Price ¥1,824 Daihatsu Motor HOLD - · PDF fileInvestment / Price Target 7262 JP Initiating...

JPY Prev. 2012A Prev. 2013E Prev. 2014E Prev. 2015E

Rev. (B) -- 1,765.0 -- 1,826.1 -- 1,786.9 -- 1,838.8

Chg (% YoY) -- 8.2% -- 3.5% -- (2.1)% -- 2.9%

OperatingProfit (B)

-- 133.0 -- 145.0 -- 130.0 -- 149.0

Chg (% YoY) -- 15.2% -- 9.0% -- (10.3)% -- 14.6%

OP Margin -- 7.5% -- 7.9% -- 7.3% -- 8.1%

Net Profit (B) -- 81.4 -- 81.1 -- 73.0 -- 83.0

Chg (% YoY) -- 25.0% -- (0.3)% -- (10.0)% -- 13.7%

DPS -- 56.00 -- 56.00 -- 50.00 -- 50.00

EPS

FY Mar -- 191.00 -- 190.40 -- 171.30 -- 194.80

Price Performance

NOV-12 MAR-13 JUL-13 NOV-13

2,500

2,000

1,500

1,000

COMPANY NOTE

Initiating Coverage

JPN | Industrials | Autos & Auto Parts 21 November 2013

Daihatsu Motor (7262 JP)Initiate at Hold: A Tough Year Ahead

EQU

ITY R

ESEARC

H JA

PAN

HOLDPrice target ¥1,700

Price ¥1,824

Financial SummaryBook Value (MM): ¥591,750.0Book Value/Share: ¥1,175Net Debt (MM): (¥159.5)BNReturn on Avg. Equity: 17.5%Net Debt/Capital: (27.0)%

Market Data52 Week Range: ¥2,300 - ¥1,390Total Entprs. Value (MM): ¥619.5BNMarket Cap. (MM): ¥779.0BNShares Out. (MM): 427.1Float (MM): 185.2Avg. Daily Vol.: 1,957,510

Takaki Nakanishi *Equity Analyst

[email protected]

* Jefferies (Japan) Limited

Key Takeaway

Daihatsu has underperformed the sector by a hefty 19% in the past 12 months,and we envisage this will not be reversed for at least 12 months. Daihatsu'svaluation has remained extremely low, reflecting the risk of a decline in profitsfor FY3/15. Our only investment strategy is to keep an eye on the next turningpoint and wait for an investment opportunity. It should be noted that a changein the tax scheme for mini-vehicles may damage profits if it happens.

Investment thesis: The following three points underpin our Hold rating: (1) a lowpossibility of profit growth; (2) no catalyst for a revaluation; and (3) uncertainty in taxationand regulation changes is rather high. The risk of a decline in profits will arise in FY3/15. Thereis a material difference between our estimates and the Bloomberg consensus. However,the FY3/14 P/E has declined 9x, and the market apparently is reflecting a considerabledeterioration in the company’s earnings in the coming years.

Price target: We are setting our price target for the next 12 months at ¥1,700. This isequivalent to 10 times the estimated P/E for FY3/15, our base-year for valuations. We applya 10% discount to the sector average of around 11x.

Earnings forecasts: Based on the assumption of ¥100/US$, we forecast FY3/14 operatingprofit of ¥145.0 billion (company guidance: ¥137.0 billion), 2% below the Bloombergconsensus forecast. In FY3/15 we envisage a decline of a hefty 10% YoY to ¥130.0 billion,which is 11% below consensus.

Valuation/Risks

Our 2-stage DCF model (discount rate of 6.5–7.0%, terminal growth of 0–1%) yields atheoretical share price range of some ¥1,624–¥1,958. Our price target is in the lower levelof the range. Due to harsh external conditions, this is likely to float around the lower levelfor the moment. Risks are high, due to factors such as the Indonesian economy, fluctuationsin Rupiah exchange rates, and the potential tax changes for mini-vehicles in Japan. A ¥1change in the dollar-to-yen rate would result in a ¥1.3bn change in operating profit witha relatively low sensitivity.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investmentdecision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 13 to 16of this report.

Band Chart 1-Yr Forward PER

Source: Bloomberg, Jefferies Estimates

Global Auto Sales Units: Regional Mix

Source: Company data

Daihatsu is Japan's largest manufacturer of mini-vehicles, with a 34.1% market share in

Japan in 2012. Daihatsu is a consolidated subsidiary of Toyota, which owns 52.2%. It

supplies Toyota and FHI with mini-vehicles on an OEM basis. It is profitable in Asia and has

high shares in Indonesia and Malaysia. It pulled out of Europe in 2012.

The extent of a revision to the tax on

vehicles in Japan will be determined by the

end of this year. It may have a material

adverse effect on the company’s business.

Developments in Indonesian politics and

the economy may be important news.

Catalysts

Target Investment Thesis

The following three points underpin our

Hold investment rating: (1) A low

possibility of profit growth; (2) no catalyst

for a revaluation; and (3) uncertainty in

taxations and regulation changes is rather

high. The risk of a decline in profits will

arise in FY3/15. There is a material

difference between our estimates and the

Bloomberg consensus. However, the

FY3/14 P/E has declined 9x, and the market

apparently is reflecting a considerable

deterioration in the company’s earnings

coming years.

Upside Scenario

Improvement in the outlook for the

Indonesian economy and a change in the

direction of the rupiah

The performance of Japan’s mini-vehicles

market will considerably exceed estimates.

A significant expansion of the company’s

role based on Toyota’s strategy for

emerging nations

Target price: ¥1,870 based on a 10%

premium to our main valuation scenario.

Downside Scenario

A further worsening of the Indonesian

economy and a fall in demand for

automobiles

The postponement of the abolition of the

automobile acquisition tax or a rise in the

mini-vehicle road tax in Japan

Further intensifying competition and a

decline in market share

Target price: ¥1,530 based on a 10%

discount to our main valuation scenario.

Long Term Analysis

Scenarios

Company Description

THE LO

NG

VIE

W

Peer Group

Daihatsu Motor (7262 JP)

Hold: ¥1,700 Price Target

Daihatsu: Trend of Long-term Earnings

Source: Company data and Jefferies Estimates

Group PEs (FY2014E)

Source: Bloomberg, Jefferies Estimates

12M Stock Relative to Topix

Source: Bloomberg

Investment / Price Target

7262 JP

Initiating Coverage

21 November 2013

page 2 of 16 , Equity Analyst, [email protected] Nakanishi

Please see important disclosure information on pages 13 - 16 of this report.

Investment Thesis and Valuation We initiate coverage of Daihatsu Motor with a Hold rating. Our price target for the coming

12 months is ¥1,700, equivalent to a P/E of 10x based on our estimates for FY3/15, our

base-year for valuations. We apply a 10% discount to the sector average of around 11x.

Operating income three-year CAGR in FY3/15–FY3/17 is likely to be unsatisfactory at 1%.

The following three points underpin our Hold investment rating.

First, Daihatsu lacks a convincing path of possibility of profit growth. The three-year CAGR

in operating profit in FY3/15–FY3/17 is expected to be as little as 1%, considerably below

the sector average. It is crucial to develop the next growth market after Indonesia.

Second, there is no clear catalyst for a revaluation. There has been little news that would

have a favorable impact on the share price, such as intensified competition in the

domestic mini-vehicle and the Indonesian market, declining profitability, and the gradual

diminution of its market shares.

Third is the considerable uncertainty regarding changes in the market structure, including

a reform of the automobile related tax in Japan.

Chart 1: Analysis of Discount Cash Flow

Source: Jefferies estimates, Company data

Chart 2:Band Chart – 1-Year Forward P/Es

Source: Jefferies estimate, Company data and Bloomberg

Chart 3: Band Chart – 1-Year Forward P/Bs

Source: Jefferies estimate, Company data and Bloomberg

There is the risk of a decline in profits for FY3/15, whereas there is more than a 10%

difference between our estimates and the Bloomberg consensus. However, the current

share price is only indicated in terms of the FY3/14 P/E of 9x. The market apparently is

reflecting the potential deterioration in performance. Our 2-stage DCF model (discount

rate of 6.5–7.0%, terminal growth of 0–1%) yields a theoretical share price range of some

¥1,624–¥1,958. Our price target is in the lower level of the range. Due to harsh external

conditions, this is likely to float around the lower level for the moment.

The company’s valuation remains extremely low. It may reflect both the risk of a peak in

Japan’s mini-vehicles market and the cyclical downturn in Indonesian market. It is unlikely

that a revaluation opportunity will arise in the next 12 months due to the deterioration of

NPV of

Discount FCF Net Debts Pension

Rates (¥ bn) 0.0% 1.0% 0.0% 1.0% (¥ bn) (¥ bn) Low High

6.5% 179.5 509.8 602.4 689.3 782.0 -159.5 107.1 1,741 1,958

7.0% 177.0 462.4 539.4 639.4 716.5 -159.5 107.1 1,624 1,805

Fair value per share (¥)

Growth rates

Terminal value

Growth rates

Enterprise Value

Growth rates

The three-year CAGR in operating

profit in FY3/15–FY3/17 is expected

to be as little as 1%.

7262 JP

Initiating Coverage

21 November 2013



results, in our view. Our strategy is to keep an eye on the next turning point and wait for

an investment opportunity at an undershooting situation.

The following is pointed out as expected new developments over the long term:

First is the company’s expanded role according to Toyota’s strategy for emerging markets.

Toyota will shift gears to a new phase around 2017 based on its strategy for emerging

markets and aims for sales of 5mn units or more. Therefore, it is imperative to take steps

to bolster China, India, and other surrounding countries in Asia. Until now Toyota’s

synergy through its collaboration with Daihatsu has mostly been restricted to Indonesia.

However, the company’s role may expand. Initially it may engage in development in

Thailand, the Philippines, Myanmar, and other Asian countries, and then expand into

China and India over the long term.

Second is the improvement of the macro economy in Indonesia. Rebuilding a sound

economy in Indonesia may draw the market’s attention toward increased vehicle

consumption for a long time.

Fundamentals Outlook

Earnings should plateau. The deteriorating profit margin for Japan’s mini-vehicles and the low earnings of

Indonesian subsidiary Astra Daihatsu Motors (ADM) should rapidly worsen profitability

after 2Q, which will likely hit a plateau for the time being. Especially in Indonesia, earnings

will not grow as expected due to the impact of higher prices for local supplier parts (LSP)

associated with the rise in imported materials caused by the substantial increase in labor

costs and the depreciation of the rupiah. In the Japanese market, the market share has

been peaking. To promote sales, costs will increase to recover from a setback.

Our estimates are based on the following assumptions:

1. Exchange rates: ¥100/$ and ¥130/€.

2. Japanese SAAR: We expect 5.51 million units (up 5.8% YoY) in FY3/14 and 5.17

million units (down 6.1% YoY) in FY3/15.

3. Japan’s mini-vehicles SAAR: Estimates of 2.2mn units for FY3/14 (up 11.5% year on

year) and 2.01mn units for FY3/15 (down 8.4% year on year). If a stepwise

reduction in the acquisition tax is put off or the mini-vehicle road tax increases,

demand may deteriorate further.

Based on the assumption of ¥100/US$, we forecast FY3/14 operating profit of ¥145.0

billion (company guidance: ¥137.0 billion), 2% below the Bloomberg consensus forecast.

In FY3/15 we envisage decline of hefty 10% YoY to ¥130.0 billion, which is 11% below

consensus. You could say that a tough year is coming.

Chart 4: Quarterly OP and YoY % changes

Source: Jefferies estimate, company data

In FY3/15 we envisage decline of a

hefty 10% YoY to ¥130.0 billion,

which is 11% below consensus.

Key new developments over the

long term…

7262 JP

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21 November 2013



Outlook for tax system reforms Not only is the impact of the April 2014 consumption tax hike unclear (from 5% to 8%),

but it is also hard to tell how overall automobile tax system reforms will take shape, and

the outlook for domestic automobile sales is uncertain. The main scenario we envisage is a

follows.

1. The LDP's Tax System Reform Committee is set to decide by December on tax levies

on automobile in its broad framework for the tax system in FY3/15. In the main

scenario we envisage four points: (1) a cut in acquisition tax (from 5% to 2% for

registered vehicles, from 3% to 0% for mini-vehicles — stepwise cut); (2) the

rejection of the plan put forward by Ministry of Internal Affairs and Communications

(MIC) to increase tax on mini-vehicles; (3) covering a staged cut in acquisition tax in

FY3/15 by sourcing funds temporarily from elsewhere (for example, the automobile

weight tax); and (4) deferral of any radical reforms until the broad framework for the

tax system in FY3/16.

2. Accordingly, we expect the demand rush ahead of the tax hike to be mitigated to

some degree, but we think this will still amount to around 200,000 units in

October–March. The corresponding pullback will come through in April–September

2014.

3. Looking ahead to the October 2015 consumption tax hike (from 8% to 10%), radical

reforms to taxes levied on vehicle bodies will constitute a topic for the discussions in

the run-up to the broad framework for the FY3/16 tax system, and this will be long-

term debate conducted while monitoring market activity after the consumption tax

hike.

We estimate that FY3/14 domestic vehicle sales will rise 5.8% YoY to 5.51 million units.

We then forecast a decline of 6.1% YoY to 5.17 million units in FY3/15. As a risk scenario,

there could be a double-figure drop in sales to below 5 million units in the event of a

vehicle body tax hike.

7262 JP

Initiating Coverage

21 November 2013



Risk Analysis

Market and business risks Risk is high due to factors such as the Indonesian economy, fluctuations in exchange rates,

and the tax scheme for mini-vehicles in Japan. Regarding the risk that can be determined,

a ¥1 (about 1%) change in the dollar-to-yen rate would result in a ¥1.3bn change in

operating profit with a low sensitivity of about 1%.

Risks to our investment thesis Upside Scenario

1. Improvement in the outlook for the Indonesian economy and a change in the

direction of the rupiah

2. The performance of Japan’s mini-vehicles market will considerably exceed estimates.

3. A significant expansion of the company’s role based on Toyota’s strategy for

emerging nations

Downside Scenario

1. A further worsening of the Indonesian economy and a fall in demand for

automobiles

2. The postponement of the abolition of the automobile acquisition tax or a rise in the

mini-vehicle road tax in Japan

3. Further intensifying competition and a decline in market share

Catalysts The extent of a revision to the tax on vehicles in Japan will be determined by the end of

this year. It may have a material adverse effect on the company’s business. Developments

in Indonesian politics and the economy may be important news.

7262 JP

Initiating Coverage

21 November 2013



Management

Chart 5: Daihatsu Motors’ Major Shareholders

Source: Japan Company Handbook Autumn 2013

Chart 6: Daihatsu Motors’ CEO Biography

Source: Bloomberg

Major shareholders

Toyota Motor 51.1%

Master Trust Bank of Japan, T. 2.3%

Japan Trustee Services, T. 2.1%

Aioi Nissay Dowa Insurance 1.3%

Ogi Shokai 1.1%

Japan Trustee Services, T9 1.1%

SSBT OD05 OmnibusAcc. TreatyC1. 1.0%

Bank of Tokyo-Mitsubishi UFJ 0.9%

Mitusi Sumitomo Insurance 0.7%

Chase Manhattan Bank 0.7%

Overseas investor 17.3%

Biography of Mr. Masanori Mitsui

President

June 2013 President

June 2010 Executive Vice President

June 2008 DirectorJune 2007 Senior Managing Director at Daihatsu Motor Kyushu Co Ltd

August 2006 Managing Director at Daihatsu Motor Kyushu Co Ltd

June 2004 Director

July 2002 General Manager

April 1975 Joined the Company

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Initiating Coverage

21 November 2013



Chart 7: Daihatsu Motor (7262) : Consolidated earnings model

Source: Jefferies estimates, company data

Full Year FY3/13A FY3/14E FY3/13A FY3/14E(¥ bn) FY3/11A FY3/12A FY3/13A FY3/14E FY3/15E FY3/16E FY3/17E 1HA 2HA 1HA 2HE 1Q A 2Q A 3Q A 4QA 1QA 2QA 3QE 4QE

1 Average/Spot rate ¥/US$ 85.72 79.08 83.07 99.43 100.00 100.00 100.00 79.41 86.74 98.85 100.00 80.20 78.62 81.17 92.30 98.76 98.95 100.00 100.002 End IDR/$ 8,901 9,146 9,735 11,000 11,000 11,000 11,000 9,500 9,735 10,641 11,000 9,433 9,500 9,793 9,735 9,799 10,641 11,000 11,0003 Total revenues 1,559.4 1,631.3 1,765.0 1,826.1 1,786.9 1,838.8 1,854.6 862.7 902.3 900.2 925.9 448.7 414.1 392.0 510.2 451.8 448.4 433.0 492.94 YoY (%) -1% 5% 8% 3% -2% 3% 1% 21% -2% 4% 3% 36% 9% -3% -1% 1% 8% 10% -3%5 CoGS 1,217.6 1,270.0 1,367.9 1,408.5 1,387.4 1,413.8 1,424.1 656.9 711.1 697.2 711.3 343.8 313.1 315.1 396.0 349.3 348.0 334.2 377.16 Gross profit 341.8 361.3 397.1 417.6 399.4 424.9 430.5 205.9 191.2 202.9 214.6 104.9 101.0 76.9 114.3 102.5 100.4 98.8 115.97 Total SG&A 238.4 245.8 264.0 272.6 269.4 275.9 280.5 132.1 131.9 132.7 139.9 67.0 65.1 57.2 74.7 59.3 73.4 65.8 74.18 Operating profit 103.4 115.5 133.0 145.0 130.0 149.0 150.0 73.7 59.3 70.3 74.7 37.8 35.9 19.7 39.6 43.2 27.0 32.9 41.89 YoY (%) 154% 12% 15% 9% -10% 15% 1% 75% -19% -5% 26% 119% 45% -27% -14% 14% -25% 67% 6%10 Interest, net 3.1 2.6 3.5 4.3 4.0 4.0 4.0 1.4 2.2 2.2 2.1 0.9 0.4 1.1 1.0 1.3 0.9 1.2 1.011 Others, net 0.4 5.1 5.8 5.6 4.0 4.0 4.0 1.1 4.6 3.1 2.5 0.7 0.5 3.2 1.4 2.3 0.8 1.3 1.312 Equity profit 5.4 5.0 5.8 5.6 5.0 5.2 5.3 2.7 3.1 2.6 3.0 1.1 1.6 1.5 1.5 1.3 1.3 1.5 1.513 Recurring profit 112.2 128.2 148.2 160.4 143.0 162.2 163.3 79.0 69.2 78.1 82.3 40.6 38.4 25.6 43.6 48.1 30.0 36.8 45.514 YoY (%) 156% 14% 16% 8% -11% 13% 1% 69% -15% -1% 19% 102% 45% -12% -17% 18% -22% 44% 4%15 Extraordinary, net -5.6 -2.7 -0.4 -1.7 0.0 0.0 0.0 -0.2 -0.2 -1.7 0.0 -0.1 -0.1 0.0 -0.2 -1.7 0.0 0.0 0.016 Pretax profit 106.6 125.5 147.8 158.7 143.0 162.2 163.3 78.8 69.0 76.3 82.3 40.5 38.4 25.6 43.4 46.3 30.0 36.8 45.517 Taxes 35.7 43.0 46.4 51.9 44.2 51.8 50.6 26.1 20.3 26.2 25.7 15.1 11.0 7.8 12.4 16.5 9.7 11.7 14.118 Minority/others -18.3 -17.4 -20.0 -25.6 -25.5 -27.1 -25.9 -8.3 -11.8 -13.4 -12.2 -4.8 -3.4 -5.3 -6.5 -6.5 -6.9 -6.3 -5.919 Net profit 52.6 65.1 81.4 81.1 73.0 83.0 87.0 44.4 37.0 36.8 44.4 20.6 23.9 12.5 24.5 23.3 13.5 18.9 25.520 YoY (%) 148% 24% 25% 0% -10% 14% 5% 108% -15% -17% 20% 202% 64% -2% -21% 13% -44% 51% 4%21 EPS (¥) 123.3 152.9 191.0 190.4 171.3 194.8 204.2 104.3 86.8 86.3 104.2 48.4 56.0 29.3 57.5 54.6 31.6 44.3 59.922 DPS (¥) 30.0 45.0 56.0 56.0 50.0 50.0 50.0 22.0 34.0 22.0 34.0 0.0 22.0 0.0 34.0 0.0 22.0 0.0 34.023 CFPS (¥) 272.8 296.0 322.9 331.2 328.6 354.4 363.8 167.4 155.5 152.9 178.3 80.6 87.0 61.9 93.6 86.8 66.1 79.5 98.824 Shares (mn) 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.1 427.125 Capex (Excl. lease) 35.4 69.3 73.1 105.0 75.0 65.0 75.0 27.2 45.9 37.9 67.1 15.8 11.4 17.4 28.5 18.3 19.6 30.0 37.126 Depreciation (Excl. lease from 3/07) 63.7 61.0 56.2 60.0 67.0 68.0 68.0 26.9 29.3 28.4 31.6 13.7 13.2 13.9 15.4 13.7 14.7 15.0 16.627 R&Ds 37.6 33.8 35.7 45.0 48.0 48.0 48.0 16.7 19.0 21.0 24.0 7.7 9.0 8.5 10.5 10.2 10.8 11.0 13.028 Ratios29 SG&A / revenues 15.3% 15.1% 15.0% 14.9% 15.1% 15.0% 15.1% 15.3% 14.6% 14.7% 15.1% 14.9% 15.7% 14.6% 14.6% 13.1% 16.4% 15.2% 15.0%30 Operating profit / revenues 6.6% 7.1% 7.5% 7.9% 7.3% 8.1% 8.1% 8.5% 6.6% 7.8% 8.1% 8.4% 8.7% 5.0% 7.8% 9.6% 6.0% 7.6% 8.5%31 Tax rates 33.5% 34.2% 31.4% 32.7% 30.9% 31.9% 31.0% 33.1% 29.4% 34.3% 31.3% 37.3% 28.8% 30.6% 28.6% 35.7% 32.2% 31.7% 30.9%32 Net profit / revenues 3.4% 4.0% 4.6% 4.4% 4.1% 4.5% 4.7% 5.2% 4.1% 4.1% 4.8% 4.6% 5.8% 3.2% 4.8% 5.2% 3.0% 4.4% 5.2%33 OP variance analysis (¥bn, YoY)34 Sales volume/mix 22.5 23.7 26.8 30.0 -2.0 16.0 9.1 42.4 -15.6 -2.5 32.6 32.9 9.5 -7.4 -8.2 -3.4 0.8 19.5 13.035 Cost Down 15.0 7.8 5.5 6.0 7.5 7.5 7.0 2.5 3.0 2.2 3.8 1.1 1.4 0.7 2.3 1.1 1.1 1.6 2.236 Forex -1.7 -3.9 5.5 17.0 -0.9 0.0 -0.3 -1.9 7.4 11.7 5.3 -1.4 -0.5 2.7 4.7 4.5 7.2 4.3 1.037 Depreciation 9.2 2.7 4.8 -3.8 -7.0 -1.0 0.0 2.5 2.3 -1.5 -2.3 0.3 2.2 1.7 0.6 0.0 -1.5 -1.1 -1.238 Expenses 17.7 -18.2 -25.0 -37.2 -12.6 -3.5 -14.8 -13.8 -11.2 -13.3 -23.9 -12.3 -1.5 -5.1 -6.1 3.2 -16.5 -11.2 -12.839 Total OP changes 62.7 12.0 17.6 12.0 -15.0 19.0 1.0 31.7 -14.1 -3.4 15.4 20.6 11.1 -7.4 -6.7 5.4 -8.9 13.2 2.2

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21 November 2013



Chart 8: Daihatsu Motor (7262): Segment Analysis


Full Year FY3/13A FY3/14E FY3/13A FY3/14E(000 units) FY3/11A FY3/12A FY3/13A FY3/14E FY3/15E FY3/16E FY3/17E 1HA 2HA 1HA 2HE 1Q A 2Q A 3Q A 4QA 1QA 2QA 3QE 4QE

1 Con. vehicle units ('000)2 Domestic 527 563 602 610 558 547 528 319 283 285 325 170 149 118 165 146 139 130 1953 Overseas 366 377 381 404 427 452 478 192 189 203 201 93 99 94 95 99 104 104 974 Daihatsu brand total 893 940 983 1,014 985 998 1,007 511 472 488 526 263 248 212 260 245 243 234 2925 YoY (%) 3% 5% 5% 3% -3% 1% 1% 27% -12% -5% 11% 37% 17% -13% -11% -7% -2% 10% 12%6 Domestic 186 235 232 238 228 221 268 141 91 121 117 67 74 33 58 60 61 52 657 (Domestic consigned) 158 129 128 95 88 83 100 79 48 49 46 38 41 21 27 25 24 21 258 (Domestic OEMs) 28 88 96 93 90 88 118 52 44 47 46 24 28 17 27 22 24 18 289 Overseas 203 227 267 301 309 322 335 129 138 152 149 65 65 71 67 75 77 74 7410 (Overseas consigned) 206 213 243 277 285 298 311 117 126 140 137 59 59 65 61 69 71 68 6811 (Overseas OEMs) -3 14 24 24 24 24 24 12 12 12 12 6 6 6 6 6 6 6 612 Consigned/OEM total 389 462 499 539 537 542 603 270 229 273 266 132 138 104 125 135 138 126 13913 YoY (%) -9% 19% 8% 8% 0% 1% 11% 35% -13% 1% 16% 65% 15% -15% -11% 2% 0% 22% 12%14 Consigned engine units ('000) 411.8 351.7 313.2 301.8 301.8 301.8 301.8 162.3 150.9 150.9 150.9 86.8 75.5 75.5 75.5 75.5 75.5 75.5 75.515 Geographical Segment (¥ bn)16 Revenues17 Japan 1,195.0 1,261.8 1,289.3 1,271.3 1,208.6 1,192.7 1,218.6 673.5 615.8 637.3 634.1 341.9 331.7 264.6 351.1 320.3 317.0 284.7 349.418 Overseas 479.3 496.4 617.7 717.4 744.8 812.8 806.4 259.1 358.5 346.2 371.1 140.5 118.7 162.5 196.0 173.0 173.3 187.9 183.219 Others -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --20 (Eliminations) -114.9 -126.8 -142.0 -162.6 -166.5 -166.7 -170.5 -70.0 -72.0 -83.3 -79.3 -33.7 -36.3 -35.1 -36.9 -41.5 -41.8 -39.7 -39.721 Total 1,559.4 1,631.3 1,765.0 1,826.1 1,786.9 1,838.8 1,854.6 862.7 902.3 900.2 925.9 448.7 414.1 392.0 510.2 451.8 448.4 433.0 492.922 Operating profit23 Japan 58.0 75.8 84.0 85.6 67.8 81.0 84.4 53.3 30.6 37.4 48.2 26.2 27.2 6.4 24.3 26.8 10.6 20.4 27.824 Overseas 44.9 39.7 48.8 58.2 61.1 68.5 64.6 20.1 28.7 32.8 25.4 11.9 8.3 13.2 15.5 16.3 16.5 12.2 13.225 Others -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --26 (Eliminations) 0.5 -0.1 0.2 1.2 1.1 -0.5 0.9 0.3 0.0 0.1 1.0 -0.2 0.5 0.2 -0.2 0.2 0.0 0.3 0.827 Total 103.4 115.5 133.0 145.0 130.0 149.0 150.0 73.7 59.3 70.3 74.7 37.8 35.9 19.7 39.6 43.2 27.0 32.9 41.828 Operating margin(%)29 Japan 4.9% 6.0% 6.5% 6.7% 5.6% 6.8% 6.9% 7.9% 5.0% 5.9% 7.6% 7.7% 8.2% 2.4% 6.9% 8.4% 3.3% 7.2% 8.0%30 Overseas 9.4% 8.0% 7.9% 8.1% 8.2% 8.4% 8.0% 7.8% 8.0% 9.5% 6.9% 8.5% 7.0% 8.1% 7.9% 9.4% 9.5% 6.5% 7.2%31 Others -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --32 (Eliminations) -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --33 Total 6.6% 7.1% 7.5% 7.9% 7.3% 8.1% 8.1% 8.5% 6.6% 7.8% 8.1% 8.4% 8.7% 5.0% 7.8% 9.6% 6.0% 7.6% 8.5%

7262 JP

Initiating Coverage

21 November 2013



Chart 9: Daihatsu Motor (7262) : Domestic Supply/Demand Model


Full Year FY3/13A FY3/14E FY3/13A FY3/14E(000 units) FY3/11A FY3/12A FY3/13A FY3/14E FY3/15E FY3/16E FY3/17E 1HA 2HA 1HA 2HE 1Q A 2Q A 3Q A 4QA 1QA 2QA 3QE 4QE

1 Dealer sales units ('000)2 Registered market sales units 2,977 3,064 3,238 3,313 3,162 3,148 3,053 1,612 1,626 1,525 1,787 762 849 684 942 699 826 711 1,0763 Minivehicle market sales units 1,629 1,689 1,973 2,200 2,015 1,970 1,911 979 994 1,020 1,180 497 481 408 586 484 536 495 6854 Total 4,606 4,753 5,210 5,513 5,177 5,118 4,964 2,591 2,620 2,545 2,967 1,260 1,331 1,092 1,528 1,184 1,362 1,206 1,7615 Daihatsu registered market share 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.1% 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%6 Daihatsu mini market share 34.9% 35.7% 33.1% 30.2% 30.3% 30.4% 30.4% 34.4% 31.8% 31.4% 29.1% 35.2% 33.5% 32.6% 31.3% 32.5% 30.3% 28.1% 29.8%7 Daihatsu total market share 12.4% 12.7% 12.6% 12.1% 11.8% 11.8% 11.8% 0.0% 12.1% 12.6% 11.6% 14.0% 12.2% 12.2% 12.0% 13.4% 12.0% 11.6% 11.6%8 Daihatsu's total dealer sales units 573 606 655 667 613 602 583 338 317 322 345 176 162 133 184 158 163 140 2059 Mini car total 568 603 652 664 611 600 582 336 316 320 344 175 161 133 183 158 163 139 20410 Registered vehicle total 5 3 3 3 2 2 1 1 1 1 1 1 1 1 1 1 1 1 111 Dealer inventory change -45 -10 12 8 10 11 0 1 11 9 -1 -5 6 1 10 7 2 6 -712 Parent shipment 528 596 668 674 623 613 583 339 329 330 344 171 168 134 194 165 165 146 19813 YoY % change -11% 13% 12% 1% -8% -2% -5% 41% -7% -3% 5% 60% 25% -10% -6% -3% -2% 9% 2%14 Exports ('000) 40 20 8 6 4 4 4 5 3 4 2 2 2 1 2 2 2 1 115 Total factory sales units 574 621 681 687 635 625 595 347 334 337 349 174 172 137 197 169 169 149 20116 Toyota/FHI OEM 28 88 96 93 90 88 118 52 44 47 46 24 28 17 27 22 24 18 2817 Change in factory inventory 23 -13 2 0 0 0 0 11 -9 0 0 14 -4 13 -22 0 0 0 018 Domestic production 619 690 757 773 717 705 705 399 359 381 392 208 191 162 197 190 191 166 22719 Consigned Vehicle to Toyota 158 129 128 95 88 83 100 79 48 49 46 38 41 21 27 25 24 21 2520 Daihatsu's total production 777 819 885 868 805 788 805 478 407 430 438 246 232 183 223 215 215 187 251

7262 JP

Initiating Coverage

21 November 2013



Chart 10: Daihatsu Motor (7262): Consolidated Balance Sheet



1 Current Assets 594.8 764.5 794.0 782.3 805.9 870.6 929.2 745.1 794.0 774.5 782.3 762.3 745.1 701.1 794.0 820.6 774.5 776.3 782.32 Cash/Securities 187.7 291.6 324.8 343.4 317.5 359.1 406.4 323.7 324.8 335.4 343.4 314.1 323.7 292.0 324.8 361.4 335.4 346.8 343.43 Accounts receivable 240.9 300.0 283.6 286.3 293.7 302.3 304.9 261.1 283.6 260.6 286.3 285.6 261.1 235.4 283.6 275.9 260.6 251.5 286.34 Inventory 80.6 73.3 76.8 90.9 133.0 143.3 144.4 69.0 76.8 78.9 90.9 72.8 69.0 78.2 76.8 79.6 78.9 80.6 90.95 Other Current Assets 85.6 99.5 108.8 61.7 61.6 65.9 73.6 91.3 108.8 99.6 61.7 89.9 91.3 95.5 108.8 103.7 99.6 97.4 61.76 Plant and Equipment 407.3 410.2 436.3 476.8 484.8 481.8 488.8 402.1 436.3 441.3 476.8 408.7 402.1 414.1 436.3 444.6 441.3 456.3 476.87 Investments and other assets 100.9 102.7 114.2 119.9 119.9 119.9 119.9 101.6 114.2 119.9 119.9 102.3 101.6 108.3 114.2 118.4 119.9 119.9 119.98 Total assets 1,103.0 1,277.4 1,344.5 1,379.0 1,410.6 1,472.2 1,537.9 1,248.9 1,344.5 1,335.6 1,379.0 1,273.4 1,248.9 1,223.6 1,344.5 1,383.6 1,335.6 1,352.4 1,379.0

9 Current liabilities 514.0 650.8 627.5 590.0 570.0 570.0 570.0 602.6 627.5 582.4 590.0 645.6 602.6 558.0 627.5 639.2 582.4 590.0 590.010 S/T debt 104.1 112.7 116.2 114.7 104.7 94.7 84.7 122.2 116.2 114.7 114.7 121.9 122.2 121.7 116.2 118.5 114.7 114.7 114.711 Accounts payable 231.6 335.8 196.2 314.0 304.1 309.9 312.1 293.1 196.2 268.5 314.0 322.2 293.1 263.3 196.2 311.7 268.5 278.3 314.012 Other current liabilities 178.2 202.3 315.6 161.3 161.3 165.5 173.2 187.2 315.6 199.2 161.3 201.5 187.2 173.1 315.6 209.0 199.2 197.0 161.313 L/T debt 67.7 50.1 49.1 56.8 56.8 56.8 56.8 45.9 49.1 56.8 56.8 45.1 45.9 45.7 49.1 52.5 56.8 56.8 56.814 Bonds & CB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.015 Retirement provisions 59.1 60.0 64.2 66.0 66.0 66.0 66.0 60.9 64.2 65.0 66.0 60.4 60.9 61.5 64.2 64.8 65.0 65.5 66.016 Other LT liabilities 13.9 12.1 12.0 10.3 10.3 10.3 10.3 11.5 12.0 9.3 10.3 12.1 11.5 11.5 12.0 11.4 9.3 9.8 10.317 Minority 61.9 74.0 91.1 99.6 99.6 99.6 99.6 76.3 74.1 99.7 99.6 68.0 74.0 0.0 74.0 74.1 91.1 0.0 91.118 Net Worth 448.3 504.3 591.8 655.9 707.6 769.2 834.9 528.1 591.8 620.9 655.9 510.6 528.1 546.6 591.8 615.7 620.9 630.4 655.919 Total Liability & Equity 1,103.0 1,277.4 1,344.5 1,379.0 1,410.6 1,472.2 1,537.9 1,248.9 1,344.5 1,335.6 1,379.0 1,273.4 1,248.9 1,223.6 1,344.5 1,383.6 1,335.6 1,352.4 1,379.0

20 Invested capital 589.0 626.6 717.1 789.0 840.6 902.2 967.9 -- -- -- -- -- -- -- -- -- -- -- --21 Working capital 80.8 113.7 166.5 192.3 235.9 300.6 359.2 142.6 166.5 192.1 192.3 116.7 142.6 143.1 166.5 181.4 192.1 186.3 192.322 Total debts 171.9 162.8 165.3 171.4 161.4 151.4 141.4 168.1 165.3 171.4 171.4 167.0 168.1 167.4 165.3 171.0 171.4 171.4 171.423 Net debt (cash) -15.9 -128.8 -159.5 -171.9 -156.1 -207.7 -265.0 -155.6 -159.5 -163.9 -171.9 -147.1 -155.6 -124.7 -159.5 -190.4 -163.9 -175.4 -171.924 Book Value/Share (Y) 901.1 1,009.8 1,175.0 1,305.6 1,426.8 1,571.5 1,725.5 1,065.3 1,175.0 1,223.5 1,305.6 1,019.1 1,065.3 1,090.9 1,175.0 1,211.0 1,223.5 1,245.7 1,305.625 Current Ratio (x) 1.2x 1.2x 1.3x 1.3x 1.4x 1.5x 1.6x 1.2x 1.3x 1.3x 1.3x 1.2x 1.2x 1.3x 1.3x 1.3x 1.3x 1.3x 1.3x26 Equity/Assets (x) 40.6% 39.5% 44.0% 47.6% 50.2% 52.2% 54.3% 42.3% 44.0% 46.5% 47.6% 40.1% 42.3% 44.7% 44.0% 44.5% 46.5% 46.6% 47.6%27 ROE (Ave. %) 14.3% 16.0% 17.5% 15.4% 12.5% 24.8% 23.7% -- -- -- -- -- -- -- -- -- -- -- --28 Net debt to equity(x) 0.0x -0.3x -0.3x -0.3x -0.2x -0.3x -0.3x -0.3x -0.3x -0.3x -0.3x -0.3x -0.3x -0.2x -0.3x -0.3x -0.3x -0.3x -0.3x29 Debt-Equity (x) 0.4x 0.3x 0.3x 0.3x 0.2x 0.2x 0.2x 0.3x 0.3x 0.3x 0.3x 0.3x 0.3x 0.3x 0.3x 0.3x 0.3x 0.3x 0.3x

7262 JP

Initiating Coverage

21 November 2013



Chart 11: Daihatsu Motor (7262): Consolidated Cash Flow Analysis



1 Cash flow from operating2 Pretax profit 106.6 125.5 147.8 158.7 143.0 162.2 163.3 -- -- -- -- -- -- -- -- -- -- -- --3 Depreciation(1) 69.5 68.0 62.9 60.0 67.0 68.0 68.0 -- -- -- -- -- -- -- -- -- -- -- --4 Warranty -0.8 -0.3 0.1 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --5 Retirement provisions -4.5 0.9 3.6 2.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --6 Realized gain (loss) fixed assets 3.1 1.2 1.4 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --7 Account receivable 59.6 -69.2 23.7 -2.8 -7.4 -8.5 -2.6 -- -- -- -- -- -- -- -- -- -- -- --8 Inventory 14.8 5.9 -1.4 -14.1 -42.1 -10.3 -1.0 -- -- -- -- -- -- -- -- -- -- -- --9 Accounts payable -58.9 107.4 -44.2 117.8 -9.9 5.8 2.3 -- -- -- -- -- -- -- -- -- -- -- --10 Taxes paid -27.5 -31.5 -51.5 -51.9 -44.2 -51.8 -50.6 -- -- -- -- -- -- -- -- -- -- -- --11 Others -17.8 -1.9 -12.8 -22.0 -15.8 -17.4 -15.7 -- -- -- -- -- -- -- -- -- -- -- --12 Subtotal 144.1 205.8 129.6 247.6 90.5 148.0 163.6 -- -- -- -- -- -- -- -- -- -- -- --13 Cash flow from investing14 Acquisition of tangible fixed assets -39.4 -65.1 -64.1 -105.0 -75.0 -65.0 -75.0 -- -- -- -- -- -- -- -- -- -- -- --15 Disposition of tangible fixed assets 3.6 2.9 1.8 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --16 Investment securities 0.0 2.0 -0.4 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --17 Loans -0.2 0.5 0.0 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --18 Others -6.0 -1.1 -2.4 0.0 -10.0 -10.0 -10.0 -- -- -- -- -- -- -- -- -- -- -- --19 Subtotal -42.0 -60.7 -65.2 -105.0 -85.0 -75.0 -85.0 -- -- -- -- -- -- -- -- -- -- -- --20 Cash flow from financing21 S/T borrowings -9.2 -12.3 1.6 0.0 -10.0 -10.0 -10.0 -- -- -- -- -- -- -- -- -- -- -- --22 L/T debts 0.1 -1.3 -5.1 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --23 Stock buybacks 0.1 0.0 0.0 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --24 Dividends -7.3 -14.1 -23.0 -9.4 -21.4 -21.4 -21.4 -- -- -- -- -- -- -- -- -- -- -- --25 Others -11.5 -10.2 -12.1 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --26 Subtotal -27.8 -37.8 -38.6 -9.4 -31.4 -31.4 -31.4 -- -- -- -- -- -- -- -- -- -- -- --27 Exchange rates impacts 1.1 -2.9 7.1 0.0 0.0 0.0 0.0 -- -- -- -- -- -- -- -- -- -- -- --28 Changes in cash/equivalents 75.4 104.4 33.2 133.2 -25.9 41.6 47.3 -- -- -- -- -- -- -- -- -- -- -- --29 Ending cash/cash equivalents 187.1 291.5 324.7 457.9 432.1 473.7 520.9 -- -- -- -- -- -- -- -- -- -- -- --

7262 JP

Initiating Coverage

21 November 2013



Company DescriptionDaihatsu is Japan's largest manufacturer of mini-vehicles, with a 34.1% market share in Japan in 2012. Daihatsu is a consolidated subsidiaryof Toyota, which owns 52.2%. It supplies Toyota and FHI with mini-vehicles on an OEM basis. It is profitable in Asia and has high shares inIndonesia and Malaysia. It pulled out of Europe in 2012.

Analyst CertificationI, Takaki Nakanishi, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Takaki Nakanishi is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Conviction List Methodology

1. The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research2. Only stocks with a Buy or Underperform rating are allowed to be included in the recommended list.3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen

is used to ensure a well-diversified portfolio.4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis.5. Once a month, analysts are invited to recommend their best ideas. Analysts’ stock selection can be based on one or more of the following:

non-Consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relativeto the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached theirtarget price, been downgraded over the course of the month or where a more suitable candidate has been found are removed.

6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list duringthe month.

7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$.8. The conviction list is published once a month whilst global equity markets are closed.9. Transaction fees are not included.

7262 JP

Initiating Coverage

21 November 2013



https://javatar.bluematrix.com/sellside/Disclosures.action

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10. All corporate actions are taken into account.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Fuji Heavy Industries (7270 JP: ¥2,790, HOLD)• Honda Motor (7267 JP: ¥4,100, BUY)• Mazda Motor (7261 JP: ¥450, BUY)• Nissan Motor (7201 JP: ¥923, HOLD)• Suzuki Motor (7269 JP: ¥2,477, HOLD)• Toyota Motor (7203 JP: ¥6,290, HOLD)

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 829 47.78% 186 22.44%HOLD 763 43.98% 121 15.86%UNDERPERFORM 143 8.24% 1 0.70%

Other Important Disclosures

Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:

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7262 JP

Initiating Coverage

21 November 2013



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