BMW [BAYERISCHE MOTOREN WERKE AG]

NIKITA SHCHUKIN, QU MING YUAN, HWAIKIAN TAN, MASCHA SAMKOVA

TABLE OF CONTENTS

• Industry overview• Company overview• New technology• Electric Vehicles• Valuation• Risks

INDUSTRY OVERVIEW• Luxury car market Luxury car = vehicle costing 28,000+ €

• Product segments

Price Segment: Lower, Middle, Upper.Type: Sedan, SUV, Sport Luxury, Super Luxury.

• Major luxury markets in 2017+ are the USA, China, Germany and UK.

• Compound growth of luxury car market of about 10%.

Global Luxury Car Market (€ billion)

● Oligopolistic market with high entry barriers and capital investment requirements.

● 3 key players BMW, VW, Mercedes-Benz. Hold 80% share of global luxury car market.

● Higher margins on lower sales due to brand value.

Profit margins for luxury vs. economy cars in the US FY15

Luxury or Major Luxury Lines

Predominantly Economy

INDUSTRY OVERVIEW

• German-owned company founded in 1916.

• Headquartered in Munich, Germany.

• Design, manufacturing and sales of premium cars, motorcycles and engines.

• Operating segments: Automotive, Motorcycles, Financial Services.

• 31 production locations in 14 countries.

• Sales network in 140+ countries.

Brand Sales Sales Growth

BMW sales split per country FY15

COMPANY OVERVIEW

BMW BRANDS

• 3 Major Brands: BMW, MINI and Rolls-Royce.

Subparts of BMW: BMW, Motorsports, i and Motorrad.

• BMW holds leading positions in the narrow niches such as Super Luxury (Rolls Royce) and Sport Luxury (Motorsports cars).

• Only cars with brands can sustain margins and resist the competition from Emerging Markets. (i.e. Korea, China).

• Brand estimated value is $29bn (Forbes, 2016).

NEW CAR RELEASES/RENEWAL

• Each new series of BMW renewal anticipated to see a corresponding surge in sales volume over subsequent years.• BMW 5 Series is one of the most popular series, with recent release in January this year. Expected revenue surge in the coming quarters.

7.6% Increment in sales of 5 Series from 2003 relaunch19.5% Increment in sales of 5 Series from 2010 relaunch

• The M5 is also anticipated to have a new addition four wheel drive in 2017.

• BMW has a slew of new releases lined up until 2020 in all various ranges:X-series (X2; X7), Mini Countryman, BMW 1 series sedan (China), I8 Roadster

• Beyond being in the frontier of electric car technology, BMW has been touting its vision for increasingly hands-off approach to driving• This includes currently available technology like hands-free parking, car proximity detection • In the current 7 series, car are fully equipped with proximity sensor around the car to allow completely hands free parking• Ahead of the curve: BMW’s collaboration with Intel and Mobileye has come to fruition. 40 Autonomous car are to be in trail in second half of 2017. • Autonomous technology is expected to be released to the market as early as 2021 under the BMW iNext Model

TECHNOLOGY: BMW VISIONARY APPROACH

• Electric Vehicle (EV) strategy: • Target Sales: 100,000 Hybrid and EV within

2017; equivalent to the total sales made in the first 3 years of EV production. Within first 3 quarters of 2016 20,062 vehicles were sold with YoY increase of 65.9%• Current Model: i3, i8 (With Hybrid and EV

format).• In the pipeline: X5; 3 series• Electric Mini (2019), X3(2020), new i8

release in convertible form(2018).• Given that electric charging

infrastructure is as prevalent as of yet, the i-Series hybrid vehicle will continue to retain its popularity

• Infrastructure:• Joint venture with Nissan to roll out a

series of public electric car charging station across 19 US states. This will be unlike Tesla’s Supercharger network that is only compatible with Tesla cars

ELECTRIC CAR: ACCELERATING TECHNOLOGY

• Other technology as well as car firm competes with BMW in this new area in electric car in the near future, most notably Tesla.

• Tesla relative to BMW is a new to the car industry and plagued with production issues.• Tesla is indebted and, unlike BMW, has no revenue

from sales of conventional car sale to finance itself.• Tesla lack the experience and infrastructure for large

volumes of production. • Model 3 with 115000 pre-orders top any of its

predecessors.• Tesla has consistently fail to meet projected launch

date for all these newly launched models. Given that each reservation fee of $1000 is fully refundable, delayed production may greatly damage volume numbers and exacerbate the cash burn.

• Currently, Tesla still remains unprofitable on its Model S and Model X. It is estimated that Tesla loses $4000 for each Model S. while BMW makes money on every electric car they sell.

• Safety Issue and reliability issue continue to plague Tesla with the most repair trips per 100 cars among major auto manufacturers from 2013 through 2015.

BMW VS TESLA

Alphabet provides fleet financing (#4 fleet company in Europe).

Retail finance: Credit finance and leasing for BMW Group brand automobiles (penetration rate 46.3%).

Dealer Finance: Alphera provides support to dealer organisations.

Also provide customers with access to insurance and banking products.

FINANCE SERVICES BMW

• BMW has the ROE target of >18% target (2016: 20.2%). But consistently outperforming targets (see the graph).

• More profitable than usual banks. • Extremely low default rate even during

2009.• Financial companies are usually valued on

the book value basis so to be conservative we value the financial arm at 1x book. value.

Outperforming ROE

Financial Arm Default Rate

FINANCE

• Split the BMW group into parts and value them separately.

• Cash at 1x. • Financial Arm at 1x Book

Value.• Compare the EV of core auto

business with its free cash flow.

• Market values the core auto business at 7.1 EV Auto/FCF multiple, which is very cheap for such a high quality business.

• This multiple translates into 15.6% Free Cash Flow (FCF) Yield for the auto business.

BMW (in millions) Per Share

Market Capitalisation €55,150 €85.32

Cash (€11,445) (€25.30)

Prefered Stock €3,781 -

Financial Arm Book Value (€10,219) (€23.30)

EV Auto €37,267 €55.60

Free Cash Flow (FCF) Last 12 months.

€5,221 €8.70

EV Auto/FCF Auto 7.1Free Cash Flow (FCF) Yield 15.6%

VALUATION: SUM OF THE PARTS (SOTP) TECHNIQUE AND MULTIPLES

Given the high unpredictability of the future we want to be very conservative with our assumptions. Growth Assumption:

• Revenue growth rate (G) = 0% BMW is undervalued on the DCF basis and has 20.4% upside. This is a very conservative and safe projection, because we do not project the any revenue growth in the future.

DISCOUNTED CASH FLOW MODEL (DCF)

We use the market stock price to investigate a kind of future assumptions are “priced in”. Current stock price indicates that the market has the following assumptions about BMW:

• Revenue growth rate (G) = -2% (in the future) • Operational Margins contract to 8.5% from 9.3%.

In our opinion these assumptions are too pessimistic, given the past volume growth (2016 - 5.3 % volume growth) and potential growth of electric cars and new releases of new cars (5 series; X7). Therefore we believe that BMW is undervalued and the stock is mispriced.

REVERSE DISCOUNTED CASH FLOW (DCF)

• USA:The new BMW Mexican plant exports to the US which means BMW might be affected by protectionist measures if implemented by the Trump’s administration.

• However, the US South Carolina plant (biggest worldwide) can serve the US market and Mexican plant can shift to exporting to the rest of the world. (CFO)

• UK: Brexit will impact revenues in the UK, but devalued £ will make production of Mini and RR cheaper.

Political Risks

• Same researcher at University of West Virginia, who discovered the VW devices, has stated that BMW diesel cars performed up to a standard.

• International Council on Clean Transportation has stated that “BMW X5e and other BMW vehicles comply with NOx requirements.”

Diesel Gate Risks

• Bears screaming “peak auto sales”.• However, economies have shown signs of recovery - 2016 growth for the US

2.9%, the EU 1.8%.• Furthermore, aggressive monetary policy has spurred job growth.• Therefore with more jobs and higher wages, demand for consumer durables –

particularly automobiles will grow.• Positive working population growth: US +1.3% ; EU +0.2%.

Cyclicality Risks (US and EU)

RISKS

• Chinese sales growth slowing down.

• SUV demand accounts for 35% of the total Chinese car market and has been growing over the last 5 years.

• BMW operates in the premium SUV market and is well positioned for this trend.

• BMW has the joint venture (JV) in Mainland China and was able to achieve healthier utilisation rate than Mercedes, while producing more cars.

• While it is impossible to predict the Chinese economy growth, BMW is better positioned relative to its competitors.

China: SUVs as a proportion of overall Passenger Vehicle Market.

Premium Segment Growth vs Total Market Growth

BMW Production (m units) vs Utilisation Rate

Tailwind

Outperforming

Advantage

RISKS – SLOWDOWN IN CHINA

Global brand and highest margins among competitors

Global luxury car market is growing at 10% per annum.

Leading electric vehicles and autonomous driving technology Strong volume growth (2016: 5.3%)

Undervalued (EV Auto/FCF Auto: 7.1x)

DCF Price Target at €102.70 (20.4% upside)

EXECUTIVE SUMMARY