Aisin Seiki - Credit Suisse

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02 October 2015

Asia Pacific/Japan

Equity Research

Auto Parts & Equipment (Auto Parts (Japan)) / MARKET WEIGHT

Aisin Seiki (7259 / 7259 JP) THEME

Essential reading: Toward newer heights and a

leaner structure

Medium-term scenario fueled by organic growth and group reorganization

■ Aisin Seiki once again our top pick: We lower our target price from ¥6,200 to

¥5,600 (potential return 34.8%) but reiterate our OUTPERFORM rating. We

continue to recommend Aisin Seiki as our top pick in the auto parts sector, as we expect the company to transform into a true major supplier with a leaner

structure, aiming for new heights.

■ Revisiting fundamentals, catalysts and medium-term growth prospects:

The shares have not performed well recently, reflecting various external factors. However, as near-term concerns now appear priced into the shares, we

recommend a fresh look at the company’s fundamentals, catalysts and medium-term growth potential. Aisin Seiki looks primed for unprecedented topline highs,

driven by organic growth, particularly in conventional automatic transmissions (ATs). We also anticipate a second round of business reorganization within the

Toyota group, including the Aisin Seiki group, to kick-start greater supply chain efficiency. We further expect VISION 2020 targets to come into focus in the

medium term. In this report, we examine a medium-term scenario for Aisin Seiki fueled by organic growth and group reorganization.

■ Catalysts/Risks: Catalysts include progress in the Toyota group’s supply chain

reorganization, including in the Aisin Seiki group, and a reconfirmation of

medium-term growth potential, particularly in ATs. Risks include higher costs due to AT capacity expansion and a lower-than-expected Toyota output in emerging

markets including in Asia in the near-term.

■ Valuation: We derive our ¥5,600 TP by applying a target P/B of 1.2x to our

FY3/17E BPS of ¥4,632. Our target P/B is based on a theoretical P/E of 13.6x (cost of equity 6.1%, discount 16.4%), and FY3/17E ROE of 8.8%.

Share price performance

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Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

TOPIX which closed at 1442.74 on 01/10/15

On 01/10/15 the spot exchange rate was ¥120.18/US$1

Performance over 1M 3M 12M Absolute (%) 1.0 -20.7 5.3 Relative (%) 3.4 -8.0 -4.1

Financial and valuation metrics

Year 3/15A 3/16E 3/17E 3/18E Sales (¥ bn) 2,964.0 3,210.0 3,380.0 3,580.0 Operating profit (¥ bn) 165.8 200.0 222.0 252.0 Recurring profit (¥ bn) 188.0 214.0 237.0 269.0 Net income (¥ bn) 77.3 101.0 112.0 128.0 EPS (¥) 273.9 357.8 396.7 453.4 Change from previous EPS (%) n.a. -5.6 -5.9 -4.5 IBES Consensus EPS (¥) n.a. 346.5 388.8 429.0 EPS growth (%) -14.3 30.6 10.9 14.3 P/E (x) 15.9 11.6 10.5 9.2 Dividend yield (%) 2.2 2.6 2.9 3.4 EV/EBITDA(x) 4.2 3.3 3.0 2.6 P/B (x) 1.1 1.0 0.9 0.8 ROE(%) 7.2 8.4 8.8 9.5 Net debt/equity (%) 13.3 12.4 10.5 6.6

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Rating OUTPERFORM* Price (01 Oct 15, ¥) 4,155 Target price (¥) (from 6,200) 5,600¹ Chg to TP (%) 34.8 Market cap. (¥ bn) 1,174.24 (US$ 9.77) Enterprise value (¥ bn) 1,327.29 Number of shares (mn) 282.61 Free float (%) 50.0 52-week price range 5,810 - 3,505

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Masahiro Akita

81 3 4550 7361

[email protected]

Koji Takahashi

81 3 4550 7884

[email protected]

02 October 2015

Aisin Seiki (7259 / 7259 JP) 2

Table of contents Key charts 3 Toward newer heights and a leaner structure 4

Medium-term scenario fueled by organic growth and group reorganization 4 Bright outlook for AT business 6

No need for much concern about AT volume shortfall 6 Continued growth likely in global automatic transmission market 7 Market share growth likely to continue for Aisin Seiki 9 Stable growth at the conventional AT business likely in the longer term 10 Dealing with all-around automatic transmission market growth 12 Breakdown of conventional AT earnings structure 17

Ready for restructuring round 2 20 Expect further restructuring with focus on AT 20 Focus on AT business 21 Expecting internal restructuring of Aisin group 22 Aisin group's history of spinoffs and mergers 24 Future shape of Aisin group 25

Vision 2020 targets in sight 28 Benefits ready to be reaped after building business base and going through growth

phase 28 FY3/16 earnings forecasts 33

Valuation 35 Looking undervalued in view of growth potential 35

02 October 2015


Key charts Figure 1: AT sales volume to increase to 11.1mn units in

FY3/21

Figure 2: Anticipate average annual growth rate of 12.3%

in AT volume in China

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

Figure 3: Shift in shares of Toyota AT parts is under way Figure 4: Shift to new organizational structure focused on

strengthening business tie-ups within the Aisin group

Automatic

Transmission

Dom. Share

2005

Dom. Share

2010

Dom. Share

2014Toyota G

In-House 46.1% 53.2% 36.4% x

Aisin Seiki 53.9% 46.8% 62.7% x

Daihatsu 0.0% 0.0% 0.5% x

Torque ConverterDom. Share

2005

Dom. Share

2010

Dom. Share

2014Toyota G

In-house 57.9% 52.7% 41.0% x

Aisin Seiki 51.1% 38.6% 56.5% x

Exedy 0.0% 8.7% 2.5% x

Group Management HeadquarterInnovation Center

Powertrain

Product

Department

Chassis/Safety

Product

Department

Body Product

DepartmentL&E*

Department

A/M*Department

Powertrain Group Companies

Chassis/SafetyGroup Companies

Body ProductGroup Companies

Material/Foundries

Gorup Companies

＊L&E： Life&Energy Products

＊A/M： Aftermarket

Gro

up

Co

mp

an

y

Board of Directors

Chairman/CEO

Elec. Component

Department

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

Figure 5: OP should rise to ¥361bn by FY3/21 Figure 6: Substantial upside potential if share price

reflects longer term EPS growth potential

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OP (LHS) OPM (RHS)

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

02 October 2015


Toward new heights and leaner structure Medium-term scenario fueled by organic growth and

group reorganization

Revisiting fundamentals, catalysts and medium-term growth prospects

The shares have not performed well recently, reflecting various external factors including a slowdown in the Chinese auto market (where the company has a significant exposure in conventional ATs), the emissions scandal at Volkswagen (VW, a key customer) and elevated volatility in the equities market due to macroeconomic factors. However, as near-term concerns now appear priced into the shares, we recommend a fresh look at the company’s fundamentals, catalysts and medium-term growth potential. In fundamentals, Aisin Seiki is primed to attain unprecedented topline highs, driven by organic growth, particularly in conventional ATs, where the rate of growth has eclipsed that of the overall auto market as a result of increased adoption. In term of catalysts, we anticipate a second round of business reorganization within the Toyota group since the end of 2014, including Aisin Seiki group, to kick-start greater supply chain efficiency leading to fixed cost reductions and greater synergy effects. We also expect VISION 2020 targets to come into focus in the medium term. Taking into account Aisin Seiki’s growth potential, we think the shares are currently undervalued. We therefore renew our recommendation of Aisin Seiki, which we expect will transform into a true major supplier with a leaner structure, aiming for new heights, as our top pick in the auto parts sector.

Bright outlook for AT business

The Chinese auto market slowdown and Aisin Seiki’s exposure to this market have raised concerns about the risk of lower-than-expected AT volume at the company. Although AT volume for some Chinese automakers may decline versus initial guidance, we still think Aisin Seiki should maintain a high growth rate as global AT volume, though somewhat below guidance for 7.900mn units, is nonetheless likely to rise 12.7% YoY to 7.749mn units in FY3/16. While it is highly likely that volumes drop below anticipated levels for VW and PSA Peugeot Citroen (PSA) in China, we do not see much room for concern on AT volume shortfall, as initial guidance probably included a buffer of around 100,000 units and there may also be a volume upside for Toyota and for automakers in other regions including Europe and the US.

For the medium term, we expect growth in the global automatic transmission market (including nonconventional automatic transmissions) to guarantee growth in Aisin Seiki’s AT business. We see growth in the global automatic transmission market fueling expansion not only in global auto volume but also in the automatic transmission adoption rate. We expect this rate to rise from 47.4% in 2014 to 50.7% in 2020. We see the rate in China as rising from 30.6% in 2014 to 41.6% in 2020, so conventional AT demand in the Chinese market should continue increasing at an average annual growth rate of 12.3% even after 2015. We expect global automatic transmission market growth to outpace growth in the overall auto market by 1–2% supported by the higher automatic transmission adoption rate, particularly in China and other emerging markets. Taking into account prospects of market share growth, we forecast Aisin Seiki’s conventional AT volume to increase to 11.1mn units in FY3/21. We expect the company's volume to grow at an annual average of 7.4% YoY from FY3/16 through FY3/21, substantially ahead of the global auto market growth rate.

Preparing for a second round of reorganization

Following the announcement of Toyota’s brake/ manual transmission (MT)/seat supply chain reorganization in end-2014 and the merger of Shiroki Corporation, we now see a high likelihood of the curtain rising on act two of a reorganization, which would involve Aisin Seiki. The company previously dealt in a variety of product areas including drivetrains, engines, chassis, and electronics, but with some parts supplies still overlapping between companies both within and outside of Toyota group, we expect Aisin

02 October 2015


Seiki to remain a core target for reorganization within the group. Owing to its long history of spinoffs, Aisin Seiki has a large number of consolidated subsidiaries, but we look for greater supply chain efficiency within the Aisin Seiki group through reorganization, in tandem with the trend in the Toyota group overall.

In particular, we focus on growth in Aisin AW’s share of conventional AT supplies to Toyota. We also look for greater supply chain efficiency within the Aisin Seiki group, particularly at its AT/MT businesses. We also expect Aisin Seiki’s synergy with Exedy to grow in importance. The company may even bolster business/capital ties with Exedy. In addition, we see room for further efficiency gains in the brake business.

VISION 2020 target in sight

Aisin Seiki went through a phase of foundation building from FY3/13 through FY3/15, and we expect that after a period of growth from FY3/16 to FY3/18, the company will finally reach a payoff period from FY3/19 through FY3/21. After analyzing medium-term earnings forecasts extending to FY3/21, we think the company is likely to achieve all of the goals envisioned in its VISION 2020 medium-term management plan (i.e., sales of ¥3trn or more, overseas sales weighting of 50% or more, and ROIC of 15% or more). We forecast sales to grow to ¥4.2trn in FY3/21. We anticipate topline growing at a CAGR of 6% from FY3/16 driven by sales growth in conventional ATs at Aisin AW. We look for Aisin Seiki to attain OP of ¥361bn in FY3/21. We expect expanding conventional AT production capacity overseas to boost the overseas sales weighting to 50% of overall sales in FY3/21. Also, Aisin Seiki’s ROIC should improve to 15.1% by FY3/21.

We forecast OP of ¥200bn in FY3/16, premised on ¥121/$ and ¥136/€. While FY3/16 guidance was skewed toward 2H from the outset, 1Q OP was a modest ¥33.9bn (−12% YoY) due partly to a one-off increase in start-up costs associated with new conventional AT products and capacity expansion at the Tianjin plant in China, and lower shipments following the switch to Toyota’s new IMV model. That said, OP appears to have finished slightly ahead of the company’s estimates due to the boost from a lower yen and higher sales in North America. In spite of sustained expansion costs at the Okazaki East plant, a profit contribution from the Tianjin plant in China, stepped up shipments for Toyota’s new IMV model, and growth in Toyota’s output for the domestic market should lead to an earnings upswing from 2Q. Although the halt in operations due to the Tianjin explosion had initially triggered concerns, the full-year impact is likely to be negligible.

We forecast a substantial 24.8% YoY growth in OP to ¥40bn in 2Q. However, we see little prospect for a full-year guidance hike at the 1H results. There appears to be some impact from VW and PSA production cutbacks on Chinese conventional AT volume, an area of concern, and the future outlook has grown increasingly murky. However, any impact from the Tianjin explosion is likely to be modest. In Japan, Toyota’s output has gained momentum QoQ, but start-up costs at the Okazaki East plant are also continuing. While demand for conventional ATs in SUVs such as RAV4/Hilux remains firm in North America, volumes slowed for Camry and other models. Conventional AT supplies for the new IMV model in ASEAN countries in Asia are apparently running slightly short of our expectations.

Shares undervalued in light of growth potential

The recent 12-month forward P/B (0.9x) still remains two standard deviations below the average since 2013, making the current valuations appear quite attractive. Also, 12-month forward P/E is tracking slightly below average valuations since 2013. We also find Aisin Seiki relatively undervalued based on the P/B-ROE correlation in the auto parts sector. While the share price has shown a strong correlation with EPS historically, we still see substantial room for an upside if investors begin pricing in longer-term EPS growth prospects. Moreover, growth in value-added stemming from sales growth in conventional ATs and better prospects for margin improvement should lead to higher valuations. We expect valuations to rise even further once greater efficiency from the Toyota group reorganization and prospective synergy effects are priced in.

02 October 2015


Bright outlook for AT business No need for much concern about AT volume shortfall

Despite downtrend in Chinese conventional AT volume, high growth rate still likely

globally

Some observers expressed concerns about conventional AT volume downside risk

following the slowdown in the China auto market, to which Aisin Seiki has significant

exposure. Although conventional AT volume for some Chinese automakers may decline

versus initial guidance, we still think Aisin Seiki should maintain a high growth rate as

global AT volume, though likely to finish below guidance for 7.9mn units, is nonetheless

likely to rise 12.7% YoY to 7.749mn units in FY3/16. We anticipate a drop of around 15%

versus initial guidance for VW and PSA in China, which have embarked on production cuts

following sluggish sales. We also see volume coming nearly in line with guidance for

Japanese automakers and Chinese local automakers. Also, the halt in operations due to

the Tianjin explosion had initially triggered concerns, but the full-year impact is likely to be

negligible.

Meanwhile, in line with management’s comments previously, the company appears to

have built in a fairly large buffer (around 100,000 units by our estimate) into its initial plan

for 7.9mn units. This should help it offset some of the volume decline in China. We also

look for a slight volume upside for Toyota and for automakers in other regions including

Europe and the US. At its 1Q results, the company lowered its 1H volume projection by

100,000 units, from 3.7mn units to 3.6mn units. In line with its usual conservative outlook,

it may lower full-year volume guidance by another notch, but taking into account the buffer

discussed earlier and supplies to other automaker clients offsetting the volume decline, we

think the company could leave its full-year earnings outlook intact.

Figure 7: Downtrend in China AT volume for VW/PSA Figure 8: Expect supplies for Toyota and other regions to

offset drop in China AT volume

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High growth potential in China; sustained capacity expansion required for now

A slowdown in the Chinese auto market is probably unavoidable in the near term, but we

think growth potential for automatic transmissions (including conventional AT) remains

high in the Chinese market. As discussed below, the adoption rate of automatic

transmissions in China stood at 30.6% in 2014, substantially lower than that of developed

markets including Japan and North America, but we expect this to rise to 41.6% in 2020.

As a result, we look for automatic transmissions to register an average annual growth rate

of 12.3%, substantially higher than the growth rate in the auto market, even beyond 2015.

We believe that in order to handle further growth in the automatic transmission market,

Aisin Seiki too will need to boost AT production capacity in China on a sustained basis.

02 October 2015


In addition to the Tianjin No. 1 plant, the company started operating the Suzhou plant from

2013. It also brought the Tianjin No. 2 plant online in 2014. With this, Aisin Seiki’s AT

production capacity in China now totals 90,000 units at the Tianjin No.1 plant, 160,000

units at the Suzhou plant and 700,000 units at the Tianjin No. 2 plant (increased from

330,000 units in June 2015) for a combined total capacity we estimate at around 950,000

units. On the other hand, we expect demand to outstrip this production capacity as early

as 2016, so Aisin Seiki will likely need to continue raising local production capacity at a

pace of 200,000–300,000 units on an ongoing basis in the medium term.

Figure 9: Current AT production capacity in China (as of

Oct 2015)

Plant Product Customer Capacity

Suzhou FF4AT Toyota, Changan 160,000/y

Tianjin #1 FR4AT, FR5AT Toyota 90,000/y

Tianjin #2 FF6AT VW, PSA 700,000/y

Source: Company data, Credit Suisse

Continued growth likely in global automatic

transmission market

Global automatic transmission market to expand to over ¥10trn

We believe expansion in the global automatic transmission market guarantees growth in

Aisin Seiki’s conventional AT business. We define an automatic transmission as any two-

pedal transmission system including AMT (Automated Manual Transmission), DCT (Dual

Clutch Transmission), CVT (Continuously Variable Transmission), AT (Automatic

Transmission), and HVT (Hybrid Vehicle Transmission). The global automatic

transmission market totaled a modest ¥7.0trn in 2010 but increased to ¥8.4trn in 2014 and

is likely to rise to ¥10.4trn by 2020.

Growth in the global automatic transmission market is fueling expansion not only in global

auto volume but also in the adoption rate of automatic transmissions. We see a sustained

uptrend in the adoption rate of automatic transmissions, which increased from 46.2% in

2010 to 47.4% in 2014, and we expect it to rise to 50.7% in 2020. We expect global

automatic transmission market growth to outpace growth in the overall auto market by 1–

2% annually, supported by growing needs for automatic transmissions, particularly in

emerging markets including China and developed markets such as Europe.

Figure 10: Global automatic transmission market size to

surpass ¥10tn

Figure 11: Higher automatic transmission adoption rate

driving market growth

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Automated Transmission Market

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

02 October 2015


Sharp increase in automatic transmission adoption rate in China

We see the growing automatic transmission adoption rate in the Chinese market, which

has emerged as the world’s largest auto market, as a key factor in driving the global

automatic transmission market in the future. Automatic transmission adoption in China

increased from 9.5% in 2010 to 30.6% in 2014, and we expect it to reach 41.6% in 2020.

As a result, Chinese automatic transmission volume should increase from 5.91mn units in

2014 to 11.83mn units in 2020. Automatic transmission volume is thus likely to grow at an

average annual rate of 12.3% even after 2015. While a temporary slowdown in the

Chinese auto market has raised investor concerns, we think the Chinese automatic

transmission market should be able to maintain relatively stable growth, supported by

sustained growth in the automatic transmission adoption rate.

Figure 12: Substantial increase in AT adoption rate in

China

Figure 13: Anticipate average annual growth rate of 12.3%

in AT volume in China

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Conventional AT to maintain highest share among automatic transmission systems;

trend toward transmissions with higher numbers of gears to continue

Although we anticipate volume growth in CVT, which is increasingly used in front-engine,

front-wheel drive (FF) cars manufactured by Japanese automakers, and DCT, whose

adoption has picked up among European/US automakers, we still look for conventional AT

to maintain the largest share (57%) in automatic transmission systems in 2020. Also, amid

growing demand for automatic transmissions, we expect the trend toward higher numbers

of gears in AT to gain momentum as the need for autos to comply with environmental

regulations also increases. In 2014, six-speed AT held the highest market share at 60.5%,

but its weighting is expected to decline to 36.1% in 2020. Instead, eight-speed AT, which

held a 10.9% share in 2014, is likely to increase its share to 23.5% in 2020, while nine-

speed AT should grow from 2% to 21% and 10-speed AT from 0% to 10% over the same

period.

02 October 2015


Figure 14: Conventional AT likely to maintain largest

automatic transmission market share

Figure 15: Trend toward AT with higher numbers of gears

to continue

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HVT market growing in tandem with greater demand for electric vehicles

With environmental regulations growing increasingly strict (Europe is a leading indicator in

this regard), automakers will likely be forced to move forward with electric powertrains.

Amid this trend, sustained growth is also likely for the HVT market. HVT (mainly used in

hybrid vehicles, in which Japanese automakers lead the market) accounted for a mere

5.3% of the automatic transmission market in 2014, but with further increases in hybrid

vehicles and the introduction of new plug-in hybrid vehicles by European/US automakers,

we expect HVT’s share to rise to 10.2% in 2020.

Figure 16: HVT market growing in tandem with greater

demand for electric vehicles

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Source: Company data, IHS, Credit Suisse estimates

Market share growth likely to continue for Aisin Seiki

Aisin Seiki holds an overwhelming share of the global automatic transmission

market

Aisin Seiki, which counts Aisin AW among its group companies, already holds an

overwhelming share in the automatic transmission market. The company not only has

conventional ATs but also CVTs and HVTs in its diverse product lineup, and it has a track

record of supplying not only Toyota but also many other overseas automakers including

VW and GM. The company also boasts a manufacturing scale substantially larger than its

rivals’ and holds a share of the global automatic transmission market we estimate at

02 October 2015

Aisin Seiki (7259 / 7259 JP) 10

16.4%. Jatco of Japan, Hyundai Powertech of South Korea, and ZF and Getrag of

Germany follow Aisin Seiki in market share. Aisin Seiki’s global market share is likely to

continue upwards in the future and should reach 21% in 2020. In addition to sales growth

effects from supplying automakers in the developed markets, increased adoption of its

products by automakers in emerging markets, including by local Chinese automakers,

should drive Aisin Seiki’s sales and market share.

Figure 17: Overwhelming share of the global automatic

transmission market

Figure 18: Aisin Seiki’s market share growth likely to

continue

Aisin Seiki 16.4%

Jatco 11.6%

Hyundai Powertech 5.8%

ZF 5.3%

Getrag 3.3%

Toyota In-house 7.3%

Others 50.3%

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Stable growth at the conventional AT business likely

in the longer term

Conventional AT volume set to increase to 11.1mn units in FY3/21

We forecast Aisin Seiki’s conventional AT volume to rise 12.7% YoY to 7.749mn units in

FY3/16. We also forecast the company’s conventional AT volume to grow to 11.1mn units

in FY3/21. Although volumes are likely to fall somewhat short of guidance (7.9mn units) in

FY3/16, we still expect the company to maintain a high growth rate. Production ramp-up

following capacity expansion at the Tianjin plan is likely to contribute to volume growth. By

customer, we look for volumes to fall short of plan for VW and PSA in China, but look for

volume growth in supplies to local Chinese automakers, other European automakers, and

Toyota. In particular, we look for conventional AT supplies for locally manufactured SUVs

in China and new business to contribute to volume growth. Among European automakers,

we see volume growth in supplies to Volvo and BMW. With Toyota, we look for a

contribution from increased HVT production for the new Prius model in Japan in 2H

FY3/16.

Meanwhile, we forecast FY3/21 AT volume to surpass the company’s target of 10.0mn

units and reach 11.1mn units under our base scenario. From FY3/16 through FY3/21,

volume should continue to grow at an average of 7.4% YoY, substantially higher than the

global auto market’s growth rate. The Chinese market, in which automatic transmission

adoption continues to grow, is likely to account for roughly 40% of the volume growth

during this period. By customer, volume growth is likely to continue for European

automakers including VW, PSA, BMW, and Volvo and accelerate for Chinese local

automakers such as Changan Automobile and Dongfeng Motor. In addition to CVTs, sales

of existing two-motor HVTs and newly developed one-motor HVTs are also likely to

increase to automakers other than Toyota. Also, depending on customer enquiries and the

level of production capacity upgrades, we think there is still a chance for sales volume

growth to as much as 12mn units in FY3/21.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 11

Figure 19: AT sales volume to increase to 11.1mn units in FY3/21

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Source: Company data, Credit Suisse estimates

Expansion of production capacity, particularly overseas

Production capacity expansion is likely to continue for now in order to deal with a

substantial increase in AT volume fueled by sales growth. Global AT production capacity

was around 7mn units in FY3/15 (just under 6mn units in Japan and 600,000 units each in

North America and China). Since the start of FY3/16, capacity has been increased at Line

2 of Tianjin Plant No. 2, and capacity expansion currently underway at the Okazaki East

Plant in Japan is also likely to continue over the next few years (beyond FY3/17). The

company is also scheduled to bring online a new plant in Thailand in 2017. Moreover,

Aisin Seiki may consider establishing new plants in Central and South America, including

in Mexico, in the longer term. As a result, the overseas production ratio of ATs is likely to

rise from around 15% in FY3/15 to more than 35% in FY3/21.

Figure 20: Expansion of production capacity, particularly

overseas

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

FY14 FY15E FY16E FY17E FY18E FY19E FY20E

Japan US China Others Overseas Production Rate

Thousand Units


02 October 2015

Aisin Seiki (7259 / 7259 JP) 12

Dealing with all-around automatic transmission

market growth

Supplying almost all types of transmissions, from light vehicles to commercial

vehicles

Aisin Seiki, which has an overwhelming share of the global transmission market, boasts a

wide lineup of products that have evolved in response to diverse market needs. Among

Aisin Seiki, Aisin AI, and Aisin AW, the Aisin group handles supplies of MT, AMT, AT, CVT,

and HVT, and the products are mounted on diverse models from light vehicles to

commercial vehicles as well as on industrial vehicles such forklifts, holds the top global

market share in conventional AT and other automatic transmission systems. We expect

the company to maintain its top market share in the future and deal with all-around growth

in the transmission market by leveraging its diverse product line-up.

Growth in FR-AT, particularly for trucks and large vehicles

Starting with the launch of the 3-speed Toyoglide AT, Aisin AW’s (then Aisin-Warner) first

product, launched in 1969, Aisin Seiki’s automatic transmission technology has evolved

over time. The key features of FR-AT (front-engine rear-wheel drive AT), which has its

roots in Toyoglide, include weight balance and stable steering/vehicle performance (even

on large vehicles), and its adoption increased over time, particularly on large/luxury

vehicles with higher engine output. The number of transmission gears has now progressed

to eight-speed due to greater fuel economy requirements, but the company still

manufactures a large number of high torque-capacity four- and six-speed ATs for trucks

(where higher output is a priority) and for emerging markets (due to road conditions). Aisin

Seiki holds a large market share in conventional ATs for light vehicles (light wagons/light

trucks) and for commercial vehicles, and the company is likely to expand conventional AT

sales particularly for emerging markets, trucks and large luxury vehicles in the future. Aisin

AI is also involved in manufacturing transfer units that convert front-engine, rear-wheel

drive into four-wheel drive; the group’s ability to handle a variety of auto model

specifications is also a strong point of Aisin Seiki.

In FF-AT, adoption of multi-speed models increasing on small and midsize autos

The most common AT system is currently FF-AT (front-engine front-wheel drive AT). FF-

AT’s adoption increased on small and midsize passenger cars, as the systems are not

only easy to mount but also improve efficiency in terms of interior space. FF-AT was

developed after FR-AT; Aisin AW started manufacturing its first model of FF-AT in 1983

and went on to manufacture the world’s first 6-speed FF-AT in 2002, demonstrating a

sharp increase in both function and scale. Since these are used in models where greater

fuel economy requirements trump engine output, there is an increasing need for higher

gears. Currently, six-speed and higher multi-speed models have become the standard in

developed markets, while six-speed AT adoption is gradually expanding in emerging

markets. In line with stricter fuel economy regulations, future sales growth is likely to be

centered around six-speed and higher ATs.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 13

Figure 21: History of Aisin AW’s FR-AT/HVT

Fwd

SpeedType Model Code

Launch

Year 70 75 80 85 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10－

Toyoglide Toyoglide 1969

03-55 1972

03-56 1979

03-75 1981

03-95 1980

03-50 1977

03-51 1982

03-70 1978

03-71 1979

03-72 1983

03-70L 1981

03-71L 1980

03-72L 1983

03-70LE 1983

03-71LE 1981

03-72LE 1983

03-70LS 1998

03-71LS 1998

03-72LS 1998

30-40E 1987

30-43E 1990

30-40LE 1984

30-41LE 1989

30-42LE 1990

30-43LE 1990

30-40LS 1996

30-41LS 1996

30-43LS 1999

30-80LE 1985

30-83LE 1990

31-80LE 1993

31-81LE 1992

31-80LS 1998

30-40Ei 1992

30-40LEi 1991

30-41LEi 1990

30-42LEi 1989

30-43LEi 1993

30-40LSi 1995

31-80LEi 1997

31-81LEi 2002

TW-40E 2003

TW-40LE 2005

TW-40LS 2005

30-50LEi 1991

30-50LSi 1995

35-50LS 1997

35-51LS 1998

TB-50LE 2002

TB-50LS 2002

TB-50SN 2003

TB-50NF 2004

TB-60SN 2003

TB-61SN 2003

TB-65SN 2004

TB-68LS 2006

TB-60NF 2003

TB-61NF 2004

TR-60SN 2002

TR-61SN 2003

Type-AWR AWR6B45 2014

TL-80SN 2006

TL-80NF 2008

Type-TR TR-80SD 2010

Type-AWR AWR8L35 2013

Type-30 30-40SD 2002

Type-35 35-50SD 2001

HR-10 2006

HR-10F 2007

Type-AWR AWRHT25 2012

3-SpeedType-03

Type-03

5-speed

Type-TB50

4-Speed

Type-TW

Type-35

Type-30

6-speed

8-speed

HVT

Type-30

Type-HR

Type-TL

Type-TB60

Type-TR


02 October 2015

Aisin Seiki (7259 / 7259 JP) 14

Figure 22: History of Aisin AW’s FF-AT/CVT/HVT

Fwd

SpeedType

Model

Code

Launch

Year70 75 80 85 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10－

20-30 1983

20-30L 1983

10-40L 1983

10-41L 1985

10-42L 1990

11-40L 1983

11-42L 1989

11-80L 1987

10-40LE 1983

10-41LE 1992

10-42LE 1990

11-40LE 1989

11-41LE 1986

11-43LE 1997

11-80LE 1995

70-40LE 1992

70-41LE 1993

71-40LE 1997

71-41LE 1999

70-40LS 1994

71-40LS 1997

72-40LE 2000

72-41LE 2000

73-40LS 2001

73-41LS 2001

50-40E 1998

50-42E 1998

50-40LE 1988

50-41LE 1989

50-42LE 1991

50-40LM 1998

50-40LN 1995

60-40LE 1992

60-41LE 1997

60-40SN 1997

60-41SN 1997

80-40LE 2002

81-40LE 1999

80-40LS 1998

81-40LS 1999

90-40LE 2000

91-40LE 2000

90-40LS 1999

91-40LS 2001

Type-AWF4 AWF4S15 2012

55-50SN 1998

55-51SN 2002

55-51SNC 2003

95-50LS 2001

95-51LS 2003

96-50LS 2006

TF-60SN 2002

TF-61SN 2003

TF-62SN 2003

Type-TF70 TF-70SC 2009

TF-80SC 2003

TF-81SC 2004

Type-TM60 TM-60LS 2008

AWF6F16 2013

AWF6F25 2013

AWF6F45 2013

AWF8F35 2012

AWF8F45 2013

XA-10LN 2004

XA-11LN 2008

XA-12SN 2010

XA-15LN 2002

Type-XB XB-20LN 2006

Type-AWFCX AWFCX12 2012

Type-AWFCX AWFCX18 2012

HD-10 2004

HD-20 2008

Type-HF HF-10 2008

Type-AWFHT AWFHT15 2010

3-Speed Type-Z

Type-Z

Type-Z II

Type-Z III

Type-90

Type-55

5-speed

4-Speed

Type-50

Type-60

Type-80

Type-95

HVT

CVT

Type-HD

6-speed

Type-AWF6

Type-AWF88-Speed

Type-TF60

Type-TF80

Type-XA


02 October 2015

Aisin Seiki (7259 / 7259 JP) 15

Figure 23: Aisin AW’s key FR-AT models (current)

Drivetype

Forward

Speeds

Torque

Range

Approx.

Family

Volume

Vehicles (Example) Production Site

TW-40E 130Nm 60,000 Suzuki Every Ogawa (Aisin Seiki)

03-70LS 215Nm 50,000 Toyota Innova Anjo

30-40LS 343Nm 450,000 Toyota Fortuner Anjo

5-speed TB-50LS 450Nm 580,000 Toyota Hilux Anjo/AWNC

TB-65SN 310Nm 100,000 Mazda Roadster Anjo

AWR6B45 450Nm 20,000 Lexus IS Anjo

TB-61SN 450Nm 180,000 Toyota Crown Anjo/Tianjin/AWNC

TB-68LS 650Nm 120,000 Toyota Tundra AWNC

A45X 1000Nm 50,000 Chrysler RAM HDOgawa/ADI

(Aisin Seiki)

AWR8L35 450Nm 30,000 Toyota Crown Royal Okazaki

TL-80SN 550Nm 50,000 Lexus LS Okazaki Higashi

TR-80SD 850Nm 160,000 Audi Q7 Okazaki

Core Model Code

4-speed

AT-FR

6-speed

8-speed


02 October 2015

Aisin Seiki (7259 / 7259 JP) 16

Figure 24: Aisin AW’s key FF-AT models (current)

Drivetype

Forward

Speeds

Torque

Range

Approx.

Family

Volume


4-Speed AWF4S15 150Nm 510,000 Toyota Corolla Anjo/Tahara/Okazaki/Suzhou

55-51SN 350Nm 50,000 Guangzhou Chuanqi Anjo

95-51LS 350Nm 10,000 Toyota EU Camry Okazaki/Kinuura

AWF6F16 250Nm 1,500,000 VW Polo Anjo/Tahara/Tianjin

TM-60LS 300Nm 1,030,000 Toyota Camry Tahara/Kinuura

AWF6F25 300Nm 350,000 Peugeot 308 Anjo/Tahara/Tianjin

AWF6F45 450Nm 500,000 VW Tiguan Anjo/Tahara

AWF8F35 350Nm 20,000 Lexus RX Anjo

AWF8F45 460Nm 120,000 Volvo S60 Anjo/Tahara

Core Model Code

AT-FF

5-speed

6-speed

8-Speed


Locking in CVT/HVT market that is growing in tandem with stricter fuel economy

regulations

Aisin AW is also involved in CVT/HVT, the adoption of which is increasing as fuel

economy regulations grow stricter. Jatco, a leader in the CVT market, boasts an

overwhelming global share, but Aisin AW is gradually expanding its share, mainly for

Toyota’s smaller autos. Unlike conventional ATs, CVTs do not shift speed by means of

gears. They instead control engine output using the belt’s expansion and contraction.

Their strength lies in seamless acceleration (i.e., no gear shift shock) and the elimination

of potential mechanical loss of engine output due to gears. On the other hand, since CVTs

use belts, their maximum level of output and durability (input torque) is inferior to that of

conventional ATs, so their adoption mainly increased on small autos. CVTECH, a

subsidiary of Aisin AW that makes belts (a core CVT component), has a base inside the

premises of Toyota Hokkaido (Toyota’s transmission manufacturing plant) and shares key

components with Toyota’s in-house manufactured CVTs. We are focusing on Aisin AW’s

future CVT sales expansion to customers other than Toyota. We believe market

expectations will also hinge on the company expanding CVT sales to overseas

automakers in order to grab market share from Jatco, which boasts an overwhelming

share for Nissan.

Aisin AW developed an FF hybrid system for the first time in 2004 and went on to launch

the world’s first twin-motor FR-HVT in 2006. Since then, the company has developed an

integrated system starting with the development of HVT system to the production of

02 October 2015

Aisin Seiki (7259 / 7259 JP) 17

motors. While FF-HVT supplies for the Prius are split between Aisin AW and Toyota’s in-

house manufacturing, the company appears to be supplying FR-HVT almost exclusively.

Among clients other than Toyota, Aisin AW has supplied HVTs to Ford and has supplied

eight-speed ATs to Volkswagen with built-in motors. We anticipate an increasing shift to

electric-powered autos in the auto market in tandem with stricter fuel economy regulations

and look for Aisin AW’s HVT technology to contribute to the increase in its market share.

Figure 25: Aisin AW’s key CVT/HVT models (current)

Drivetype

Forward

Speeds

Torque

Range

Approx.

Family

Volume


AWFCX12 135Nm 210,000 Toyota Ractis Tahara

XA-10LN 135Nm 50,000 Toyota Vitz Tahara

XA-11LN 135Nm 50,000 Toyota iQ Tahara

AWFCX18 160Nm 200,000 Toyota Porte Okazaki Higashi

AWRHT25 230Nm 50,000 Toyota Crown-Hv Okazaki-Higashi

HR-10 350Nm 5,000 Lexus GS-Hv Okazaki-Higashi

HR-10F 545Nm 5,000 Lexus LS-Hv Okazaki-HIgashi

AWFHT15 170Nm Okazaki

HF-10 250Nm Okazaki

300,000Toyota

Prius, Camry Hv

Core Model Code

HV-FR HEV

HEVHV-FF

CVT CVT


Breakdown of conventional AT earnings structure

AT cost weighting by key mechanism

Conventional AT, made up of roughly 1,000 components, is said to have the highest

number of parts for any auto unit component. A precise assembly of these parts creates a

transmission unit that can efficiently transfer and control the engine’s power to the wheels.

By amplifying, transferring, and shifting engine torque, conventional AT sends the engine’s

output to the wheels in an appropriate and flexible manner, and there are multiple

mechanisms within the AT that enable it to perform this function flawlessly. The power of

the engine is conveyed first to a mechanism called a torque converter, which transmits it to

the gear train inside of the transmission. The torque converter uses its internal turbine

mechanism to amplify torque and cuts off the power from the engine during a gear shift

(similar to the clutch function in an MT). Moreover, the torque converter must be highly

durable as it receives all of the engine power. It is also high value-added since it is a single

unit component that has multiple functions.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 18

The gear train is a composite of various gears. It shifts gears by changing the combination

of gears, and it delivers power to the wheels via the drive shaft. Since the gear train is the

mechanism with the most parts in a conventional AT, and since most of those parts are

precision-machined, it accounts for a significant proportion of the cost of the AT. In order

to prevent gear burnout and operate the AT’s internal clutch/brake for use in gear

combinations, it is necessary to generate hydraulic pressure inside the AT; this is handled

by mechanisms known as the transmission oil pump and the valve body. All of these

mechanisms are housed in the transmission case (typically made of die-cast aluminum),

and the transmission assembly is complete once all external components including

connectors have been attached to the transmission case. We estimate the gear train

accounts for the largest proportion of the cost structure, as it is made up of more parts

than any other unit component and requires different processes such as machining and

heat treatment. After the gear train, the transmission case (as it is a substantial component

with a large area that requires machining) and its assembly account for the largest

proportion of costs, followed by the torque converter, which is a high value-added

component in its own right.

Figure 26: AT cost breakdown by key mechanism

Torque ConverterConsists approx.

13.6% of the totalcomponent cost

Transmission CasesConsists approx.


(Includes assembly)

Oil PumpsConsists approx.


GeartrainConsists approx.

47.1% of the total component cost

Valve-BodyConsists approx.


OthersConsists approx.



AT manufacturing cost estimate

Conventional AT components are wide-ranging (from bolts to the transmission case and

electronic control solenoids) and require various processes during the manufacturing

stage (e.g., pressing, cutting, sintering, heat treatment, and die casting). Accordingly, it is

difficult for top-tier conventional AT makers to have all of the manufacturing processes in-

house, so the cost of materials, mainly purchased parts, accounts for a large proportion of

the AT manufacturing cost. According to our estimates, material costs account for more

than 60% of a conventional AT unit’s cost. Also, material management costs tend to be

high as external part procurement accounts for the bulk of the material cost. We therefore

believe total materials costs (including cost of materials and cost of material management)

account for nearly 80% of the total cost. Meanwhile, Aisin AW sources the majority of

02 October 2015

Aisin Seiki (7259 / 7259 JP) 19

components (including torque converters, cases, gears, and friction materials) from Aisin

group companies, so we believe there are fairly large overlapping fixed costs such as

internal/external material management costs. Conversely, duplication of the above fixed

costs can be corrected if Aisin AW, a top-tier AT maker, were able to bring components

procured from within the Aisin group under its own management.

Figure 27: Material/material management costs account

for most of AT cost

Variable Cost72%

Material Cost68%

Process Cost 4%

Fixed Cost28%

In/OutsourceAdmin Cost

18%

Other Fixed Cost10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


02 October 2015

Aisin Seiki (7259 / 7259 JP) 20

Ready for restructuring round 2 Expect further restructuring with focus on AT

Likely to be at center of Toyota group restructuring moves

In late 2014, Aisin Seiki, together with other members of the Toyota group, announced

plans to: (1) strengthen the group’s brake business, (2) consolidate the MT business, (3)

integrate Shiroki into Aisin Seiki, and (4) transfer automotive seat operations to Toyota

Boshoku. The details are as follows:

1) Strengthening of brake business under ADVICS: Aisin Seiki, ADVICS, Denso,

Sumitomo Electric Industries, and Toyota Motor announced they had agreed to

consolidate brake operations under ADVICS to further strengthen the competitiveness of

the Toyota group’s brake business. Aisin Seiki, Denso and Toyota agreed to strengthen

development support to ADVICS through the dispatch of personnel and other measures

starting in January 2015. From January 2016, manufacturing of electronically controlled

brake systems currently conducted at Aisin Seiki’s Handa Plant and Denso’s Daian Plant

will be gradually transferred to ADVICS' Handa Plant.

2) Consolidation of MT operations under Aisin AI: Aisin AI, an Aisin Seiki subsidiary,

and Toyota Motor agreed to consolidate the development and production of manual

transmissions under Aisin AI. The consolidation of MT operations, which are currently

spread across the two companies, aims to strengthen the competitiveness of the MT

business by facilitating a more efficient allocation of resources under one roof.

Development and production of MT currently carried out at Toyota’s Kinuura Plant will be

transferred to Aisin AI around mid-2016. Aisin AI's FY3/15 consolidated results included

sales of ¥126.4bn and OP of ¥2.6bn. A specialized manufacturer of manual transmissions,

Aisin AI supplies MT systems to automakers in Japan and overseas. The company

produced 1.44mn MT systems in FY3/15. Toyota’s internal MT production volume during

the same year was about 1.30mn. Toyota manufactures six-speed MTs at its Kinuura

Plant in Japan, five-speed MTs at plants in the Philippines and India, and both five- and

six-speed MT systems at its plant in Poland.

3) Management integration of Shiroki: Aisin Seiki announced that it would turn equity-

method affiliate Shiroki into a wholly owned subsidiary via a share exchange. The main

goal is to strengthen the competitiveness of the two companies’ auto body parts

businesses. Integration will likely enable the two to optimize their combined production

network by making mutual use of global production facilities. In addition, they plan to make

more efficient use of development resources by having Aisin Seiki concentrate on systems

and modular products while Shiroki focuses on external and functional body parts. They

also expect to achieve synergies and expand sales by, for example, sharing customer

bases. Aisin Seiki’s sales of auto body parts amounted to ¥524.4bn in FY3/15, while

Shiroki’s sales totaled ¥125.3bn.

4) Transfer of mechanical seat frame components to Toyota Boshoku: Aisin Seiki

and Shiroki announced that they would transfer their separately operated mechanical seat

frame component businesses to Toyota Boshoku. These components are supplied to

Toyota Motor. Specifically, Aisin Seiki and Shiroki will transfer their development and

production of mechanical seat frame components, such as recliners and slide rails, to

Toyota Boshoku.

Aisin Seiki has been a core part of Toyota’s supply chain, providing the automaker with a

wide range of products, including drivetrain, engine, body, brake & chassis, and electronic

products. The Toyota supply chain remains laden with duplication inside and outside of the

Toyota group. We therefore expect to see further restructuring of the group supply chain,

with Aisin Seiki at the center of restructuring moves. Aisin Seiki itself has numerous

consolidated companies, the result of spinning off operations into separate companies

02 October 2015

Aisin Seiki (7259 / 7259 JP) 21

over the years. We think that a restructuring within the Aisin group that corresponds to

moves in the Toyota group will contribute to greater efficiency of Toyota’s supply chain.

Get ready for Round 2 of Aisin group’s reorganization

We think the Aisin group is very likely to follow up the string of restructuring moves

announced toward the end of 2014 with a second round of reorganization. Toward the end

of 2015, Toyota will launch the next-generation Prius, widely expected to be the first car to

be based on Toyota’s new modular platform, the Toyota New Global Architecture (TNGA).

The next-generation Camry, expected in early 2017, is also likely to come equipped with

TNGA engines and transmissions. Aisin Seiki is deeply involved in the development of

TNGA units, and we would not be surprised to see further business restructuring revolving

around components from TNGA.

Shifts in supply share precede reorganizations

An examination of Aisin Seiki’s end-2014 release of data on supply shares of MT and

brake systems supplied to Toyota, shows that the shift toward supply chain consolidation

started before the announcement of the planned restructurings. Take MT for example. In

2005, Aisin Seiki supplied 68.3% of MT systems installed at Toyota’s domestic plants. By

2010, this figure had risen to 90% and in 2014 it expanded to 97%. Similarly, its supply of

brake systems to domestic Toyota plants rose from 70% in 2005 to 79.7% in 2010 and

89% in 2014. Based on this trend, we searched for other product areas likely to undergo

restructuring.

Figure 28: Changes in supply share preceded reorganization

Product Supplier

Toyota

Domestic

Share 2005

Toyota

Domestic

Share 2010

Toyota

Domestic

Share 2014

Notes

Aisin Seiki 68.3% 90.0% 97.0%

In-House 31.7% 10.0% 3.0%

Aisin Seiki 70.0% 79.7% 89.0%

Denso 0.7% 0.4% 0.1%

In-house 25.2% 12.3% 7.1%

MTMT business consolidated to Aisin AI (Aisin

Seiki) - November 2014

Brakes

(ABS, Others)

Brake business consolidated to Advics (Aisin

Seiki)- November 2014

Source: Company data, IRC, Credit Suisse estimates

Focus on AT business

Aisin’s share of Toyota AT components on the rise

We have focused our attention on conventional AT components, such as AT assembly

and torque converters. Similar to the situation with MT components, Toyota has been

shifting its in-house production of conventional AT parts to some of its affiliates, in this

case, mainly Aisin group company Aisin AW. For example, Aisin AW has been taking over

conventional AT assembly from Toyota, raising its share of conventional AT systems

installed on domestically produced Toyota vehicles from 53.9% in 2005 to 62.7% in 2014.

Similarly, Aisin AW's share of Toyota’s domestic torque converter requirements has risen

from 51.1% in 2005 to 56.5% in 2014.

Aisin’s consolidation of its Toyota drivetrain supply chain is in keeping with Toyota Motor’s

longer-term supply chain strategy. If the Aisin group were to supply all AT systems used in

Toyota vehicles made around the world, its annual AT shipments would expand to about

6.1mn units (about 3.0mn units manufactured in-house by Toyota and another 3.1mn

made by the Aisin Seiki group). We estimate this shift would add at least ¥35bn to Aisin

Seiki’s annual consolidated OP, boosting its FY3/15 OP of ¥165.8bn, for example, by

more than 20% and therefore having a rather large impact on company earnings. In

addition, if the Aisin group were to take over all of Toyota’s in-house AT production, the

Aisin group’s global output of AT systems would likely expand to 15mn units in FY3/21.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 22

Figure 29: Shift in shares of Toyota AT parts is under way

Automatic

Transmission

Dom. Share

2005

Dom. Share

2010

Dom. Share

2014Toyota G

In-House 46.1% 53.2% 36.4% x

Aisin Seiki 53.9% 46.8% 62.7% x

Daihatsu 0.0% 0.0% 0.5% x

Torque ConverterDom. Share

2005

Dom. Share

2010

Dom. Share

2014Toyota G

In-house 57.9% 52.7% 41.0% x

Aisin Seiki 51.1% 38.6% 56.5% x

Exedy 0.0% 8.7% 2.5% x

Source: Company data, IRC, Credit Suisse estimates

Figure 30: Takeover of Toyota AT production would boost

Aisin group’s volume

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


AT Original Volume Toyota Inhouse AT Volume

Thousand Units


Expecting internal restructuring of Aisin group

Are newly established group corporate planning HQ and product divisions

precursors of group restructuring?

As of 1 January 2015, the Aisin group corporate structure includes a new Aisin-Group

Corporate Planning Headquarters and several new product divisions. The establishment of

these new organizational units is likely to lead to further restructuring of the group. The

group planning HQ and product divisions were established to strengthen group

management and business strategies from a groupwide perspective. More specifically, by

bringing management of diverse product domains under more broad-based product

divisions such as powertrain products, chassis & vehicle safety systems, and body

products, management hopes to deepen and strengthen collaboration among group

companies. While this new structure might be viewed as a return to Aisin Seiki’s former

business division structure, bringing together planning for various group companies active

in similar product domains under one management unit raises hopes that group

companies that have been competing with each other in their respective areas of expertise

will be reorganized into a more efficient organizational structure.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 23

Figure 31: Aisin group’s new organizational structure

Board of

Directors

Chairman

CEO

Group Management Headquarter

Innovation Center

Powertrain

Product

Department

Chassis/Safety

Product

Department

Body Product

DepartmentL&E*

Department

A/M*Department

Elec. Component

Department

Aisin Seiki: New Organizational Structure




Material/Foundries

Gorup Companies




Expect group reorganization centering on AT/MT business

In particular, we look for the Aisin group to create a more efficient supply chain by

promoting restructurings and integration within the group, centering on its conventional AT

& MT businesses, whose resources are concentrated in Aisin AW. This company is

already highly dependent on other group companies; for example, its AT cases and shafts

are processed by Aisin AI while its AT gears and drive plates are assembled by Aisin Kiko.

In addition, as reported by the Nikkan Kogyo Shimbun and other media, Aisin AW and

Aisin Kiko, which handles ATs for commercial vehicles, are likely to strengthen

collaboration in the areas of product development and production. Further evidence of

greater collaboration is the adoption of a personnel system that will see executives from

the group’s various transmission-related businesses alternating as the director in charge of

technology. The Aisin group has in the past transferred commercial rights for ATs used in

mini vehicles from Aisin Kiko to Aisin AW, so we think there are few obstacles to

reorganizing the group’s transmission business, which includes Aisin AI and Aisin AW, and

that these obstacles can be easily cleared.

We will also be watching developments at Exedy, an equity-method affiliate in which Aisin

Seiki has a 33.7% stake. However, the two companies’ transmission businesses compete

with each other in such product areas as torque converters and clutches. The Toyota

group’s consolidation of its MT/AT supply chain will likely press Aisin Seiki and Exedy to

seek greater synergies in common business areas.

Synergistic effects likely from transmission business restructuring

At Aisin AW, procured parts and materials account for a major portion of AT production

costs. Also, the company is highly dependent on other Aisin group companies for key

functional parts including transmission cases, gears, and torque converters. Parts

procured from other group companies entail administrative costs, at the supplying group

companies for materials produced in-house and at Aisin AW for materials made by

external vendors. In other words, this structure results in cost duplications. If Aisin AW

were to produce all the required parts and materials internally, this cost duplication could

be eliminated. We estimate this could improve its marginal profit ratio by about 2%.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 24

Figure 32: Significant duplication of external/internal

administrative costs (current estimates)

Torque 'Converter,

8.8%

T/C Admin, 2.0%

Case/Assembly, 12.4%

Case Purchased Admin, 2.3%

Case In-house Admin, 0.3%Pumps, 4.5%

Pumps Admin, 0.9%

ValveBody, 6.4%

Valvebody Admin, 1.4%

Geartrain, 34.0%

Geartrain Purchased

Admin, 5.9%

Geartrain In-house Admin,

1.2%

Others, 4.4%

Others Admin, 0.9%

Other Fixed Cost, 12.8%


Plenty of room to improve efficiency at brake business

The Aisin group’s brake operations also have plenty of room for efficiency improvements,

in our view. For example, Hosei Brake, a consolidated subsidiary of Aisin Seiki (shares

owned 53.1% by Aisin Seiki and 46.9% by Toyota Motor), produces conventional brakes

and parts, including both drum brakes and disc brakes. Many of the same products are

also manufactured by ADVICS. Akebono Brake, not a Toyota group supplier, is also

worthy of some attention because Toyota’s 11.4% equity stake in the company and Aisin

Seiki’s 2.3% stake hold some potential for inclusion of Akebono in Toyota's brake supply

chain.

Aisin group's history of spinoffs and mergers

Restructuring nothing new for the Aisin group

The Aisin group’s history is full of corporate spinoffs and mergers. Aisin Seiki traces its

roots back to 1942, when the Japanese army requested a new company be established to

produce aircraft engines. The result was Tokai Hikoki, established through joint investment

with Kawasaki Aircraft. Tokai Hikoki never began full production owing to a change in army

policy; however, after the war it capitalized on its engine technology to become an

automotive parts manufacturer. The company changed its name to Aichi Kogyo, which

merged with another auto parts maker, Shinkawa Kogyo, to form Aisin Seiki.

The history of spinoffs and mergers to facilitate entry into different lines of business that

has resulted in today’s Aisin group began in 1969, when Aisin Seiki and Borg Warner

formed a joint venture called Aisin-Warner, now known as Aisin AW. Today the Aisin

group has six core companies engaged in a wide variety of automotive parts businesses.

Aisin AW, in which Toyota Motor is directly invested, is a specialized maker of automatic

transmissions and supplies the group with AT components and peripheral parts, such as

drivetrain components. Aisin AI manufactures mechanical drivetrain products, such as

manual transmissions, as well as gears and other related components. Aisin Chemical

makes friction materials, and Aisin Takaoka specializes in automotive castings. Together

under the leadership of parent Aisin Seiki, these six companies form a corporate group

with highly complementary businesses.

In 2001, three group companies (Aisin Seiki, Aisin Holdings of America, and Aisin Europe)

acquired the shares in auto parts maker Exedy that were previously held by Nissan Motor.

The acquisition has established Aisin Seiki as Exedy’s largest shareholder, and the two

companies have formed a cooperative business alliance in the area of drivetrain

components, especially in foreign markets. Given Exedy’s position as an equity-method

affiliate of Aisin Seiki and the convergence of its core products—clutches and torque

converters—with the Aisin group’s core drivetrain business, we see potential for Exedy to

strengthen business ties within the group.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 25

Also in 2001, Aisin Seiki joined with Toyota Motor, Denso, and Sumitomo Electric

Industries to establish ADVICS as a separate company to strengthen the group’s brake &

chassis business. In late 2014, as earlier noted, the companies announced they would

consolidate their brake business under ADVICS and shift Toyota’s internal production of

MT systems to Aisin AI. At the same time, it was announced that auto body parts company

Shiroki would be integrated into Aisin Seiki and that automotive seat operations would be

transferred to Toyota Boshoku. Aisin Seiki is active in a diverse range of key product areas

in the Toyota supply chain, including drivetrain, engine, body, brake & chassis, and

electronic products. Given the conspicuous duplication in the Toyota supply chain, both

inside and outside of the Toyota group, we expect to see further restructuring and

integration of the group, with Aisin group companies playing a central role.

Future shape of Aisin group

Duplication of supplied products is striking feature of current Aisin group

Looking at the product lineups of the 12 main companies of the Aisin group, we note that

each company has some specialized expertise in a specific area, but the more striking

feature is the overlap in group companies' product lineups. Looking first at the largest and

oldest six companies, Aisin Seiki is a Tier 1 supplier in all its product areas—engines,

drivetrains, bodies, brake & chassis, and electronics. Aisin Takaoka is Japan’s largest

specialized maker of automotive castings and is a Tier 1 or Tier 2 supplier of cast parts

made from steel and stainless steel. The group’s sole maker of chemical products, Aisin

Chemical, makes friction materials for clutches, brake pads, damping materials, and other

chemical-based automotive components. Aisin AW is a worldwide leader in automatic

transmissions and car navigation systems. Aisin AI originally specialized in manual

transmissions, but lately it has become more dependent on its supply of AT cases and

shafts to Aisin AW. Lastly, ADVICS has established itself as a global supplier of brake

systems.

The other six group companies, however, are sources of duplication. Hosei Brake is a

supplier of conventional brake components, but its product lineup overlaps with ADVICS’.

Aisin Sinei is a supplier of auto body parts, but its product lineup overlaps Aisin Takaoka's

lineup of auto body framework parts, such as pillars. Aisin Keikinzoku has a broad lineup

of aluminum die-cast products, but this lineup overlaps the one at Aisin Seiki’s Nishio Die-

casting Plant in many areas. Aisin AW Industries (separate from Aisin AW) supplies torque

converters, gears, and other conventional AT components, but plays second fiddle in

these areas to Aisin Seiki’s Ogawa Plant and equity-method affiliate Exedy. Aisin Kiko

supplies AT gears and drive plates to Aisin AW, but it also makes door locks, a core

product of Aisin Seiki’s body parts business.

While building their businesses independently with a focus on their individual areas of

expertise, Aisin group companies have also established product lineups that overlap those

of other members of the group. In the future, it will be increasingly important for the group

to increase its comprehensive strengths, which increasingly will require a group

reorganization aimed at enhancing efficiencies at each company and across the group.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 26

Figure 33: Aisin group companies and their main products

Powertrain Drivetrain BodyChassis/

BrakesElectronics Product Examples

Aisin Seiki ○ ○ ○ ○ ○ Overall

Aisin Takaoka ○ ● ○ ● ○ ● Exhaust Module, differential, pillars, etc

Aisin Chemical ○ ● ●Friction material, sound insulation, intake manifolds,

etc

Aisin AW ○ ○ Automatic transmission, navigation system

Aisin AI ○ ●Manual transmission, 4WD transfer, machining of

drivetrain components, etc

ADVICS ○ Brake system, disk/drum brakes

Hosei Brake Industry ● ○ Disk/drum brakes, stamping

Aisin Sin'ei ● ○ ●Pillar, other structural body components, gear

stamping, etc

Aisin Keikinzoku ○ ● ● ○ ● ● Diecast, aluminum components, etc

Aisin AW Industries ● Transmission components

Aisin Kiko ● ● Gear machining, driveplate, door-locks

Aisin Development Construction, insurance agency, etc

Aisin Group

Note: ○ = Tier 1, ● = Tier 2 or lower


Strengthening collaboration could trigger group restructuring/integration

If Aisin Seiki advances collaboration within the Aisin group, one of the goals of its medium-

term management plan, a likely side effect will be the restructuring and integration of core

group companies in an effort to eliminate duplication within the product lineups. The new

product divisions that have been established in Aisin Seiki’s new organizational structure

are tasked with strengthening cooperation among group companies in each product area.

Given the many areas of overlap in the product lineups of group companies active in the

same business domain, any effort to maximize the group’s comprehensive strength should

focus on creating a leaner organization, which most likely will lead to the restructuring and

integration of core group companies.

Figure 34: Shift to new organizational structure focused on strengthening business tie-

ups within the Aisin group

Group Management HeadquarterInnovation Center

Powertrain

Product

Department

Chassis/Safety

Product

Department

Body Product

DepartmentL&E*

Department

A/M*Department




Material/Foundries

Gorup Companies



Gro

up

Co

mp

any

Board of Directors

Chairman/CEO

Elec. Component

Department


02 October 2015

Aisin Seiki (7259 / 7259 JP) 27

Our vision of the future shape of the Aisin group

Assuming restructuring and integration of group companies takes place over the longer

term along the lines indicated by our above analysis, we have drawn up our vision of the

Aisin group of the future. First, we expect to see restructuring and integration of group

companies in the three core product domains—powertrain products, chassis & vehicle

safety systems, and body products. In the powertrain product domain, restructuring will

focus on creating a more efficient supply chain for transmissions and related components.

Currently, these products are manufactured by several group companies, so we look for

management to seek to eliminate this duplication in its supply capabilities. Aisin AW’s

conventional AT business, a core driver of consolidated earnings, is procuring components

and commissioning processes to other group companies, such as Aisin Seiki, Aisin AI and

Aisin Kiko. We think greater consolidation of these activities will generate synergistic

effects. Aisin Seiki and Toyota have already announced plans to consolidate manual

transmission operations. If they did the same for automatic transmissions, by shifting in-

house production at Toyota to Aisin AW, we think it would make a big contribution to Aisin

Seiki’s profits. We also see a growing importance for generating synergies with equity-

method affiliate Exedy by strengthening business ties, even while continuing the

competition in torque converters and clutches.

In chassis & vehicle safety systems, Toyota has already decided to consolidate its brake

supply chain under Aisin group company ADVICS. We think even greater efficiencies

could be created if it restructured the supply chain for conventional brake parts handled by

a number of companies, including Hosei Brake. In body products, Shiroki will be integrated

into Aisin Seiki, but several other group companies remain involved in the production and

supply of auto body components. Given the mature state of technologies used to

manufacture many of the products in this domain, we think it would be advantageous to

pursue greater benefits of scale through further restructuring. Possible target areas are the

supply of door locks by both Aisin Kiko and Aisin Seiki and the overlap between Aisin Sinei

and Aisin Takaoka in auto body framework parts, including pillars.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 28

Vision 2020 targets in sight Benefits ready to be reaped after building business

base and going through growth phase

Medium-term earnings forecast (through FY3/21)

After constructing a business base in FY3/13–15 and going through a growth phase in

FY3/16–18, Aisin Seiki appears ready to reap the benefits in FY3/19–21. Aisin Seiki could

eventually achieve the numerical targets outlined in its Vision 2020 medium-term plan

lasting through FY3/21: sales of ¥3.0tn, overseas business at 50%, ROIC of 15%. Our

own forecasts call for sales to increase to ¥4.2tn by FY3/21, as we expect topline CAGR of

6% in FY3/16 and thereafter driven by increasing AT sales by Aisin AW. We also expect

the overseas business ratio to reach 50% in FY3/21 due in part to overseas expansion of

AT production capacity and ROIC to improve to 15.1%.

Figure 35: Sales should increase to ¥4.2tn in FY3/21 Figure 36: Overseas sales ratio should rise to 50% in

FY3/21

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


Sales

Billion Yen

20%

25%

30%

35%

40%

45%

50%

55%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


Domestic Sales (LHS) Overseas Sales (LHS) Oveseas Sales Ratio (RHS)

Billion Yen


Figure 37: ROIC should reach target of 15% or higher

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%


ROIC


Expecting FY3/21 OP to reach ¥361bn at a higher-profit/leaner Aisin

We expect Aisin's OP to ratchet up to ¥4.2tn by FY3/21 due to organic growth, especially

in conventional AT. Conventional AT sales should rise to over ¥1.5tn by that time due to

rising volume of 11.1mn units, beating guidance at 10.0mn. Sales to overseas

manufacturers, including Chinese local manufacturers, will likely increase due to growth in

the proportion of vehicles fitted with AT. Outside of conventional AT, we expect sales

02 October 2015

Aisin Seiki (7259 / 7259 JP) 29

growth in hybrid electric vehicle transmissions (HVT) driven by the trend toward increasing

use of electronics in autos and also look for growth in electric oil and water pumps, next-

generation variable valve timing (VVT) devices, electric 4WD systems, and grille shutters.

In automation, we expect growth related to advanced driver assistance systems (ADAS)

including advanced parking assist (APA) systems and electronic stability control (ESC) for

emergency braking. Given the above factors, we think the company's non-Toyota sales

will rise to around 43% in FY3/21 as a result.

Our OP forecast is ¥361bn for FY3/21. We expect OPM to improve to 8.6% by that time

due to sales expansion efforts in high-value-added products such as AT. In addition, if the

company can achieve gains in supply chain efficiency through a restructuring of the

Toyota group (and the Aisin group within it), whose handling of a wide range of products

(drivetrains, engines, bodies, brake & chassis components, and electronics) produces

notable product overlap within the group, we would expect cuts in fixed costs and synergy

benefits, leading to further earnings outperformance and higher margins. We believe Aisin

Seiki can ratchet up to a leaner true major supplier in the medium term.

Figure 38: Higher AT sales should drive organic growth Figure 39: Non-Toyota sales ratio rising

0

200

400

600

800

1,000

1,200

1,400

1,600


AT Sales

Billion Yen

20%

25%

30%

35%

40%

45%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


Toyota Sales (LHS) Non Toyota Sales (LHS) Non Toyota Sales Ratio (RHS)

Billion Yen


Figure 40: OP should rise to ¥361bn by FY3/21

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

50

100

150

200

250

300

350

400


OP (LHS) OPM (RHS)

Billion Yen


02 October 2015

Aisin Seiki (7259 / 7259 JP) 30

Capex likely to decline but remain high due to conventional AT capacity expansion

Due partly to capacity expansion at the company's plant in Tianjin, China, and its Okazaki

East plant, we expect capex to increase to ¥325bn in FY3/16 and then switch to a gradual

decline. However, capex should remain around ¥250bn in FY3/21 due to parallel capacity

expansion driven by growth in conventional AT sales. In addition to the previously

announced new conventional AT plant in Thailand (scheduled to start operations in July

2017), Aisin Seiki could also expand production bases in such location as Latin America.

We expect the company to continue to invest in expanding conventional AT capacity for

now, especially overseas. Growth in depreciation should slow down after capex peaks,

while R&D spending will likely increase to around ¥210bn in FY3/21.

Figure 41: Expecting gradual decline in capex

0

50

100

150

200

250

300

350


CAPEX Depreciation R&D

Billion Yen


Substantial improvement in margins and ROIC

We expect ROE to improve to 10.8% in FY3/21. Breaking ROE down into components,

financial leverage could fall to 222% by FY3/21 by making use of accumulated cash, which

we expect will be more abundant as free cash flow (FCF), rising after capex peaks out,

should move into the black in FY3/17 and then continue to expand. On the ROA side, we

see the value rising to 9.7% by FY3/21, enough to drive up ROE. Breaking down ROA, we

see an OPM of component of 8.7% and an asset turnover component (ratio to sales) of

113% in FY3/21. Asset turnover has declined recently due to the company's focus on

capex, but should rise sharply as the company moves into growth phase and recoups its

capital spending.

Figure 42: ROE should improve to 10.8% by FY3/21 Figure 43: FCF should expand from FY3/17

7%

8%

9%

10%

11%

12%


ROE

-400

-300

-200

-100

0

100

200

300

400

500


Operating C/F Investing C/F Free C/F

Billion Yen


02 October 2015

Aisin Seiki (7259 / 7259 JP) 31

Figure 44: Expecting substantial improvement in ROE in

tandem with rise in ROA

Figure 45: Expecting rises in OPM, asset turnover

190%

210%

230%

250%

270%

290%

310%

5%

6%

7%

8%

9%

10%

11%

12%


ROE (LHS) ROA (LHS) Financial Leverage (RHS)

100%

102%

104%

106%

108%

110%

112%

114%

116%

118%

120%

4%

5%

6%

7%

8%

9%

10%

11%


ROA (LHS) OPM (LHS) Asset Turnover (RHS)


Expecting further enhancement of shareholder returns

Aisin Seiki’s dividend payout ratio (DPR) is around 30%. However, we think it will enhance

shareholder returns in the medium term. Our FY3/21 forecast is slightly conservative as it

assumes the company will keep its DPR at 30%. However, the company's cash position

shows that DPR is still on the high side within its historical range. The total value of cash

and cash equivalents and highly liquid marketable securities in FY3/15 was equivalent to

1.65 trading months on a consolidated sales basis, beating the level prior to the global

financial crisis (0.7–1.0 trading months). As we expect cash flow to improve, we would not

be surprised if the company decided to return surplus cash to shareholders. We think the

company might also emulate Toyota Motor, Denso and other companies and switch to the

total shareholder return concept and note that Aisin has bought back shares in the past,

including in 2008.

Figure 46: DPR currently around 30% Figure 47: Cash and cash equivalents and liquid

securities still at a high level

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250


Dividend (LHS) Dividend Payout Ratio (RHS)

Yen

0.0

0.5

1.0

1.5

2.0

2.5

Cash & Cash Equivalents & Liquid Securities/ Monthly Sales


02 O

cto

ber 2

01

5

Ais

in S

eik

i (7259

/ 725

9 J

P)

32

Figure 48: Forecasts through FY3/21 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E

Profit & Loss Statement

Sales 1,221,916 1,408,012 1,605,252 1,829,064 2,120,588 2,378,611 2,700,405 2,214,492 2,054,474 2,257,436 2,304,168 2,529,964 2,822,215 2,963,971 3,210,000 3,380,000 3,580,000 3,777,000 3,985,000 4,206,000

Gross Profit 165,830 196,676 228,091 249,580 290,906 317,944 385,201 191,348 262,703 319,400 304,383 347,071 410,079 416,035 467,000 500,000 543,000 586,000 637,000 693,000

EBIT 60,644 80,600 86,768 95,110 118,096 131,034 180,484 (3,489) 87,546 137,266 121,832 148,892 171,196 165,752 200,000 222,000 252,000 282,000 319,000 361,000

Recurring Profit 60,308 76,590 84,654 98,457 125,096 134,287 186,309 (4,965) 94,942 147,894 129,140 158,725 189,462 188,026 214,000 237,000 269,000 300,000 338,000 382,000

Income before income taxes and minority interests 60,308 105,197 77,335 92,729 125,096 134,287 186,309 (14,983) 57,665 147,894 129,140 158,725 189,462 183,710 214,000 237,000 269,000 300,000 338,000 382,000

Net Profit 25,651 47,994 34,719 46,718 61,095 66,889 91,654 (25,149) 16,605 69,643 55,497 77,518 90,089 77,318 101,000 112,000 128,000 142,000 160,000 181,000

Basic EPS 91.84 171.98 126.11 159.94 209.15 233.03 322.50 (89.36) 59.00 247.46 197.04 275.05 319.47 273.87 357.76 396.72 453.40 502.99 566.74 641.13

Book Value Per Share 1,546.21 1,612.96 1,771.12 1,928.58 2,361.66 2,662.78 2,725.67 2,202.86 2,328.68 2,440.39 2,573.95 3,038.88 3,542.60 4,108.86 4,355.85 4,631.85 4,946.77 5,293.54 5,686.31 6,125.08

EBITDA 140,882 166,950 184,331 201,078 241,129 276,310 347,966 178,568 257,213 282,097 259,589 288,092 320,196 326,752 400,000 441,000 482,000 519,000 560,000 603,000

Investments 90,700 124,100 143,100 165,200 259,540 197,806 212,003 220,224 83,821 133,200 150,700 195,000 204,700 247,800 325,000 300,000 280,000 270,000 260,000 250,000

Depreciation 80,238 86,350 97,563 105,968 123,033 145,276 167,482 182,057 169,667 144,831 137,757 139,200 149,000 161,000 200,000 219,000 230,000 237,000 241,000 242,000

R&D 67,600 80,000 89,000 95,500 95,152 103,750 115,330 115,994 101,102 111,400 121,400 135,000 144,300 149,100 160,000 168,000 178,000 188,000 198,000 209,000

Cash Flow Statement

Net cash used in operating activities 99,591 129,067 132,899 142,675 185,715 228,402 299,247 114,668 303,788 273,627 167,291 256,343 286,606 239,771 241,000 354,000 361,000 360,000 348,000 413,000

Net cash used in investing activities (79,789) (113,777) (160,798) (174,817) (215,495) (236,614) (217,844) (223,752) (331,630) 14,833 (195,165) (198,693) (265,405) (261,354) (346,000) (321,000) (301,000) (291,000) (281,000) (271,000)

Net cash used in financing activities (20,072) (11,286) 44,223 22,304 36,834 13,361 (27,682) 75,743 34,817 (63,932) (66,537) (43,967) (1,886) (17,734) 125,000 (59,000) (62,000) (68,000) (58,000) (173,000)

Cash and cash equivalents at beginning of the period 106,011 109,479 111,732 126,214 116,401 128,212 136,307 190,245 143,804 152,727 372,179 275,656 298,197 328,024 295,000 322,000 303,000 308,000 316,000 332,000

Increase (decrease) in cash and cash equivalents 3,467 1,979 14,481 (9,812) 11,811 8,094 53,937 (46,440) 8,923 219,451 (96,522) 22,540 24,740 (33,332) 27,000 (19,000) 5,000 8,000 16,000 (24,000)

Cash and cash equivalents at end of the period 109,479 111,732 126,214 116,401 128,212 136,307 190,245 143,804 152,727 372,179 275,656 298,197 328,024 294,692 322,000 303,000 308,000 316,000 332,000 308,000

Balance Sheet

Current assets 435,173 505,551 555,063 601,881 694,030 767,369 869,917 613,581 928,135 933,825 1,011,566 1,003,761 1,148,306 1,213,443 1,323,000 1,357,000 1,423,000 1,491,000 1,569,000 1,610,000

Fixed Assets 711,646 718,759 827,521 901,432 1,159,428 1,270,526 1,227,810 1,118,108 1,053,853 1,044,399 1,062,269 1,244,339 1,439,317 1,716,764 1,839,000 1,918,000 1,979,000 2,038,000 2,093,000 2,147,000

Total Assets 1,146,819 1,224,311 1,382,584 1,503,313 1,853,458 2,037,896 2,097,727 1,731,689 1,981,988 1,978,225 2,073,836 2,248,100 2,587,623 2,930,208 3,162,000 3,275,000 3,402,000 3,529,000 3,662,000 3,757,000

Current Liabilities 407,201 505,321 493,294 531,611 639,100 679,070 704,280 455,682 597,436 576,029 678,305 683,626 763,587 831,280 886,000 909,000 944,000 960,000 1,101,000 1,111,000

Long Term Liabilities 200,282 165,933 249,395 273,256 363,294 402,972 398,854 461,499 512,662 484,491 426,223 428,130 495,532 566,234 645,000 625,000 592,000 565,000 401,000 312,000

Shareholders' Equity 379,147 397,752 456,211 497,830 551,732 602,382 662,106 618,398 629,315 686,296 728,584 792,107 861,990 910,402 980,000 1,058,000 1,147,000 1,245,000 1,356,000 1,480,000

Total Liabilities 1,146,819 1,224,311 1,382,584 1,503,313 1,853,458 2,037,896 2,097,727 1,731,689 1,981,988 1,978,225 2,073,836 2,248,100 2,587,623 2,930,208 3,162,000 3,275,000 3,402,000 3,529,000 3,662,000 3,757,000

Margins

Gross Margin (%) 13.6% 14.0% 14.2% 13.6% 13.7% 13.4% 14.3% 8.6% 12.8% 14.1% 13.2% 13.7% 14.5% 14.0% 14.5% 14.8% 15.2% 15.5% 16.0% 16.5%

EBIT Margin (%) 5.0% 5.7% 5.4% 5.2% 5.6% 5.5% 6.7% -0.2% 4.3% 6.1% 5.3% 5.9% 6.1% 5.6% 6.2% 6.6% 7.0% 7.5% 8.0% 8.6%

Recurring Profit Margin (%) 4.9% 5.4% 5.3% 5.4% 5.9% 5.6% 6.9% -0.2% 4.6% 6.6% 5.6% 6.3% 6.7% 6.3% 6.7% 7.0% 7.5% 7.9% 8.5% 9.1%

Net Profit Margin (%) 2.1% 3.4% 2.2% 2.6% 2.9% 2.8% 3.4% -1.1% 0.8% 3.1% 2.4% 3.1% 3.2% 2.6% 3.1% 3.3% 3.6% 3.8% 4.0% 4.3%

Growth

Sales 8.3% 15.2% 14.0% 13.9% 15.9% 12.2% 13.5% -18.0% -7.2% 9.9% 2.1% 9.8% 11.6% 5.0% 8.3% 5.3% 5.9% 5.5% 5.5% 5.5%

EBIT -6.4% 32.9% 7.7% 9.6% 24.2% 11.0% 37.7% -101.9% -2609.2% 56.8% -11.2% 22.2% 15.0% -3.2% 20.7% 11.0% 13.5% 11.9% 13.1% 13.2%

EBITDA -4.5% 18.5% 10.4% 9.1% 19.9% 14.6% 25.9% -48.7% 44.0% 9.7% -8.0% 11.0% 11.1% 2.0% 22.4% 10.3% 9.3% 7.7% 7.9% 7.7%

Net Profit -454.8% 87.1% -27.7% 34.6% 30.8% 9.5% 37.0% -127.4% -166.0% 319.4% -20.3% 39.7% 16.2% -14.2% 30.6% 10.9% 14.3% 10.9% 12.7% 13.1%

Expense/Sales Ratio

COGS 86.4% 86.0% 85.8% 86.4% 86.3% 86.6% 85.7% 91.4% 87.2% 85.9% 86.8% 86.3% 85.5% 86.0% 85.5% 85.2% 84.8% 84.5% 84.0% 83.5%

SG&A 8.6% 8.2% 8.8% 8.4% 8.1% 7.9% 7.6% 8.8% 8.5% 8.1% 7.9% 7.8% 8.5% 8.4% 8.3% 8.2% 8.1% 8.0% 8.0% 7.9%

Investments 7.4% 8.8% 8.9% 9.0% 12.2% 8.3% 7.9% 9.9% 4.1% 5.9% 6.5% 7.7% 7.3% 8.4% 10.1% 8.9% 7.8% 7.1% 6.5% 5.9%

Depreciation 6.6% 6.1% 6.1% 5.8% 5.8% 6.1% 6.2% 8.2% 8.3% 6.4% 6.0% 5.5% 5.3% 5.4% 6.2% 6.5% 6.4% 6.3% 6.0% 5.8%

R&D 5.5% 5.7% 5.5% 5.2% 4.5% 4.4% 4.3% 5.2% 4.9% 4.9% 5.3% 5.3% 5.1% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Profitability Ratios

Return on Assets 5.4% 6.8% 6.7% 6.6% 7.0% 6.7% 8.7% -0.2% 4.7% 6.9% 6.0% 6.9% 7.1% 6.0% 6.6% 6.9% 7.5% 8.1% 8.9% 9.7%

Return on Invested Capital 6.1% 6.5% 8.7% 8.9% 9.3% 8.9% 11.9% -1.9% 7.4% 10.6% 8.9% 11.5% 11.1% 8.6% 10.0% 10.3% 11.2% 12.2% 13.5% 15.1%

Return on Equity 6.0% 11.2% 7.4% 8.8% 9.9% 9.3% 12.0% -3.6% 2.6% 10.4% 7.9% 9.8% 9.7% 7.2% 8.4% 8.8% 9.5% 9.8% 10.3% 10.8%

Per Share Information

Basic EPS 91.84 171.98 126.11 159.94 209.15 233.03 322.50 (89.36) 59.00 247.46 197.04 275.05 319.47 273.87 357.76 396.72 453.40 502.99 566.74 641.13

Book Value Per Share 1,546.21 1,612.96 1,771.12 1,928.58 2,361.66 2,662.78 2,725.67 2,202.86 2,328.68 2,440.39 2,573.95 3,038.88 3,542.60 4,108.86 4,355.85 4,631.85 4,946.77 5,293.54 5,686.31 6,125.08

Dividends Per Share - - - - 32 40 60 40 30 50 50 75 95 95 110 120 140 155 175 200

Payout Ratio 0.0% 0.0% 0.0% 0.0% 15.3% 17.2% 18.6% -44.8% 50.8% 20.2% 25.4% 27.3% 29.7% 34.7% 30.7% 30.2% 30.9% 30.8% 30.9% 31.2%


02 October 2015

Aisin Seiki (7259 / 7259 JP) 33

FY3/16 earnings forecasts

No need to be too concerned about AT volume misses

We forecast FY3/16 OP of ¥200bn. The company's forex assumptions are ¥121/$ and

¥136/€. Some market participants appear overly concerned about the conventional AT

volume miss risk due to the currently sluggish Chinese auto market. We, on the other

hand, still expect the company to maintain a high growth rate, even though our forecast

(7.749mn units, +12.7% YoY) is slightly below guidance (7.900mn units, +15.0%).

Shipments to VW and PSA in China will likely miss target, but we think guidance includes

a buffer of around 100,000 units and that in view of higher-than-expected shipments to

Toyota and to other regions such as Europe and the US, great concern about AT volume

misses is unwarranted .

FY3/16 guidance is concentrated in 2H, but 1Q OP reached only ¥33.9bn (−12% YoY) due

to temporary increases in startup costs including capacity expansion at the company's

plant in Tianjin, China, and new conventional AT products and lower shipments due to the

switch to Toyota's new international multi-purpose vehicles (IMV). However, we think

results have slightly beat guidance due to higher sales including those in North America

and the weaker yen. Although expansion expenses at the company's Okazaki East plant

are set to continue from 2Q, we expect earnings to switch to a growth trend due to such

factors as earnings contributions from the Tianjin plant, full-scale shipments for Toyota

IMVs, and growth in production volume for Toyota Japan. Initially there were concerns

about a halt in production due to the Tianjin port explosions but we think the full-year

impact will be slight.

2Q OP: expecting substantial growth to ¥40bn

We expect 2Q OP to be ¥40bn, up 24.8% YoY. We see revisions to full-year guidance

when the company announces 2Q results as unlikely. Conventional AT volume in China, a

cause for concern, is being impacted by VW and PSA production adjustments, making the

outlook also uncertain. However, we think the Tianjin port explosions will have only a

modest impact on Aisin Seiki. In Japan, we expect Toyota production volume to increase

QoQ and also anticipate ongoing startup costs associated with the Okazaki East plant. In

North America, shipments for SUVs such as the RAV4/Hilux are firm, but volumes for the

Camry and other models have weakened. In Asia, we understand shipments for new

model IMVs in southeast Asia have trended slightly below expectations.

Figure 49: Earnings forecasts summary

¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%)

Consolidated

Mar-15 A 2,963,971 5.0 165,752 -3.2 188,026 -0.8 77,318 -14.2 273.9 -14.3

Mar-16 CS E (new) 3,210,000 8.3 200,000 20.7 214,000 13.8 101,000 30.6 357.8 30.6

(prev) 3,226,000 8.8 210,000 26.7 224,000 19.1 107,000 38.4 379.0 38.4

CoE 3,250,000 9.7 200,000 20.7 215,000 14.3 100,000 29.3 353.9 29.2

IBES E 3,215,605 8.5 192,103 15.9 207,917 10.6 97,530 26.1 346.5 26.5

Mar-17 CS E (new) 3,380,000 5.3 222,000 11.0 237,000 10.7 112,000 10.9 396.7 10.9

(prev) 3,412,000 5.8 235,000 11.9 250,000 11.6 119,000 11.2 421.5 11.2

IBES E 3,390,398 5.4 215,448 12.2 232,587 11.9 108,705 11.5 388.8 12.2

Mar-18 CS E (new) 3,580,000 5.9 252,000 13.5 269,000 13.5 128,000 14.3 453.4 14.3

(prev) 3,617,000 6.0 265,000 12.8 282,000 12.8 134,000 12.6 474.6 12.6

IBES E 3,548,662 4.7 238,811 10.8 254,459 9.4 119,970 10.4 429.0 10.4

EPSSales Operating profit Recurring profit Net profit

Source: Company data, I/B/E/S, Credit Suisse estimates

02 October 2015

Aisin Seiki (7259 / 7259 JP) 34

Figure 50: Financial summary

In JPY bn, unless otherwise stated

Profit & Loss 3/15A 3/16E 3/17E 3/18E Key Financials 3/15A 3/16E 3/17E 3/18E

Sales revenue 2,964.0 3,210.0 3,380.0 3,580.0 Growth(%)

COGS 2,547.9 2,743.0 2,880.0 3,037.0 Sales 5.0 8.3 5.3 5.9

SGA 250.3 267.0 278.0 291.0 EBIT -3.2 20.7 11.0 13.5

Other op income(expense) -310.1 -360.0 -387.0 -408.0 Net Income -14.2 30.6 10.9 14.3

EBITDA 326.8 400.0 441.0 482.0 EPS -14.3 30.6 10.9 14.3

Depr. & Amort. 161.0 200.0 219.0 230.0 Margins(%)

Goodwill amort. 0.0 0.0 0.0 0.0 EBITDA 11.0 12.5 13.0 13.5

EBIT 165.8 200.0 222.0 252.0 EBIT 5.6 6.2 6.6 7.0

Net interest income(exp.) 5.0 6.0 5.0 4.0 Pretax profit 6.2 6.7 7.0 7.5

Associates 8.7 9.0 9.0 9.0 Net income 2.6 3.1 3.3 3.6

Net other non-op income(exp.) 8.5 -1.0 1.0 4.0 Valuation(x)

Recurring profit 188.0 214.0 237.0 269.0 EV/Sales 0.5 0.4 0.4 0.4

Extraordinary gain & loss 0.0 0.0 0.0 0.0 EV/EBITDA 4.2 3.3 3.0 2.6

Profit before tax 183.7 214.0 237.0 269.0 EV/EBIT 8.4 6.6 5.9 5.0

Income tax 65.6 67.0 74.0 83.0 PER 15.9 11.6 10.5 9.2

Minorities 40.8 46.0 51.0 58.0 PBR 1.1 1.0 0.9 0.8

Net Income 77.3 101.0 112.0 128.0 ROE analysis(%)

Balance Sheet 3/15A 3/16E 3/17E 3/18E ROE 7.2 8.4 8.8 9.5

Cash & equivalents 273.9 322.0 303.0 308.0 ROIC 6.8 7.9 8.3 9.1

Receivables 429.1 465.0 490.0 519.0 Asset turnover 101.2 101.5 103.2 105.2

Inventories 245.4 266.0 280.0 297.0 Tax burden 35.7 31.3 31.2 30.9

Other current assets 265.0 270.0 284.0 299.0 Financial leverage(x) 2.5 2.6 2.5 2.4

Current assets 1,213.4 1,323.0 1,357.0 1,423.0 Credit ratio(%)

Property, plant & equipments 1,006.3 1,133.0 1,198.0 1,235.0 Net debt/Equity 0.1 0.1 0.1 0.1

Intangibles 24.7 24.0 33.0 52.0 Net debt/EBITDA 0.5 0.4 0.3 0.2

Other non-current assets 685.8 682.0 687.0 692.0 Interest converage ratio(x) 5.3 6.4 6.8 7.5

Non-current assets 1,716.8 1,839.0 1,918.0 1,979.0 Per share data 3/15A 3/16E 3/17E 3/18E

Total assets 2,930.2 3,162.0 3,275.0 3,402.0 No. of shares(millions) 282.3 282.3 282.3 282.3

Payables 381.6 413.0 435.0 461.0 EPS(¥) 273.9 357.8 396.7 453.4

Short term debt 106.9 87.0 84.0 87.0 BPS(¥) 4,108.9 4,355.9 4,631.9 4,946.8

Other current liability 342.7 386.0 390.0 396.0 DPS(¥) 95.0 110.0 120.0 140.0

Total current liability 831.3 886.0 909.0 944.0 Dividend payout ratio(%) 34.7 30.7 30.2 30.9

Long term debt 321.1 388.1 357.0 313.0

Other non-current liability 245.1 256.9 268.0 279.0

Total liabilities 1,397.5 1,531.0 1,534.0 1,536.0

Shareholders equity 1,161.2 1,231.0 1,309.0 1,398.0

Minority interests 369.7 398.0 430.0 466.0

Total shareholder funds 2,930.2 3,162.0 3,275.0 3,402.0

Cashflow 3/15A 3/16E 3/17E 3/18E

EBIT 165.8 200.0 222.0 252.0

Depr & Amortisation 161.0 200.0 219.0 230.0

Chage in working capital -44.8 -26.0 -17.0 -20.0

Other -42.2 -133.0 -70.0 -101.0

Operating cashflow 239.8 241.0 354.0 361.0

Capex -240.5 -325.0 -300.0 -280.0

Disposal of PPE 11.9 0.0 0.0 0.0

Acquisitions & Investments 0.0 0.0 0.0 0.0

Asset sale proceeds 0.0 0.0 0.0 0.0

Other -32.8 -21.0 -21.0 -21.0

Investing cashflow -261.4 -346.0 -321.0 -301.0

Equity raised 0.0 0.0 0.0 0.0

Dividends paid -29.7 -31.0 -34.0 -40.0

Net borrowings 22.7 147.0 -34.0 -31.0

Other -10.8 9.0 9.0 9.0

Financing cashflow -17.7 125.0 -59.0 -62.0

Effect of exchange rates 6.0 7.0 7.0 7.0

Net Change in Cash -33.3 27.0 -19.0 5.0

Free cash flow -21.6 -105.0 33.0 60.0 Source: Company data, Credit Suisse estimates

02 October 2015

Aisin Seiki (7259 / 7259 JP) 35

Valuation Looking undervalued in view of growth potential

Current P/B makes stock look undervalued at −2σ

The recent 12-month forward P/B (0.9x) still remains two standard deviations below the average since 2013, making the current valuations appear quite attractive. Also, 12-month forward P/E is tracking slightly below average valuations since 2013. We also find Aisin Seiki relatively undervalued based on the P/B-ROE correlation in the auto parts sector. While the share price has shown a strong correlation with EPS historically, we still see substantial room for upside if investors begin pricing in longer-term EPS growth prospects. Moreover, growth in value-added stemming from sales growth in conventional ATs and better prospects for margin improvement should lead to higher valuations. We expect valuations to rise even further once greater efficiency from the Toyota group reorganization and prospective synergy effects are priced in.

Figure 51: Looking undervalued with current P/B at -2σ Figure 52: P/E below historical average

0.8

0.9

1.0

1.1

1.2

1.3

1.4

12MF PBR μ -2σ +2σ

8

9

10

11

12

13

14

15

16

12MF PER μ -2σ +2σ

Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse

Figure 53: Aisin Seiki is also looking relatively

undervalued in terms of P/B–ROE correlation

0.0

0.5

1.0

1.5

2.0

2.5

0% 5% 10% 15% 20% 25%

PBR

ROE

Source: Company data, Thomson Reuters, Credit Suisse estimates

02 October 2015

Aisin Seiki (7259 / 7259 JP) 36

Figure 54: Substantial upside potential if share price reflects longer term EPS growth

potential

(200)

(100)

0

100

200

300

400

500

600

700

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Share Price (LHS) EPS (RHS)

Yen Yen

Source: Company data, Thomson Reuters, Credit Suisse estimates

Valuation: Updating our base year to FY3/17

Our target price is ¥5,600 (potential return 34.8%), which we base on a target P/B of 1.2x

applied to FY3/17E BPS of ¥4,632. The 1.2x target P/B references a theoretical P/E of

13.6x (cost of equity 6.1%, discount 16.4%), and FY3/17E ROE of 8.8%. We estimate

shareholders' cost of capital based on an ERP of 5.75%, RFR of 0.4%, and beta of 1.0.

Our previous P/B of 1.42x was based on a theoretical P/E of 15.9x (cost of equity 6.3%,

ERP 5.75%, RFR 0.40%, and premium 0.3%) and FY3/16 ROE of 8.9%.

Potential return indicated by HOLT analysis is 80%

Potential return indicated by our HOLT analysis is high at 80%. This analysis also

suggests that the stock is currently undervalued.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 37

Figure 55: Credit Suisse HOLT analysis

Source: Company data, HOLT, Credit Suisse estimates

02 October 2015

Aisin Seiki (7259 / 7259 JP) 38

Companies Mentioned (Price as of 01-Oct-2015)

ADVICS (Unlisted) Aisin AI (Unlisted) Aisin AW (Unlisted) Aisin Chemical (Unlisted) Aisin Europe (Unlisted) Aisin Holdings of America (Unlisted) Aisin Keikinzoku (Unlisted) Aisin Kiko (Unlisted) Aisin Seiki (7259.T, ¥4,155, OUTPERFORM, TP ¥5,600) Aisin Sinei (Unlisted) Aisin Takaoka (Unlisted) Akebono Brake (7238.T, ¥388) BMW (BMWG.DE, €78.33) BorgWarner, Inc. (BWA.N, $41.73) CVTEC (Unlisted) Chongqing Changan Automobile (Unlisted) Denso (6902.T, ¥5,195) Dongfeng Motor Group Company Limited (0489.HK, HK$9.65) Exedy (7278.T, ¥2,673) Ford Motor Company (F.N, $13.67) General Motors Corp. (GM.N, $30.67) Getrag (Unlisted) Hosei Brake Industry (Unlisted) Hyundai Powertech (Unlisted) Jatco (Unlisted) Nissan Motor (7201.T, ¥1,150) Shiroki (7243.T, ¥303) Sumitomo Electric Industries (5802.T, ¥1,558) Toyota Boshoku (3116.T, ¥2,231) Toyota Motor (7203.T, ¥7,151) Volkswagen (VOWG_p.DE, €96.5) Volvo (VOLVY.PK, $11.685) ZF (Unlisted) psa peugeot citroen (Unlisted) For other companies mentioned, please refer to Figure 7

Disclosure Appendix

Important Global Disclosures

Masahiro Akita and Koji Takahashi, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her 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 Aisin Seiki (7259.T)

7259.T Closing Price Target Price

Date (¥) (¥) Rating

05-Oct-12 2,224 3,050 O

20-Nov-12 2,241 3,100

15-Jan-13 2,826 3,350

25-Feb-13 3,310 3,700

05-Apr-13 3,545 4,000

30-May-13 3,755 4,500

20-Aug-13 3,865 4,850

17-Jan-14 4,125 5,100

05-Jun-14 3,755 4,800

17-Sep-14 3,910 4,650

26-Nov-14 4,130 5,050

23-Mar-15 4,535 5,150

07-Jul-15 5,130 6,200

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

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.

02 October 2015

Aisin Seiki (7259 / 7259 JP) 39

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 representing 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 representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investmen t 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 12-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.

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.

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* 56% (32% banking clients)

Neutral/Hold* 29% (38% banking clients)

Underperform/Sell* 13% (31% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d 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 hold ings, and other individual factors.

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Price Target: (12 months) for Aisin Seiki (7259.T)

Method: We derive our ¥5,600 target price for Aisin Seiki from a P/B of 1.2x applied to our end-FY3/17 BPS forecast of ¥4,632. The benchmark P/B 1.2x is based on a fair value P/E of 13.6x (cost of shareholders' equity 6.1% : Beta 1, ERP 5.75%, RFR 0.40%, Discount 16.4%) and our FY3/17 ROE forecast of 8.8%. Discount 16.4% is based on the shares' relative P/E vs. the average for auto parts companies in our coverage over the past two years.

Risk: Risks to our ¥5,600 target price for Aisin Seiki include: higher costs due to AT capacity expansion and a lower-than-expected Toyota output in emerging markets including in Asia in the near-term.

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

See the Companies Mentioned section for full company names

02 October 2015

Aisin Seiki (7259 / 7259 JP) 40

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (7259.T) within the next 3 months.

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Credit Suisse Securities (Japan) Limited ................................................................................................................ Masahiro Akita ; Koji Takahashi

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02 October 2015

Aisin Seiki (7259 / 7259 JP) 41

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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.

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