HanOn Systems - research-doc.credit-suisse.com

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

25 September 2017 Asia Pacific/South Korea

Equity Research Automobile Manufacturers

HanOn Systems (018880.KS / 018880 KS) Rating (from NEUTRAL) OUTPERFORM Price (22-Sep-17, W) 12,150 Target price (W) (from 10,000) 15,000 Upside/downside (%) 23.5 Mkt cap (W/US$ bn) 6,486 / 5.71 Enterprise value (W bn) 6,544 Number of shares (mn) 533.80 Free float (%) 30.0 52-wk price range (W) 13,350-8,250 ADTO-6M (US$ mn) 12.1 Target price is for 12 months.

Research Analysts

Michael Sohn

82 2 3707 3739

[email protected]

UPGRADE RATING

Secured backlog to lead growth recovery

■ Debut upgrade to OUTPERFORM. We upgrade Hanon Systems (Hanon) to

OUTPERFORM from Neutral, and raise our TP to W15,000 from W10,000. Our rating change theses are: (1) recovery in sales and earnings growth from 2018E, driven by execution of new business backlog orders, (2) based on diversified customers & NEV (new energy vehicle) parts-focused strategy, and (3) tightening NEV regulation in China.

■ Secured backlog, diversified OEMs with NEV-focused strategy to shine. (1) Growing backlog orders support higher growth. Hanon's new business backlog orders grew 80% to US$8.2 bn in 1H17 from US$4.6 bn in 2015. As the backlog typically becomes revenue after two years, Hanon's sales growth is expected to recover from 2018E. We forecast Hanon to post 2017-20E sales/EPS CAGR of 6%/15% from 2014-17E's 1%/2%, respectively. (2) Shining diversified customers & NEV parts-focused strategy. While Hyundai Motor Group's (HMG) sluggish sales have raised growth concerns for HMG-dependent auto parts suppliers, structurally growing NEV market has triggered valuation premium on NEV parts-focused suppliers. 59% of Hanon's new business backlog is from non-HMG/Ford, and 27% is NEV parts backlog. As such, we forecast Hanon's HMG sales portion to decline to 45% in 2020E (vs. 51% in 1H17), 2017E-20E NEV parts sales CAGR of 32%, and its 2020E sales and OP contribution to rise to 13% (vs. 5% in 2016), 11% (vs. 1% in 2016), respectively.

■ Beneficiary of tightening regulations in China. China plans to adopt a new NEV credit program which requires NEV production quota from 2019E. We estimate China's NEV market growth CAGR of 22% over 2016-20E. Tightening regulations assure structural growth of NEV market in China.

■ Valuation and risks. We use DCF methodology to derive our new TP of

W15,000. With relatively high degree of visibility in future cash flows, based

on secured backlog orders, we believe DCF captures Hanon’s longer-term

growth. Key risks: (1) cost reduction pressure by OEMs and (2) the rise of

new participants, which could intensify competition in NEV parts markets.

Share price performance

The price relative chart measures performance against the

KOREA SE KOSPI IDX which closed at 2,388.71 on

22/09/17. On 22/09/17 the spot exchange rate was

W1,136.09/US$1

Performance 1M 3M 12M Absolute (%) 5.2 12.0 -0.8 Relative (%) 4.3 11.6 -17.4

Financial and valuation metrics

Year 12/16A 12/17E 12/18E 12/19E Revenue (W bn) 5,703.7 5,669.4 6,016.5 6,439.6 EBITDA (W bn) 608.7 647.1 731.0 805.5 EBIT (W bn) 422.5 447.0 513.2 570.9 Net profit (W bn) 292.1 295.1 375.3 421.4 EPS (CS adj.) (W) 547.26 552.83 703.14 789.47 Change from previous EPS (%) n.a. (12.4) 3.8 9.2 Consensus EPS (W) n.a. 579.65 688.26 757.49 EPS growth (%) (74.7) 1.0 27.2 12.3 P/E (x) 22.2 22.0 17.3 15.4 Dividend yield (%) 1.9 2.0 2.1 2.2 EV/EBITDA (x) 11.0 10.0 8.6 7.5 P/B (x) 3.55 3.17 2.81 3.05 ROE (%) 16.4 15.2 17.3 19.0 Net debt/equity (%) 9.6 0.6 (8.5) (20.2)

Source: Company data, Thomson Reuters, Credit Suisse estimates

25 September 2017

HanOn Systems (018880.KS / 018880 KS) 2

Focus charts

Figure 1: Growing backlog order book, which

typically takes two years to realise as sales…

Figure 2: …which will lead to 2017E-20E sales and

EPS CAGR of 6%, 15% respectively…

Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates

Figure 3: HMG's (Hyundai Motor + Kia Motors)

stagnant sales growth continues…

Figure 4: Yet, Hanon's diversified sales channels

will be highlighted…

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 5: With prominent NEV parts sales growth

outlook…

Figure 6: Hanon has begun to outperform the KOSPI

along with other Korean EV-related names…

Source: Company data, Credit Suisse estimates Source: Bloomberg, Credit Suisse

4.6

6.8

8.2

-

2

4

6

8

10

2015 2016 1H17Hanon's new business backlog

(USD bn)

Eco-friendly: 27%

Eco-friendly: 21%up 50%

up 20%

0

12

6

0

3

6

9

12

15

Hanon's sales growth CAGR Hanon's EPS growth CAGR

2014-2017E 2017E-2020E

(%)15

-20

0

20

40

60

Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16 Apr-17

HMC portion Kia portion

HMG's (HMC + Kia) YoY monthly sales growth

(%)

Hyundai Motor Group51%

Ford24%

VW3%

North America EV OEM3%

BMW2%

JLR1%

GM1%

FCA1%

Suzuki1%

Jiangling1%

Geely / Volvo1%

Others11%

1H17

278393

557711

9095

7

9

11

13

0

3

6

9

12

15

0

200

400

600

800

1,000

2016 2017E 2018E 2019E 2020E

NEV parts sales revnue NEV parts sales portion

(W bn) (%)

2017-20E Hanon's NEV parts sales CAGR: 32%

-25

-20

-15

-10

-5

0

5

10

15

20

25

-250

-200

-150

-100

-50

0

50

100

150

200

250

1/2/2017 3/2/2017 5/2/2017 7/2/2017 9/2/2017

LG Elec (LHS) Samsung SDI (LHS) LANDF (LHS)Foosung (LHS) Posco Chemtech (LHS) Iljin Materials (LHS)Hanon (RHS)

(%) (%)

Korea EV share performance relative to KOSPI

25 September 2017


Secured backlog to lead growth recovery

We upgrade Hanon Systems (Hanon) to OUTPERFORM from Neutral, and raise our

target price to W15,000 from W10,000. We were initially skeptical on Hanon owing to its

limited sales growth. Hanon's OP growth and OPM expansion came from internal cost-

cutting activities and accounting change (capitalising R&D). Yet, we change our view on

the back of (1) a recovery in sales and earnings growth from 2018E, driven by execution of

new business backlog orders, (2) diversified customers & NEV (new energy vehicle) parts-

focused strategy, and (3) tightening NEV regulation in China.

Secured backlog, diversified OEMs with NEV-focused strategy to shine

(1) Growing backlog orders support higher growth. Hanon's new business backlog order

grew 80% to US$8.2 bn in 1H17 from US$4.6 bn in 2015. As the backlog typically

becomes revenue after two years, Hanon's sales growth is expected to recover from

2018E. We forecast Hanon to post 2017E-20E sales/EPS growth CAGR of 6%/15% from

2014-17E's 1%/2%, respectively

(2) Shining diversified customers & NEV parts-focused strategy. While Hyundai Motor

Group's (HMG) sluggish sales have raised growth concerns for HMG-dependent auto

parts suppliers, structurally growing NEV market has triggered valuation premium on NEV

parts-focused suppliers. 59% of Hanon's new business backlog is from non-HMG/Ford,

and 27% is NEV parts backlog. As such, we forecast Hanon's HMG sales portion to

decline to 45% in 2020E (vs.51% in 1H17) and 2017E-20E NEV parts sales CAGR of 32%

and its 2020E sales and OP contribution to rise to 13% (vs. 5% in 2016), and 11% (vs. 1%

in 2016), respectively.

Beneficiary of tightening regulations in China

China plans to adopt a new NEV credit program which requires NEV production quota

from 2019E. The NEV target score of an auto company is defined as a percentage of its

total annual conventional-fuel passenger car production or import in each year. The

percentage requirements are 10% for 2019E, and 12% for 2020E. With the new regulation,

we estimate China's NEV market to witness a 22% CAGR over 2016-20E. Tightening

regulations assure structural growth of NEV market in China.

Valuation and risks

Our new TP is derived by using DCF methodology, which we believe is suitable gauging

Hanon’s intrinsic value. With relatively high degree of visibility in future cash flows, based

on secured backlog orders especially on growing NEV parts, we believe DCF captures

Hanon’s longer-term growth. To derive our target price, we applied terminal growth rate of

2.0%, beta of 1.2, risk premium of 6.0%, risk free rate of 2.0%, and WACC of 7.9%. Key

risks: (1) cost reduction pressure by OEMs and (2) the rise of new participants, which

could intensify competition in NEV parts markets.

Upgrade our rating to OUTPERFORM and a

new target price of W15,000

Secures US$8.2 bn of backlog orders

Diversified sales channels with NEV

parts-focused strategy should lead to 2017E-

20E NEV parts sales CAGR of 32%

NEV credit policy in China assures the

growth of NEV market

25 September 2017


HanOn Systems (018880.KS / 018880 KS)

Price (22 Sep 2017): W12,150; Rating: (from NEUTRAL) OUTPERFORM; Target Price: (from W10,000) W15,000; Analyst: Michael Sohn

Income Statement (W bn) 12/16A 12/17E 12/18E 12/19E

Sales revenue 5,704 5,669 6,017 6,440 Cost of goods sold 4,805 4,753 5,043 5,452 EBITDA 609 647 731 805 EBIT 423 447 513 571 Net interest expense/(inc.) 15 12 9 5 Recurring PBT 416 419 517 583 Profit after tax 304 305 385 435 Reported net profit 292 295 375 421 Net profit (Credit Suisse) 292 295 375 421

Balance Sheet (W bn) 12/16A 12/17E 12/18E 12/19E

Cash & cash equivalents 425 508 629 770 Current receivables 931 897 922 954 Inventories 430 401 431 467 Other current assets 365 412 514 632 Current assets 2,151 2,218 2,496 2,823 Property, plant & equip. 1,010 1,082 1,148 1,210 Investments 95 175 238 315 Intangibles 350 489 624 755 Other non-current assets 254 261 302 344 Total assets 3,860 4,225 4,808 5,447 Current liabilities 1,463 1,618 1,941 2,755 Total liabilities 1,975 2,120 2,446 3,263 Shareholders' equity 1,828 2,047 2,304 2,126 Minority interests 57 57 57 57 Total liabilities & equity 3,860 4,225 4,808 5,447

Cash Flow (W bn) 12/16A 12/17E 12/18E 12/19E

EBIT 423 447 513 571 Net interest 0 0 0 0 Tax paid 0 0 0 0 Working capital (205) 41 (44) (67) Other cash & non-cash items 172 100 102 105 Operating cash flow 389 587 571 609 Capex (250) (257) (265) (273) Free cash flow to the firm 139 308 291 320 Investing cash flow (452) (371) (295) (251) Equity raised 0 0 0 0 Dividends paid (203) (80) (128) (136) Financing cash flow 48 (130) (155) (217) Total cash flow (14) 87 121 141 Adjustments (8) (5) 0 0 Net change in cash (22) 82 121 141

Per share 12/16A 12/17E 12/18E 12/19E

Shares (wtd avg.) (mn) 534 534 534 534 EPS (Credit Suisse) (W) 547 553 703 789 DPS (W) 225 240 255 270 Operating CFPS (W) 729 1,100 1,070 1,141

Earnings 12/16A 12/17E 12/18E 12/19E

Growth (%) Sales revenue 2.6 (0.6) 6.1 7.0 EBIT 17.5 5.8 14.8 11.2 EPS (74.7) 1.0 27.2 12.3 Margins (%) EBITDA 10.7 11.4 12.1 12.5 EBIT 7.4 7.9 8.5 8.9

Valuation (x) 12/16A 12/17E 12/18E 12/19E

P/E 22.2 22.0 17.3 15.4 P/B 3.55 3.17 2.81 3.05 Dividend yield (%) 1.9 2.0 2.1 2.2 EV/sales 1.2 1.1 1.0 0.9 EV/EBITDA 11.0 10.0 8.6 7.5 EV/EBIT 15.8 14.5 12.2 10.6

ROE analysis (%) 12/16A 12/17E 12/18E 12/19E

ROE 16.4 15.2 17.3 19.0 ROIC 16.3 15.5 17.9 21.8

Credit ratios 12/16A 12/17E 12/18E 12/19E

Net debt/equity (%) 9.6 0.6 (8.5) (20.2) Net debt/EBITDA (x) 0.30 0.02 (0.27) (0.55)

Company Background

HanOn systems (formerly Halla Visteon Climate Control) is a Korea-based company specialising in air-conditioning and heating systems for automobiles. The company mainly distributes HVAC (heating, ventilation, air-conditioning) systems on an OEM basis.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (W) (from 13,000) 18,000

Our blue sky target price is based on 20% upside on FCF considering better than expected backlog orders.

Our Grey Sky Scenario (W) (from 7,000) 10,000

Our grey sky target price is based on 20% downside on FCF with 0% terminal growth rate considering (1) cost reduction pressure by OEMs and (2) the rise of new participants, which could intensify competition in NEV parts markets, (3) lower than expected backlog orders.

Share price performance

The price relative chart measures performance against the KOREA SE KOSPI

IDX which closed at 2,388.71 on 22-Sep-2017

On 22-Sep-2017 the spot exchange rate was W1,136.09/US$1

Source: Company data, Thomson Reuters, Credit Suisse estimates

25 September 2017


Secured backlog, diversified OEMs with NEV-focused strategy to shine

(1) Growing backlog orders support higher growth

We were initially skeptical on Hanon due to its limited sales growth. Despite Hanon's

solid earnings growth (OP up 18% YoY in 2016), we were skeptical about Hanon's growth

outlook as its sales revenue posted a mere 2.6% YoY growth in 2016 which was not much

different from 1.9% YoY growth in 2015. As Hanon's OP growth and OPM expansion

came mainly from internal cost-cutting activities and accounting changes (capitalising

R&D), we were cautious about its future growth unless its sales growth accelerated.

Figure 7: Despite Hanon's solid YoY OP growth… Figure 8: …its sales posted stagnant YoY growth…


Figure 9: Hanon has begun to capitalise R&D from

2015 and increased its capitalised portion in 2016…

Figure 10: ...this increased Hanon's OPM by 54 bp

YoY in 2015 and 118 bp YoY in 2016...


-50

-25

0

25

50

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

Hanon YoY OP growth

(%)

-8

-4

0

4

8

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

Hanon YoY sales growth

(%)

0

13.8

38.7

0

10

20

30

40

2014 2015 2016

% of capitalized R&D expense

(%)

0

54

118

0

30

60

90

120

2014 2015 2016

Hanon's YoY OP margin growth

(bps)

Stagnant sales growth was our key concern

25 September 2017


Yet, growing backlog order supports higher growth. While Hanon posted stagnant

sales growth, its 2016 new business backlog order rose to US$6.8 bn (up 50% YoY) from

2015's US$4.6 bn. In 1H17, its order book rose to US$8.2 bn. As the backlog typically

becomes revenue after two years, Hanon's sales growth is expected to recover to 6% YoY

in 2018E. We forecast Hanon to post 2017E-20E sales/EPS growth CAGR of 6%/15%

from 2014-17E's 1%/2%, respectively.

Figure 11: Hanon's backlog order book was up 80%

in 1H17 from end-2015…

Figure 12: Given backlog typically becomes revenue

after two years, Hanon's sales are likely to grow

from 2018E

Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates

Figure 13: …and 2017E-20E OP CAGR of 12%.. Figure 14: …and 2017E-20E EPS CAGR of 15%...

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

4.6

6.8

8.2

-

2

4

6

8

10

2015 2016 1H17Hanon's new business backlog

(USD bn)

Eco-friendly: 27%

Eco-friendly: 21%up 50%

up 20%

0-2

0

2

4

6

8

2015 2016 2017E 2018E 2019E 2020E

Hanon YoY sales growth

(%)2017E-20E Hanon sales growth CAGR: 6%

2014-17E Hanon sales growth CAGR: 1%

-5

0

5

10

15

20

2015 2016 2017E 2018E 2019E 2020E

Hanon YoY OP growth

(%)

2017E-20E Hanon OP growth CAGR: 12%

-20

-10

0

10

20

30

2015 2016 2017E 2018E 2019E 2020E

Hanon YoY EPS growth

(%) 2017E-20E Hanon EPS growth CAGR: 15%

Hanon has secured US$8.2 bn of backlog,

up 80% since 2015

25 September 2017


(2) Shining diversified customers & NEV parts

focused strategy

Shining diversified sales channels. While Hyundai Motor Group's (HMG) sluggish sales

have raised growth concerns for HMG-dependent parts suppliers, Hanon's growing non-

HMG/Ford sales will lead to differentiated growth, in our view. As of 1H17, 59% of new

business backlog orders came from non-HMG/Ford, which include GM, VW, BMW, Jaguar

Land Rover, Geely/Volvo and a North American EV maker. As such, the recent sales

volume slowdown of HMG, especially in China, should be partially defended by growing

non-HMG sales.

Figure 15: Hanon already has the lowest HMG sales

exposure among Korean autos parts makers…

Figure 16: …which could be lowered further based

on the backlog order book trend…


Shining NEV parts focused strategy. Early penetration of NEV (new energy vehicle)

market has been the key investment theses for Hanon and growing NEV parts sales have

been the valuation premium factor over peers. As of 1H17, 27% of the new business

backlog orders were NEV parts, including electric compressor, from 21% in 2016. Based

on the current backlog, we forecast 2017E-20E NEV parts sales CAGR of 32% and its

2020E sales and OP contribution to rise to 13% (vs. 5% in 2016), and 11% (vs. 1% in

2016), respectively. Detailed NEV parts forecast are in Figure 19.

Figure 17: Expecting Hanon's NEV parts sales

CAGR of 32% over 2017E-20E …

Figure 18: …which should increase its NEV parts

sales portion to reach 13% in 2020E



Ford24%

VW3%

North America EV OEM3%

BMW2%

JLR1%

GM1%

FCA1%

Suzuki1%

Jiangling1%

Geely / Volvo1%

Others11%

1H17


Ford20%

Others35%

2020E

138247

314408

516140

146

242

303

393

278

393

557

711

909

0

200

400

600

800

1,000

2016 2017E 2018E 2019E 2020E

NEV parts sales from HMG NEV parts sales from non-HMG Series1

(W bn)

Hanon's total NEV part sales 2017-20E CAGR: 32%

Hanon's NEV parts sales

5

7

9

11

13

0

3

6

9

12

15

2016 2017E 2018E 2019E 2020E

Hanon's NEV parts sales portion

(%)

Diversified sales channels minimise

HMG sales slowdown

Expecting 2017E-20E NEV parts sales CAGR

of 32%

25 September 2017


Figure 19: Hanon Systems’ NEV parts growth forecasts

(Won bn, US$ mn, '000 units, %) 2016 2017E 2018E 2019E 2020E 2017E-20E CAGR (%)

KRW/USD (A) 1,161 1,155 1,110 1,090 1,080

HMG hybrid sales units (1) 109 193 260 351 456

HMG Plug-in hybrid (2) 3 16 21 28 37

HMG EV (3) 14 23 31 42 54

HMG's NEV sales units ('000) = (1) + (2) + (3) 126 231 312 421 547 33.3

Hybrid parts ASP for HMG (B) $800 $784 $768 $753 $738

Plug-in ASP for HMG (C) $1,200 $1,176 $1,152 $1,129 $1,107

EV system ASP for HMG (D) $2,000 $1,960 $1,921 $1,882 $1,845

Hybrid parts sales for HMG (US$ mn) (E) = (1) * (B) $88 $151 $200 $264 $337

Plug-in sales for HMG (US$ mn) (F) = (2) * (C) $4 $18 $24 $32 $41

EV sales for HMG (US$ mn) (G) = (3) * (D) $27 $45 $59 $78 $100

HMG NEV parts sales (US$ mn) (H) = (E) + (F) + (G) $119 $214 $283 $375 $477

NEV parts sales from HMG (Won (bn) (I) =(H) *(A) / 1000 138 247 314 408 516 27.8

BMW (4) 84 112 151 202 270

VW (5) 64 95 142 211 315

Ford (6) 15

FCA (7) 90

Total non-HMG E-compressor volume ('000 units) (8) = (4) + (5) + (6) + (7) 148 208 293 413 690 49.2

ASP (US$) (J) 250 245 240 235 231

Total non-HMG E-compressor sales (US$ mn) (K) = (8) * (J) 37 51 70 97 159

Total non-HMG E-compressor sales (Won bn) (L) = (K) * (A) / 1000 43 59 78 106 172 43.0

North America EV maker ('000 units) (9) 84 90 300 400 500

ASP (US$) (M) 1,000 840 494 451 410

North America EV maker sales (US$ mn) (N) = (9) * (M) 84 76 148 181 205

North America EV maker sales (W bn) (O) = (N) * (A) / 1000 97 87 164 197 222 36.4

Total non-HMG NEV parts sale (Won bn) (P) = (L) + (O) 140 146 242 303 393

Hanon's NEV parts sales (Won bn) (Q) = (I) +(P) 278 393 557 711 909 32.2

YoY (%) 25 41 42 28 28

NEV parts operating profit (Won bn) (R) 5 14 25 43 68 70.4

NEV parts OPM 1.8% 3.5% 4.5% 6.0% 7.5%

Hanon's total sales (Won bn) (S) 5,704 5,669 6,017 6,440 6,832 6.4

YoY (%) 3 -1 6 7 6

Hanon's annual OP (T) 423 447 513 571 625 11.8

YoY (%) 18 6 15 11 9

NEV parts sales contribution = (Q) / (S) 4.9% 6.9% 9.3% 11.0% 13.3%

NEV parts OP contribution = (R ) / (T) 1.2% 3.1% 4.9% 7.5% 10.9%

Source: Company data, Credit Suisse estimates

25 September 2017


HMG's aggressive NEV line-up expansion also supports Hanon's NEV parts sales

growth. 52% of Hanon's sales came from Hyundai Motor Group (HMG) in 2016 and HMG

plans aggressive NEV initiatives globally which is a positive for Hanon. To meet the

regulatory standards globally, HMG plans to expand NEV sales by launching 31 models

until 2020E from 2016's 13 NEV models. We believe HMG's NEV expansion plan firmly

supports Hanon's NEV parts sales growth as Hanon is the exclusive supplier for various

NEV parts including E-compressor, HVAC (heating ventilation and air conditioning),

battery chiller, electric water coolant pump/valve, fluid transport, etc.

Figure 20: HMG plans to launch more NEV vehicles

until 2020E…

Figure 21: …and we forecast HMG's NEV parts sales

CAGR of 33% over 2017E-20E


Figure 22: HMG’s NEV sales to rise…

Figure 23: …and we forecast Hanon’s NEV parts

sales from HMG to witness a 28% CAGR over

2017E-20E


47

101

2

11

2

3

8

1

1

2

0

8

16

24

32

2015 2016 2020E

HEV PHEV EV FCEV

(Number of HMG's NEV models)

13 models

31 models

8 models

49 43 62

328

30 28

64

0

50

100

150

200

250

300

2014 2015 2016 2020E

HMC NEV Kia NEV

7970

('000 Units) NEV portion: 6%

NEV portion: 1-2%

126

300

600

450

300

600

450219

547

0

100

200

300

400

500

600

2016 2017E 2018E 2019E 2020E

HMG's NEV sales units

('000 units)

HMG's NEV sales unit 2017-20E CAGR: 33%

0

100

200

300

400

500

600

2016 2017E 2018E 2019E 2020E

Hanon's NEV parts sales from HMG

(W bn)

Hanon's NEV part sales from HMG 2017E-20E CAGR: 28%

Hanon exclusively supplies various NEV

parts including E-compressor

25 September 2017


Figure 24: Rising HMG NEV sales…

Figure 25: Hanon supplies various NEV parts for

HMG…


-

10

20

30

40

1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Quarterly HMC NEV sales Quarterly Kia NEV sales

('000 units)

0

2,000

1,200

800 800

0

500

1,000

1,500

2,000

EV System Plug-in PV Hybrid PV Heat pumpHanon System's ASP for HMG's NEV parts

(USD)

25 September 2017


Beneficiary of tightening regulations in China Subsidy driven NEV market in China is shifting to regulation driven. Until 2016,

China's NEV market was mainly driven by subsidy. People could get up to Rmb110k in

combined subsidies from the central and local governments. However, China government

will reduce the subsidy by 20% starting 2017E and take it further down by 40% from

2019E, before removing it completely from 2021E. We expect sales of NEV vehicles in

China, including both hybrid and NEV, to accelerate as CAFC Phase IV and NEV credit

policy will require automakers to fulfill the requirements. Subsidy-driven NEV vehicle

market is shifting to regulation-driven market, in our view.

Every automaker must prepare to meet the required NEV credit regulation. In

September 2016, China’s Ministry of Industry and Information Technology (MIIT) proposed a

Temporary Management Regulation for CAFC NEV credits for public comment. The

proposal essentially would add a new NEV credit program to the existing CAFC regulation

for passenger vehicles. Automakers with annual production or import volume of 50,000 units

or more traditional fuel passenger vehicles will need to meet both CAFC standards and NEV

targets. Companies that fail to hit their targets will be subject to MIIT-imposed penalties.

Figure 26: Central and local government provide

subsidy when purchasing NEV…

Figure 27: …yet subsidy is expected to shrink

Source: Innovation Center for Energy and Transportation, Credit Suisse Source: Innovation Center for Energy and Transportation, Credit Suisse

Figure 28: Subsidy mainly led strong NEV sales in

China yet subsidy cut resulted in weaker growth…

Figure 29: Automakers in China must increase NEV

sales portion to meet the required NEV credit…

Source: China Association of Automobile Manufacturers (CAAM), Company data, Credit Suisse

Note: Score defined as a percentage of its total annual conventional-fuel passenger car production/import in each year. Source: Innovation Center for Energy and Transportation, Credit Suisse

25

45

55

30

0

15

30

45

60

EV (100≤R˂150) EV (150≤R˂250) EV (R≥250) PHEV (R≥50)

2016 China NEV Subsidy amount

(k RMB)

-20

-40

-100

-100

-75

-50

-25

0

2017E-2018E 2019E-2020E 2021E and after

Subsidy phase-out plan

(%)

-2

0

2

4

6

8

10

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

China monthly YoY NEV sales growth

(%)

10

12

0

2

4

6

8

10

12

2019E 2020E

Percentage requirements for calculating NEV target score

(%)

Less NEV subsidy, growing NEV

regulations in China

Automakers need to satisfy both CAFC

and NEV credit from 2018E

25 September 2017


Automakers must achieve 10% NEV target score in 2019E which will rise to 12% in

2020E. The NEV target score of an auto company is defined as a percentage of its total

annual conventional-fuel passenger car production or import in each year. The percentage

requirements are 10% for 2019E, and 12% for 2020E. Automakers can earn NEV scores

by producing or importing NEVs and NEV score is calculated by summing up the products

of the annual manufacturing or import volume of each NEV type and the per-NEV score.

The per-vehicle NEV score varies by technology and electric driving range. A company

generates NEV score credits (NEV credit) if its actual NEV score is greater than its target

NEV score. It will face an NEV score deficit if its actual NEV score falls short of its target.

Figure 30: NEV score calculation

NEV Credit calculation = (0.012 * R) + 0.8

R: electric driving range (km)

Passenger Vehicle Types 80≤R˂150 150≤R˂250 250≤R˂350 R≥350 R≥50

EVs 1.8 – 2.5* 2.6 - 3.7* 3.8 – 4.9* 5 -

PHEVs - - - - 2

FCEVs - - 4 5 -

Note *: For EVs’ NEV credit calculation for driving ranges from 80km to 350km, NEV Credit formula was used. Source: Ministry of Industry and Information Technology, Credit Suisse

Why NEV credit matters? NEV credits can be traded among auto companies, but cannot

be banked or carried forward. Purchased NEV credits can be used only in the current year

and cannot be sold again. Failure to meet NEV targets will lead to suspension of

production of certain existing high-fuel-consumption models until the company’s

recalculated CAFC credits based on the adjusted production plan can offset its NEV-score

deficit. As such, the growth in NEV demand which previously was driven by subsidy will

turn to regulation driven and automakers must increase NEV sales structurally to meet

NEV target which rises every year. We think this newly created regulation is critical for

automakers for the following reasons:

1) The growth of NEV used to be subsidy driven but it will shift to regulation driven as

automakers must meet both CAFC and NEV score to avoid penalties.

2) Unlike CAFC credit, NEV credit cannot be banked or carried forward.

3) NEV credit can be used to cover CAFC deficit but CAFC credit cannot be used for NEV

deficit. To make NEV deficit, automakers must purchase from other automakers that

have NEV credit.

4) CAFC requires 5L/100km by 2020E and producing NEV is essential to achieve the

target.

Figure 31: CAFC and NEV compliance pathways

CAFC CREDIT CAFC DEFICIT

NEV CREDIT In compliance

A. Use banked CAFC credits from own company

B. Transfer CAFC credits from shareholder(affiliated companies)

C. Use NEV credits from own company

D. Purchase NEV credits from other companies

NEV DEFICIT Purchase NEV credits from other companies

A. Use banked CAFC credits from own company

B. Transfer CAFC credits from shareholder(affiliated companies)

C. Use NEV credits from own company

D. Purchase NEV credits from other companies

Source: Innovation Center for Energy and Transportation, Credit Suisse

Automakers should achieve 10% NEV

score in 2019E and 12% in 2020E

NEV credit cannot be banked or carried

forward

25 September 2017


An example of NEV credit calculation. We assume an automaker that produces

300,000 combustion engine passenger vehicles and 10,000 NEVs (including 5,000 EVs

with an electric range of 150km, and 5,000 EVs with an electric range of 250km) in 2019E.

1) To meet 2019E NEV target score, the company requires 30,000 score (300,000 units *

10%).

2) The company’s NEV score is ((0.012*150 + 0.8) * 5000) + ((0.012*250 + 0.8) * 5000) =

13,000 + 19,000 = 32,000.

3) As the company generated 32,000 NEV score, the company generates 2,000 NEV

credit (32,000 – 30,000).

4) If the production units remain unchanged, the company will generate NEV deficit of

4,000 in 2020E as NEV score target rises to 36,000 (12% x 300,000).

25 September 2017


Hyundai Motor Group's NEV sales outlook in China. In order to meet NEV scores,

HMG must produce / sell 45k units of NEVs in 2019E which will rise to 56k units in 2020E,

in our view. If it does not sell any NEV, the W127 bn penalty in 2019E could rise to W170

bn in 2020E.

Figure 32: Calculating NEV credits for HMC

Hyundai Motor (HMC) 2019E 2020E

NEV credit target (% of combustion engine vehicle sales) (a) 10% 12%

sales units (b) 1,000,000 1,100,000

NEV credit formula 0.012 x R + 0.8

R = EV driving distance (based on ‘Ioniq’ EV)* 210km 231km

NEV credit per vehicle (c) 3.3 3.6

Combustion engine sales units (d) = (b) / (1 + (a) / (c)) 970,770 1,064,260

Target NEV credit (e) = (a) x (c) 97,077 127,711

Required NEV sales units to meet the target (f) = (e) / (c) 29,230 35,740

Required NEV sales portion 2.9% 3.2%

NEV deficit if not produce any NEV (g) = (a) x (d) 100,000 132,000

NEV penalty per unit (h) ** RMB 5,000 RMB 5,000

Penalty if not producing NEV (i) = (e) x (h) RMB 485 mn RMB 639 mn

KRW/RMB exchange rate (j) 170 170

Penalty in KRW = (i) x (j) W83 bn W109 bn

Note 1: *assuming annual driving range improvement of 10% Note 2: ** assuming NEV penalty of RMB5,000 per unit Source: Ministry of Industry and Information Technology, Company data, Credit Suisse estimates

Figure 33: Calculating NEV credits for Kia Motors

Kia Motors (Kia) 2019E 2020E

NEV credit target (% of combustion engine vehicle sales) (a) 10% 12%

sales units (b) 540,000 620,000

NEV credit formula 0.012 x R + 0.8

R = EV driving distance (based on ‘Niro’ EV)* 204km 224km

NEV credit per vehicle (c) 3.2 3.5

Combustion engine sales units (d) = (b) / (1 + (a) / (c)) 523,842 599,369

Target NEV credit (e) = (a) x (c) 52,384 71,924

Required NEV sales units to meet the target (f) = (e) / (c) 16,158 20,631

Required NEV sales portion 3.0% 3.3%

NEV deficit if not produce any NEV (g) = (a) x (d) 54,000 74,400

NEV penalty per unit (h) ** RMB5,000 RMB5,000

Penalty if not producing NEV (i) = (e) x (h) RMB262 mn RMB360 mn

KRW/RMB exchange rate (j) 170 170

Penalty in KRW = (i) x (j) W45 bn W61 bn

Note 1: *assuming annual driving range improvement of 10% Note 2: ** assuming NEV penalty of RMB5,000 per unit Source: Ministry of Industry and Information Technology, Company data, Credit Suisse estimates

Figure 34: Calculating NEV penalty for HMG (HMC + Kia)

HMG penalty if not making any NEV in China 2019E 2020E

HMG's required NEV sales unit in China to meet the regulation 45,387 56,371

HMG's NEV penalty if not producing NEV in China W127 bn W170 bn

HMG' China equity-method income W251 bn W330 bn

Downside to HMG China estimates if not producing NEV 51% 51%

Source: Ministry of Industry and Information Technology, Company data, Credit Suisse estimates

25 September 2017


NEV credit policy is an opportunity for Hanon. Hanon currently supplies various parts for

NEVs which includes E-compressor, heat pump HVAC (heating ventilation and air

conditioning), high voltage cooling fan motor, thin film coolant heater, etc. For HMC's Ionic

EV, Hanon generates US$2,000 per unit as system package. Meanwhile, HMC and Kia's

NEV vehicle posted 148% YoY sales volume growth in August/2017YTD, and we believe

China's new NEV credit policy will support Hanon's NEV parts sales growth, in our view.

Assuming Hanon to exclusively supply the key NEV parts for HMC/Kia in China, we estimate

Hanon to generate W62 bn of sales in 2019E which will rise to W71 bn in 2020E. With other

NEV parts sales for various customers, we forecast Hanon to post 2016-20E NEV parts

sales growth of 32% and its sales portion to reach 13% in 2020E from 4.9% in 2016.

Figure 35: We see 2016-20E China NEV sales

volume CAGR of 22%...

Figure 36: NEV credit policy in China could trigger

Hanon to generate W62 bn sales from HMG in 2019E

which we expect to rise to W71 bn in 2020E…

Source: China Association of Automobile Manufacturers (CAAM), Company data, Credit Suisse estimates


Figure 37: 1H17 NEV sales, China stands out the most…

Source: SNE research, Credit Suisse

0.0

0.3

0.6

0.9

1.2

2013 2014 2015 2016 2017E 2018E 2019E 2020E

China NEV sales

(mn units)2016-2020E China NEV sales volume growth CAGR: 22%

6271

0

20

40

60

80

2019E 2020E

Hanon's upside from China's NEV regulation (based on HMG)

(W bn)

205

87

27 27 22 21 21 8 7 7 5

-

50

100

150

200

China USA Japan Norway Germany England France Sweden Canada Belgium Korea

1H17 global EV sales

('000 units)

25 September 2017


Valuation

Debut upgrade to OUTPERFORM and raise target price to W15,000. We upgrade

Hanon Systems to OUTPERFORM from Neutral, and raise our target price to W15,000

from W10,000 by applying DCF methodology, which we believe is suitable to gauge

Hanon’s intrinsic value. With relatively high degree of visibility in future cash flows, based

on secured backlog orders especially on growing NEV parts, we believe DCF captures

Hanon’s longer-term growth. To derive our TP, we applied a terminal growth rate of 2.0%,

beta of 1.2, risk premium of 6.0%, risk free rate of 2.0%, and WACC of 7.9%.

Lower 2017E EPS, yet lift 2018E-20E to reflect growing orders. Although our 2017E

EPS is lowered 12.4% to reflect HMG's lowered China sales outlook (G2 uncertainty

dilutes EM ex-China recovery), we increase 2018E-20E EPS by 3.8%, 9.2%, and 10.6%,

respectively. Our 2017E EPS is -1.3% lower, yet 5.2% higher than Bloomberg consensus.

Figure 38: Hanon Systems target price using DCF methodology


(Won bn) 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Sales 5,669 6,017 6,440 6,832 7,092 7,393 7,700 8,135 8,526 9,014

(grow th, yoy) -0.6% 6.1% 7.0% 6.1% 3.8% 4.2% 4.2% 5.6% 4.8% 5.7%

EBIT 447 513 571 625 659 699 740 786 840 901

(grow th, yoy)

EBIT margin 7.9% 8.5% 8.9% 9.1% 9.3% 9.5% 9.6% 9.7% 9.8% 10.0%

Tax rate 27.4% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5%

NOPLAT 325 382 425 466 491 521 551 586 626 671

Depreciatoin 186 199 212 224 235 245 255 266 278 294

Amortization 14 18 22 26 32 37 42 47 51 56

Gross Cash Flow 525 600 660 716 758 802 848 898 955 1021

(+) Changes in Working Capital 41 -44 -67 -38 -50 -52 -47 -49 -49 -48

CAPEX 257 265 273 281 290 298 307 322 342 383

-22 -15 -17 -22 -1 0 -1 1 2 3

FCF 308 291 320 397 419 453 494 526 564 590

Discount Factor 1.00 1.08 1.16 1.26 1.35 1.46 1.58 1.70 1.83 1.98

(1) Present Value (PV) 308 270 275 316 309 310 314 309 307 298

Total PV of FCF (A) 3,017

(2) Terminal Value (TV) Discount Rate Assumptions: 2018E

Terminal Growth Rate (B) 2.0% Cost of Debt (a) 3.0%

FCF (t+1) (C) 602 Cost of Equity (b) = ((c) * (d)) + (e) 9.4%

WACC (D) 7.9% Beta (c) 1.2

Terminal Value (t+1) (E ) = (C) / ((D)-(B)) 10,242 Risk Premium (d) 6.0%

Discount Factor (t+1) (F) 2.13 Risk Free Rate (e) 2.0%

PV of TV (G) = (E ) / (F) 4,798 Debt-to-Equity (f) 24.1%

Equity Value (Hanon) (H)=(A) + (G) 7,816 WACC (a)*(f)+(b)*(1-f) 7.9%

Net debt (I) -201

Enterprise value (J) = (H) - (I) 8,016

Total shares outstanding (mn) (K) 534

Target price (L) = (J) / (K) 15,018

Upgrade to OUTPERFORM with a

new target price of W15,000

https://plus.credit-suisse.com/r/V7fqNv2AF-WErFtR

https://plus.credit-suisse.com/r/V7fqNv2AF-WErFtR

25 September 2017


P/E valuation also suggests similar target price. As a sanity check, we also used P/E

methodology applying 19.7x to 2018E-19E average EPS, which we derive from an

average of its historical average PER since Volkswagen’s diesel gate and Korean EV

related peers' average 2018E P/E multiple.

Figure 39: Sanity check—P/E methodology also shows similar target price

Rationales Multiples/value

Hanon's historical average PER since Volkswagen’s diesel gate (A) 18.0x

2018E average PER of Korean EV related peers (B) 21.4x

Target PER (C) = average of (A) and (B) 19.7x

Hanon's 2018E-2019E average EPS (D) W746

Fair value (C) X (D) KRW 14,705

12-month target price (rounding off) KRW 15,000

Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service

Figure 40: Hanon—earnings estimate revisions (W bn) 2016 2017E 2018E 2019E 2020E

Sales - New 5,704 5,669 6,017 6,440 6,832

Sales - Old 5,795 5,944 6,192 6,532

% change -2.2% 1.2% 4.0% 4.6%

Operating profit - New 423 447 513 571 625

Operating profit - Old 481 496 528 564

% change -7.1% 3.4% 8.1% 10.8%

Recurring profit - New 416 419 517 583 629

Recurring profit - Old 474 498 530 564

% change -11.6% 3.9% 10.1% 11.6%

Net profit - New (excluding minority shares) 292 295 375 421 455

Net profit - Old 337 362 386 411

% change -12.4% 3.8% 9.2% 10.6%

EPS - New (excluding minority shares) 547 553 703 789 852

EPS - Old 631 678 723 770

% change -12.4% 3.8% 9.2% 10.6%


Figure 41: Hanon—annual earnings forecasts 2017E 2018E

(W bn, %) CS est Consensus Variance (%) CS est Consensus Variance (%)

Sales revenue 5,669 5,629 0.7 6,017 6,121 -1.7

Operating profit 447 455 -1.8 513 520 -1.2

Pre-tax profit 419 428 -2.2 517 505 2.4

Net profit 295 299 -1.3 375 357 5.2

OP margin 7.9 8.1 -0.2%ppt 8.5 8.5 0.0%ppt

Pre-tax margin 7.4 7.6 -0.2%ppt 8.6 8.3 0.3%ppt

NP margin 5.2 5.3 -0.1%ppt 6.2 5.8 0.4%ppt

Source: Company data, The BLOOMBERG PROFESSIONAL™ service estimates, Credit Suisse estimates

25 September 2017


Figure 42: Hanon—quarterly earnings forecasts (KRW bn, %) 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17 3Q17E 4Q17E 2017E

Sales 1,428 1,491 1,283 1,502 5,704 1,449 1,373 1,318 1,529 5,669

(%, y-y) 3.8 7.0 -3.5 2.8 2.6 1.5 -7.9 2.7 1.8 -0.6

OP 105 95 107 116 423 127 103 99 118 447

(%, y-y) 30.8 11.6 44.8 -3.8 17.5 21.3 8.1 -7.4 1.9 5.8

RP 104 88 102 122 423 103 98 92 126 419

(%, y-y) 28.5 -5.6 43.1 21.4 22.5 -0.9 11.7 -9.9 3.5 1.3

NP 72 64 74 94 311 74 69 68 93 305

(%, y-y) 19.6 -1.8 63.1 29.2 28.0 2.6 8.4 -7.8 -0.8 0.9

OP margin 7.3 6.4 8.3 7.7 7.4 8.8 7.5 7.5 7.7 7.9

RP margin 7.3 5.9 7.9 8.1 7.4 7.1 7.2 7.0 8.2 7.4

NP margin 5.1 4.3 5.7 6.3 5.5 5.1 5.0 5.2 6.1 5.4


Figure 43: Hanon—one-year forward P/E band Figure 44: Hanon—one-year forward P/B band

Source: The BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates

Source: The BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates

0

3,000

6,000

9,000

12,000

15,000

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

(KRW)

18.0x

15.0x

12.0x

9.0x

21.0x

Stock split

0

3,000

6,000

9,000

12,000

15,000

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

(KRW)

2.5x

3.0x

2.0x

1.5x

3.5xStock split

25 September 2017


Figure 45: Global peer comparison—Autopart makers

Source: RAVE, Credit Suisse estimates

Figure 46: Global peer comparison—Climate control system makers


Figure 47: Global peer comparison—NEV and EV parts makers


Figure 48: Korean EV-related peers


Company Code Rec Price TP % Mkt Cap

As of 21-Sep-2017

(local) (local) Upside

(USD mn)

PER

(x)

PBR

(x)

NP Margin

(%)

EPS YoY

(%)

ROE

(%)

PER

(x)

PBR

(x)

NP Margin

(%)

EPS YoY

(%)

ROE

(%)

Johnson Controls JCI.N O 40 48 20 37,530 15.4 1.4 8.2 12.5 9.6 13.7 1.3 8.9 12.4 10.2

Denso 6902.T N 5,630 5,850 4 39,035 17.3 1.3 5.7 6.2 8.0 15.1 1.3 6.1 14.4 8.6

Aisin Seiki 7259.T O 5,820 7,100 22 14,272 13.1 1.3 3.6 25.4 10.5 12.1 1.2 3.5 8.3 10.4

Valeo VLOF.PA NC 62 N/A N/A 17,694 14.5 3.0 5.3 6.9 22.2 12.6 2.5 5.7 15.1 22.2

Faurecia EPED.PA NC 58 N/A N/A 9,578 13.1 2.4 2.9 35.2 17.9 11.7 2.0 3.3 11.9 17.2

S&T Motiv 064960.KS NR 45,800 N/A N/A 592 9.0 0.9 6.3 122.7 10.2 8.1 0.8 6.3 11.8 10.7

Keihin 7251.T N 1,925 1,700 -12 1,266 12.8 0.8 3.4 95.3 6.7 11.8 0.8 3.6 9.1 6.9

Honeywell HON.N N 141 139 -1 107,134 19.9 4.9 13.7 7.5 26.7 18.2 4.4 14.4 9.2 26.1

BorgWarner BWA.N NC 50 N/A N/A 10,467 13.4 2.7 8.3 13.1 22.1 12.5 2.4 8.4 7.7 20.7

Hyundai Mobis 012330.KS O 216,000 285,000 32 18,578 7.9 0.7 7.4 -12.7 9.0 6.6 0.6 8.2 20.8 10.1

Hyundai Wia 011210.KS N 62,000 58,000 -6 1,490 11.9 0.5 1.8 8.2 4.3 7.6 0.5 2.6 56.9 6.4

Mando Corp 204320.KS O 241,000 290,000 20 2,000 13.8 1.5 2.8 -17.6 10.9 9.6 1.3 3.8 43.9 14.4

HanOn Systems 018880.KS O 12,250 15,000 22 5,778 22.2 3.2 5.2 1.0 15.2 17.4 2.8 6.2 27.2 17.3

Global Average 14.2 1.9 5.7 23.3 13.3 12.1 1.7 6.2 19.1 13.9

2018E2017E


As of 21-Sep-2017


(USD mn)

PER

(x)

PBR

(x)

NP Margin

(%)

EPS YoY

(%)

ROE

(%)

PER

(x)

PBR

(x)

NP Margin

(%)

EPS YoY

(%)

ROE

(%)

Denso 6902.T N 5,630 5,850 4 39,035 17.3 1.3 5.7 6.2 8.0 15.1 1.3 6.1 14.4 8.6

Keihin 7251.T N 1,925 1,700 -12 1,266 12.8 0.8 3.4 95.3 6.7 11.8 0.8 3.6 9.1 6.9

Sanden Hldg 6444.T NR 434 N/A N/A 542 N/M -8.0 NM -39.6 20.0 1.0 NM 5.0

Valeo VLOF.PA NC 62 N/A N/A 17,694 14.5 3.0 5.3 6.9 22.2 12.6 2.5 5.7 15.1 22.2


Global Average 16.7 2.1 2.3 27.3 2.5 15.4 1.9 4.5 16.5 12.0

2017E 2018E


As of 21-Sep-2017


(USD mn)

PER

(x)

PBR

(x)

NP Margin

(%)

EPS YoY

(%)

ROE

(%)

PER

(x)

PBR

(x)

NP Margin

(%)

EPS YoY

(%)

ROE

(%)

Denso 6902.T N 5,630 5,850 4 39,035 17.3 1.3 5.7 6.2 8.0 15.1 1.3 6.1 14.4 8.6

Aisin Seiki 7259.T O 5,820 7,100 22 14,272 13.1 1.3 3.6 25.4 10.5 12.1 1.2 3.5 8.3 10.4

Continental CONG.DE NC 212 N/A N/A 50,611 13.2 2.6 7.4 5.3 20.4 11.9 2.3 7.7 10.5 19.6

Delphi DLPH.N NC 101 N/A N/A 26,962 15.1 7.7 10.5 6.5 58.3 13.8 6.0 10.6 9.4 47.5

Autoliv ALV.N NC 124 N/A N/A 10,815 20.0 2.8 5.3 -7.7 14.1 17.5 2.5 5.6 14.2 15.4

TUNG THIH 3552.TWO NR 213 N/A N/A 598 31.3 4.0 7.9 -51.9 16.0 19.8 3.3 9.1 58.0 19.9



Mando Corp 204320.KS O 241,000 290,000 20 2,000 13.8 1.5 2.8 -17.6 10.9 9.6 1.3 3.8 43.9 14.4

Global Average 17.1 2.8 6.2 -5.0 18.1 13.8 2.4 6.8 23.0 18.1

2017E 2018E


As of 21-Sep-2017


(USD mn)

PER

(x)

PBR

(x)

NP Margin

(%)

EPS YoY

(%)

ROE

(%)

PER

(x)

PBR

(x)

NP Margin

(%)

EPS YoY

(%)

ROE

(%)

LANDF 066970.KQ NR 39,550 N/A N/A 859 47.0 10.2 4.7 195.4 15.0 32.1 6.6 6.1 46.2 22.8

Foosung 093370.KS NR 10,650 N/A N/A 869 27.5 5.4 14.5 -46.2 21.4 17.2 4.1 18.8 60.2 26.7

Posco Chemtech 003670.KQ NR 29,600 N/A N/A 1,545 17.5 2.8 8.2 128.0 15.3 15.5 2.4 9.2 13.0 16.4

LG Chem 051910.KS NC 389,000 N/A N/A 24,263 14.3 1.9 8.0 56.4 13.5 14.0 1.7 7.8 2.3 12.4

Samsung SDI 006400.KS N 213,000 144,000 -32 12,942 22.0 1.3 10.8 209.2 6.0 14.1 1.2 14.2 55.8 8.8

Ecopro 086520.KQ NR 34,800 N/A N/A 679 65.5 4.7 4.5 5.9 8.0 43.6 4.2 5.3 50.0 10.2

Iljin Materials 020150.KS NR 37,500 N/A N/A 1,524 31.1 3.5 11.5 24.3 14.5 33.8 3.1 9.6 -8.1 10.5

Woory Industrials 215360.KQ NR 37,550 N/A N/A 303 25.6 4.1 5.7 2.1 20.8 19.6 3.4 5.9 30.3 21.2



Global Average 28.0 3.8 8.1 56.4 13.9 21.4 3.0 9.1 29.8 15.6

2017E 2018E

25 September 2017


Company profile

History: Hanon Systems (Hanon) was previously established in 1986 as a 50:50 joint

venture between Ford Motor and Mando Machinery (Mando's former entity) as 'Halla

Climate Control' and began supplying automotive climate systems globally. The company

was listed on the Korea Stock Exchange (KRX) on 31 July 1996, and Visteon (a spin-off of

Ford's auto parts division) subsequently became a majority shareholder (70% stake) in

1999. Visteon and Halla Climate Control ran a climate automotive climate system business

separately until the latter acquired the former's stake in 2013 (acquired 18 subsidiaries of

Visteon for W439 bn), forming 'Halla Visteon Climate Control' (HVCC). On 9 June 2015,

Visteon sold its entire 70% stake in HVCC to the consortium of Hahn & Company (private

equity firm, 50.5%) and Hankook Tire (19.5%) at W3.9 tn. The company then changed its

official name to 'Hanon Systems' on 24 July 2015 and went through a 5-for-1 stock split on

26 January 2016 (trading halted from 22 January to 15 February).

Business: Hanon is a global OEM manufacturer of automotive climate control (HVAC or

heating, ventilation and air-conditioning) systems, thermal management systems and related

components. The company's business can be categorised into three areas: (1) overall

climate control systems (offering occupant comforts), (2) internal combustion engines (ICE)

thermal management systems (maintaining engine temperatures), and (3) electric vehicles

(EV) thermal management systems (controlling battery/motor temperatures).

Demand: Hanon is world's No. 3 automotive thermal management solutions provider

(behind Denso and Mahle Behr), with 34 overseas affiliates in China, North/South America,

Europe, and other regions. As of 2015, 51% of Hanon's revenue (consolidated) came from

Hyundai Motor Group (HMG) and 19% from Ford Motors. Hanon guides to lower the core

group sales portion to 50% by 2020E and increase the non-HMG / Ford portion.

Shareholding structure: Visteon sold its entire 69.99% stake in Hanon in June 2015 to a

consortium of Hahn & Company (private equity firm) and Hankook Tire. Since then, Hahn

& Company (Hahn & Co. Auto Holdings) and Hankook Tire own 50.50%/19.49% of the

company, respectively, followed by National Pension Service (5%).

Management: Since the takeover of the company by the consortium of financial investors

(FI) and strategic investors (SI) last year, Hanon is run by both private equity professionals

and industry experts. Its chairman/board of Directors (Mr. Yeo-Eul Yoon) is also the

current chairman of Hahn & Co, while its president/CEO (Mr. In-Young Lee) previously

worked as CEO at Coavis (auto fuel pump company) and CFO at General Motors Asia.

Figure 49: Hanon sales breakdown as of 1H17 Figure 50: Shareholding structure as of 2Q17



Ford24%

VW3%

CA-OEM3%

BMW2%

JLR1%

GM1%

FCA1%

Suzuki1%

JMC1%

Geely / Volvo1%

Others11%

1H17

Hahn & Co. Auto Holdings (PEF)

50.5%

Hankook Tire19.5%

National Pension Service

5%

Others25%

2Q17

25 September 2017


Figure 51: Hanon—market cap trend with major historical events

Source: Datastream, Company data, Credit Suisse

Figure 52: Hanon—main product portfolios

Company Division Product Image Functions / descriptions

Hanon Systems

NEV

E- compressor

■ Electric and hybrid vehicles operate under different conditions that preclude conventional compressor designs. The electric compressor operates independently, enabling the cabin to be cooled even when the engine is off.

Battery Thermal Management System

■ Battery thermal management systems include battery chiller (compact plate-to-plate heat exchanger that transfers thermal energy to maintain optimum battery temperatures) and battery contact heat exchanger (packaged in the battery pack to transfer thermal energy)

Thin Film Coolant Heater

■ Thin Film Heater uses ceramic thin film heating element technology for improved performance with high efficiency for hybrid and full electric vehicles

Heat Pump System

■ The heat pump system is a solution to heating electric, hybrid and internal combustion engine vehicles where there is insufficient waste heat for cabin heating

High Voltage Cooling Fan Motor

■ The high voltage cooling fan motor incorporates a brushless DC motor offering high efficiency and reliability in fuel cell electric vehicle applications.

Centrifugal Air Compressor

■ The centrifugal air compressor is a turbo blower for fuel cell electric vehicles that generates electricity by supplying oxygen to the stack of a fuel cell. It mainly compresses air to a set pressure and flow rate, and includes a brushless DC motor designed to rotate the compressor smoothly and at high speed.

Coolant Heater

■ The coolant heater is high voltage integrated heater for fuel cell electric vehicle applications that heats the fuel cell stack for optimal operation during cold start conditions and burns the electricity in the event of an impact.

Efficiency

Fluid transport

■ Fluid transport portfolio consists of refrigerant lines, coolant lines, transmission oil cooler lines, accumulators, receiver driers and internal heat exchangers (IHX) FT

Condenser

■ The condenser—a component of the air conditioning circuit—is integrated into the engine cooling module, where it is used to cool down and condense the compressed, gaseous refrigerant from the compressor.

Radiator

■ The radiator is necessary to regulate engine temperature through a heat exchange process involving coolant and air flow.

Cooling Fan & Shroud

■ Involves an automotive refrigerant fan, mounted onto the engine, which helps to boost heat exchange. The fan's center line is designed with a wave-like form to maximise air flow and to reduce operational noise.

Air CAC

■ Air charge air coolers that transfer heat from boosted air into ambient air. Variants support diesel of gasoline engine package constraints, including full-face, brick and wheel arch styles.

0

1

2

3

4

5

6

7

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Hanon Systems market cap trend

(KRW tn)

Delphi filed for bankruptcy (chapter 11)

Visteon filed for bankruptcy (chapter 11) Acquired thermal/emissions business

from Cooper-Standard Automotive

Acquired climate business from Visteon

Hahn & Co and Hankook Tire consortium becomes majority shareholder

Went through stock split (5:1 ratio)

Won contract from Tesla Motors on supplying A/C systems

Established compressor plants in Dalian, China

2Q17 earnings beat

25 September 2017


Water CAC

■ Water-cooled charge air coolers that transfer heat from intake air to a coolant loop using a low temperature radiator. This secondary loop architecture makes it possible to position the cooler away from the front of the engine compartment, without a loss of charge air pressure.

High Pressure EGR

■ Close-coupled to the engine, hot exhaust gas is cooled by engine coolant and recirculated to the intake manifold.

Low Pressure EGR

■ Downstream the exhaust pipe, hot exhaust gas is cooled by engine coolant and recirculated to the air intake prior to the turbocharger.

Auto Transmission Warmer & Cooler

■ Auto transmission fluid warmer/cooler contributes to enhanced fuel efficiency by simultaneously regulating two roles with a single heat exchanger.

Efficiency with

Thermal &

Emissions

Pumps & Valves

■ Electronic coolant pumps are a key component to supply coolant on-demand for critical thermal management systems. By cooling the engine precisely and only as required, electronic coolant pumps reduce fuel consumption with the additional benefit of curbing friction losses and emissions.

Electronic Wastegate Actuator (eWGA)

■ Thin Film Heater uses ceramic thin film heating element technology for improved performance with high efficiency for hybrid and full electric vehicles

Electronic Throttle Body (ETB)

■ Electronic throttle body (ETB) controls the volume of air flowing into the engine and is a main part of the engine emission management system

Comfort

Ultra-Flat HVAC

■ Developed for innovative utilisation of unused or unconventional package space in the floor pan or body sides. When designed as a main unit, it can be completely relocated out of the cockpit for greater flexibility in cabin styling and roominess.

Super Slim HVAC

■ The Super Slim HVAC system is the world's first technology that allows reducing the physical size and weight of HVAC by integrating each of the airflow and temperature control rotary door into a sliding door.

Straight Airflow Path HVAC

■ The Straight Airflow Path HVAC provides efficient, high airflow to quickly heat or cool vehicle occupants. Less pressure loss through the straight air ducts allows a smaller blower motor for improved fuel efficiency and quieter A/C operation.

HS Compressor

■ HS Compressor is fixed swash plate type. It maintains the constant compression ratio and discharge rate of refrigerant. It is also able to adjust the cooling load through the on/off function of Clutch that is compressor's component.

RS Compressor

■ Rotary Suction compressor has a fixed displacement swashplate design that draws refrigerant through the center shaft. It delivers improved fuel economy by creating less suction loss compared to a traditional suction valve.

VS Compressor

■ Variable swashplate compressor can vary its duty cycle and change the amount of displaced refrigerant. This appropriate sizing of compressor displacement improves power consumption and fuel economy.

Controller

■ Climate controllers offer automatic and manual front and rear temperature controls that operate the Heating, Ventilation and Air Conditioning System (HVAC).

Ionizer

■ A cluster ion generator known as 'CLIOGEN' developed with domestic technology is a product which can completely remove chronic odors that are being generated from the use of Air-Conditioner/Heater.

Cold Storage Evaporator

■ Cold storage evaporator technology was developed to maintain a consistently comfortable interior when in ISG made and also improve fuel efficiency of a vehicle when slowing or stopping.

Source: Company data, Credit Suisse

25 September 2017


Companies Mentioned (Price as of 22-Sep-2017) Aisin Seiki (7259.T, ¥5,840) Autoliv (ALV.N, $124.43) BorgWarner, Inc. (BWA.N, $49.59) Continental (CONG.DE, €211.95) Delphi Automotive Plc (DLPH.N, $101.04) Denso (6902.T, ¥5,670) Ecopro (086520.KQ, W32,800) Faurecia (EPED.PA, €58.12) Foosung (093370.KS, W10,250) HanOn Systems (018880.KS, W12,150, OUTPERFORM, TP W15,000) Honeywell International Inc. (HON.N, $140.86) Hyundai Mobis (012330.KS, W218,000) Hyundai Motor Company (005380.KS, W142,000) Hyundai Wia (011210.KS, W62,500) Iljin Materials (020150.KS, W34,600) Johnson Controls Inc (JCI.N, $39.98) Keihin (7251.T, ¥1,921) Kia Motors (000270.KS, W30,400) L&F (066970.KQ, W36,550) LG Chem Ltd. (051910.KS, W369,000) Mando Corp (204320.KS, W236,500) Posco Chemtech (003670.KQ, W27,650) S&T Motiv (064960.KS, W45,400) Samsung SDI (006400.KS, W208,500) Sanden Hldg (6444.T, ¥441) TUNG THIH (3552.TWO, NT$214.0) Valeo (VLOF.PA, €61.84) Woory Industrial (215360.KQ, W37,800)

Disclosure Appendix

Analyst Certification I, Michael Sohn, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for HanOn Systems (018880.KS)

018880.KS Closing Price Target Price

Date (W) (W) Rating

13-Jun-16 11,850 8,000 U *

10-Aug-16 11,750 8,500

10-Nov-16 10,300 10,000 N

13-Feb-17 9,280 9,500

15-May-17 9,500 10,000

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms repre senting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms represe nting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.

25 September 2017


Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 41% (59% banking clients) Underperform/Sell* 14% (53% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf .

Target Price and Rating Valuation Methodology and Risks: (12 months) for HanOn Systems (018880.KS)

Method: Our target price of W15,000 for Hanon Systems is based on DCF methodology. Our OUTPERFORM rating is on the back of (1) a recovery in sales and earnings growth from 2018E, driven by execution of new business backlog orders, (2) based on diversified customers & NEV (new energy vehicles) parts focused strategy, and (3) tightening NEV regulation in China.

Risk: Key risks for our target price of W15,000 and OUTPERFORM rating on Hanon Systems include: (1) cost reduction pressure by OEMs and (2) the rise of new participants, which could intensify competition in NEV parts markets.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): 018880.KS Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (018880.KS) within the next 3 months. Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): 018880.KS

https://plus.credit-suisse.com/

https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html

https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html

https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf

https://rave.credit-suisse.com/disclosures/view/selectArchive

25 September 2017


For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=321559&v=3s1mhqjda5sio24a0zzo1rmg3 .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (Europe) Limited, Seoul Branch ................................................................................................................ Michael Sohn To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Europe) Limited, Seoul Branch ................................................................................................................ Michael Sohn

Important disclosures regarding companies or other issuers that are the subject of this report are available on Credit Suisse ’s disclosure website at https://rave.credit-suisse.com/disclosures or by calling +1 (877) 291-2683.

https://rave.credit-suisse.com/disclosures/view/report?i=321559&v=3s1mhqjda5sio24a0zzo1rmg3

https://rave.credit-suisse.com/disclosures

25 September 2017


This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk.

This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited,

Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Sekuritas Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited (“CSSEL”) and Credit Suisse International (“CSI”) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence (“AFSL”) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 (“Corporations Act”) under Class Order 03/1099 published by the Australian Securities and Investments Commission (“ASIC”), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited (“CSHK”) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

https://www.credit-suisse.com/who-we-are

HanOn Systems - research-doc.credit-suisse.com

Documents

Transcript of HanOn Systems - research-doc.credit-suisse.com