670 -1.8%

ROIC n.a. n.m. n.a. 16.0% 17.6% -9.2% 20.0% 18.2% -9.1%


We see the 2019-24 Business plan as a very interesting transparency exercise,

open and challenging. Overall our take is positive:

The financial metrics laid out are based on "mid cycle" industry volumes

reflecting 15-18 year average demand levels;

The “grow” target of 5% sales CAGR is more about regaining market share

and less about huge expectations for market growth;

The “perform and simplify” strategy together with the “Optimize and growth”

are underway with organization changes and, together with the 80/20 actions,

should deliver adj. EBIT growth of +400bps to 10% and adj. EPS of ~18%

CAGR;

The strategic initiatives mentioned in the previous bullet should result in a

smaller footprint with capital returns targeting a +600bps improvement in

ROIC to 20%.

A preliminary guidance was provided also on 2020 (USD0.95-USD1.00; consensus

is currently at USD0.84) which implies a nice 13.3% YoY growth vs. the FY2019

guidance (USD0.84/0.88).

Moving to the divisional target the majority of the growth should come from AG

(USD4 billion out of the USD8 billion sales increase in the 2018-24 period for the

group) while EBIT should more than double in CV (adding USD510 million) and

growth by 5x in CE (adding USD360 million):

AG is targeting a 5% sales CAGR, mostly thanks to market shares gains

(services driven by digital offerings, market share in Germany, plus cyclical ag

improvement). EBIT margin should grow by 500bps representing, in absolute

terms, the biggest contributor to the Group EBIT growth;


7

CE is targeting a 7% sales CAGR and a 9% EBIT margin (+570bps vs. 2018);

CV targets a 1% sales CAGR and a 380bps expansion in EBIT margin that

should reach the 7% level;

Powertrain is focused on increasing its propulsions portfolio as well as non-

captive sales. It targets a 5% sales CAGR and a 110bps improvement in EBIT

margin that should touch the 10% mark, after declining in 2022 from the

2018/19 levels.

At divisional level, our estimates are broadly aligned on AG and PWT but

significantly below on CV and CE. On those two divisions, while we project a nice

growth (>11% EBIT 2018-24 CAGR), we find difficult to assume:

For CV: such a high EBIT margin in a period of significant capex (peak margin

was a 7.7% in 2008 so difficult, but not impossible, to envisage a 7% in 2024);

For CE: such a significant revenues growth (peak revenues stood at USD5

billion in 2007 so low visibility of a USD4.6 billion number in 2024) and EBIT

margin (peak margin stood at 8.2% in 2007, difficult to have visibility on a 9%

in 2024) in a period of model line-up reshuffle.

In both cases, the majority of the improvement is defined as coming from self-help

(cost optimization, simplification, 80720, etc) and management has a solid truck

record in delivering on those topics. However, those measure delivers full benefits

when the top line is supportive. In case of a flattish top line cost optimization fail to

have a pass-through on EBIT but it is mostly given back to customers or suppliers.

Figure 2 – UBI vs. Divisional Guidance

(USDm, %) 2022 2024

Sales Guidance UBI UBI vs Gui Guidance UBI UBI vs Gui

AG 14,000 13,365 -4.5% 16,000 14,493 -9.4%

CE 3,800 3,277 -13.8% 4,600 3,407 -25.9%

CV 11,000 11,464 4.2% 12,000 12,057 0.5%

PWT 5,400 4,996 -7.5% 6,100 5,614 -8.0%

EBIT margin Guidance UBI UBI vs Gui Guidance UBI UBI vs Gui

AG 12.0% 10.8% -10.1% 14.0% 11.9% -15.0%

CE 6.0% 4.0% -33.3% 9.0% 5.0% -44.4%

CV 5.0% 4.0% -19.8% 7.0% 4.9% -29.6%

PWT 8.0% 8.5% 6.3% 10.0% 9.5% -5.0%


Despite the fact that our estimates are below guidance we still remain above

consensus:


8

Figure 3 – UBI vs. Consensus estimates

(USDm) 2019 2020

Cons UBI % change Cons UBI % change

Sales - Industrial ops. 27,370 27,474 0.4% 27,697 28,196 1.8%

Sales - group 28,190 29,360 4.1% 28,304 30,109 6.4%

Operating profit - Ind. Ops. 1,639 1,549 -5.5% 1,649 1,712 3.8%

% 6.0% 5.6%

6.0% 6.1%

Operating profit - Group 1,874 2,032 8.4% 1,967 2,203 12.0%

% 6.6% 6.9%

6.9% 7.3%

Net results - res. 2,235 1,135 -49.2% 1,920 1,265 -34.1%

EPS - reported 14.27 0.85 -94.0% 0.84 0.93 11.7%

Net (Debt)/Cash (293) (314) -6.6% (90) (42) 111.8%


Looking in more details at the short term, our estimates are above consensus

almost on all items (with the exception of 2019 EBIT for industrial ops) anywhere

between 1% and 10% and still reflects the mid-point of the guidance (thus implying

a strong 2H19 with a +3.0% YoY growth in group revenues as opposed to a -5.4%

posted in 1H19).

Our estimates are predicated on the back of the followings:

During 2Q19 call management confirmed that the North American row crop

market is weak due to a pause in demand originated from the trade war and

the consequent decline in purchases from China. Despite this backdrop,

industry fundamentals remain solid:

o The performance of the used equipment portfolio remained healthy

both in volumes and pricing terms;

o The US administration has released construction to access the 2019

farmers aid package that, together with the 2018 disaster relief

support, contributes about USD30 billion over the last two years,

helping to provide stability to farmer and to support the replacement

cycle that had started before the trade war erupted.

While EU tractors are up YoY, EU combines are suffering from the spill over

impact from extremely dry weather conditions in Central and Northern Europe;

In South America and Brazil particularly, farmers had a gap in funding

between the early run-off of their 2018 Moderfrota program and the 2019 new

program. The new plan for 2019/2020 has been announced at the end of June

and confirms similar support level to that of the prior one. We would anticipate

that there is demand that has been pushed out into Q3, that would have come

during 2Q19 otherwise;

On Construction, demand has been flattish to slightly negative due to a

slowdown in investments related to the overall macro-slowdown.

Public/infrastructure is doing better than residential but still, for the FY, the

indication is that production will be below retail;

Trucks have been performing well both in EU (mostly for regulatory reasons,

new requirements around trucking drive activity) and Brazil. Bus as well are

positive and expected to continue to be also in 2H19. The company lost

market share as a result of the re-focus towards more profitable products like

LNG/CNG vehicles. Deliveries in natural gas-powered engine represent

now one out of five trucks produced in IVECO Spanish facility;

We expect pricing to remain supportive in all divisions, also thanks to a


9

disciplined inventory management;

On the cost side, while cost optimization initiatives (the 80/20 program) will be

supportive, raw materials, tariffs and R&D spending should more than balance

the savings;

When talking about AG production levels management, during 2Q19 call, stated

that it expects:

To underproduce retail demand by around 10% in 3Q19,

To overproduce in 4Q19;

So to end the FY2019 with a “slight under-production retail demand”.

Lastly, here below we present our 3Q19 preview:

(USDm) 3Q18A 3Q19E YoY

Group Revenues 6,686 6,760 -1.1%

Operating profit 444 365 -17.8%

margin 6.6% 5.4%

Reported Net Income 222 193 -13.0%

Adjusted Net income 222 191 -14.0%

Net Cash/(Debt) -1,989 -2,008 1.0%


10

VALUATION

Our target price of EUR10.3 (or USD11.4 at the current exchange rate of 1.10) is

the average of different valuation methods:

A peer group comparison;

An EVA valuation;

A SoP which makes sense in this case in view of the proposed spin off.

Figure 5 – Summary Valuation (USD)


Upside to our rating/TP may be given by:

IVECO disposal before the spin-off: we believe this could be the case

because:

o Usually when a company plans some portfolio reshuffle (spinoffs,

IPO, etc) it signals the fact that the division is not 100% core and it is

exactly the time, for willing competitors, to present an offer. In this

specific case the timeline of the spinoff is long (to be completed 1st

January 2021);

o Rarity effect: the EU/US industry doesn’t count more than 5/6 players

so few options left to consolidate if the chance on IVECO is left

behind;

o Asian players may be looking at entering the EU market and IVECO

could be the best way to do it (also from a technological point of view

it could be the way to close a decade-long gap). For the same reason

a European player may try to avoid favoring additional competition in

its home market.

Our estimates are below company guidance: which was defined by the

management as conservative. Markets may be more benign than what we and

the company are assuming (AG cycles are more driven by the weather/price

of commodities rather than GDP growth);

All of the above may be amplified by the excellent positioning the company

has on the major trends in future mobility: CNG/LNG technology could be

a reason to buy IVECO; increase in productivity granted by new tractors may

11.3

11.5

11.2

11.4

SoP Peers EVA Average


11

support a replacement cycle, CNG/LNG tractors too may be a reason to prefer

CNH to Deere products.

Downside risk may be given by:

The AG cycle is really unpredictable and may be worse than expected: as

usual it is driven by weather conditions that impact supply/demand for

commodities but, in this case, trade talks may add volatility;

While our estimates are below company guidance they still see growth rates

not to be given for granted (>11% 2018-24 EBIT CAGR for both CE and

CV);

Self-help measure returns the maximum benefit onto EBIT when and if top line is growing or at least flat. In case of top line decline the USD1.1 billion incremental EBIT in the 2018-24 period may not materialize (or not entirely).

Peer group comparison and EVA valuation

The peer group selection for a company like CNH is quite straightforward: Deere,

Caterpillar, AGO for the off-highway business and Volvo, Paccar and Cummins for

the On-highway:

Figure 6 – Peer Group Multiples

Name TIER Price Currency Mkt Cap EV/EBITDA EV/EBIT P/E FCF Yield

bn 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

AGCO Corporation I 66.3 USD 5.1 7.5 x 6.9 x 6.3 x 11.2 x 10.1 x 9.0 x 14.4 13.1 12.2 5.2% 7.4% 7.9%

Deere & Company I 153.2 USD 48.2 20.9 x 18.7 x 16.1 x 27.1 x 22.7 x 20.9 x 17.0 15.2 13.5 4.9% 6.4% 6.6%

Caterpillar Inc. I 116.4 USD 65.5 6.6 x 6.8 x 6.9 x 8.3 x 8.5 x 8.4 x 10.9 10.7 10.2 8.0% 9.1% 10.2%

Volvo AB I 12.8 EUR 27.2 4.1 x 4.6 x 4.3 x 5.4 x 6.5 x 6.1 x 8.2 10.3 10.1 10.5% 9.4% 8.7%

PACCAR Inc II 63.0 USD 21.8 9.8 x 11.3 x 10.3 x 11.4 x 13.6 x 13.4 x 10.2 12.4 12.2 7.3% 7.6% 7.1%

TRATON SE II 22.6 USD 11.3 5.1 x 5.4 x 4.9 x 7.7 x 8.2 x 7.4 x 8.2 8.2 7.5 4.0% 4.4% 5.5%

Cummins Inc. II 148.5 USD 23.4 6.7 x 7.5 x 7.2 x 8.1 x 9.1 x 8.7 x 10.4 11.6 11.2 8.2% 7.8% 7.6%

Median

6.7 x 6.9 x 6.9 x 8.3 x 9.1 x 8.7 x 10.4 x 11.6 x 11.2 x 6.3% 7.5% 7.5%

TIER I - Average

9.8 x 9.3 x 8.4 x 13.0 x 11.9 x 11.1 x 12.6 x 12.3 x 11.5 x 7.1% 8.1% 8.3%

TIER II - Average

7.2 x 8.1 x 7.5 x 9.1 x 10.3 x 9.8 x 9.6 10.7 10.3 6.5% 6.6% 6.7%

CNH Industrial

10.67 USD 14,300 6.1 x 5.7 x 5.1 x 10.4 x 9.2 x 8.0 x 12.5 x 11.4 x 9.7 x 2.0% 1.9% 2.2%

Premium/(Disc.) to peers

-9.5% -18.0% -25.5% 25.9% 1.0% -7.5% 20.2% -1.6% -12.8% n.m. n.m. n.m.

Source: FactSet

Performances and multiples shows that the two laggards are Volvo and Caterpillar

(lower multiples, worst performances) due to the construction cycle peaking.


12

Figure 7 – Share price performance

Company Price Market cap Share performance

mn 1M 3M 6M 12M YTD 3 Years

AGCO Corp (USD) 66.3 5,057 -4.3% -3.8% 4.3% 38.3% 36.2% 42.9%

Deere (USD) 153.2 48,244 2.7% 4.3% 7.4% 19.4% 17.4% 95.1%

Caterpillar (USD) 116.4 65,507 -3.5% -5.3% -6.7% -5.2% 4.8% 46.1%

Volvo B (SKR) 12.8 27,189 -6.8% -8.1% -9.0% -7.7% 11.7% 28.8%

PACCAR (USD) 63.0 21,827 -2.4% -1.7% 1.1% 17.3% 26.1% 22.0%

TRATON SE (EUR) 22.6 11,300 -10.6% -16.2%

Cummins Inc. (USD) 148.5 23,436 -0.3% -2.3% 1.2% 18.2% 27.1% 30.0%

CNH Industrial (USD) 9.7 13,073 -4.2% 4.6% -0.7% 0.3% 20.1% 42.4%

FTSE Italia All-Share 137.6 330,925 -0.5% -0.9% 0.5% 13.8% 19.1% 30.1%

Average (ex CNH) -4.1% -5.2% -0.6% 12.4% 19.2% 47.0%

Source: FactSet

The resulting valuation shows a fair value, averaging 2019-21, of USD11.5:

Figure 8 – Peers comparison valuation

(USD, x ) 2019E 2020E 2021E

PE - Peers 12.6 12.3 11.5

CNH Adj. EPS 0.85 0.94 1.06

CNH Per Share value 10.7 11.6 12.2


As for EVA valuation, the company ROACE is 40% higher than its WACC, also

thanks to the ability to reduce the cost of debt. The resulting fair value therefore we

estimate being USD11.2:

Figure 9 – EVA Valuation

(USD, %, x)

Av. CE 24,350

Average cycle EBIT - post tax 1,678

Av. ROACE (2019-2022) 6.9%

WACC 5.0%

Risk free rate 2.5%

Beta 1.00

Market premium 4.5%

Cost of Equity 7.0%

Cost of debt 2.9%

% Sustainable Debt on CE 50%

ROACE/WACC 1.4

Av. CE 24,350

Implied EV 33,835

Net (Debt)/Cash -17,333

Pension liabilities -1,473

Implied Equity value 15,029

N.° of shares 1,340

Equity value p.s. (USD) 11.2

Equity value p.s. (EUR) 10.2



13

Figure 17 – EVA Valuation – Sensitivity Analysis

ROACE

11.2 5.9% 6.9% 7.9%

WACC 4.5% 10.0 14.1 18.1

5.0% 7.6 11.2 14.9

5.5% 5.6 8.9 12.2


Sum of the Parts valuation and the merit of On-Highway spinoff

While we don’t usually like to value industrial conglomerate based on their SoP, we

believe that in the case of CNH, with a spinoff of the on-highway business already

announced, this method may be very useful in assessing how much it could be

worth the entire group when, in 2021, the deal will be completed.

We believe that the best way to value the on and off-highway business is through a

P/E comparison with peers. This because:

Valuing the AG business comparing it with Deere on the EV/EBITDA or

EV/EBIT basis will not work. On the US market stocks are not looked through

those multiples and different accounting principles may impair the comparison;

For the sake of consistency, and in order to avoid double-counting, also the

on-highway should be looked through the lens of a P/E peers comparison

(despite the fact that European truck makers may be looked on EV multiples).

To assess the net income of the two divisions one should make assumptions

regarding:

The capital structure of the two businesses: we believe that, given the superior

capability of the off-highway to generate cash, this business will have more

leverage to start with;

Their tax rates: we presume on-highway will be higher (having all the plants

located in WE and the vast majority of the revenues). We therefore assume a

33% tax rate for the on-highway and a 23% for the off-highway.

Our assumptions are showed in the table below:


14

Figure 10 – Off-highway & On-highway – UBI Assumptions

(USDm) 2018A 2019E 2020E

Off-highway

Revenues 15,600 15,200 15,973

Adj. EBIT 1,000 913 1,053

Financial charges -368 -387 -432

Others -106 19 19

Pre tax 526 546 641

Tax rate 23% 23% 24%

Net Income 405 420 539

Net Debt/(Cash) 1,500 1,332 1,245

Free cash flow 348 337 475

On-highway

Revenues

Adj. EBIT 13,100 13,279 13,324

Financial charges 500 566 614

Others 16 11 -8

Pre tax 0 0 0

Tax rate 516 577 606

Net Income 33% 33% 33%

Net Debt/(Cash) 315 360 381

Free cash flow (900) (998) (1,151)


Consequently we present our SoP that returns a fair value of USD11.3:

Figure 11 – SoP Valuation

Core Businesses Valuation method Implied 2019 Fair value Per share

2019-20 P/E EV/Sales Multiple (USDm) (USD)

Off-higway Deere/AGCO 0.45x $6,421 $4.8

On-highway Volvo, Paccar,

Traton, Cummins 0.21x $3,311 $2.5

FinCo ROE vs. P/BV 2.75x $5,469 $4.1

Total assets

15,200 11.30


At current market multiples, and based on our estimates, it is not clear that the

spinoff offers valuation upside.


15

Income Statement

(USDm) 2018 2019E 2020E 2021E

Net Revenues 29,706 29,360 30,109 31,213 EBITDA 2,671 2,639 2,787 3,007 EBITDA margin 9.0% 9.0% 9.3% 9.6% EBIT 2,101 2,032 2,203 2,424 EBIT margin 7.1% 6.9% 7.3% 7.8% Net financial income /expense (368) (308) (301) (295) Associates & Others (167) (80) (101) (20) Profit before taxes 1,566 1,644 1,801 2,108 Taxes (417) (418) (458) (538) Minorities & discontinuing ops (31) (23) (25) (30) Net Income 1,068 1,155 1,265 1,483


Balance Sheet

(USDm) 2018 2019E 2020E 2021E

Net working capital 1,811 2,222 2,279 2,362

Net Fixed assets 13,316 13,217 13,491 13,854

M/L term funds 11,559 11,650 11,406 11,053

Capital employed 23,710 24,143 24,259 24,383

Shareholders' equity 5,043 5,951 6,928 8,069

Minorities 25 25 25 25

Shareholders' funds 5,068 5,976 6,953 8,094

Net financial debt/(cash) 600 314 42 (277)


Cash Flow Statement

(USDm) 2018 2019E 2020E 2021E

NFP Beginning of Period 908 600 314 42

EBITDA 2,671 2,639 2,787 3,007

Interest expenses (368) (308) (301) (295)

Cash taxes (417) (418) (458) (538)

Change in Working Capital (496) (411) (57) (84)

Other (234) (282) (299) (217)

Operating Cash Flow 1,156 1,220 1,672 1,874

Net Capex (550) (604) (987) (1,083)

Other Investments 0 0 0 0


Dividends Paid (245) (269) (314) (372)

Other & Chg in Consolid. Area (53) (60) (100) (100)

Chg in Net Worth & capital Incr. - - - -

Change in NFP 308 286 271 319

NFP End of Period 600 314 42 (277)



16

Financial Ratios

(%) 2018 2019E 2020E 2021E

ROE 21.1% 19.3% 18.2% 18.3%

ROI 41.5% 34.0% 31.7% 29.9%

Net Fin. Debt/Equity (x) 0.12 0.05 0.01 (0.03)

Net Fin. Debt/EBITDA (x) 0.22 0.12 0.02 (0.09)

Interest Coverage 7.3 8.6 9.2 10.2

NWC/Sales 6.1% 7.6% 7.6% 7.6%

Capex/Sales 2.0% 2.2% 3.5% 3.7%

Pay Out Ratio 25.2% 27.2% 29.4% 29.7%

Source: Company data, UBI Banca estimates,

Per Share Data

(USD) 2018 2019E 2020E 2021E

EPS 0.79 0.85 0.93 1.10

DPS 0.198 0.232 0.275 0.325

Op. CFPS 0.85 0.90 1.23 1.38

Free CFPS 0.45 0.45 0.51 0.58

BVPS 3.7 4.4 5.1 6.0


Stock Market Ratios

(x) 2018 * 2019E 2020E 2021E

P/E 15.1 12.5 11.4 9.7

P/OpCFPS 13.9 11.8 8.6 7.7

P/BV 3.18 2.42 2.08 1.78

Dividend Yield (%) 1.7% 2.2% 2.6% 3.0%


EV (USDm) 18,148 16,087 15,801 15,467

EV/Sales 0.65 0.59 0.56 0.53

EV/EBITDA 6.79 6.10 5.67 5.14

EV/EBIT 11.45 10.39 9.23 8.03

EV/Capital Employed 0.77 0.67 0.65 0.63


Growth Rates

(%) 2018 2019E 2020E 2021E

Growth Group Net Sales 7.2% -1.2% 2.6% 3.7%

Growth EBITDA 15.1% -1.2% 5.6% 7.9%

Growth EBIT 28.2% -3.3% 8.4% 10.0%

Growth Net Profit 293.5% 8.1% 9.6% 17.2%


1

FERRARI

Initiation of Coverage BUY

15 October 2019 – 9:00 AM MARKET PRICE: EUR140.2 TARGET PRICE: EUR163.0

Branded goods

Data


Market Cap. (EURm): 25,476




Main Shareholder: EXOR NV (23.5%)

Reuters/Bloomberg: RACE.MI RACE IM



Performance

1m 3m 12m

Absolute 1.0% -5.2% 39.5%

Rel. to FTSE IT 6.2% -2.9% 31.0%


Source: FactSet

Analysts




From RACE to RAC-e

We initiate the coverage on Ferrari with a BUY rating based on the uniqueness of the brand that still has meaningful space for growth (0.05% penetration on the 18 million HNWI). This will be enhanced by the development of hybrid cars which, in our view, will be accretive to profitability margins. We believe this is not the consensus view which, in fact, is below our estimates. We also believe that, while meaningful revenues from the electrification will materialize only from 2021-22, P&L is already taking the brunt of the associated costs. Therefore, once again, consensus is not appreciating the full effect on profitability of the price/mix increase of the past two years. Our TP offers a 16% upside.

> SF90 stradale: the first plug-in hybrid in the series car. Last May

Ferrari launched its first series car with a hybrid engine (La Ferrari was

already hybrid, but it was not a series car and not plug-in either). The

1,000hp car is equipped with a 780hp V8 engine and with three electric

engines worth 220hp in total. We believe that the profitability of this car is

astronomical: it will sell at a price lower than that of La Ferrari (our guess

estimate is EUR450K) but the additional costs related to the electric

engine we estimate being around EUR20/30,000.The only official

statement the company made on that topic is that the car “generates a

margin that is above that of the 812 Superfast”.

> Why Ferrari customers are willing to pay such a price for a hybrid.

While many may see electrification as a price to pay in terms of cars

performances but useful to reduce emissions, this is not the case for sport

cars. The performances of the SF90 Stradale are quite peculiar: a) two of

the three electric engines are mounted on the front wheels transforming

the car into a 4WD at times, with obvious benefits on the acceleration (2.5

second from zero to 100Km/h) and road-handling; b) every electric engine

can also rotate at different speed. This phenomenon, known as torque

vectoring, gives an unparalleled control during turns.

> 60% of the range will be electrified by 2022. This was expressed in the

2018 CMD, and should expand margins. Together with the introduction of

the V6 engine, we believe this should reduce emissions so to allow the

company to surpass the 10K units mark without any stress.

> We estimate a visible 12.5% 2018-22 Adj Net Profit CAGR while

continuing to generate cash. UBI is 12% above 2020 consensus EPS.

> Main risks. Trade wars; regulations changes, F1 developments (sport

results, Liberty Media strategy, transition to Formula-E). Financials EURm

2018 2019E 2020E 2021E

Revenues (EURm) 3,420 3,630 4,122 4,650

EBITDA (EURm) 1,135 1,301 1,490 1,776

EBITDA margin (%) 33.2% 35.8% 36.1% 38.2%

EBIT (EURm) 826 903 1,044 1,215

EPS (EUR) 4.2 3.8 4.4 5.1

CFPS (EUR) 2.7 3.6 4.2 5.9

DPS (EUR) 1.0 1.1 1.3 1.5



2018* 2019E 2020E 2021E

P/E (x) 25.3 36.8 31.9 27.4

P/CF (x) 38.8 29.2 25.3 18.0

P/BV (x) 14.7 10.6 7.9 6.2

Dividend Yield 1.0% 0.8% 0.9% 1.1%

EV/EBITDA (x) 17.3 19.8 17.0 13.9

Debt/Equity (x) -0.3 -0.2 0.1 0.2

Debt/EBITDA (x) -0.3 -0.2 0.1 0.5

Source: Company data, UBI Banca Estimates, *18 average price

70

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r-19

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Ferrari NV FTSE Italia All-Share

FERRARI 15 October 2019

2

Index

1

INVESTMENT CASE: WHY HYBRIDS ARE AN OPPORTUNITY

4

2

SWOT ANALYSIS

8

3

FINANCIALS

9

4

VALUATION

11


3

Key Financials

(EURm) 2018 2019E 2020E 2021E

Revenues 3,420 3,630 4,122 4,650

EBITDA 1,135 1,301 1,490 1,776

EBIT 826 903 1,044 1,215

NOPAT 568 622 719 839


Net Capital Employed 2,487 2,968 3,156 3,220

Shareholders’ Equity 1,354 1,878 2,509 3,227

Net Financial Position (1,133) (1,090) (646) 7



2018 2019E 2020E 2021E

Net Debt/Ebitda (x) -0.3 -0.2 0.1 0.5

Net Debt/Equity (x) -0.3 -0.2 0.1 0.2



ROE (%) 58.1% 38.3% 33.1% 30.0%

ROI pre-tax (%) 61.0% 48.1% 41.6% 37.6%

ROCE (%) 22.9% 21.0% 22.8% 26.0%



2018 * 2019E 2020E 2021E

P/E (x) 25.3 36.8 31.9 27.4

P/BV (x) 14.7 10.6 7.9 6.2

P/CF (x) 38.8 29.2 25.3 18.0

Dividend Yield (%) 1.0% 0.8% 0.9% 1.1%

EV/Sales (x) 5.7 7.1 6.1 5.3

EV/EBITDA (x) 17.3 19.8 17.0 13.9

EV/EBIT (x) 23.7 28.5 24.3 20.3

EV/CE (x) 7.9 8.7 8.0 7.7


Key Value Drivers

(%) 2018 2019E 2020E 2021E

Payout 24.6% 27.7% 30.0% 30.0%

NWC/Sales -1.5% -5.0% -5.0% -4.7%

Capex/Sales -18.6% -20.6% -17.7% -14.7%



4

INVESTMENT CASE: WHY HYBRIDS ARE AN OPPORTUNITY

We initiate the coverage on Ferrari with a BUY rating and a target price of

EUR163.0. Our investment case is based on the followings:

A unique asset that can leverage on a community of ultra-wealthy clients

worldwide extremely loyal to the brand;

The visibility on its revenues/cash streams also thanks to a long waiting list;

Figure 1 – Ferrari resiliency vs. other performance car manufacturers

Source: Company data

The pricing power that the brand is showing;

Its wide product offer compared to competition, and that this gap has only

enlarged in recent years (the launch of the “Icona” models and the addition of

the rear-mid engine architecture are good example);

Figure 2 – Ferrari product line-up

Source: Company data


5

The possibility to widen its products/geography matrix in segments

unexploited before: Gt potential customers and geographies like China (where

HNWI has the strongest expected CAGR of all worldwide regions) are

examples. According to Capgemini there are 18 million HNWI in the world

returning a penetration for Ferrari of only 0.05%;

The strong cash generation that will be returned to shareholders in the form of

dividends and buy back and that protects the competitive advantage the

company has;

We expect earnings surprise in the coming quarters;

The space available in terms of valuation, mostly when using absolute

methods.

On top of that, we believe that many on the market fears the introduction of hybrid

and electric cars will negatively impact company profitability and, more importantly,

will reduce the exclusivity of the brand. In our view instead:

Hybrids sport car are more performing than petrol cars as they add power and

torque while not reducing driveability;

Thus, the value customers attach to this kind of products is higher than the

increased content costs;

We believe that margins attached are higher than the current average. A

confirmation of that comes from the company itself that targets 60% of its

product mix to be hybrid by 2022 and, at the same time, a “significant increase

in average retail price thanks to price/product mix”. While it will not come

entirely from hybrids, for sure this category will not be dilutive;

As every technology, if one like Ferrari has an long history of mastering

leading edge technologies and very likely will continue to do in the hybrid-

electric space.

We made some estimates on the profitability of the first ever series Ferrari with a

hybrid propulsion, the SF90 stradale. We believe that it would sell (before VAT and

dealer margins) at EUR450,000 a level that is above any other series car by a wide

margin (the 812 Gts seems to us the most expensive series car and we estimate it

has a price, ex-VAT and dealer margins, of around EUR300,000). Summing up,

while in the general part of this sector report we named the price as one (if not the

main) factor preventing customers to buy hybrid/electric cars, this is not true in the

case of sport cars.

In terms of added content we estimate that it amounts to anywhere between EUR20,000 and EUR30,000 as can be seen in the following table:

Figure 3 – Hybrid extra content cost

Additional components Number of units Cost/Unit Total Cost

BMS 1 140 140

Battery Pack 1 6,000 6,000

Torque vectoring 3 200 600

Electronic control unit 3 290 870

Power Distribution Unit 3 650 1,950

Inverter 3 1,600 4,800

Motor (Pancake or PM-OC) 3 2,500 7,500

Charger 1 600 600

Total 22,460



6

In terms of autonomous driving, what we wrote in the general part of this sector

report has mostly to do with mass market vehicles. Aside from the fact that this

trend will materialize in the very long in mass market as well, we believe that there

will always be a space for human-driven sport cars.

Autonomous Driving can be an interesting opportunity for Ferrari: it could be a

system for real-time coaching. We came across start-ups and University research

centers which are developing similar systems. In other words a software can

support the human in specific driving conditions (snow, mud, ice, race, mountain

uphill, etc) teaching the driver how to improve its performances. Or, it could simply

help the inexpert driver to manage a car like a Ferrari that some perceives as too

powerful to drive.

All in all, the combined effect of what we said would bring sales volumes above the

10,000 units mark, surpassing the Small Volume Manufacturer limit thus triggering

different emission targets. We believe this is not an issue as the combined effect of

Declining emission on petrol engines;

The benefit of lower emissions from hybrids;

The bonus granted by several regulators on hybrids

All would make the issue manageable. If eventually small fines would have to be

paid those should be not material.

Our estimates are above consensus and this is a crucial element of our investment

case:

Figure 4 – UBI vs Consensus

(EURm, units, %) 2019 2020

Cons UBI % change Cons UBI % change

Shipments (units) 9,839 10,329

Net Revenues 3,713 3,630 -2.2% 4,044 4122 1.9%

EBITDA – Adj 1,264 1,301 2.9% 1,443 1,490 3.3%

% 34.0% 35.8% 35.7% 36.1%

EBIT - Adj 923 903 -2.1% 1,044 1,044 0.0%

% 24.9% 24.9% 25.8% 25.3%

ADJ. EPS Diluted 3.75 3.66 -2.4% 4.08 4.57 12.2%

Ind. FCF 487 607 24.6% 459 667 45.3%


Our target price has been obtained as an average of three valuation methods

(DCF, EVA and a peers comparison) as shown in the table below. For more details

please look at the valuation section:


7

Figure 5 – Summary Valuation


161

154

175

163

DCF Peers EVA Average


8

SWOT ANALYSIS

Strengths

Unmatchable brand image, the world's most recognizable luxury performance

sport car;

Unique racing heritage;

Loyal and growing customer base composed of UHNWI;

Exceptional pricing power and value resiliency overtime;

Widest product offer declined by engines, GT/Sport, road/non-registered cars;

Leading hedge engineering capabilities;

In-house design, engineering, production, chassis and engines production

gives full control on the entire process and high flexibility;

Business model presents low risk on the retail side as dealers and stores are

franchisees;

Best-in-class "clients relations" activities;

Strong and resilient financial performances that allow to finance investments in

future technologies (like hybrids) which are unfeasible for many small and mid

producers;

High entry barriers;

Strong, experienced management team.

Weaknesses

Exposure to exchange rate fluctuations;

Product category not ideal to benefit from growth in Chinese's HNWI;

100% reliance on a single plant (Maranello, Modena only for chassis);

Opportunities

Personalization increasing more than we estimate;

Volumes increases;

Efficiencies higher than expected also on F1;

Above expectations development of the brand extension activities;

M&A opportunities also thanks to limited leverage and strong cash flow;

Threats

Trade war may impact volumes or margins and, with a single plant, is

impossible to balance-out also in the long run;

Need to maintain a proper balance between exclusivity and growth;

Lack of wins in F1;

Preserving the brand image is imperative;

Emissions rules and, more in general, legislation changes (including safety

standards);

Ferrari has to be wise in deciding which technology has to produce in-house

and which one can be outsourced in order to find a right balance between

control and investments.


9

FINANCIALS

We expect Ferrari to report:

A 2018-22 Sales CAGR of 9.0% with Cars and spare parts posting a 12.9%

(mostly driven by volumes, at 8.2%, while price/mix/forex is expected at

+4.3%);

Adj. EBITDA 2018-22 CAGR of 15.8% thanks to the price/mix and operating

leverage;

Adj. Net Income 2018-22 CAGR of 12.5% due to the expiration of the patent

box benefit that should increase the tax rate by more than 400bps;

EUR3.4 billion cumulated FCF for 2019-22 with the business turning cash

positive by 2022.

We assume the company to surpass the 10,000 units mark by 2020 and the

12,000 mark by 2022:

Figure 6 – Car sales estimates - breakdown by model

(Units) 2018 2019E 2020E 2021E 2022E 2023E 2024E

Sport cars 6,303 6,750 7,220 8,011 7,735 8,391 8,302

Tributo (488 GTB until 1H19) 3,153 2,700 3,000 3,200 3,000 3,000 2,900

F8 Spider (488 Spider until 4Q19) 1,850 1,650 1,200 1,500 1,700 1,600 1,500

488 Pista (458 Speciale) 300 935 900 900 200 900 1,000

488 Pista spider n.a. 350 350 450 550 500 550

Rear-mid engine (to be announced) n.a. n.a. 275 316 323 329 336

SF90 Stradale n.a. n.a. 200 350 700 700 600

V8 - Total 5,303 5,635 5,925 6,716 6,473 7,029 6,886

812 Superfast 950 1,045 1,045 1,045 993 1,092 1,147

LaFerrari/LaFerrari Aperta 30 n.a. n.a. n.a. n.a. n.a. n.a.

Icona n.a. 45 230 230 250 250 250

Fuori Serie 20 25 20 20 20 20 20

V12 - total 1,000 1,115 1,295 1,295 1,263 1,362 1,417

GT cars 2,948 3,089 3,109 3,525 4,965 5,495 6,046

Portofino (California T until 2018) 1,846 1,939 1,939 1,977 2,017 2,017 1,815

GTC4Lusso T 202 250 220 198 198 228 250

V8 - Total 2,048 2,189 2,159 2,175 2,215 2,245 2,066

GTC4Lusso 900 500 350 350 400 450 480

812 Gts 200 400 600 600 500 450

New models 200 200 400 850 900 1,050

Purosangue 900 1,400 2,000

V12 - total 900 900 950 1,350 2,750 3,250 3,980

Total cars sold 9,251 9,839 10,329 11,537 12,700 13,886 14,348

% change 10.2% 6.3% 5.0% 11.7% 10.1% 9.3% 3.3%

Source: Company data, UBI Banca estimates (for specific models)

Some more details on our estimates:

During 2Q19 call management stated that the order book has reached record

levels in both absolute and relative terms. Furthermore, the launch of the F8

Tributo is going very well, ahead of both the 458 and 488 for the respective

period since their launch. On the other hand the second half, while benefiting

from 4Q19 of the Monza ramp-up, will be hit by several factors:

o The end of the lifecycle of the 488GTB and Spider and the approach


10

of the end of the lifecycle for the GTC4Lusso and GTC4Lusso T;

o Also on the FXX K, extremely accretive mix-wise, there are hardly

any volume left;

o The slowdown of China volumes, which were particularly booming in

1H19 in anticipation of regulatory issues;

o A ramp up in the capex;

o A ramp up in spending to support the launch of 3 new models;

o A ramp up in investments on F1 given that the 2021 regulations are

completely different from the current ones.

2020 should witness another improvement on all metrics: a full year for the

Monza and the SF90 (which are high-margins products) coupled with volume

increase from the tail effect of the 5 new products launched during 2019 will

be the main drivers;

On the tax side, the current Patent Box exemption expired with 2019 but it was

extended so Ferrari filed its new request and is beginning talks with the

authorities. We believe that the new benefits will be lower than the ones

expiring, so we are factoring-in a 20% tax rate going forward with EUR55

million benefit on the cash-taxes side;

As far as China volume growth, as management stated during the call “the key

to China will be the Purosangue”. Also the SF90 will be an

attractive model for China from 2020 because its hybrid feature that will get a

significant tax benefits.

Lastly, our 3Q19 preview is represented in the below table:

Figure 7 - 3Q 2019 preview

(EURm) 3Q 2018A 3Q 2019E YoY chg.

Shipments (units) 2,262 2,285 1.0%

Total sales 838 853 1.8%

EBITDA Adj. 278 282 1.4%

EBITDA margin % 33.2% 33.0%

EBIT 202 203 0.3%

EBIT margin % 24.1% 23.7%

Net profit 287 162 -43.6%

Industrial Net (Debt)/Cash (372) (318)

Res. Net profit 146 162 10.9%



11

VALUATION

Our target price has been obtained as an average of three valuation methods

(DCF, EVA and a peers comparison).

Figure 8 – Summary Valuation


Peer Group valuation

Out of the entire universe of branded goods and luxury sports cars (see Figure 10

for more details) we selected a group of peers which we deem being more

comparable (although it is worth saying that a real comparable doesn’t not exist):

Hermes and Brunello Cucinelli have a similar concept of self-imposed

production limits and controlled distribution;

Those two companies, together with Essilor-Luxottica, are the ones, within the

peer group, with the lowest share of third-party production.

We excluded from the peer group used to asses the target price:

LVMH and Richemont because of their “holding company” nature;

Moncler because it outsource to third-party 100% of its production;

Ferragamo and Burberry because of their earning trend in the last year which

has been going in the opposite direction of Ferrari.

Before entering into the comparison exercise, it is worth focusing on why we

excluded Aston Martin from the peer group:

Lower number of models when compared to Ferrari product offer;

Lower number of engines, not necessarily internally developed;

Lower cash generation (2018, before IPO costs returned a FCF of GBP15

million);

Lower profitability (net loss in 2018, low EBITDA margin when adjusted for

capitalized R&D);

Lower return on capital.

The performance of this peer group has been broadly positive but below the YTD

performance of Ferrari:

161

154

175

163



12

Figure 9 – Share price performance

Company Price Market cap Share performance

mn 1M 3M 6M 12M YTD 3 Years

Brunello Cucinelli (EUR) 26.8 1,821 -8.0% -

15.7% -16.0% -9.2% -10.9% 49.0%

Hermes (EUR) 634.2 66,952 -1.4% -1.7% 5.8% 28.9% 30.8% 69.8%

EssilorLuxottica (EUR) 134.4 58,646 3.1% 13.9% 33.0% 16.8% 21.6% 20.8%

Aston Martin (GBP) 5.0 1,143 -24.0% -

51.8% -54.4% -71.5% -63.2% n.a.

Moncler (EUR) 34.2 8,823 -2.6% -

11.1% -6.3% 10.6% 18.2% 123.5%

LVMH (EUR) 379.3 191,685 -0.7% -1.2% 10.6% 44.5% 46.9% 127.4%

Burberry Group (GBP) 22.8 9,337 -6.9% 1.6% 0.9% 13.5% 17.7% 34.2%

Ferragamo (EUR) 16.3 2,750 -11.7% -2.5% -17.7% -11.3% -7.7% -28.9%

Richemont SA (EUR) 65.8 37,791 -10.8% -

11.7% 2.4% 4.5% 17.7% 8.0%

Ferrari 140.3 34,888 1.0% -5.2% 14.4% 39.5% 61.6% 191.6%

FTSE Italy 137.6 330,925 -0.5% -0.9% 0.5% 13.8% 19.1% 30.1%

Average (ex-Ferrari) -7.0% -

11.1% -4.6% 3.0% 7.9% 50.5%

Source: FactSet

With that in mind, comparing peers financials with Ferrari’s we note that:

Ferrari is investing well above peers as its capex/sales spread vs. them is

above 10% on average for the 2019-21 period;

At the same time its EBITDA margin is around 10% higher than that of peers

over the same time horizon;

The combined result of the two points above is that Ferrari FCF/EBITDA and

FCF Yield are broadly aligned with peers. Its ROCE (post-tax) is comparable

as well.

When compared to other branded goods stock and with Aston Martin it is clear

how Ferrari, and the peer group we selected, can boast better financials:

Figure 10 – Comparison with Ferrari on EBITDA margins, cash generation, capex/Sales and ROCE

Name TIER Price Curr Mkt Cap FCF/EBITDA Capex/Sales ROCE (post tax) EBITDA %

bn 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Brunello Cucinelli I 26.8 EUR 1.8 25.2% 33.3% 33.8% 7.8% 7.4% 7.0% 17.4% 16.9% 17.5% 17.3% 17.5% 17.7%

Hermes International I 634.2 EUR 67.0 55.4% 57.5% 0.0% 5.2% 4.8% 4.6% 64.1% 68.4% 73.9% 39.0% 39.3% 39.7%

EssilorLuxottica SA I 134.4 EUR 58.6 43.8% 49.6% 5.4% 5.5% 5.4% 5.4% 5.8% 6.3% 22.1% 22.6% 23.0%

Aston Martin II 5.0 GBP 1.1 -43.5% -7.9% 0.0% 20.1% 15.7% 13.3% 2.1% 8.7% 11.6% 20.3% 22.9% 23.9%

Moncler SpA II 34.2 EUR 8.8 53.7% 53.1% 50.3% 6.8% 6.3% 6.0% 55.4% 55.9% 54.5% 34.9% 35.1% 35.4%

LVMH II 379.3 EUR 191.7 47.2% 48.4% 51.8% 5.8% 5.3% 5.1% 17.6% 19.2% 20.1% 27.2% 27.6% 27.7%

Burberry Group II 22.8 GBP 2.3 45.7% 49.5% 51.9% 7.0% 6.6% 6.4% 55.1% 53.9% 55.6% 21.0% 21.7% 22.5%

Salvatore Ferragamo II 16.3 EUR 2.1 46.4% 48.8% 49.4% 5.0% 4.8% 4.8% 17.4% 19.0% 21.2% 15.5% 16.3% 17.3%

Richemont II 65.8 CHF 2.1 37.2% 43.6% 45.9% 5.6% 5.5% 5.5% 11.4% 11.9% 12.7% 20.4% 20.8% 21.6%

Average

41.5% 46.8% 35.4% 6.1% 5.9% 5.7% 29.0% 30.4% 32.6% 26.1% 26.4% 26.8%

Ferrari

45.7% 48.8% 21.0% 5.8% 5.5% 5.5% 17.4% 19.0% 20.1% 21.0% 22.6% 23.0%

Median – All peers

46.7% 44.8% 51.6% 20.6% 17.7% 14.7% 25.2% 27.1% 30.5% 35.8% 36.1% 38.2%



13

In terms of multiples, the Tier I peer group shows a very low dispersion of

multiples, therefore we consider fair to use all of those peers as a valuation tool:


Tier Price Curr MktCap EV/EBITDA EV/EBIT P/E Adjusted FCF Yield

bn 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Hermes International I 634.2 EUR 67.0 23.9 x 21.5 x 19.4 x 27.4 x 24.6 x 22.2 x 44.1 39.8 36.1 2.2% 2.5% 2.8%

EssilorLuxottica I 134.4 EUR 58.6 15.8 x 14.5 x 13.3 x 22.7 x 20.6 x 18.6 x 30.3 27.9 25.2 2.9% 3.5% 3.8%

Brunello Cucinelli II 26.8 EUR 1.8 17.7 x 16.2 x 14.6 x 24.2 x 22.0 x 19.9 x 34.7 33.1 29.9 1.4% 2.1% 2.3%

Aston Martin II 5.0 GBP 1.1 7.9 x 5.3 x 4.2 x 24.4 x 11.4 x 7.9 x n.a. 18.3 9.5 -9.6% -2.7% 5.2%

Moncler SpA II 34.2 EUR 8.8 14.3 x 12.2 x 10.7 x 16.5 x 14.1 x 12.3 x 23.7 21.9 19.6 3.5% 3.9% 4.1%

LVMH II 379.3 EUR 191.7 13.7 x 12.3 x 11.2 x 17.3 x 15.5 x 14.1 x 26.1 23.5 21.6 3.6% 4.0% 4.6%

Burberry Group plc II 22.8 GBP 2.3 2.4 x 2.2 x 10.8 x 11.2 x 9.9 x 13.9 x 14.4 12.6 24.2 3.4% 3.9% 4.6%

Salvatore Ferragamo II 16.3 EUR 2.1 1.7 x 1.6 x 13.1 x 10.6 x 9.3 x 18.8 x 14.8 12.7 31.4 3.6% 4.2% 4.8%

Richemont II 65.8 CHF 2.1 2.2 x 2.0 x 10.4 x 10.6 x 9.4 x 15.2 x 14.3 12.7 25.4 3.0% 3.9% 4.5%

Average - Tier I 19.1 x 17.4 x 15.7 x 24.7 x 22.4 x 20.2 x 36.4 x 33.6 x 30.4 x 2.2% 2.7% 2.9%

Median – All peers 13.7 x 12.2 x 10.7 x 17.3 x 14.8 x 12.7 x 27.1 x 23.5 x 20.9 x 2.3% 2.5% 3.4%

Ferrari 140.2 EUR 26.5 19.8 x 17.0 x 13.9 x 28.5 x 24.3 x 20.3 x 36.8 x 31.9 x 27.4 x 2.3% 2.5% 3.5%

Prem./(Disc.) toTier I 3.6% -2.2% -11.8% 15.3% 8.3% 0.6% 1.2% -5.2% -10.0% -6.0% 6.1% -

15.3%

Source: FactSet

We believe the combination of risk and growth allows Ferrari to be valued on same

static multiples than its peers, meaning a valuation of EUR154.0 per share

(averaging 2020-22):

Figure 12 – Peers comparison valuation

(EURm, x) 2020 2021 2022

EV/EBITDA - peers 17.4 15.7 14.2

Ferrari Adj. EBITDA - Industrial ops. € 1,467 € 1,750 € 2,013

Implied EV € 25,507 € 27,569 € 28,539

Ferrari Debt/(Cash) -€ 146 -€ 799 -€ 1,723

Pension liabilities € 87 € 82 € 78

A - FERRARI Equity value € 25,567 € 28,286 € 30,184

PE - Peers 33.5 30.4 27.3

Ferrari Net Profit € 815 € 949 € 1,013

B - FERRARI Equity Value € 27,265 € 28,826 € 27,683

Average of A and B € 26,416 € 28,556 € 28,934

FinCo Value 534 605 630

Ferrari Group - Fair value € 26,949 € 29,161 € 29,564

Number of shares 182 182 182

Ferrari Group - fair value p.s. € 145.4 € 157.2 € 159.3



14

DISCOUNTED CASH FLOW

The DCF is our preferred valuation method given that, as we already wrote, the

asset is a “unicum" in our view with a solid and visible cash flow generation. Here

below you’ll find the assumptions used for the DCF valuation:

Explicit estimates until 2024;

Terminal value calculated on a revenues growth of 4.0% and an EBIT

margin at 28%, capex in line with D&A, and neutral. This returns an exit

EV/EBITDA multiple of 15.1x;

A WACC of 6.0% deriving from:

o A free risk rate of 2.5%, higher than the current market one;

o An equity risk premium of 4.5%;

o A beta of 1.0;

o A sustainable D/E of 19% (implying Debt/EBITDA of 2.5x).

In summary, as a result we would value Ferrari at EUR160.6 based on our DCF:

Figure 13 – DCF summary valuation

(EURm)

PV of future cash flows € 5,383

PV of Terminal value € 24,086

Enterprise value € 29,469

Net debt YE 2018 - Industrial -€ 298

Equity Value € 29,172

No of shares (m) 182

Equity Value ps € 160.6



15

EVA Valuation

The EVA is a valuation method to be favored as well because, although it

considers only partially the cash generation side of the business (it does it through

the deleverage) it takes into account the return on capital of this business. ROCE

is a topic to be looked carefully in a company that runs its single plant far away

from its full capacity.

With a post tax return of 27% Ferrari, on an EVA basis, should be worth in our view

EUR175 p.s.:


(EURm, %)

Av. CE € 3,096

Av. EBIT (post tax) € 834

Av. ROACE 2019-22 27.0%

WACC 2.67%

Risk free rate 2.5%

Beta 1.00

Market premium 4.5%

Cost of Equity 7.0%

Cost of debt 0.8%

% theoretical Debt on CE 70.0%

ROACE/WACC 10.1

CE - Average € 3,096

A - Implied EV € 31,235

B - Net Debt/(Cash) - average 19-22 -€ 593

C - Pension liabilities € 74

Implied Equity value (A-B-C+D) € 31,753

Number of shares 182

Fair value 175



ROACE

26.0% 27.0% 28.0%

WACC 2.2% 206.6 214.4 222.3

2.7% 168.4 174.8 181.2

3.2% 142.3 147.7 153.1



16

Income Statement

(EURm) 2018 2019E 2020E 2021E

Net Revenues 3,420 3,630 4,122 4,650

EBITDA 1,135 1,301 1,490 1,776

EBITDA margin 33.2% 35.8% 36.1% 38.2%

EBIT 826 903 1,044 1,215

EBIT margin 24.2% 24.9% 25.3% 26.1%

Net financial income /expense -23 -30 -24 -15

Associates & Others 3 5 5 5

Profit before taxes 803 874 1020 1200

Taxes -16 -155 -190 -233

Minorities & discontinuing ops 0 0 0 0

Net Income 787 719 830 967


Balance Sheet

(EURm) 2018 2019E 2020E 2021E

Net working capital -51 -182 -206 -220

Net Fixed assets 2,374 2,726 3,008 3,131

Other assets/(liabilities) 164 -379 -415 -352

Capital employed 2,487 2,968 3,156 3,220

Shareholders' equity 1,349 1,873 2,504 3,222

Minorities 5 5 5 5

Shareholders' funds 1,354 1,878 2,509 3,227

Net financial debt/(cash) -1,133 -1,090 -646 7


Cash Flow Statement

(EURm) 2018 2019E 2020E 2021E

NFP Beginning of Period (1,679) (1,547) (1,504) (1,060)

EBITDA 1135 1301 1490 1776

Interest expenses -23 -30 -24 -15

Cash taxes -16 -155 -190 -233

Change in Working Capital 16 130 25 13

Other -70 80 70 45

Operating Cash Flow 1,042 1,327 1,371 1,587

Net Capex (637) (749) (728) (684)

Other Investments (146) (65) (56) (127)


Dividends Paid (136) (195) (199) (249)

Other & Chg in Consolid. Area 0 0 0 0

Chg in Net Worth & capital Incr. (136) (340) 0 0

Change in NFP 132 43 444 653

NFP End of Period (1,547) (1,504) (1,060) (407)



17

Financial Ratios

(%) 2018 2019E 2020E 2021E

ROE 58.1% 38.3% 33.1% 30.0%

ROI 61.0% 48.1% 41.6% 37.6%

Net Fin. Debt/Equity (x) -0.3 -0.2 0.1 0.2

Net Fin. Debt/EBITDA (x) -0.3 -0.2 0.1 0.5


NWC/Sales -1.5% -5.0% -5.0% -4.7%

Capex/Sales -18.6% -20.6% -17.7% -14.7%

Pay Out Ratio 24.6% 27.7% 30.0% 30.0%

Source: Company data, UBI Banca estimates,

Per Share Data

(EUR) 2018 2019E 2020E 2021E

EPS 4.17 3.81 4.40 5.13

DPS 1.03 1.06 1.32 1.54

Op. CFPS 5.52 7.03 7.27 8.41

Free CFPS 2.25 3.22 3.53 4.86

BVPS 7.18 9.96 13.30 17.11


Stock Market Ratios

(x) 2018 * 2019E 2020E 2021E

P/E 25.3 36.8 31.9 27.4

P/OpCFPS 38.8 29.2 25.3 18.0

P/BV 14.7 10.6 7.9 6.2

Dividend Yield (%) 1.0% 0.8% 0.9% 1.1%


EV (EURm) 19,609 25,773 25,330 24,676

EV/Sales 5.7 7.1 6.1 5.3

EV/EBITDA 17.3 19.8 17.0 13.9

EV/EBIT 23.7 28.5 24.3 20.3



Growth Rates

(%) 2018 2019E 2020E 2021E

Growth Group Net Sales 0.1% 6.2% 13.5% 12.8%

Growth EBITDA 9.5% 14.6% 14.5% 19.2%

Growth EBIT 6.6% 9.4% 15.5% 16.4%

Growth Net Profit 46.5% -8.6% 15.5% 16.5%


1

PIAGGIO

Initiation of Coverage BUY

15 October 2019 – 5:30 PM MARKET PRICE: EUR2.68 TARGET PRICE: EUR3.20

Automotive

Data


Market Cap. (EURm): 960




Main Shareholder: IMMSI (50.6%)

Reuters/Bloomberg: PIA.MI PIA IM



Performance

1m 3m 12m

Absolute -2.1% -2.1% 48.4%

Rel. to FTSE IT -1.7% -1.7% 35.2%


Source: FactSet

Analysts




Betting on EU replacement cycle

We initiate coverage on PIAGGIO with a BUY rating based on the wide portfolio of technologies that differentiate it from its peers and are significant advantage looking at the evolution that the mobility is having. Penetration of electric-2Wheels is lagging behind cars, in our view because there was no regulation push. But, from our analysis, it seems that we are at the beginning of a growth story: “range anxiety” doesn’t apply to 2W which, on average, run 15Km/day and micro-mobility trends are supportive too. While demography plays against 2W, at least in Europe, marketing electric 2W as “tech-toys” could attract a new breed of customers thus rejuvenating the client base. The old circulating park (around 18 years old in Italy) coupled with incentives and traffic bans are behind the current replacement cycle. Piaggio top line growth in EU should compound with a under-utilized production base in Italy, a significant operating leverage and a fiscal advantage in growing its European sales/profits. BUY.

> Electric 2W were only 1.3% of EU registrations (1Q19), but growing

at 136% p.a. (2018). Piaggio launched in the past a MP3 hybrid and the

Liberty (to Austrian Postal services) and now sells the e-Vespa and

should increase its offer soon. Not a lot of space on Asian 2W (due to

price) and motorbikes (weight). Pure electric 3W could be launched soon.

> The long-awaited replacement cycle in Europe has started. With a

total of 6 million Euro 0 and 1 already in use in Italy/Spain alone the

circulating park offers plenty of replacement optionality. In 1H19

registrations stood at +9.1%. Piaggio was not able to fulfill all the demand

but should recover the lost ground in 2H19 and next year. Worth

mentioning that the market is still 40% off from peaks (2008).

> An unparalleled portfolio of technologies. Piaggio has a unique

combination of engines (petrol/hybrid/electric, 50cc to >1,000cc),

segments (2W, 3W, 4W – bikes, scooters, mopeds, motorbikes, LCVs)

that makes the Italian company the most diversified of its peers. While

Piaggio pays that in terms of ROCE and Capex/sales (and, in turns, on a

cash generation lower than peers) it could be a significant competitive

advantage to whom we add Piaggio Fast Forward. Nevertheless, we

would welcome more concentration on scooters/3Wheelers.

> We estimate a 30.6% 2018-22 Net Profit CAGR. We are 9.3% above

consensus due to our growth expectations in Europe (+7% in 2020).

> Main risks. Geopolitical tension in Asia; regulations, adverse weather.

Financials EURm

2018 2019E 2020E 2021E

Revenues (EURm) 1,390 1,521 1,628 1,741

EBITDA (EURm) 202 233 251 275

EBITDA margin (%) 14.5% 15.3% 15.4% 15.8%

EBIT (EURm) 93 118 133 156

EPS (EUR) 0.10 0.16 0.19 0.23

CFPS (EUR) 0.25 0.29 0.36 0.45

DPS (EUR) 0.09 0.10 0.10 0.11



2018* 2019E 2020E 2021E

P/E (x) 20.9 17.3 14.3 11.7

P/CF (x) 4.8 4.5 5.2 4.7

P/BV (x) 1.9 2.4 2.2 2.0

Dividend Yield 4.3% 3.6% 3.9% 4.2%

EV/EBITDA (x) 5.9 5.9 5.4 4.7

Debt/Equity (x) 1.1 1.1 0.9 0.7

Debt/EBITDA (x) 2.1 1.8 1.6 1.3

Source: Company data, UBI Banca Estimates *2018 av price

1.00

1.40

1.80

2.20

2.60

3.00

3.40

Oct

-18

No

v-18

Dec

-18

Jan

-19

Feb

-19

Mar

-19

Ap

r-19

May

-19

Jun

-19

Jul-

19

Au

g-19

Sep

-19

Oct

-19

Piaggio & C. S.p.a. FTSE Italia All-Share

PIAGGIO 15 October 2019

2

Key Financials

(EURm) 2018 2019E 2020E 2021E

Revenues 1,390 1,521 1,628 1,741

EBITDA 202 233 251 275

EBIT 93 118 133 156

NOPAT 62 79 89 105


Net Capital Employed 829 828 830 825

Shareholders’ Equity 399 403 435 480

Net Financial Position 429 426 394 345



2018 2019E 2020E 2021E

Net Debt/Ebitda (x) 2.1 1.8 1.6 1.3

Net Debt/Equity (x) 1.1 1.1 0.9 0.7



ROE (%) 9.0% 13.8% 15.4% 17.1%

ROI pre-tax (%) 11.2% 14.2% 16.1% 19.0%

ROCE (%) 7.5% 9.5% 10.8% 12.7%



2018 * 2019E 2020E 2021E

P/E (x) 20.9 17.3 14.3 11.7

P/BV (x) 1.9 2.4 2.2 2.0

P/CF (x) 4.8 4.5 5.2 4.7

Dividend Yield (%) 4.3% 3.6% 3.9% 4.2%

EV/Sales (x) 0.9 0.9 0.8 0.7

EV/EBITDA (x) 5.9 5.9 5.4 4.7

EV/EBIT (x) 12.8 11.8 10.2 8.3

EV/CE (x) 1.4 1.7 1.6 1.6


Key Value Drivers

(%) 2018 2019E 2020E 2021E

Payout 89.4% 62.7% 56.0% 49.3%

NWC/Sales -5.6% -7.4% -7.3% -7.2%

Capex/Sales 8.0% 8.4% 7.4% 6.6%



3

Index

1

INVESTMENT CASE: THE EUROPEAN REPLACEMENT CYCLE

4

2

SWOT ANALYSIS

9

3

FINANCIALS

10

4

VALUATION

12


4

INVESTMENT CASE: THE EUROPEAN REPLACEMENT CYCLE

We are initiating the coverage on Piaggio with a BUY rating based on the following:

A play on the replacement cycle just started in Europe. This cycle seems

resilient also to the macro-slow down we are witnessing;

The replacement cycle could be speed-up by the advent of electric vehicles,

on which Piaggio has a long-standing expertise;

The operating leverage the company has in its European footprint could

compound the volume growth in terms of EBIT impact;

Our estimates are above consensus (on average for 2019-21 Net Income by

8.7%);

The cash generation capability of the company has improved and this should

turn into higher dividend streams (we see a dividend yield above 4% from

2021).

Europe: the beginning of a replacement cycle

In our view the ageing of the vehicle circulating park coupled with public incentives

and urban access limitations are a powerful mix that is giving birth to a meaningful

replacement cycle in Europe.

Regarding the low emission zones, we have briefly summarized, here below, the

main urban access regulation for 2W vehicles adopted in major Southern Europe

countries that lead us think how vehicles must be at least Euro2 to circulate in LEZ:

Italy

o Milan: Two-stroke motorbikes and mopeds must be at least Euro2 to

access to Area C from Monday to Friday between 7:30am and

7:30pm, while from October 2019 all motorbikes must be at least

Euro2. To Area B the same rules applies from Monday to Friday

between 7:30am to 7:30pm;

o Rome: The railway ring is restricted permanently for Euro0

motorbikes and mopeds and from Monday to Friday for Euro1

motorbikes and mopeds.

Spain

o Madrid: Gasoline motorcycles manufactured prior to 2000 and

motorcycles produced before 2006 are permanently precluded from

entering the Madrid Central area. Instead, Gasoline motorcycles

manufactured after 2000 and diesel motorcycles produced from 2006

can access between 7am and 10pm. Lastly, full electric, hybrid, LPG

and CNG vehicles have fully free access to Madrid Central;

o Barcelona: During periods of high pollution, Euro2 is the minimum

requirement for motorcycles and mopeds to enter into the core city

from Monday to Friday between 7am and 10pm. These measures will

come into force permanently in 2020.

France

o Paris: the minimum requirements for motorcycles is Euro2 registered

from 1 July 2004 and is valid from Monday to Friday between 8am

and 10pm. Starting from 2022, only Euro3 motorcycles registered

from January 2007 will be accepted;


5

o Greater Paris: Only motorbikes registered from June 2000 can

access to the low emission zone from Monday to Friday between

8am and 10pm. This requirement will become tighter from July 2021,

when circulation will be limited to Euro2 motorbikes registered from

July 2004.

Greece

o Athens: In the city centre, vehicles up to 2.2 tonnes are only allowed

access to the LEZ on alternating days, depending on the last digit of

their license plate. The following vehicles are exempted from this

restriction: electric vehicles, vehicles complying with Euro 5 standard

or subsequent and at least Euro 4 gas-powered vehicles (LPG or

CNG) emitting less than 140g CO2/km.

In terms of circulating car park, the size of old vehicles is massive. In Italy,

according to ACI statistics, Euro0 2W vehicles reached 2.1 million at Dec-18

(24.1% of total), while Euro1 were around 1.5 million (17.7% of total), for an overall

3.7 million 2W fleet with more than 18 years average life (oldest in Europe) to be

ideally replaced in the forthcoming years. From the annual report of the Directorate

for Traffic, we found out that in Spain 1.1 million 2W vehicles are >15 years old

(Euro0 and Euro1), representing 34% of the comprehensive 2W national fleet.

Figure 1 - Italy and Spain Euro0 and Euro1 motorcycles

(Units, %) Italy – over 50cc Spain

Euro0 motorcycles 1,893,865 885,364

Euro1 motorcycles 1,076,847 242,651

Euro0 + Euro1 motorcycles 2,970,712 1,128,015

Total motorcycles 6,780,733 3,327,048

% of Euro0 and Euro1 43.8% 33.9%

2018 registrations 219,694 159,946

Source: ACI, Direccion General de Trafico

Therefore, just considering Italy and Spain, more than 4 million vehicles, do not

comply with current LEZ in Southern Europe and are eligible for government

subsidy programs. Obviously in many cases a trigger is needed to transform

“dormant” owners into buyers and government incentives could be exactly this.

In Italy, for instance, March 1 has seen the launch of the new ecobonus, a

measure passed by the Italian government to promote electric and hybrid vehicle

sales. For mopeds and motorcycles, a subsidy of 30% original purchase price

excluding VAT (up to EUR3,000) is recognized in case of scrapping of an Euro0 to

Euro3 vehicle. The measure is backed by an ecotax that aims to penalise high-

pollution models with a BMS based on CO2 emission levels, which are often

petrol-fuelled.

Figure 2 – 2019 ecobonus regulation

Beneficiary Subsidy Upper limit Conditions Plafond Benefit period

New electric or hybrid mopeds and motorcycles registered in Italy without cc cap

30% of original

purchase price

EUR3,000 excluding

VAT

Scrapping of an Euro0

to Euro3 vehicle of the

same category

EUR10 million Limited to 2019

Source: Ministry of Economic Development

Overall, out of the EUR10 million made available for the benefit at national level,


6

just a fraction, EUR0.6 million, have been used, mainly due to a technical issue on

the Ministry of Economic Development platform. Currently, the Italian government

is mulling additional scrapping incentives but the final form is still unknown.

Similar incentives have been established also in other European countries: among

the other, Spain MOVES program grants up to EUR700 for buying an electric

motorcycle, while in France the bonus is capped to EUR900.

The consequence of what we just said is turning, in our view, into a replacement cycle of which the magnitude is still unknown. The European market is coming from a decade of (massive) decline and 1H19 figures are, instead, showing an inversion:

Figure 3 – 2W EU registration evolution

Source: ACEM

If one can see our 6% YoY growth expectation for 2019 as bullish, in the next table

we show that simply assuming that 2H19 will grow as much as 2Q19 did, than

FY2019 growth would approach 9% (worth mentioning that 2Q19 showed a lower

growth rate than what seen in 1Q19):

Figure 4 – Estimate of 2H19 registrations growth based on 2Q19 figure

1Q18 2Q18 1H18 2H18 FY18 1Q19 2Q19 1H19 2H19 FY2019

Motorcycle 205,529 361,384 566,913 437,150 1,004,063 244,991 373,511 618,502 451,820 1,070,322

19.2% 3.4% 9.1%

6.6%

Mopeds 40,519 83,185 123,704 149,941 273,645 52,715 95,111 147,826 171,438 319,264

30.1% 14.3% 19.5%

16.7%


Our estimates on Piaggio sales in Europe are conservative: we assume a 30bps

market share loss in 2019 (in line with what seen in 1H19, mostly due to the lack of

stock and low production volumes) and 4bps gain going forward. We defined those

estimates as conservative because the share of Piaggio vehicles on total vehicles

get higher when the age grows. This is because of two factors: a) 50cc share of

total registrations was higher in the past than today (and in this segment Piaggio

had a higher market share); b) Piaggio share in non-50cc vehicles was higher in

the past than what it is today (it was around 40% at the beginning of 2000 vs.

around 30% as of last year).

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0

500

1,000

1,500

2,000

2,500

20

06A

20

07A

20

08A

20

09A

20

10A

20

11A

20

12A

20

13A

20

14A

20

15A

20

16A

20

17A

20

18A

20

19E

20

20E

20

21E

20

22E

Registrations % change


7

The growth of electric vehicles

A top-down theme that that works across the factors described above is the

emission reduction. In this context, the role of electric vehicles could be the one

that amplifies the top-down trend and works as an “excuse” to substitute the

vehicles and to give public incentives.

Although still a small fraction of the market, the growth of electric vehicles as

picked-up recently and we believe, talking with several producers like Piaggio,

Askoll EVA and Energica, that the product offer will increase thus driving more

sales:

Figure 5 – Italian Electric mopeds and motorcycles registrations

Source: ANCMA

According to market researches, at the moment, the typical buyer of an electric

premium 2W is:

A wealthy individual;

Focused on the environment;

In love with technology and its recent trends;

That wants to diversify itself from the mass-market.

Business models here could be B-2-C (Piaggio option in our view) and B-2-B

(selling to fleet operators, zero margin, high competition, low product

differentiation).

Piaggio offer in this spot is focused on the premium segment but, in our view, is

due to be expanded soon.

…and Piaggio can leverage on its portfolio of technologies

In general terms, Piaggio has a wide portfolio of technologies which derives from

its wide span of activities (2W, 3W, bikes, motorbikes, mopeds, scooters, etc) and

from its history and DNA which, for instance, brought the company to launch

Piaggio Fast Forward.

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2011 2012 2013 2014 2015 2016 2017 2018

Electric vehicles % of total


8

Figure 6 - Piaggio technologies’ portfolio

Petrol Diesel Gas Hybrid Electric

Bikes

X

Scooters X

O X

Motorbikes X

3W X X X O O

4W X X X X O

Source: Company data Legend: X stands for current technology, O stands for future expected technology

The evolution of mobility is still underway, but clearly mastering a wide span of

technologies will allow to be well positioned in the future and should be a source of

competitive advantage.

As we will see in the valuation paragraph, Piaggio pays for this diversification in

terms of high capex, lower return on capital employed and cash flow generation.

We believe however that it is fair and coherent to value in some way the portfolio of

technologies that the company has when compared to peers which are focused on

only some segments of the market.


9

SWOT ANALYSIS

Strengths

Piagio is one of the major worldwide player in the 2 wheelers sector with

strong foothold in the European market;

A major player in the Indian 3/4 wheelers market;

An unparalleled portfolio of brands where Vespa is clearly the star, but others

like for instance Moto Guzzi and Piaggio (MP3) itself have a place in the

consumers’ minds;

A unique combination of engines (petrol/hybrid/electric, 50cc to >1,000cc) and

segments (2W, 3W, 4W – bikes, scooters, mopeds, motorbikes, LCVs) that

makes the Italian company the most diversified of its peers;

Solid financials (also during downturns: profitable in 2008-09, cash generative

in 2009) allow PIAGGIO to remain the innovation leader on the market;

Its family-owned nature allows to plan for the long-term and to weather short

term discontinuity;

Weaknesses

Some of its competitors (Yamaha, Honda mostly) can boast massive sizes on

which leverage product/technology/distribution investments;

The company is quite levered, when compared to its peer group (which stand

on 1.2x Debt/EBITDA on 2019 and 0.2x on 2020);

Large amount of Intangibles (EUR0.7 billion);

The business is somewhat impacted by weather conditions.

Opportunities

A under-utilized production base (in Europe) which leaves space to significant

operating leverage;

The (organized) entrance in markets like Latam, Africa and Middle East may

provide opportunities not yet visible to increase the revenues pool while

maintaining the current footprint/product offer;

Broader technological developments (electric, gas-powered 3-4 wheelers)

work in favor of industry leaders like Piaggio that could bear the required

investments;

Threats

Millennials less inclined to 2 wheelers when compared to older generations;

Past down-cycles have shown that 2 wheelers, although important, are not

essential to people’s transportation needs and, as such, their substitution

could be delayed for some more years;

Future mobility operators may adopt the user-ship model rather than the

ownership and for OEMs finding a profitable approach to this new form is not

to give for granted;

Geopolitical tension in South East Asia.


10

FINANCIALS

Our estimates are broadly aligned with consensus on 2019 and than above on

2020 and 2021. The gap on 2021 sales is driven by our growth estimates on

Europe where we see a replacement cycle starting.

This, in turns, impacts also the EBITDA margin as we calculate a very strong

operating leverage in Europe. The slight reduction in tax rate is another difference

between UBI and consensus estimates and, again, is driven by the growth in

Europe and goes beyond the reduction just announced on India (from 30% to 22%,

which we estimate reaching 25% including all the additional levies).

Figure 7 – UBI vs Consensus estimates

2019 2020 2021

UBI Cons. UBI vs. cons. UBI Cons. UBI vs. cons. UBI Cons. UBI vs. cons.

Sales 1,520 1,530 -1% 1,626 1,615 1% 1,741 1,687 3%

EBITDA 232 231 1% 249 246 1% 275 260 6%

margin 15.3% 15.1% 15.3% 15.2% 15.8% 15.4%

EBIT 117 116 1% 132 131 1% 156 148 6%

margin 7.7% 7.6% 8.1% 8.1% 9.0% 8.8%

Net profit 55 52 4.7% 66 60 9.3% 82 72 15.0%

NFP 426 436 -2.3% 396 414 -4.1% 345 380 -9.4%

D&A implied 115 115

117 115 118 112


Going down to volumes/prices by market we stress how the growth we assume for

Europe is the major difference with consensus. Furthermore, our experience tells

us that the chances that all markets are heading in the same direction at the same

time is quite low. In our estimates in fact, while we are bullish on Europe, we

assume flattish volumes in Vietnam and in India both 3W and 2W (where we see

declining volumes in 2019). As of today we expect in fact to see new regulations

(Bharat VI) to push up prices and, consequently, impact volumes (pre-buy during

the course of 2020 and than “overhang” in 2021). Furthermore, the macro-

economic conditions in India are showing a slow down, although the government

launched new initiatives to stimulate the economy. One of those measure could be

a scrappage incentive plan which it is not included in our estimates. Although it is

difficult at this stage to quantify the impact, given the huge (and old) circulating

park in India it will likely have a positive impact on volumes.


11

Figure 8 – Volumes and ARPU by market

2018 2019E 2020E 2021E

Volumes

2W - Total 393 414 445 474

EMEA 205 213 229 246

Americas 14 15 15 16

Vietnam 38 38 39 40

Indonesia 13 20 25 30

Rest of SE Asia 35 43 46 49

India 88 85 91 93

LCV - Total 211 214 225 228

India 194 193 203 204

EMEA & Americas 16 21 22 23

Piaggio - Total 604 628 670 701

ARPU + ForEx - YoY change

2W

EMEA

4.0% 2.0% 1.0%

Americas

2.0% 2.0% 1.0%

Vietnam

5.0% 1.0% 1.0%

Indonesia

5.0% 2.0% 2.0%

Rest of SE Asia

7.0% 1.0% 1.0%

India

4.0% -2.0% 3.0%

LCV

India

5% -2% 3%

EMEA & Americas

-7% -3% 0%

Piaggio - Total

5.2% 0.2% 2.1%


A closer look at operating leverage, costs and margins

While we estimate that the Piaggio Group has an overall operating leverage of

around 25%, we calculated that the same figure is above 35% in Europe alone. A

higher share of fix costs on the total base coupled with a lower utilization rates is a

plausible explanation in our view.

Figure 9 – Piaggio Group – Overall operating leverage

2012 2013 2014 2015 2016 2017 2018 2019 Median

Revenues change -110 -194 1 82 18 29 47 133

EBITDA change -24.4 -29.8 12.9 2.4 9.0 21.6 9.4 29.7

Op leverage 22.1% 15.4% 1068.7% 3.0% 50.4% 73.6% 20.0% 22.3% 22.2%


We found very interesting, to extrapolate the operating leverage in Europe, to look

at 2016. In that specific year, group revenues were broadly flat (plus EUR18

million, or +1.4% YoY) but EBITDA grew by EUR9 million. Revenues made on

Indian 3W and Asian 2W (excluding India) declined and, we estimate, this has

reduced EBITDA by around EUR3 million. European revenues grew and, implicitly,

this returns an operating leverage of 37%, as can be seen in the following table.

Now, were we to assume a similar operating leverage in 2019 and 2020 and,

based on our revenues estimates, we would get a YoY increase in EBITDA of

EUR20 million for 2019 and EUR23 million for 2020 (which explains 60% of our

2019 EBITDA growth and more than 100% of the 2020 one):


12

Figure 10 – Piaggio Group – European operating leverage

(EURm) 2016 2019E 2020E

European revenues increase 33.4 53.4 61.1

Group EBITDA increase 9.0

YoY change in Asia EBITDA -1.7

YoY change in India EBITDA -1.7 19.8 22.7

Op leverage implied 37% 37% 37%


We than estimates:

Higher D&A as a consequence of the increase in capex;

Declining financial charges as a consequence of cash generation and

reduction in the overage cost of debt;

Slightly lower tax rate due to an increase in the share of profit coming from

Europe. From 2020 we are including the benefit of the patent box (in the tune

of EUR1 million). We are not sure the benefit will be accounted for in the P&L

and the company is not including it in the guidance. For sure it will imply a

lower level of csh-taxes.

As far as the cash flow is concerned, we assume a significant release of cash from

NWC in 2019 (de-stocking in Europe) which should moderate going forward and

driven by revenues growth (Piaggio works with negative NWC/Sales). We estimate

a capex/sales in the 6.4% to 8.4% range (declining from the most recent historical

figures).

Assuming a dividend growth of 8% p.a. and no buy back the net debt position

should improve by more than EUR100 million for the 2019-22 period, thus ending

with a very low leverage in 2022 (1x Debt/EBITDA). Were our estimates correct,

space for a dividend increase and/or a buy back is clearly there.

VALUATION

Our target price of EUR3.20 was obtained by averaging different valuation

methods:

A DCF and an EVA (which we consider the main criteria) which returned a fair

value of EUR3.23 and EUR3.04 respectively;

A peer comparison, although exact comparables are not easy to find, which

returned a fair value of EUR3.4;

Upside to our rating/TP may be given by:

A stronger than expected replacement cycle in Europe, that could compound

on the operating leverage granted by a under-utilized production footprint;

Scrapping incentives both in Italy and India.

Any M&A activity aiming to “unbundle” the conglomerate nature of the group

may prove value accretive.

Vice versa, downside to our rating/TP may come from:

The contagion of the current macro-slowdown to the 2 wheelers replacement

cycle that has just began;

An escalating in the trade war that could hit Asian economis.


13

Figure 11 – Summary Valuation (EUR)


Peers comparison

Before entering into the comparison exercise, it is worth noticing that peers share

prices have been broadly flat YTD (although with massive gaps between one and

the other) while Piaggio posted a strong +45%, outperforming the broader index

(FTSE Italia All-share up by 19.4% YoY). The peers comparison returns a fair

value of EUR3.4, as can be seen in the next table:

Figure 12 – Peers Valuation

(EURm, x) 2020E 2021E Average

EV/EBIT - peers 12.4 12.0

Piaggio EBIT 133 156

Piaggio implied EV 1658 1877

Piaggio (Debt)/Cash -394 -345

Pension liabilities -40 -40

Piaggio Equity value 1223 1492

Piaggio Equity value - Per share 3.36 4.13 3.7

PE - Peers 15.6 14.0

Piaggio EPS 0.19 0.23

Piaggio Equity value - Per share 2.93 3.22 3.0

Average 3.15 3.67 3.40


As peers we selected a group of companies which could be used as a guidance in

terms of valuation but are not 100% comparable with Piaggio:

KTM: doesn’t sell scooters and 3 wheelers (while Piaggio is less exposed to

the off-road market than KTM). Furthermore, the stock is not very liquid;

Harley Davidson: very different demographic profile of the customers base:

flat to declining sales, but with very high EBITDA margin (thanks to the

financials services >38%) and cash conversion;

Polaris: active mostly in 4 wheelers and quad, differently from Piaggio;

3.23

3.41

3.04

3.20



14

Bajaj: active in motorcycles and 3 wheelers like Piaggio. However, it is mostly

an Indian business (70% of the revenues come from India, China and Japan)

which compounds the comparability issue due to different accounting

standards. Furthermore, it doesn’t operate in the scooter market and it owns a

control stake in KTM;

TVS: the most comparable in terms of product offer (scooters, motorbikes, 3

wheelers and mopeds). However, the issues of different accounting standard

and revenues concentration (84% in India, China and Japan) remain;

Hero Honda: active mostly in India, different accounting standards;

In the SoP valuation we used also Yamaha Motor to value the non-Vespa 2W

business in Asia. However it is worth noting that Yamaha gets the vast

majority of its EBIT through marine engines;

When compared to its peers Piaggio shows:

Lower cash generation (in terms of FCF/EBITDA, and Cash conversion ratio);

Higher Capex/Sales;

Lower ROCE;

Higher EBITDA margin;

Higher dividend yield.

This is explained, in our view, by the multi-brand and multi-market nature of

Piaggio which implies more investment streams, higher capital employed (a wider

production footprint) that returns a higher EBITDA margin but, still, not enough to

generate more cash than pure players.

However, as we said, this diversity is a plus in the evolution that we see for the

mobility sector: premium and mass market brand, ICE and electric vehicles 2 and 3

wheelers will have to be mixed in terms of solutions to customers needs.

Furthermore, the unfavorable comparison for Piaggio is also driven by the fact that

its largest market, Europe, has been declining. A recovery of that market, which is

at the core of our equity story, will have a dis-proportionate impact on Piaggio

financials. In fact, for all those ratios we mentioned, the gap with competition

shrinks in the outer year of the comparison (2021).


Name Price Currency Mkt Cap EV/EBITDA EV/EBIT P/E Adjusted FCF Yield

bn 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

KTM Industries AG 45.4 USD 1.0 5.8 x 5.3 x 4.7 x 10.1 x 9.3 x 7.9 x 20.4 18.5 14.8 6.1% 2.9% 4.5%

Yamaha Motor Co., Ltd. 16.7 USD 5.8 5.1 x 4.6 x 4.2 x 7.1 x 6.4 x 5.6 x 8.3 7.6 6.9 7.5% 6.9% 10.1%

Harley-Davidson, Inc. 31.9 USD 5.0 12.9 x 11.9 x 11.9 x 17.1 x 16.3 x 16.3 x 10.1 9.8 9.6 11.7% 14.1% NA

Polaris Inc. 79.8 EUR 4.9 8.6 x 8.0 x 7.2 x 13.6 x 11.5 x 11.3 x 14.1 13.1 12.0 5.7% 6.7% NA

Bajaj Auto Limited. 37.7 USD 10.9 14.5 x 12.9 x 12.1 x 15.1 x 13.3 x 12.7 x 18.1 16.7 15.4 4.8% 4.7% 5.2%

TVS Motor Comp. Limited 5.1 USD 2.4 12.6 x 11.0 x 9.9 x 17.3 x 15.2 x 14.1 x 25.8 22.6 19.6 3.8% 3.9% 4.2%

Median 11.2 x 10.1 x 9.2 x 14.4 x 12.4 x 12.0 x 17.1 x 15.6 x 14.0 x 5.9% 5.4% 5.2%

Average

10.7 x 9.7 x 9.0 x 14.1 x 12.7 x 12.0 x 17.4 x 15.9 x 14.1 x 6.6% 6.5% 6.0%

Piaggio 2.68 EUR 960 5.4 x 4.8 x 4.2 x 11.9 x 10.3 x 8.5 x 17.5 x 14.6 x 11.9 x 3.6% 3.1% 5.0%

Premium/(Disc.) to peers

-51.4% -52.3% -54.0% -17.4% -17.2% -29.0% 2.2% -6.7% -14.7% 80.8% 111.1% 21.1%

Source: FactSet


15

Summing up, having said that a perfect peer doesn’t exit, obviously a fair value has

to be compared with what is available on the market in a given time. Here below

you can find Piaggio’s multiples at our target price, which in our view are fair

considered the strong growth profile (i.e. the stock is more expensive on 2019 P/E

and gets cheaper by 2021):

Figure 14 – PE at target price

(EUR, x) 2019 2020 2021 2022

TP 3.2

EPS 0.16 0.19 0.23 0.27

PE 20.6 17.1 13.9 11.7


Discounted Cash Flow Valuation

We believe that a DCF valuation incorporates well the merits of a portfolio of

unique brands like Piaggio, able to return sustainable long terms cash streams.

However, to take into account the cyclical nature of the business, we adopted a

two-stage DCF based on:

Explicit estimates until 2022;

For a 2023-24 period, we assume a recession (revenues down 10% in

2023) and then a stabilization in 2024 (flat revenues). EBIT margin is

expected to decline by 180bps while capex declines YoY assuming some

corrective actions by the management, NWC should release cash;

Terminal value calculated on the “stabilization” year (2024), thus not

particularly aggressive. EBIT margin assumed at 7.8%, capex in line with

D&A, and neutral. This returns an exit EV/EBITDA multiple of 10.0x;

A WACC of 5.9% deriving from:

o A free risk rate of 2.5%, higher than the current market one;

o An equity risk premium of 4.5%;

o A beta of 1.0;

o A sustainable D/E of 25% (implying Debt/EBITDA of 1.3x, in line

with peers’ average).

In summary, here below we present the results of our DCF valuation:

Figure 15 – DCF Valuation

(EURm, %)

PV of future cash flows 486.0

PV of Terminal value 1,128.3

Enterprise Value 1,614.3

Net (Debt)/Cash 2018 -426.2

Minorities 0.0

Equity accounted investments 7.4

Pension liabilities -40.9

Own shares 2.1

Other EV adjustments 0.0

Equity Value 1,156.8

Long Term growth rate 1.0%

No of shares 358.2

Equity Value ps 3.23



16

EVA Valuation

We particularly like the EVA method because, on top of being an absolute

valuation method, it takes into account the capital efficiency of a company and the

level of utilization of its asset base. This is extremely useful when treating

companies with a strong brand that, by definition, self-limit their product supply to

the market.

The way we use the EVA theory to value companies is quite straightforward: we

look at the post tax ROACE (or ROIC) and then compare it to the WACC. In

Piaggio’s case this ratio, we estimate, is 1.8. This means that for every euro

employed in the company being it equity or debt than a EUR1.8 is obtained in

return. Therefore, by applying this ratio to the overall capital employed a fair EV is

obtained which returned a fair value of EUR3.04:


(EURm, %)

Av. CE 827

Av. EBIT (post tax) 82

Av. ROACE 9.9%

WACC 5.4%

Risk free rate 2.5%

Beta 1.0

Market premium 4.5%

Cost of Equity 6.5%

Cost of debt 2.7%

% Debt on CE 37%

ROACE/WACC 1.8

CE (Av. '18-'21) 827

A - Implied EV 1,517

B - Net (Debt)/Cash - Av. '19-'21 -391

D - Tax assets (NPV) 0

E - Own shares 2

F - Pension liabilities -41

Implied Equity value (A-B-C+D+E) 1,088

N° of shares 358

Piaggio equity value PS 3.04



ROACE

9.0% 10.0% 11.0%

WACC 4.9% 3.05 3.53 3.99

5.4% 2.65 3.09 3.51

5.9% 2.33 2.73 3.11


Sum of the Parts Valuation

We didn’t include this method in the calculation of the target price because we

believe that, to achieve the value expressed by the parts, a group of businesses


17

has to be split (at least partially: i.e. Vespa spin off) otherwise our experience tells

us that the market will not be ready to recognize the full value.

However, we find the results of a SoP analysis very interesting to share.

Furthermore, it could be a guide in case the company were to announce some

extraordinary deal. In our SoP exercise we value the different businesses using

EV/EBITDA multiples of what we believe being the most comparable peers:

For the iconic Vespa business (India is excluded) we are not shy in

applying Harley Davidson multiples. The superior growth profile of vespa

could even call for higher multiples to be applied, but we stayed on the

cautious side, also to take in account the risk that a different accounting

principles may add;

The Indian business of Vespa instead, which still has low profitability

and market price positioning was valued using the Indian peers;

The non-Vespa European 2 wheelers business, which is more affected

by price competition, was valued using Yamaha (mass market business)

multiples. It is worth noticing that: a) Yamaha makes the majority of its

profit on marine engines; b) the accounting is different; c) Piaggio makes

money in this area while Yamaha loses money; d) low interest rates in

Japan command lower multiples. As such a slightly higher multiples would

not be insane;

The non-Vespa Asean 2 wheelers business has been valued averaging

Yamaha and Indian peers;

The Indian 3-4 wheelers business has been valued based on the main

local pure player, Hero Honda. However it is worth noticing the difference

in accounting standards;

The non Asian commercial vehicles business has been valued using

Volvo AB multiples.

The resulting fair value was EUR4.5 and shows the potential embedded in a group

that, as explained while analyzing peers, pays in terms of cash generation and

ROCE the effort of maintaining such a diversified portfolio.

Figure 18 – Sum of Parts Valuation

Sector Units (000) Revenues EBITDA Margin Multiple EV

Vespa 130 390 86 22.0% 12.0 1,030.6

Vespa India 85 68 3 5.0% 13.0 44.0

Other 2W Europe/US 136 459 41 9.0% 4.0 165.2

Other 2W SE Asia 63 138 21 15.0% 7.5 154.8

Indian 3-4W 193 358 65 18.3% 9.1 599.1

Commercial Vehicles 21 107 16 15.0% 5.0 80.6

Total 627.9 1,520.8 232.9 2,074.3

Net (Debt)/Cash 2019 (425.5)

Equity accounted investments 7.4

Pension liabilities (40.9)

Own shares 2.1

Equity Value 1,617.5

No of shares 358.2

Equity Value ps 4.5



18

Income Statement

(EURm) 2018 2019E 2020E 2021E

Net Revenues 1,390 1,521 1,628 1,741 EBITDA 202 233 251 275 EBITDA margin 14.5% 15.3% 15.4% 15.8% EBIT 93 118 133 156 EBIT margin 6.7% 7.7% 8.2% 9.0% Net financial income /expense -25 -25 -23 -21 Associates & Others 0 0 0 0 Profit before taxes 68 93 110 135 Taxes -32 -37 -43 -53 Minorities & discontinuing ops 0 0 0 0 Net Income 36 56 67 82


Balance Sheet

(EURm) 2018 2019E 2020E 2021E

Net working capital -78 -113 -119 -126

Net Fixed assets 1,043 1,061 1,070 1,073

M/L term funds 136 119 121 122

Capital employed 829 828 830 825

Shareholders' equity 400 403 436 480

Minorities 0 0 0 0

Shareholders' funds 399 403 435 480

Net financial debt/(cash) 426 394 345 284


Cash Flow Statement

(EURm) 2018 2019E 2020E 2021E

NFP Beginning of Period 447 429 426 394

EBITDA 202 233 251 275

Interest expenses -25 -25 -23 -21

Cash taxes -32 -37 -43 -53

Change in Working Capital 14 35 6 7

Other 0 10 -5 -5

Operating Cash Flow 158 216 186 202

Net Capex -112 -128 -120 -115

Other Investments 0 0 0 0


Dividends Paid -20 -52 -35 -38

Other & Chg in Consolid. Area -9 -32 0 0

Chg in Net Worth & capital Incr. 0 0 0 0

Change in NFP 17 4 31 50

NFP End of Period 429 426 394 345



19

Financial Ratios

(%) 2018 2019E 2020E 2021E

ROE 9.0% 13.8% 15.4% 17.1%

ROI 11.2% 14.2% 16.1% 19.0%

Net Fin. Debt/Equity (x) 1.1 1.1 0.9 0.7

Net Fin. Debt/EBITDA (x) 2.1 1.8 1.6 1.3


NWC/Sales -5.6% -7.4% -7.3% -7.2%

Capex/Sales 8.0% 8.4% 7.4% 6.6%

Pay Out Ratio 89.4% 62.7% 56.0% 49.3%


Per Share Data

(EUR) 2018 2019E 2020E 2021E

EPS 0.10 0.16 0.19 0.23

DPS 0.09 0.10 0.10 0.11

Op. CFPS 0.44 0.60 0.52 0.57

Free CFPS 0.05 0.01 0.09 0.14

BVPS 1.12 1.13 1.22 1.34


Stock Market Ratios

(x) 2018 * 2019E 2020E 2021E

P/E 20.9 17.3 14.3 11.7

P/OpCFPS 4.8 4.5 5.2 4.7

P/BV 1.9 2.4 2.2 2.0

Dividend Yield (%) 4.3% 3.6% 3.9% 4.2%


EV (EURm) 1,185 1,385 1,354 1,305

EV/Sales 0.9 0.9 0.8 0.7

EV/EBITDA 5.9 5.9 5.4 4.7

EV/EBIT 12.8 11.8 10.2 8.3



Growth Rates

(%) 2018 2019E 2020E 2021E

Growth Group Net Sales 3.5% 9.4% 7.1% 6.9%

Growth EBITDA 4.9% 15.4% 7.6% 9.6%

Growth EBIT 28.3% 26.7% 13.5% 17.2%

Growth Net Profit 80.5% 53.9% 21.0% 22.5%



20

Disclaimer

Analyst Declaration

This research report (the “Report”) has been prepared by Massimo Vecchio and Dario Fasani on behalf of UBI Banca S.p.A. (“UBI Banca”) in the context of the ancillary service provided by UBI Banca named “Investment research and financial analysis or other forms of recommendation relating to transactions in financial instruments” under Paragraph 5), Section B, Annex I of the Directive 2014/65/EU (“MiFID II”). UBI Banca is an Italian bank under art. 4 (1)(27) of MiFID II and it is supervised by the European Central Bank and duly authorised to provide investment services pursuant to Article 1, Paragraph 5, letter a), b), c), c-bis), e) and f) of the Legislative Decree 24 February 1998, n° 58 under the supervision of the Italian Authority for the financial markets (Consob). UBI Banca has its head office at Piazza Vittorio Veneto 8, 24122 Bergamo.

The analyst who prepared the Report, and whose name and role appear on the front page, certifies that:

a. The views expressed on the companies, mentioned herein (the “Companies”) accurately reflect his personal views, but do not represent the views or opinions of UBI Banca, its management or any other company which is part of or affiliated with UBI Banca group (the “UBI Banca Group”). It may be possible that some UBI Banca Group officers may disagree with the views expressed in this Report;

b. He has not received, and will not receive any direct or indirect compensation in exchange for any views expressed in this Report;

c. The analyst does not own any securities and/or any other financial instruments issued by the Company or any financial instrument which the price depends on, or is linked to any securities and/or any financial instruments issued by the Company.

d. Neither the analyst nor any member of the analyst’s household serves as an officer, director or advisory board member of the Company.

e. The remuneration of the analyst is not directly tied to transactions for services for investment firms or other types of transactions it or any legal person, part of the same group performs, or to trading fees it or any legal person that is part of the same group receives.

f. Massimo Vecchio is a member of AIAF.

General disclosure

This Report is for information purposes only. This Report (i) is not, nor may it be construed, to constitute, an offer for sale or subscription or of a solicitation of any offer to buy or subscribe for any securities issued or to be issued by the Company, (ii) should not be regarded as a substitute for the exercise of the recipient’s own judgement. In addition, the information included in this Report may not be suitable for all recipients. Therefore the recipient should conduct their own investigations and analysis of the Company and securities referred to in this document, and make their own investment decisions without undue reliance on its contents. Neither UBI Banca, nor any other company belonging to the UBI Banca Group, nor any of its directors, managers, officers or employees, accepts any direct or indirect liability whatsoever (in negligence or otherwise), and accordingly no direct or indirect liability whatsoever shall be assumed by, or shall be placed on, UBI Banca, or any other company belonging to the UBI Banca Group, or any of its directors, managers, officers or employees, for any loss, damage, cost, expense, lower earnings howsoever arising from any use of this Report or its contents or otherwise arising in connection with this Report.


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The information provided and the opinions expressed in this Report are based upon information and data provided to the public by the Company or news otherwise public, and refers to the date of publication of the Report. The sources (press publications, financial statements, current and periodic releases, as well as meetings and telephone conversations with the Company’s representatives) are believed to be reliable and in good faith, but no representation or warranty, express or implied, is made by UBI Banca as to their accuracy, completeness or correctness. Past performance is not a guarantee of future results. Any opinions, forecasts or estimates contained herein constitute a judgement as of the date of this Report, and there can be no assurance that the future results of the Company and/or any future events involving directly or indirectly the Company will be consistent with any such opinions, forecasts or estimates. Any information herein is subject to change, update or amendment without notice by UBI Banca subsequent to the date of this Report, with no undertaking by UBI Banca to notify the recipient of this Report of such change, update or amendment.

Organizational and administrative arrangements to prevent conflicts of interests

UBI Banca maintains procedures and organizational mechanism (physical and non physical barriers designed to restrict the flow of information between the unit which performs investment research activity, and other units of UBI Banca) to prevent and professionally manage conflicts of interest in relation to investment research in accordance with art. 23 of Directive 2014/65/EU and under art. 34 (3) and art. 37 of the Regulation 2017/565/EU.

More specifically, UBI Banca has established, implements and maintains an effective conflicts of interests policy aimed at preventing and managing the potential conflicts of interest that could occur during the performance of the investment research services.

Insofar as the above mentioned organizational and administrative arrangements established by UBI Banca to prevent or manage potential conflicts of interests are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of the client will be prevented, UBI Banca engages to provide a clear disclosure of the specific conflicts of interests arising from the performance of investment research services, including a description of the sources of those conflicts and the steps undertaken to mitigate them, taking into account the nature of the client to whom the disclosure is being made. For further information please see UBI Banca’s website (www.ubibanca.com/equity-research - “Informativa sintetica sull’attività di ricerca”) and (www.ubibanca.com/Mifid - “Policy sintetica conflitti di interessi”). More details about the conflicts of interests policy will be provided by UBI Banca upon request.

Disclosure of interests and conflicts of interests pursuant to Delegated Regulation 2016/958/EU

In relation to the Companies the following interest/conflict of interest have been found:

> UBI Banca may have long or short positions with the issuers

> UBI Banca has delivered corporate finance services to CNH Industrial N.V. and Ferrari N.V. in the last 12 months

On the basis of the checks carried out no other interest/conflict of interest arose.

Frequency of updates

UBI Banca aims to provide continuous coverage of the companies in conjunction with the timing of periodical accounting reports and any exceptional event that occurs affecting the issuer’s sphere of operations and in any case at least twice per year. The companies for which UBI Banca acts as Sponsor or Specialist are covered in compliance with regulations



http://www.ubibanca.com/Mifid


22

of the market authorities.

For further information please refer to www.ubibanca.com/equity-research

Valuation methodology

UBI Banca’s analysts value the Company subject to their recommendations using several methods among which the most prevalent are: the Discounted Cash Flow method (DCF), the Economic Value Added method (EVA), the Multiple comparison method, the SOP method and the NAV method.

The analysts use the above valuation methods alternatively and/or jointly at their discretion. The assigned target price may differ from their fair value, as it also takes into account overall market/sector conditions, corporate/market events, and corporate specifics (i.e. holding discounts) reasonably considered to be possible drivers of the company’s share price performance. These factors may also be assessed using the methodologies indicated above.

For further information please refer to www.ubibanca.com/equity-research.

Ranking system

UBI Banca’s analysts use an “absolute” rating system, not related to market performance. The explanation of the rating system is listed below:

Buy: if the target price is 15% higher than the market price, over the next 12 months.

Hold: if the target price is 15% below or 15% above the market price, over the next 12 months.

Sell: if the target price is 15% lower than the market price, over the next 12 months.

No Rating: the investment rating and target price have been suspended as there is not sufficient fundamental basis for determining an investment rating or target. The previous investment rating and target price, if any, are no longer in effect. Alternatively, No Rating is assigned in certain circumstances when UBI Banca is acting in any advisory capacity in a strategic transaction involving the Company.

Target price: the market price that the analyst believes that the share may reach within a one-year time horizon.

Market price: closing price on the day before the issue date of the report, appearing on the first page.

Distribution

Italy: This document is intended for distribution in electronic form to “Professional Clients” and “Qualified Counterparties” as defined by Legislative Decree 24 February 1998, n. 58 and by Consob Regulation n. 16190 dated 29.10.2007, as further amended and supplemented.

This Report has been released within 30 minutes from the timing reported on the front page.

IN THE UNITED KINGDOM, THIS DOCUMENT IS BEING DISTRIBUTED ONLY TO, AND IS DIRECTED ONLY AT PERSONS WHO (A) ARE (I) PERSONS FALLING WITHIN ARTICLE 19 OR ARTICLE 49 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005 (AND ONLY WHERE THE CONDITIONS CONTAINED IN THOSE ARTICLES HAVE BEEN, OR WILL AT THE RELEVANT TIME BE, SATISFIED) OR (II) ANY OTHER PERSONS TO WHOM IT MAY BE LAWFULLY COMMUNICATED; AND (B) ARE QUALIFIED INVESTORS WITHIN THE MEANING OF ARTICLE 2(1)(E) OF THE PROSPECTUS DIRECTIVE (DIRECTIVE 2003/71/EC), (ALL SUCH PERSONS BEING REFERRED TO AS "RELEVANT




23

PERSONS"). THIS DOCUMENT MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS. SWITZERLAND THIS REPORT DOES NOT CONSTITUE A PROSPECTUS WITHIN THE MEANING OF THE ARTICLE 652a OR ART. 1156 OF THE SWISS CODE OF OBLIGATIONS OR A LISTING PROSPECTUS WITHIN THE MEANING OF THE LISTING RULES OF THE SIX SWISS EXCHANGE OR ANY OTHER TRADING VENUES IN SWITZERLAND, OR A SIMILAR COMMUNICATION WITHIN THE MEANING OF ART. 752 OF THE SWISS CODE OF OBBLIGATIONS, AND HAS BEEN PREPARED WITHOUT REGARD TO THE SWISS LAWS AND REGULATIONS, AND DOES NOT CONSTITUTE AN OFFER TO SUBSCRIBE FOR, BUY OR OTHERWISE ACQUIRE ANY SECURITY OF THE COMPANY.

Copyright

This Report is being supplied solely for the recipient’s information and may not be reproduced, redistributed or passed on, directly or indirectly to any other person or published, in whole or in part, for any purpose without prior written consent of UBI Banca.

The copyright and intellectual property rights on the data are owned by UBI Banca Group, unless otherwise indicated. The data, information, opinions and valuations contained in this Report may not be subject to further distribution or reproduction, in any form or via any means, even in part, unless expressly consented by UBI Banca.

By accepting this Report the recipient agrees to be bound by all of the forgoing provisions.

Distribution of ratings

Equity rating dispersion in the past 12 months

Buy Hold Sell No Rating

89.8% 6.1% 2.1% 2.0%

Proportion on issuers to which UBI Banca has supplied investment banking services relating to the last 12 months

Buy Hold Sell No Rating

95.9% 100% 100% 100%

For further information regarding yearly and quarterly rating statistics and descriptions, please refer to www.ubibanca.com/equity-research.



24

SERVIZIO STUDI

Head of Research Department

Giovanni Barone

[email protected]

Industry Research

Macroeconomic and Financial Market Research

Equity Research

Enza De Vita

Francesca Pascali

Marco Cristofori

[email protected]

[email protected]

+39.02.6275 3015

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Anna Cristina Visconti

Vincenzo Petrignano

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Massimo Vecchio

+39.02.6275 3016

Paolo Manzoni

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Oriana Cardani, CFA

Quantitative Analysis

Paolo Leoni

+39.02.6275 3017

[email protected]

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Francesco Martinelli

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Dario Fasani

+39.02.6275 3014

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ECM & DCM

GLOBAL MARKETS SALES

Head of ECM & DCM

Head of Global Markets Sales

Marco Germano (Key Executive)

Alessandro Michele Ravogli

+39.02.7781 4651

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Head of Sales ECM & DCM

Gisella Barisone (Key Executive)

Andrea Paolo Martini

+39.02.7781 4618

+39.02.7781.4341

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Ilenia Osimi

Roberta Pupeschi

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+39.02.7781 4682

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Pierfrancesco Genoviva

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