Barclays | European Autos & Auto Parts29 October 2018 2Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E) Old New 26-Oct-18 Old New %Chg Old New %Chg Old New %ChgEuropean Autos & Auto Parts Pos PosBMW (BMW GY / BMWG.DE) OW OW 75.02 106.00 106.00 - 10.31 10.31 - 11.11 11.11 -Continental (CON GY / CONG.DE) EW EW 136.10 218.00 218.00 - 14.94 14.94 - 15.71 15.71 -Daimler AG (DAI GY / DAIGn.DE) UW UW 51.37 64.00 64.00 - 7.28 7.28 - 8.47 8.47 -Fiat Chrysler Automobiles (FCA IM / FCHA.MI) OW OW 13.97 18.00 18.00 - 2.62 2.62 - 3.01 3.01 -Porsche Automobil Holding SE (PAH3 GY / PSHG_p.DE) OW OW 51.56 90.00 90.00 - 11.76 11.76 - 15.46 15.46 -Renault SA (RNO FP / RENA.PA) EW EW 64.50 83.00 83.00 - 14.40 14.40 - 15.13 15.13 -Volkswagen AG-PFD Preferred (VOW3 GY / VOWG_p.DE) OW OW 136.88 203.00 203.00 - 25.25 24.75 -2 29.47 29.14 -1Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating SuspendedIndustry View: Pos: Positive; Neu: Neutral; Neg: NegativeValuation Methodology and RisksEuropean Autos & Auto PartsVolkswagen AG-PFD Preferred (VOW3 GY / VOWG_p.DE)Valuation Methodology: To reach our current valuation for Volkswagen prefs, we employ a sum-of-the-parts valuation methodology using ablend of peer multiples for the different brands/businesses and market values for listed holdings and minorities. We then apply a 25%conglomerate holding discount to the preference shares to take into account VW's corporate governance issues. We also assume an additionalEUR5.5bn cash out from Dieselgate, EUR4bn more than currently provisioned for.Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: The main risks to our price target, in our view,are:1) The fallout surrounding the NOx emissions scandal and possible further regulatory, legal, and recall costs as well as the changeover toWLTP in Europe, 2) external risks, such as macroeconomic factors, outside the control of the company, leading to a weaker demand and pricingenvironment than we currently assume that could make our forecasts difficult to achieve, including rising raw materials and volatile FX rates and3) concerns around corporate governance and management's focus on shareholders.Source: Barclays Research.Barclays | European Autos & Auto Parts29 October 2018 3EXECUTIVE SUMMARY – CHINA: A MARKET IN TURMOIL Chinese car sales have seen a sharp contraction in Q3Following a strong start to 2018, Chinese auto sales have slowed since the summer. Inparticular, July, August and September have seen a rapid deterioration in car demand withChinese auto sales falling 7.7% in the third quarter (and latest data for October shows thefirst three weeks of the month down -25%, although we note in prior months a last-weekpush by dealers saw early losses partially compensated by month-end). Demand is currently particularly weak in China’s lower tier cities and among the mid marketJVs and local brands. A gloomier economic picture and fears over trade wars have burdenedthe Chinese stock market and currency, reducing Chinese purchasing power and consumerconfidence. It is also possible that some buyers are waiting for the Chinese government tostep in with car tax purchase incentives (as it did in late 2015 to counter a more modestsummer time slump) and thus holding off from buying new vehicles. An additional factor isBeijing’s clampdown on online P2P lending, which has been an important source of autofinancing. This appears to have taken a significant toll on auto sales.1Finally, near-recordgas prices (up 50% since January 2016) may also be putting pressure on mass marketbuyers.FIGURE 1 China passenger vehicle retail sales y/y change 2017-18 Source: CAAM, CPCAUnder our base case, we forecast growth of 4.7% in China auto sales in2019EFor 2019 we see three possible China market scenarios. Under every scenario we have moreconfidence that the premium end of the market can outperform the market. YTD premiumvolumes have outperformed the underlying market by 11ppts. We expect this trend tocontinue into 2019E, although we forecast a more moderate outperformance of just 3ppts. 1 China Automotive News, 2018/9/72% -3%-2% 3%5%4%3%0% 0%-1% 11% -10% 3% 11% 8% 2% -5%-5% -13%-18%-14% -10% -6% -2% 2% 6% 10% 14% 18% Ma r-1 7 Ap r-1 7 Ma y-1 7 Jun -1 7 Jul -1 7 Au g- 17 Se p- 17 Oc t-1 7 No v-1 7 De c-1 7 Jan -1 8 Fe b- 18 Ma r-1 8 Ap r-1 8 Ma y-1 8 Jun -1 8 Jul -1 8 Au g- 18 Se p- 18 y/y % We note that micro-mobility(a term we define as anyvehicle under 500kgs) isexpanding exponentiallyglobally, with e-bikes inparticular becoming prevalentin China. So far we have seenlittle cannibalization of autodemand as a result, but itremains on our radar ofpotential future disruptionBarclays | European Autos & Auto Parts29 October 2018 41. Our base case assumes 4.7% growth in 2019E. Our base case is predicated on thegovernment stepping in with additional tax incentives, targeted at lower tier cities tooffset the softening demand from restrictions on peer to peer (P2P) lending. This shouldsteady the market and return China to mid single-digit growth, more aligned to currentGDP forecasts. This would be similar to the slowdown in summer 2015, which was metwith increased government incentives in the form of tax cuts on auto sales that led to astrong rebound in 4Q’15 and 12% growth in the underlying market in 2016. We basethis assumption on our understanding of the importance of the auto industry to thecountry’s GDP targets. Our current China earnings forecasts by company are basedon this base case scenario. FIGURE 2 Barclays China base case sales and production estimates:Source: Barclays research, CAAM2. A bear case scenario would see mass market demand stall and China car salesvolumes fall 5% in 2019E: Were the government not to provide a stimulus in China, wecould see a scenario unfold whereby mass market China auto sales stall for severalyears, as the market digests the pace of new vehicles already brought onto the fleet. Weassume that in 2019E we would see demand in H1 on a similar level to 2H18 (ie -10%)and zero growth in 2H19E.We note that under this bear case scenario, we might see even less densely vehiclepopulated areas in Tier3/Tier 4 cities having reached peak as households shift from adesire for car ownership to other forms of shared mobility.We note that micro- mobility (a term we define as any vehicle under 500kgs and includes vehicles suchas bikes, scooters, or 4-wheeled motorised pods which are largely focused on thelow mileage range) is expanding exponentially globally, with e-bikes in particularbecoming prevalent in China. Horace Dediu, founder of Asymco, estimates micro- mobility currently has a 70mn daily active user base globally. The popularity of micro- mobility in China is evidenced by Didi Chuxing’s 2016 investment in bike-sharingplatform ofo2. While as yet there is little evidence of micro-mobility cannibalising carownership in China, it is an area we hope to analyse in more detail to provide comfort onour base case scenario for China auto demand. 3. A worst case scenario: Under this scenario, we would see China domestic demandcollapsing across multiple sectors in the context of a global recession. This scenario,while far from our base case, would certainly mark the end of the Chinese automotivegrowth story.Under this scenario we assume the auto market in China contracts afurther -15% in 2019E (with premium demand continuing to outperform but still down - 12%). 2Didi invests in bicycle-sharing platform ofo, ChinaDaily, 26 Sept 2016Barclays Sales Estimates(units mn)2015201620172018E9M182019E2020E2021E2