Global Gambits Autos - J.P. MorganAnalyst: Himanshu Patel, CFA EV/EBITDA (Calendar) Phone: (1-212) 622-3906 2006E 2007E Email: himanshu.patel @jpmorgan.com 9.6 7.7 • We see potential

Global Equity ResearchJune 28, 2006

Global GambitsThe Right Moves for Right Now

See jpmorganSaVanT.com for global sector valuation tools

The following is a chapter from Global Gambits � The Right Moves for Right Now, dated June 28, 2006. This chapter is presented forconvenience, and should be read in conjunction with the full report and its analyst certifications and important disclosures. The full report isavailable on MorganMarkets.

Autoschapter

http://www.jpmorganSaVanT.com

June 28, 2006

Global Equity Research Global Gambits — The Right Moves for Right Now See jpmorganSaVanT.com for global sector valuation tools

2

Autos Go East

Key Drivers• Relative value in Japan and Korea. With OEM valuations

likely to be range-bound in the US and Europe, relative value in the global auto sector may now be in Asian OE names, though currency may be a near-term concern. Among the Japanese OEs, we like Toyota and Honda (above peer profitability, growth potential). In Korea, we prefer Hyundai (improving US sales momentum). Among US OEs, while we prefer GM ($25.59, OW) to F, the stock’s recent run-up suggests that better value may be in transplant-exposed suppliers such as JCI. And in Europe, we like DCX (restructuring potential).

• In the US, the auto sector could now be range-bound as high interest rates/gas prices may weaken near-term new vehicle demand, in our view. With last year’s employee pricing programs likely to make Y/Y sales comparisons particularly hard for the Big Three, we think supplier names with high transplant exposure and non-auto revenues, such as Overweight-rated JCI look better placed to outperform the sector. Among the OEs, we prefer GM to Ford as a strengthening product cycle and structural cost savings should help earnings recover in 2007E, though the stock’s recent run-up and the Delphi strike risk may limit further near-term gains.

• With the recent correction, European auto stocks look fairly valued. Generally, robust balance sheets suggest limited scope for incremental de-leveraging, indicating that upside to equity value will be contingent on multiple expansion (i.e., positive earnings momentum)—arguing against a near-term upward re-rating, in our view. We continue to prefer Overweight-rated DCX (restructuring potential, attractive valuation) to Underweight-rated BMW and Neutral-rated Renault (€81.50).

• We reiterate our bullish stance on the Japanese OEM sector based on three elements: (1) a 5%+ CAGR for the five-year volume growth; (2) sustainable top industry profitability, with EBIT margins of 8-9%; and (3) a period of improving returns on invested capital. We rate Toyota Motor and Honda Motor Overweight, but remain cautious on Nissan Motor (¥1,232) with a Neutral.

• In Korea, OEM valuations are beginning to look more attractive with the recent correction. While near-term risks remain due to the strong Won and investigation on the Hyundai Motor Group, we believe valuations are now undemanding vis-à-vis global peers and the market, especially in light of improving US sales momentum.

Global Sector Coordinator

Himanshu Patel, CFA (1-212) 622-3906 [email protected] J.P. Morgan Securities Inc. Full sector coverage details on page 7

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Our Non-Consensus Views

• US. UAW concessions, capacity/headcount reductions and the upcoming ’07 union contract negotiations could help the Detroit 3 achieve a much more competitive cost structure by the end of 2007. In the case of GM, we think cost savings and positive mix (from the T900 launch) may see ’07 earnings (ex-GMAC) north of US$4 (consensus: US$3.31).

• Japan. Higher-than-expected capital expenditure may hold back operating margins slightly, and we think that the improvement in Japanese OEMs’ ROIC may be delayed marginally, remaining flat at 14.0% in FY06E. However, we envisage an improvement in returns led by Toyota, and expect an upswing to 14.7% in FY07E, and an all-time high of 15.2% in FY08E. The global OEMs face a tough environment with cost inflation, product mix deterioration, and price deflation. Nonetheless, we believe Japanese OEMs hold superior fundamentals backed up by high secular growth and high ability to control structural costs.

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Autos: Top Picks Company Key Financials Rationale and Catalysts Johnson Controls Inc. Rating: Overweight Fiscal EPS (Local): Year-end Sept. Ticker: JCI US / JCI 2005 2006E 2007E 4.49 5.35 7.00 Exchange: NYSE P/E (Calendar) Price (Local): US$81.69 2006E 2007EMkt Cap (US$): 15.9 bn 15.3 11.7 Analyst: Himanshu Patel, CFA EV/EBITDA (Calendar) Phone: (1-212) 622-3906 2006E 2007EEmail: himanshu.patel @jpmorgan.com 9.6 7.7

• We see potential for 15-20% upside to FY07/08 consensus estimates for JCI, driven by non-auto growth and York acquisition synergies.

• Four key areas of potential earnings upside: (1) the likelihood for JCI’s building efficiency business to grow sales at roughly 10%/year through 2008 (2x global HVAC industry growth); (2) high operating leverage at York; (3) what we sense is a growing likelihood of a sweeping European-style restructuring in JCI’s NAFTA interiors business; and (4) the potential for roughly 130bps of cumulative margin expansion from 2006-08E in power solutions stemming purely from the Delphi business integration and European restructuring (and possibly another 200bps from operating leverage).

• Valuing the stock at 14.3x on our new FY07E EPS estimate yields a May 2007 US$100 price target. Risks: Interior margins may take longer to recover if commodity costs rise higher than expected. On 2007 consensus estimates, pure auto suppliers with high transplant exposure (BWA/ALV) trade at 12.2x, while HVAC comps trade at 15-17x, suggesting a mid-14x P/E for JCI is reasonable.

DaimlerChrysler AG Rating: Overweight Fiscal EPS (Local): Year-end Dec. Ticker: DCX GR/ DCXGn.DE 2005 2006E 2007ETicker ADR: DCX 4.08 4.11 4.22 Exchange: Frankfurt Electronic P/E (Calendar) Price (Local): €37.53 2006E 2007EMkt Cap (US$): 48.3 bn 9.1 8.9 Analyst: Philippe Houchois EV/EBITDA (Calendar) Phone: (44-20) 7325-8106 2006E 2007EEmail: [email protected] 4.4 3.6

• With the stock trading around €40 again and the SOP benefiting from further reductions in employee liabilities (worth €2.5 per share) and having crystallized value in non-core associates (EADS), we believe DaimlerChrysler offers an attractive value opportunity. We believe management’s focus on operating performance combined with a strong balance sheet will help close the disconnect between the company's earnings based valuation and asset values. In the near term, however, we expect the stock to suffer from limited visibility on the truck cycle and the US volume/pricing environment.

• In our view, upside to the stock could be driven by: (1) a change of focus towards operating excellence versus value destructive strategies; (2) corporate activity focusing on further streamlining the portfolio (EADS, Smart, etc.); and (3) improved communication with financial investors. We maintain our Overweight rating with a six-month DCF/SOP-based target price of €52. Currency, limited visibility on the truck cycle and economic weakness are potential risks to target price.

Toyota Motor Rating: Overweight Fiscal EPS (Local): Year-end Mar. Ticker: 7203 JP / 7203.T 2005 2006E 2007ETicker ADR: TM 421.8 425.7 462.7 Exchange: Tokyo Stock Exchange P/E (Calendar) Price (Local): ¥5630 2006E 2007EMkt Cap (US$): 183.2 bn 13.2 12.2 Analyst: Takaki Nakanishi EV/EBITDA (Calendar) Phone: (81-3) 6736-8600 2006E 2007EEmail: [email protected] 4.8 4.3

• Under its Global Master Plan (GMP) Phase II (2006–10), Toyota’s sales are likely to reach 9 million vehicles in 2008 (about 10 million groupwide) and approach 10 million (11 million groupwide) by 2010. The company has implemented a strategic shift, trying to improve its cost efficiency. Whereas Toyota fell into a growth trap in the latter half of Phase I of the plan, it is reconciling strong top-line growth with improvement in returns in Phase II.

• Whereas GMP Phase I was characterized by a positive turnaround in returns for Toyota’s affiliates and suppliers rather than that of Toyota, Phase II is characterized by an improvement in Toyota’s core earnings growth potential. Toyota Motor should start to see a full-scale improvement in returns, outstripping the increase at affiliated companies and suppliers.

• We maintain our Overweight rating and our DCF-based share price target through June 2007 of ¥8,200 (FY06E P/E of 19x based on JPMorgan estimates). Risks to target price are changes in exchange rates and the economy.

Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, 2006.

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Autos: Top Picks (cont’d) Company Key Financials Rationale and Catalysts Honda Motor Rating: Overweight Fiscal EPS (Local): Year-end Mar. Ticker: 7267 JP / 7267.T 2005 2006E 2007E 652.2 319.3 341.2 Exchange: Tokyo Stock Exchange P/E (Calendar) Price (Local): ¥6900 2006E 2007EMkt Cap (US$): 57.0 bn 10.8 10.1 Analyst: Takaki Nakanishi EV/EBITDA (Calendar) Phone: (81-3) 6736-8600 2006E 2007EEmail: [email protected] 5.6 5.1

• Honda’s new long-term strategy aims to accelerate global growth in fuel-efficient cars. Our own view has been that the emergence of a concrete long-term strategy would catalyze a revaluation of the stock.

• Honda plans to build three new factories in Japan and North America, looking to tap into soaring global demand for fuel-efficient vehicles. Honda has its sights on automobile sales of at least 4.5 million units in 2010, giving annualized growth of 5.8%.

• New factories potentially offer around a 20% improvement in productivity compared with existing sites, and a substantial step forward in Honda’s productivity-based competitive position looks possible in our view. We believe the emergence of a strategic push to supply diesel engines and small hybrid cars to the U.S. represents an extremely important development.

• Overweight maintained. We leave our DCF-based share price target through April 2007 unchanged at ¥9,000 (P/E of 14x based on our FY06 estimates). Risks to our target price include yen appreciation, crude oil prices and other changes in the economy.

Hyundai Rating: Overweight Fiscal EPS (Local): Year-end Dec. Ticker: 005380 KS / 005380.KS 2005 2006E 2007E 8154 7662 9698 Exchange: Korea Stock Exchange P/E (Calendar) Price (Local): W76,900 2006E 2007EMkt Cap (US$): 17.8 bn 7.4 5.9 Analyst: JM Pak EV/EBITDA (Calendar) Phone: (82-2) 758-5715 2006E 2007EEmail: [email protected] 5.9 4.3

• We believe sales momentum will accelerate in the US market towards 2H06 on the back of new models such as the recently launched Azera, Accent and the upcoming SUV Santa Fe.

• Near-term risks remain with the appreciation of the Won and the ongoing group investigation. However, we believe forex exposure will be mitigated in the longer term with the company’s strategy of diversifying its production base.

• Valuations remain undemanding vis-à-vis global peers and the underlying Korean market. We maintain our Overweight rating and a June 2007 price target of W100,000 (11.8x adjusted FY06E EPS). Risks to our price target are: (1) stronger-than-expected appreciation of the Won, and (2) delays in the recovery of the domestic market.


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Autos: Stocks to Underweight Company Key Financials Rationale and Catalysts Ford Motor Company Rating: Underweight Fiscal EPS (Local): Year-end Dec. Ticker: F US / F 2005 2006E 2007E 1.25 0.40 0.60 Exchange: NYSE P/E (Calendar) Price (Local): US$6.78 2006E 2007EMkt Cap (US$): 12.7 bn 17.0 11.3 Analyst: Himanshu Patel, CFA EV/EBITDA (Calendar) Phone: (1-212) 622-3906 2006E 2007EEmail: himanshu.patel @jpmorgan.com 2.9 3.9

• We think Ford’s top line will be challenged over the next 12-18 months as its highest margin vehicles (large SUVs and large pick-ups) come under pressure from what is likely to be a well-received GM T900 platform.

• We are reluctant to count on a surge in the rate of cost savings given Way Forward’s vagueness and Forward’s past tendency for product cost overruns. Targeted capacity savings seem meaningful but will likely take 2-3 years to become significant; procurement savings targets seem optimistic (~3%/year versus 1.5% at GM’s); and other savings areas (e.g., engineering) remain unquantified.

• Western mass-market automotive OEM stocks typically trade between 6.5x and 12x P/E on forward EPS, with the high end of this P/E range usually being realized during widely believed earnings troughs, and the low end being realized during widely believed earnings peaks. We think Ford’s 2006E and 2007E earnings are representative of mid-product cycle earnings, suggesting the stock should be valued toward the middle of this historical forward P/E range. Currently, the stock is trading at 11.3x 2007E EPS, and looks overvalued.

BMW AG Rating: Underweight Fiscal EPS (Local): Year-end Dec. Ticker: BMW GR / BMWG.DE 2005 2006E 2007E 3.33 3.92 3.85 Exchange: Frankfurt Electronic P/E (Calendar) Price (Local): €37.73 2006E 2007EMkt Cap (US$): 32.0 bn 9.6 9.8 Analyst: Philippe Houchois EV/EBITDA (Calendar) Phone: (44-20) 7325-8106 2006E 2007EEmail: [email protected] 4.2 3.8

• Yesterday’s story to be delivered tomorrow? Having failed to deliver an earnings leverage while enjoying superior growth and currency protection, BMW looks set to join the ranks of cost-driven OEMs as growth rates normalize. The decline in capital returns highlights both excess currency benefits in the past and lower incremental returns as recent investment projects failed to deliver the optimal mix/volume returns of the 3 series. We do not see 2006 as a turning point for earnings momentum.

• With stable earnings and superior cash flows, BMW increasingly looks like a utility company, without the cash distribution and higher risks associated with the car industry’s demands on price (remember, Mercedes was also an “annuity”). Recent performance is again valuing the company as a growth stock on EV multiples. For a stock whose cash generation credentials are well established, we believe BMW’ share price performance requires more earnings momentum than what it currently offers.

• We remain Underweight with a DCF/multiples based six-month target price of €40. Risks to target price are a better-than-anticipated strength in the US market and favourable currency.


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JPMorgan Global Autos Team – Research Equity Research Credit Research Americas Americas Himanshu Patel, CFA Global Sector Coordinator

United States Himanshu Patel, CFA Ranjit Unnithan

United States Eric Selle, CFA (HG/HY) Stephanie Renegar (HY)

EMEA EMEA Pan Europe Philippe Houchois

Shaz Kidwai Pan Europe James Banghart (HG/HY)

Asia Pacific Asia Pacific China Frank Li Japan Mana Nakazora India Vijay Chugh Indonesia Fordyanto Widjaja, CFA Japan Takaki Nakanishi

Yoshiki Masaki

Malaysia Chris Oh South Korea J.M. Pak

Taiwan Nick Lai

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Companies Recommended in This Report (prices as of COB 19 June 2006) Honda Motor (7267) (7267.T/¥7,170/Overweight), Hyundai Motor (005380.KS/W78,500/Overweight), Nissan Motor (7201) (7201.T/¥1,242/Neutral), Toyota Motor (7203) (7203.T/¥5,840/Overweight)

Analyst Certification: The research analyst who is primarily responsible for this research and whose name is listed first on the front cover certifies (or in a case where multiple research analysts are primarily responsible for this research, the research analyst named first in each group on the front cover or named within the document individually certifies, with respect to each security or issuer that the research analyst covered in this research) that: (1) all of the views expressed in this research accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research.

Important Disclosures

• Client of the Firm: Honda Motor (7267) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Hyundai Motor is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Nissan Motor (7201) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Toyota Motor (7203) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services.

• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Nissan Motor (7201).

• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Honda Motor (7267), Hyundai Motor, Nissan Motor (7201), Toyota Motor (7203). An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Honda Motor (7267), Hyundai Motor, Nissan Motor (7201), Toyota Motor (7203).

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0

1,695

3,390

5,085

6,780

8,475

10,170

11,865

13,560

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Honda Motor (7267) (7267.T) Price Chart

N OW Y5,950 OW Y9,000

Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.Break in coverage Oct 02, 2003 - Mar 02, 2004, and Aug 15, 2005 - Apr 20, 2006. This chart shows JPMorgan's continuingcoverage of this stock; the current analyst may or may not have covered it over the entire period. As of Aug. 30, 2002,the firm discontinued price targets in all markets where they were used. They were reinstated at JPMSI as of May 19th,2003, for Focus List (FL) and selected Latin stocks. For non-JPMSI covered stocks, price targets are required forregional FL stocks and may be set for other stocks at analysts' discretion.JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (Y)

Price Target (Y)

14-Jul-03 N 4890 - 02-Mar-04 OW 4770 5950

0

23,510

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Hyundai Motor (005380.KS) Price Chart

N W51,000 OW W100,000

N W45,000 OW W100,000

OW W42,400 OW W61,000OW W68,000 OW W85,000 OW W96,000OW W100,00

Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.This chart shows JPMorgan's continuing coverage of this stock; the current analyst may or may not have covered it overthe entire period. As of Aug. 30, 2002, the firm discontinued price targets in all markets where they were used. Theywere reinstated at JPMSI as of May 19th, 2003, for Focus List (FL) and selected Latin stocks. For non-JPMSI coveredstocks, price targets are required for regional FL stocks and may be set for other stocks at analysts' discretion.JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (W)

Price Target (W)

11-Jul-03 OW 34400 42400 12-Nov-03 N 44000 45000 05-May-04 OW 46450 61000

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Nissan Motor (7201) (7201.T) Price Chart

N N Y1,500



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02-Mar-04 N 1220 -

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Toyota Motor (7203) (7203.T) Price Chart

OW Y5,000

N OW Y8,200



Price Target (Y)

02-Mar-04 N 3860 - 31-May-04 OW 4000 5000

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Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

JPMorgan Equity Research Ratings Distribution, as of April 3, 2006

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Neutral (hold)

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JPM Global Equity Research Coverage 40% 42% 18% IB clients* 45% 47% 39% JPMSI Equity Research Coverage 35% 50% 15% IB clients* 63% 57% 46%

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Revised April 3, 2006.

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Documents

Global Gambits Autos - J.P. MorganAnalyst: Himanshu Patel, CFA EV/EBITDA (Calendar) Phone: (1-212) 622-3906 2006E 2007E Email: himanshu.patel @jpmorgan.com 9.6 7.7 • We see potential