Investment pitch to UCL student-led investment society on 21/02/2017 at €86.53 with 20.6% upside at assumption and projection of 0% revenue growth. Investment horizon is 1 year and exit at €102.70. Feel free to contact anyone of us if you have a feedback: Associate: Mykyta Shchukin Analysts: Qu Ming Yuan, Mascha Samkova, HwaiKian Tan

1. BMW
[BAYERISCHE
MOTOREN
WERKE AG]
NIKITA SHCHUKIN, QU MING YUAN,
HWAIKIAN TAN, MASCHA SAMKOVA

2. TABLE OF
CONTENTS
• Industry overview
• Company overview
• New technology
• Electric Vehicles
• Valuation
• Risks

3. INDUSTRY OVERVIEW
• Luxury car market
Luxury car = vehicle costing 28,000+ €
• Product segments
Price Segment: Lower, Middle, Upper.
Type: Sedan, SUV, Sport Luxury, Super
Luxury.
• Major luxury markets in
2017+ are the USA, China,
Germany and UK.
• Compound growth of luxury
car market of about 10%.
Global Luxury Car Market (€ billion)

4. ● Oligopolistic market with high
entry barriers and capital
investment requirements.
● 3 key players
BMW, VW, Mercedes-Benz.
Hold 80% share of global luxury car
market.
● Higher margins on lower sales
due to brand value.
Profit margins for luxury vs. economy cars in the US FY15
Luxury or Major Luxury Lines Predominantly Economy
INDUSTRY OVERVIEW

5. • German-owned company
founded in 1916.
• Headquartered in Munich,
Germany.
• Design, manufacturing and
sales of premium cars,
motorcycles and engines.
• Operating segments:
Automotive, Motorcycles,
Financial Services.
• 31 production locations in 14
countries.
• Sales network in 140+
countries.
Brand Sales Sales Growth
BMW sales split
per country FY15
COMPANY OVERVIEW

6. BMW BRANDS
• 3 Major Brands: BMW, MINI and
Rolls-Royce.
Subparts of BMW:
BMW, Motorsports, i and
Motorrad.
• BMW holds leading positions in
the narrow niches such as Super
Luxury (Rolls Royce) and Sport
Luxury (Motorsports cars).
• Only cars with brands can
sustain margins and resist the
competition from Emerging
Markets. (i.e. Korea,
China).
• Brand estimated value is $29bn

7. NEW CAR RELEASES/RENEWAL
• Each new series of BMW renewal
anticipated to see a corresponding
surge in sales volume over subsequent
years.
• BMW 5 Series is one of the most
popular series, with recent release in
January this year. Expected revenue
surge in the coming quarters.
7.6% Increment in sales of 5 Series from 2003
relaunch
19.5% Increment in sales of 5 Series from 2010
relaunch
• The M5 is also anticipated to have a
new addition four wheel drive in 2017.
• BMW has a slew of new releases lined
up until 2020 in all various ranges:
X-series (X2; X7), Mini Countryman,
BMW 1 series sedan (China), I8 Roadster

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

9. • Electric Vehicle (EV) strategy:
• Target Sales: 100,000 Hybrid and EV within 2017;
equivalent to the total sales made in the first 3
years of EV production. Within first 3 quarters of
2016 20,062 vehicles were sold with YoY increase of
65.9%
• Current Model: i3, i8 (With Hybrid and EV
format).
• In the pipeline: X5; 3 series
• Electric Mini (2019), X3(2020), new i8 release in
convertible form(2018).
• Given that electric charging infrastructure is as
prevalent as of yet, the i-Series hybrid vehicle
will continue to retain its popularity
• Infrastructure:
• Joint venture with Nissan to roll out a series of
public electric car charging station across 19
US states. This will be unlike Tesla’s
Supercharger network that is only compatible
ELECTRIC CAR: ACCELERATING TECHNOLOGY

10. • Other technology as well as car firm competes with BMW in
this new area in electric car in the near future, most notably
Tesla.
• Tesla relative to BMW is a new to the car industry and
plagued with production issues.
• Tesla is indebted and, unlike BMW, has no revenue from sales
of conventional car sale to finance itself.
• Tesla lack the experience and infrastructure for large volumes
of production.
• Model 3 with 115000 pre-orders top any of its predecessors.
• Tesla has consistently fail to meet projected launch date for
all these newly launched models. Given that each reservation
fee of $1000 is fully refundable, delayed production may
greatly damage volume numbers and exacerbate the cash
burn.
• Currently, Tesla still remains unprofitable on its Model S and
Model X. It is estimated that Tesla loses $4000 for each
Model S. while BMW makes money on every electric car they
sell.
• Safety Issue and reliability issue continue to plague Tesla with
the most repair trips per 100 cars among major auto
manufacturers from 2013 through 2015.
BMW VS TESLA

11. Alphabet provides
fleet financing (#4
fleet company in
Europe).
Retail finance: Credit
finance and leasing
for BMW Group
brand automobiles
(penetration rate
46.3%).
Dealer Finance:
Alphera provides
support to dealer
organisations.
Also provide
customers with access
to insurance and
banking products.
FINANCE SERVICES BMW

12. • BMW has the ROE target of >18% target (2016:
20.2%). But consistently outperforming targets
(see the graph).
• More profitable than usual banks.
• Extremely low default rate even during 2009.
• Financial companies are usually valued on the
book value basis so to be conservative we value
the financial arm at 1x book. value.
Outperforming
ROE
Financial Arm Default Rate
FINANCE

13. • Split the BMW group into parts
and value them separately.
• Cash at 1x.
• Financial Arm at 1x Book Value.
• Compare the EV of core auto
business with its free cash flow.
• Market values the core auto
business at 7.1 EV Auto/FCF
multiple, which is very cheap for
such a high quality business.
• This multiple translates into
15.6% Free Cash Flow (FCF) Yield
for the auto business.
BMW (in millions) Per Share
Market Capitalisation €55,150 €85.32
Cash (€11,445) (€25.30)
Prefered Stock €3,781 -
Financial Arm Book Value (€10,219) (€23.30)
EV Auto €37,267 €55.60
Free Cash Flow (FCF) Last 12 months. €5,221 €8.70
EV Auto/FCF Auto 7.1
Free Cash Flow (FCF) Yield 15.6%
VALUATION: SUM OF THE PARTS (SOTP) TECHNIQUE
AND MULTIPLES

14. Given the high unpredictability of the future we want to be very conservative with our assumptions.
Growth Assumption:
• Revenue growth rate (G) = 0%
BMW is undervalued on the DCF basis and has 20.4% upside. This is a very conservative and safe
projection, because we do not project the any revenue growth in the future.
DISCOUNTED CASH FLOW MODEL (DCF)

15. We use the market stock price to investigate a kind of future assumptions are “priced in”.
Current stock price indicates that the market has the following assumptions about BMW:
• Revenue growth rate (G) = -2% (in the future)
• Operational Margins contract to 8.5% from 9.3%.
In our opinion these assumptions are too pessimistic, given the past volume growth (2016 - 5.3 % volume growth) and potential
growth of electric cars and new releases of new cars (5 series; X7).
Therefore we believe that BMW is undervalued and the stock is mispriced.
REVERSE DISCOUNTED CASH FLOW (DCF)

16. • USA:The new BMW Mexican plant exports to the US which means BMW might be
affected by protectionist measures if implemented by the Trump’s administration.
• However, the US South Carolina plant (biggest worldwide) can serve the US market and
Mexican plant can shift to exporting to the rest of the world. (CFO)
• UK: Brexit will impact revenues in the UK, but devalued £ will make production of Mini
and RR cheaper.
Political Risks
• Same researcher at University of West Virginia, who discovered the VW devices, has
stated that BMW diesel cars performed up to a standard.
• International Council on Clean Transportation has stated that “BMW X5e and other BMW
vehicles comply with NOx requirements.”
Diesel Gate
Risks
• Bears screaming “peak auto sales”.
• However, economies have shown signs of recovery - 2016 growth for the US 2.9%, the
EU 1.8%.
• Furthermore, aggressive monetary policy has spurred job growth.
• Therefore with more jobs and higher wages, demand for consumer durables –
particularly automobiles will grow.
• Positive working population growth: US +1.3% ; EU +0.2%.
Cyclicality
Risks (US and
EU)
RISKS

17. • Chinese sales growth slowing
down.
• SUV demand accounts for 35% of
the total Chinese car market and
has been growing over the last 5
years.
• BMW operates in the premium
SUV market and is well
positioned for this trend.
• BMW has the joint venture (JV) in
Mainland China and was able to
achieve healthier utilisation rate
than Mercedes, while producing
more cars.
• While it is impossible to predict
the Chinese economy growth,
BMW is better positioned relative
to its competitors.
China: SUVs as a proportion of overall Passenger Vehicle Market.
Premium Segment Growth vs Total Market Growth
BMW Production (m units) vs Utilisation Rate
Tailwind
Outperforming
Advantage
RISKS – SLOWDOWN IN CHINA

18. Global brand and highest margins
among competitors
Global luxury car market is growing
at 10% per annum.
Leading electric vehicles and
autonomous driving technology
Strong volume growth (2016: 5.3%)
Undervalued (EV Auto/FCF Auto:
7.1x)
DCF Price Target at €102.70 (20.4%
upside)
EXECUTIVE SUMMARY