The US automotive product pipeline - News1 US automotive product pipeline 16 May 2012 . 3. Executive...

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The US automotive product pipeline

Car Wars 2013-2016

In-depth study of the US automotive product pipeline Car Wars is an annual proprietary study that assesses the relative strength of each automaker’s product pipeline in the US. The purpose is to quantify industry product trends and then relate our findings to investment decisions.

Car Wars thesis and investment relevance We believe that the replacement rate drives showroom age, which drives market share, which in turn drives profits and stock prices. OEMs with the highest replacement rate and youngest relative showroom age have generally gained market share from 2002-2012 (Table 1). We expect this relationship to hold over our forecast period of model years 2013-16 (Charts 1 & 2). We also expect that the total industry’s profit momentum will be strong as more new models are launched in the next four model years (Chart 3).

Ten key findings of our study:

1. Product replacement rate and showroom age drive market share shifts.

2. Product activity should accelerate in model years 2013-2016 following a lull from 2009-2012 supporting a recovery in total industry volume and profits.

3. Product intros are slightly overweight CUVs, Luxury Cars, and Light Trucks, which combined may drive a positive mix shift in MY2014-MY2016e.

4. Convergence of product cycles appears to be intensifying as the Detroit Three increase focus on product and improve relative competitiveness.

5. GM product launches for MY2013-2016 should at least stabilize market sharelong-term, but share in CY2012 is at risk as Japanese competitors recover.

6. Ford’s product cadence is solid, which should support market share in the long term. However, as management increasingly focuses on maximizing profit, market share may be traded for higher prices/profits.

7. Chrysler’s product cadence appears adequate to tread water in a competitive market for now. However, the launch of the new Ram pickup in MY2017 should be helpful in the years beyond the window of our analysis.

8. Japanese Big Three OEM product cycles are generally converging around the industry average, indicating large share gains are over. However, in the near-term a rebound from 2011’s disaster-depressed market share is likely.

9. Korean OEM product cadence appears to remain volatile, indicating market share gains should slow. However, the vehicles represent an attractive value proposition to consumers.

10. The success of suppliers and dealers should be correlated to exposure to OEMs with high replacement rates and low average showroom ages.

Industry Overview

Equity | United States | Autos/Car Manufacturers & Auto Parts 16 May 2012

John Murphy, CFA +1 646 855 2025 Research Analyst MLPF&S [email protected]

See Team Page for Full List of Contributors

Table 1: Replacement Rate, Showroom Age, Market Share (2002-2012)

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US Market Share Δ[1]

GM 13% 0.4 -8.7% Chrysler 13% (0.2) 0.0% Ford 14% 1.3 -5.1% European 15% (0.1) 2.7% Industry Avg. 16% 0.0 0.0% Nissan 17% (0.6) 8.3% Honda 19% (0.8) -2.6% Toyota 19% (0.6) 2.7% Korean 20% (1.0) 5.6% Source: BofA Merrill Lynch Global Research [1] Market Share is based on Calendar Years 2001-2011

Chart 1: Product Replacement Rate 2013e-2016e[1] [2]

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Source: BofA Merrill Lynch Global Research [1] Cumulative replacement rate for MY2013-2016 [2] It should be noted that forward replacement rates are somewhat inflated due to the low denominator of 2011 sales of 12.7mm

Chart 2: Average Showroom Age 2013e-2016e 3.6

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Source: BofA Merrill Lynch Global Research

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Text Box

This report is an extract of a report of the same name published on 16 May 2012.

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The US au tomot ive p roduc t p ipe l ine 16 May 2012

Contents Executive summary 3

Car Wars background 5

Industry & manufacturer trends 9

Company analysis 15

Implications for suppliers & dealers 31

Appendix 35

Team page 46


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Executive summary Car Wars is a proprietary study we conduct every year to assess the relative strength of each automaker’s product pipeline in the US. The study is based on numerous primary and secondary sources, including industry contacts, auto show visits, trade publications, enthusiast magazines, supply chain relationships, and our general knowledge of platform strategies, and product cycle planning.

The purpose is to quantify industry product trends and then relate our findings to investment decisions.

The key metrics that we use are the replacement rate (the estimated percentage of an OEM’s sales volume to be replaced with new models or next generation models), average showroom age (the number of years on the market for the average design in an OEM’s showroom), and new model volume mix (the mix of new models by segment during the forecast period for each OEM).

Car Wars thesis We believe that the replacement rate drives showroom age, which drives market share, which in turn drives profits and ultimately stock prices. Table 2 shows the average annual replacement rate, relative showroom age, and market share change of the largest OEMs between MY02 and MY12. Table 2: Historical Replacement Rate, Showroom Age, Market Share (2002-2012) Avg. Replacement Rate Avg. Showroom Age O/(U) US Market Share Δ[1] GM 13% 0.4 -8.7% Chrysler 13% (0.2) 0.0% Ford 14% 1.3 -5.1% European 15% (0.1) 2.7% Industry Avg. 16% 0.0 0.0% Nissan 17% (0.6) 8.3% Honda 19% (0.8) -2.6% Toyota 19% (0.6) 2.7% Korean 20% (1.0) 5.6% Source: BofA Merrill Lynch Global Research [1] Volume weighted average annual replacement rate [2] Market Share change is based on calendar years 2001-2011

Although other factors, including mix, pricing, execution, distribution, brand power, and restructuring impact market share, we think this data strongly supports our thesis that successful new products drive higher market share and profit. Table 3 summarizes our forecasts of these key metrics for MY13 to MY16 and subsequent estimates of market share shifts. Based on our estimates, it appears that the large market share shifts that occurred in the last decade are unlikely to continue with the possible exception of unforeseen disruptions at particular automakers, like last year’s natural disasters in Japan.

Table 3: Forecast Replacement Rate (MY13-MY16e), Showroom Age (MY13-MY16e), and Market Share Change (CY15 vs. CY12 YTD) Replacement Rate [1] Avg. Showroom Age O/(U) 2011 Mkt. Share 2012 YTD Mkt. Share US Market Share Δ[2] 2015e Mkt. Share Ford 26% (0.1) 16.6% 15.3% 0.8% 16.0% GM 25% 0.4 19.7% 17.7% 0.5% 18.2% Toyota 24% (0.3) 12.9% 14.3% 0.3% 14.6% Nissan 23% (0.6) 8.2% 8.5% 0.0% 8.5% Industry Avg. 23% 0.0 nm nm nm nm Honda 20% (0.5) 9.0% 9.5% 0.0% 9.5% Chrysler 20% 1.0 10.7% 11.6% 0.0% 11.6% European 18% 0.0 9.2% 9.0% 0.0% 9.0% Korean 18% (0.3) 8.9% 8.9% -0.5% 8.4% Source: BofA Merrill Lynch Global Research [1] Volume weighted average annual replacement rate, [2] Market Share forecast is for calendar years 2012 YTD to 2015

The purpose of our Car Wars study is to quantify industry product trends and relate our findings to investment decisions. Replacement rate and relative showroom age are two of the main drivers of market share gains or losses (Table 2 & 3), and ultimately profit.


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Ten key conclusions Our measures of replacement rate and showroom age are the major driver of market share gains and losses. Historically, Detroit has replaced its line-up every seven to eight years while the competition has done so about every four to five years – we believe this is one of the main reasons that Ford, GM, and Chrysler lost share in the past.

Product activity slowed, but should re-accelerate in MY13-MY16. This should help drive a more robust recovery in US auto demand and industry wide profits.

New vehicle introductions are slightly overweight the CUV, Luxury Car, and Light Truck segments. Combined this may drive a positive mix shift in MY2014-MY2016e and better profits for the industry.

Convergence of product cycles appears to be intensifying as the Detroit Three increase focus on product and improve relative competitiveness. Historically there was tremendous discrepancy between the product cycles of US automakers versus foreign competitors, but this gap has been largely closed. In the upcoming model years it appears that most OEMs should have average showroom ages within the 2-3 year range with only slight outliers on either end.

GM product launches for MY2013-2016 should at least stabilize market share long term, but CY2012 is at risk as Japanese competitors recover. GM product launches in model years 2013 to 2016 ramp significantly as it hits the sweet spot in its product cycle. This should drive market share gains of about 50bps over April 2012 YTD levels of 17.7% into the low 18% range.

Ford should regain some of its recent lost market share and settle in the 16% range. We believe this will be driven by the relative strength of its product launches, which are increasingly leveraging Ford’s global platforms. However, as management remains focused on maximizing profit, market share may be traded for higher prices/profits.

Chrysler’s launch of Fiat-based vehicles should result in a stabilization of market share in the mid 11% range. It should be noted that Chrysler is at one of the toughest points of its product cycle because the all important Ram pickup does not launch as a new model until MY2017e.

Japanese OEM product cycles are generally hovering around the industry average. Notably Honda has a very strong cadence through MY2015 beginning with the Accord, but this slows materially by MY2016. This is a similar pattern for the Japanese OEMs as a group.

Korean OEM products remain very competitive, but recent market share gains are slowing and may even reverse. This is largely due to a replacement rate of 18%, which is the lowest of the major automakers.

The success of suppliers and dealers should be correlated to exposure to OEMs with high replacement rates and low average showroom ages. .

1. Replacement rate and showroom age drive market share gains and losses.

2. Product activity should accelerate in model years 2013-2016 following a lull from 2009-2012e

3. Product intros are slightly overweight CUVs, Luxury Cars, and Light Trucks.

4. Convergence of product cycles appears to be intensifying as the Detroit Three increase focus on product and improve relative competitiveness.

5. GM product launches for MY2013-2016 should at least stabilize market share long-term, but share in CY2012 is at risk as Japanese competitors recover.

6. Ford should regain some of its recent lost market share and settle in the 16% range.

7. Chrysler’s product cadence appears to be improving and should help stabilize market share in the mid 11% range.

8. Japanese OEM product cycles are generally hovering around the industry average.

9. Korean OEM product cadence appears volatile, indicating market share gains should slow or reverse.

10. The success of suppliers and dealers should be correlated to exposure to OEMs with high replacement rates and low average showroom ages.


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Car Wars background The purpose of Car Wars 7

An independent view 7

Car Wars thesis 8


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The purpose of Car Wars Background and purpose Car Wars is a proprietary study we conduct every year to assess the relative strength of each automaker’s product pipeline in the US. The study is based on numerous primary and secondary sources, including industry contacts, auto show visits, trade publications, enthusiast magazines, supply chain relationships, and our general knowledge of platform strategies, and product cycle planning.

The purpose is to quantify industry product trends and then relate findings to investment decisions.

Key metrics The key metrics that we use include the following:

Replacement rate: One of the simplest and most important ways to measure the strength of an automaker’s product plan: the estimated percentage of its sales volume to be replaced with entirely new models or next generations of existing models.

Average showroom age: The number of years on the market for the average model in an OEM’s showroom (measured on a stand-alone basis and relative to the industry).

New model volume mix: The mix of new models by segment during the forecast period for each OEM.

Our process of data collection is continuous, and we have developed a comprehensive database of US product activity going back to 1987 – through two cycle peaks and now two troughs. Once a year, we summarize our findings in a report and on a color poster. This year’s study forecasts activity for the 2013-2016 model years.

An independent view Relative performance is what counts Car Wars represents our independent view of automakers’ competitiveness, so it doesn’t necessarily agree with the views of the car companies. It is likely we are missing information on all OEMs. Therefore, despite differences of opinion on any one OEM’s pipeline forecast, we believe that we have an accurate view of its relative position in the market, and that’s what we believe matters when forecasting market share.

“All-new” versus “new and improved” Readers may find that our data might differ from the announcements OEMs make occasionally about the number of products they plan to launch. This is because our definition of what a new product may differ from that of automakers. (New product definitions even vary from company to company.) In Car Wars, we include only products we judge to be all-new or next-generation vehicles – what the industry typically calls a “major.” We don’t include mid-cycle enhancements where only modest changes are made to the vehicle. Furthermore, we forecast volume based on what we think the average annual volume will be for the product over its entire model life. We do not use company sales targets or peak volumes, which could distort results.

Purpose of report: quantify industry product trends, market share shifts and then relate conclusions to investment decisions.

Replacement rate, average showroom age and new model volume mix are the key metrics we calculate to analyze the OEMs’ product pipeline.


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Car Wars thesis Our thesis is that an OEM’s product replacement rate drives showroom age, which drives market share, which in turn drives profits and stock prices. Table 4 shows the average annual replacement rate, relative showroom age, and market share change of the largest OEMs between MY2002 and 2012. The table shows how the OEMs with the highest replacement rate and youngest showroom age relative to the industry have generally gained market share. Although other factors, including mix, pricing, execution, distribution, brand power, restructuring, and unforeseen disruptions impact market share, we think this data strongly supports our thesis that successful new products drive higher market shares.

Table 4: Historical Replacement Rate, Showroom Age, Market Share (2002-2012)

Avg. Volume

Replacement Rate [1] Avg. Showroom Age O/(U)

Industry Avg. US Market Share Δ[2]

GM 13% 0.4 -8.7% Chrysler 13% (0.2) 0.0% Ford 14% 1.3 -5.1% European 15% (0.1) 2.7% Industry Avg. 16% 0.0 0.0% Nissan 17% (0.6) 8.3% Honda 19% (0.8) -2.6% Toyota 19% (0.6) 2.7% Korean 20% (1.0) 5.6% Source: BofA Merrill Lynch Global Research [1] Volume weighted average annual replacement rate [2] Market Share change is based on calendar Years 2001-2011

Based on the relative strength of this historical relationship, and taking mix and strategy into account, we have forecasted market share shifts for the major automakers in the US market relative to YTD 2012 levels, which is summarized in Table 5. It should be noted that we believe that YTD 2012 levels are closer to current “normal” market shares given the distortion/depression of Toyota and Honda’s 2011 market shares due to the natural disasters. We will discuss the implications of these shifts in the following sections. Based on our estimates, it appears that the large market share shifts that occurred in the last decade are unlikely to continue.

Table 5: Forecast Replacement Rate (MY13-MY16e), Showroom Age (MY13-MY16e), and Market Share Change (CY15 vs. CY12 YTD) Replacement Rate [1] Avg. Showroom Age O/(U) 2011 Mkt. Share 2012 YTD Mkt. Share US Market Share Δ[2] 2015e Mkt. Share Ford 26% (0.1) 16.6% 15.3% 0.8% 16.0% GM 25% 0.4 19.7% 17.7% 0.5% 18.2% Toyota 24% (0.3) 12.9% 14.3% 0.3% 14.6% Nissan 23% (0.6) 8.2% 8.5% 0.0% 8.5% Industry Avg. 23% 0.0 nm nm nm nm Honda 20% (0.5) 9.0% 9.5% 0.0% 9.5% Chrysler 20% 1.0 10.7% 11.6% 0.0% 11.6% European 18% 0.0 9.2% 9.0% 0.0% 9.0% Korean 18% (0.3) 8.9% 8.9% -0.5% 8.4% Source: BofA Merrill Lynch Global Research [1] Volume weighted average annual replacement rate, [2] Market Share forecast is for calendar years 2012 YTD to 2015

Replacement rate ▼

Showroom age ▼

Market share ▼

Profitability ▼

Share price


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Industry & manufacturer trends Industry trends

New model launches 11

Replacement rate 12

Average showroom age 12

New models by segment 13

Manufacturer trends

Average showroom age 14

Cumulative replacement rates 14


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Industry trends This section details product trends for the US auto market. The size, homogeneity, relatively rich mix, and ultimately the profitability of the US market continue to attract new investments. The accelerating boom of new model launches in the mid-2000s took a breather from model years 2009-2012, but will likely accelerate somewhat in MY2013e and materially for MY2014e-2016e as the pressure from the extreme downturn in ‘09 continues to fade and recovery ramps.

New model launch activity accelerates after a lull As shown in Chart 3, we expect OEMs to launch 176 new models during our forecast period (MY2013-2016), or an average of 44 per year. This rate is about 19% above the average number of models launched per year between 1990 and 2012, underscoring that competition in the industry is heating up once again.

Chart 3: New model launches 2013e-2016e

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There are many factors contributing to the acceleration in product, including OEMs’ rush to enter new vehicles segments (CUVs, hybrids, ultra-luxury, youth, etc.), an aggressive push by some OEMs to expand product line-ups (for example, Chrysler and GM after emerging from bankruptcy), as well as the relative richness and size of the US vehicle market. This is helping drive an industry product pipeline that is slightly overweight the CUV, Luxury Car, and Light Truck segments, which combined may drive a slight positive mix shift in MY2014-MY2016e (Chart 4) following what might be a weak year in MY2013.

Chart 4: 2013e-2016e new vehicle launch mix vs. 2003-2012

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New model launches hit a relative lull from MY09- MY12, but will likely accelerate somewhat in MY2013e and materially for MY2014e-2016e as the pressure from the extreme downturn in 2009 continues to fade and recovery ramps.

The US au tomot ive produc t p ipe l ine 16 May 2012

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Replacement rate could ramp up in MY2013-2016 The replacement rate mirrors the trend in new model launches to a large degree. On average, between 1992 and 2012 the industry replaced about 16% of its volume each year with new models. At this rate, the industry turns over its entire model line about every 6.3 years. Over the next four years, we expect the annual replacement rate will trend higher at close to 23%, significantly higher than the historical average level. New volume mix is moving towards CUVs, trucks, and luxury cars representing about 69% of new volume launched from MY13 to MY16, which becomes more pronounced in after MY13.

In our opinion, the continued strong pace of product activity can be linked to the competitive industry environment. As with all industries, auto companies can compete through cost leadership, superior product, or product differentiation. For most OEMs, the first strategy has been unachievable, and with the reorganized and restructured Detroit Three it is even tougher to differentiate on cost. On the second strategy, there has been extreme convergence in quality as all automakers have improved to a relatively common level. That leaves almost all trying to compete by differentiating their product. This has resulted in the strengthening pace of new model introductions. As automakers emerge from the trough in the cycle, more are aiming to spur demand by launching fresh product rather than discounting stale models at the expense of margins.

Chart 5: Replacement rate*

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Source: BofA Merrill Lynch Global Research *It should be noted that forward replacement rates are inflated slightly due to the relatively low denominator of 2011 sales of 12.7mm

Average showroom age remains low across the board The age of vehicles on sale in showrooms across the US (Chart 6 on the following page) has been on a steady decline since the early 1990s, as automakers replace their products more frequently. We attribute this trend to intensifying competition – in part from new entrants – and product line expansion by car companies that have introduced numerous new nameplates. We expect that the industry’s average showroom age will trend lower, averaging about 2.6 years for MY13–MY16, a noticeable tick down from an average age of 3.1 years for the last decade.

The industry replacement rate over the forecast period should remain well above the 16% historical average. However, it should be noted that forward replacement rates are somewhat inflated due to the relatively low denominator of 2011 sales of 12.7mm.


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Chart 6: Average showroom age [1]

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Intensified competition and the resulting new products are, of course, beneficial for consumers, who will enjoy the choice of new cars and trucks. All of this new product, however, comes at a high cost to the OEMs, which will need to increasingly leverage global platforms and simplify product offerings to remain efficient and competitive. Although industry-wide pricing has been challenged in the past, a relative level of pricing power has emerged and the surge in new product should be supportive. New model segment shift toward CUVs, Trucks and Luxury Charts 7 & 8 show the US market’s evolving market shift, based on the number of new models and volume, from traditional Small, Midsize, and Large cars to Light Trucks, Luxury Cars, and Crossovers. Since the MY1997 launch of the Toyota RAV4 and the Honda CRV, Crossovers have been the fastest growing vehicle segment, which should continue into the upcoming model years. 61 of the 176 new models we forecast for 2013-2016, or 34%, will be Crossovers. The Detroit Three are making a big push with our estimate of 7 new Crossovers from Ford, 8 from GM, and 7 from Chrysler in the next four model years. Chart 7: New models by segment, simple vehicle count not volume weighted

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In addition to the continuation of the Crossover boom, Light Truck launches are picking up, accounting for 33 launches, or about 19%, over the next four years. The Luxury & Sporty Car category is also picking up some steam with 45 new vehicle launches from MY2013-2016, perhaps in preparation for economic improvement.

Competitive pressure, new entrants, brand eliminations, and an increasing use of common global platforms will continue to drive down product cycle times.

Although industry-wide pricing has been challenged in the past, a relative level of pricing power has emerged and the surge in new product should be supportive.

New model emphasis is on Crossovers, Light Trucks, Luxury & Sporty Cars accounting for 139 launches over the next four years, or about 78% of total launches.

Chart 8: ‘13e-‘16e launch mix vs. ‘03-’12 by volume

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Manufacturer trends Average showroom age converging to 2.6 years Average showroom age is one way to quantify how intensely competitive the US market has become in the last two decades (see Chart 9). Since at least the late 1980s there has been a significant convergence in average showroom age. At the end of the next four model years we expect an increasing convergence in average showroom age to around 2.6 years with only slight outliers on either end of the spectrum (Chrysler at 3.6 years and Honda at 2.2 years).

Chart 9: Average showroom age by OEM

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Cumulative replacement rates appear to drive market share Comparing cumulative replacement rates is one of the simplest and most effective ways in which we measure the strength of product plan. The replacement rate is the estimated percentage of sales volume to be replaced with entirely new models or next-generation existing models during the period.

Over the next four years, we estimate the industry will replace 90% of its volume based on 2011 industry volumes. We estimate that a relatively low level of disparity in replacement rates will result in smaller market share shifts in the future. This differs greatly from the last few decades where large shifts were the norm.

Chart 10: Cumulative replacement rates, % of 2011 CY volume replaced in MY 2013e-2016e

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At the end of the next four model years we expect an increasing convergence in average showroom age to around 2.6 years.

We estimate that a relatively low level of disparity in replacement rates will result in smaller market share shifts in the future. This differs greatly from the last few decades where large shifts were the norm.


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Company analysis General Motors Corp 17

Ford Motor Co 19

Chrysler 21

Japanese OEMs 23

European OEMs 26

Korean OEMs 28


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General Motors Corporation Conclusion: GM product launches in model years 2013 to 2016 ramp up significantly as it hits the sweet spot in its product cycle. This should support market share gains of about 50bps over GM’s YTD market share through April 2012 of 17.7% into the low 18% range.

Chart 11: GM replacement rate vs. industry

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Chart 12: New model volume mix

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Chart 13: Average showroom age (years)

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Av erage Show room Age (Years)


GM’s replacement rate averages 25% over the next four years, which is above the industry average of 23%. This is also well above the company’s historical average due to an increasing utilization of global platforms for cars and CUVs as well as the all important launch of the next generation pickup and large SUV platform in MY2014-2015.

GM’s mix is skewed toward Light Trucks due to the launch of the next generation pickup and large SUV platform in MY2014-2015.

Relative showroom age should improve dramatically, driven by an acceleration in GM’s product cycles after streamlining the brand portfolio. In addition, GM is hitting the sweet spot in its product cycle in MY2013-2016 with the launch of its large trucks (K2XX), large CUVs (L2XX), Small CUVs (D2XX) and high volume Malibu and Impala.


18

Table 6: General Motors US product pipeline 2013e-2016e 2013e 2014e 2015e 2016e Buick Encore - Small Lux CUV Chevrolet Silverado/HD - Large Pickup Chevrolet Equinox - Small CUV Cadillac SRX - Small Lux CUV Cadillac ATS - Sedan & Coupe GMC Sierra/HD - Large Pickup GMC Terrain - Small CUV GMC Acadia - Mid CUV Cadillac XTS - Sedan Chevrolet Tahoe - Large SUV Chevrolet Colorado - Small Pickup Buick Enclave - Mid Lux CUV Chevrolet Malibu - Sedan Chevrolet Suburban - Large SUV GMC Canyon - Small Pickup Cadillac Escalade Light - Mid Lux CUV Chevrolet Spark - Hatchback GMC Yukon - Large SUV Cadillac Escalade - Large SUV Chevrolet Traverse - Mid CUV GMC Yukon XL - Large SUV Cadillac Escalade ESV - Large SUV Buick Verano - Sedan Cadillac CTS - Sedan, Coupe & Wagon Chevrolet Camaro - Coupe & Convertible Chevrolet Corvette - Coupe & Convertible Buick LaCrosse - Sedan Chevrolet Impala - Sedan % of volume replaced : 16% % of volume replaced : 52% % of volume replaced : 13% % of volume replaced : 20% Source: BofA Merrill Lynch Global Research

Chart 14: 2013 Chevrolet Spark

Source: General Motors

Chart 15: 2013 Buick Encore


Chart 16: 2014 Chevrolet Silverado

Source: Car and Driver

Chart 17: 2013 Cadillac ATS



19

Ford Motor Company Conclusion: Ford should regain some of its recent lost market share with its share ultimately settling in the 16%+ range. We believe this will be driven by the relative strength of its product launches, which are increasingly leveraging Ford’s global platforms. However, as management remains focused on maximizing profit, market share may be traded for higher prices/profits.

Chart 18: Replacement rate

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Ford’s estimated replacement rate for MY 2013 to 2016 is 26%, above the industry average of 23%, which should support market share recovery to the 16%+ range.

Ford product launches are overweight light trucks and CUVs. This is due to the likely launch of the new F-150 in MY2015. In the CUV segment we are forecasting the launches of the Escape, C-Max, Lincoln MKD, Ford Edge, Lincoln MKX, Explorer, and Lincoln Aviator.

Ford’s average showroom age should drop dramatically as it simplifies its product cycle and leverages global platforms.


20

Table 7: Ford US product pipeline 2013e-2016e 2013e 2014e 2015e 2016e Ford C-Max - Small CUV Lincoln MKD - Small Lux CUV Ford Edge - Mid CUV Ford Explorer - Large CUV Ford Escape - Mid CUV Ford Transit - Large Van Lincoln MKX - Mid Lux CUV Lincoln Aviator - Large Lux CUV Lincoln MKZ - Sedan Ford Transit Connect - Small Van Ford F-Series - Large Pickup Lincoln MKS - Sedan Ford Fusion - Sedan Lincoln MKC - Sedan Ford Mustang - Coupe & Convertible Ford Taurus - Sedan Ford Fiesta - Sedan & Hatchback % of volume replaced : 30% % of volume replaced : 9% % of volume replaced : 46% % of volume replaced : 20% Source: BofA Merrill Lynch Global Research

Chart 21: 2013 Ford Escape

Source: Ford Motor Co

Chart 22: 2013 Ford Fusion


Chart 23: 2013 Lincoln MKZ


Chart 24: 2014 Ford Transit (2012 UK version shown)



21

Chrysler Conclusion: Chrysler’s launch of Fiat-based vehicles should result in a stabilization of market share in the mid 11% range. It should be noted that Chrysler is at one of the toughest points of its product cycle because the all important Ram pickup does not launch as a new model until MY2017e.


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Chrysler’s average replacement rate of 20% over the next four model years is below the industry average of 23%. The launch of numerous Fiat-based vehicles and recent improvement in perception may help Chrysler stabilize its market share in the 11% range.

Chrysler’s mix is skewed towards CUVs, with the intro of a number of Fiat-based vehicles, and Trucks due to the likely launch of minivans in MY 2016.

Chrysler’s average showroom age appears likely to rise and then decline as aging models are offset by new launches late in the forecast period. It should be noted that this would likely improve meaningfully if the Ram pickup MY2017 were included, but it is just outside of our forecast window.


22

Table 8: Chrysler US product pipeline 2013e-2016e 2013e 2014e 2015e 2016e Ram C/V - Small Van Jeep Compass - Small CUV Jeep Liberty - Mid CUV Dodge Journey - Large CUV Dodge SRT Viper - Coupe & Convertible Chrysler Pacifica - Mid CUV Dodge Nitro - Mid SUV Chrysler Town & Country - Minivan Dodge Dart - Compact Sedan Jeep Grand Wagoneer - Large CUV Alfa Romeo Giulietta - Lux CUV Dodge Caravan - Minivan Maserati Kubang - Lux CUV Ram Dakota - Small Pickup Ram Ducato - Large Van Alfa Romeo Giulia - Sport Lux Sedan Chrysler 200 - Sedan, Coupe & Convertible Dodge Avenger - Sedan Chrysler Horizon - Hatchback % of volume replaced : 10% % of volume replaced : 35% % of volume replaced : 8% % of volume replaced : 28% Source: BofA Merrill Lynch Global Research

Chart 28: 2013 Dodge Dart

Source: Chrysler Group LLC

Chart 29: 2014 Chrysler Horizon (Fiat Lancia Delta concept shown)


Chart 30: 2013 Dodge SRT Viper


Chart 31: 2014 Maserati Kubang



23

Japanese OEMs Conclusion: Japanese OEM product cycles are generally hovering around the industry average. Notably Honda has a very strong cadence through MY2015 beginning with the Accord, but this slows materially in MY2016. This is a similar pattern for the Japanese OEMs as a group. Chart 32: Replacement rate

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Total JapaneseTotal Japanese 93-12 Av g.Industry

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The lead is shrinking - Japanese OEMs have a solid lineup of products launching over the next four years. However, the average replacement rate of 22% is just below the industry average. This is largely a function of the market becoming more competitive and the smaller manufacturers fading.

Model introduction mix is skewed toward mid/large cars with the launch of the Toyota Avalon, Toyota Prius, Honda Accord, Nissan Altima and Nissan Maxima, which are high-volume models. There is also a notable skew towards Small Cars. Historically the Japanese brands are light on trucks, which we do not believe will change.

Showroom age remains below average through MY16, but the lead has been narrowing since at least the late 1980s. This is a function of increased competition, but also a function of Toyota, Honda, and Nissan’s broader product lineup.


24

Table 9: Toyota OEM product pipeline 2013e-2016e 2013e 2014e 2015e 2016e Toyota RAV4 - Small CUV Toyota Highlander - Mid CUV Lexus CX - Small Lux CUV Toyota FJ Cruiser - Midsize SUV Lexus ES - Sedan Lexus RX - Mid Lux CUV Toyota Venza - Small CUV/Wagon Toyota Sequoia - Large SUV Lexus GS - Sedan Toyota Tundra - Large Pickup Toyota Tacoma - Small Pickup Toyota Sienna - Minivan Scion FR-S - Coupe Lexus IS - Coupe, Sedan & Convertible Lexus LS - Sedan Toyota Avalon - Sedan Toyota Corolla - Sedan Toyota Prius - Hatchback % of volume replaced : 19% % of volume replaced : 40% % of volume replaced : 24% % of volume replaced : 11% Source: BofA Merrill Lynch Global Research

Table 10: Honda OEM product pipeline 2013e-2016e 2013e 2014e 2015e 2016e Acura RDX - Small Lux CUV Acura MDX - Mid Lux CUV Honda Stream - Small CUV Honda Crosstour - Mid CUV Acura ILX - Sedan Honda Ridgeline - Small Pickup Honda Pilot - Mid CUV Honda Insight - Hatchback Honda Accord - Coupe & Sedan Acura TL - Sedan Acura NSX - Coupe Acura TSX - Sedan Honda Fit - Hatchback Acura RL - Sedan % of volume replaced : 37% % of volume replaced : 18% % of volume replaced : 22% % of volume replaced : 4% Source: BofA Merrill Lynch Global Research

Table 11: Nissan OEM product pipeline 2013e-2016e 2013e 2014e 2015e 2016e Infiniti EX - Small Lux CUV Nissan Rogue - Small CUV Nissan Frontier - Small Pickup Nissan Quest - Minivan Nissan Pathfinder - Mid CUV Nissan Murano - Mid CUV Nissan Titan - Pickup Infiniti M - Sedan Infiniti JX - Lux SUV Infiniti FX - Mid Lux CUV Nissan Maxima - Sedan Nissan Altima - Sedan & Coupe Infiniti G - Coupe & Sedan Nissan Sentra - Sedan % of volume replaced : 45% % of volume replaced : 27% % of volume replaced : 17% % of volume replaced : 5% Source: BofA Merrill Lynch Global Research

Table 12: Other Japanese OEM product pipeline 2013e-2016e 2013e 2014e 2015e 2016e Mitsubishi Outlander Sport- Small CUV Mazda CX-7 - Mid CUV Subaru Outback - Small CUV/Wagon Mazda CX-5 - Small CUV Subaru Forester - Small CUV Suzuki SX4 - Small CUV Mitsubishi Lancer - Sedan Mazda CX-9 - Large CUV Mazda6 - Sedan Suzuki Grand Vitara - Small SUV Mazda Miata - Convertible Subaru Legacy - Sedan & Wagon Mazda2 - Sedan & Hatchback Source: BofA Merrill Lynch Global Research


25

Chart 35: 2013 Toyota Avalon

Source: Toyota Motor Sales, USA, Inc.

Chart 36: 2013 Lexus ES

Source: Toyota Motor Sales, USA, Inc.

Chart 37: 2013 Honda Accord

Source: American Honda Motor Co

Chart 38: 2013 Acura RDX

Source: American Honda Motor Co

Chart 39: 2014 Mazda6 (Takeri concept shown)

Source: Edmunds

Chart 40: 2013 Nissan Altima

Source: Nissan Motors Corp


26

European OEMs Conclusion: We expect European OEMs to collectively fight to maintain market share over the next four years. There is likely upside market share risk at BMW and Mercedes while there is downside risk at Volkswagen. Chart 41: Replacement rate

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European OEM average replacement rates are about 18.5%, below the industry average of 23% over the next four model years. This will make it difficult to maintain market share.

With high-end brands like BMW, Audi, Porsche, and Mercedes it is no surprise that the Europeans are significantly overweight Luxury cars.

European OEMs have an average showroom age of about 2.7 years over the next four model years which is just above the industry average of 2.6 years.


27

Table 13: European OEM product pipeline 2013e-2016e 2013e 2014e 2015e 2016e

Land Rover Range Rover - Large SUV Land Rover Range Rover Sport - Small SUV VW Tiguan - Small CUV Volvo XC40 - Small CUV

Mercedes GL-Class - Large Lux CUV Audi Q3 - Small Lux CUV Volvo XC70 - Small CUV Volvo XC90 - Mid CUV Mercedes B-Class - Hatchback Mercedes GLC-Class - Small Lux CUV Land Rover LR2 - Mid CUV Audi Q5 - Mid Lux CUV BMW 3-Series - Coupe, Sedan & Convertible BMW X4 - Mid Lux CUV BMW X6 - Mid Lux CUV Mercedes GLK - Small Lux SUV Porsche Boxster - Convertible BMW X5 - Mid Lux CUV Mercedes MLC - Mid Lux CUV Audi R8 - Coupe Porsche Cayman - Coupe Audi Q7 - Large Lux CUV Audi A4 - Sedan & Wagon BMW 7-Series - Sedan Mercedes SL Roadster - Convertible Audi A3 - Sedan & Wagon Audi A5 - Coupe Porsche Panamera - Sedan VW Polo - Hatchback Mercedes S-Class - Sedan Audi TT - Coupe & Convertible Mercedes CL-Class - Coupe Mercedes C-Class - Hatchback, Sedan & Wagon Mercedes CLC-Class - Coupe Jaguar XF - Sedan Jaguar XK - Coupe & Convertible Volvo S80 - Sedan MINI Cooper - Hatchback BMW 1-Series - Coupe VW Golf - Hatchback VW EOS - Convertible % of volume replaced : 20% % of volume replaced : 26% % of volume replaced : 21% % of volume replaced : 7% Source: BofA Merrill Lynch Global Research

Chart 44: 2013 Volkswagen Polo

Source: MotorTrend

Chart 45: 2014 Jaguar XK

Source: Jaguar USA

Chart 46: 2013 Porsche Boxster

Source: Porsche Cars North America

Chart 47: 2014 BMW X4

Source: Car and Driver


28

Korean OEMs Conclusion: Korean OEM products remain very competitive, but recent market share gains are slowing and may even reverse. This is largely due to a replacement rate of 18%, which is the lowest of the major automakers.


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The average replacement rate of 18% over the next four model years is well below the industry average of 23%, due to a relative lack of new product being introduced.

The mix of introductions for Korean OEMs is overweight in the Small Car, Mid/Large Car, and CUV segments.

Average showroom age remained below the industry average throughout the last two decades. However, by MY2014 we believe that the other major players in the industry will more than catch up, driving Hyundai and Kia’s average age close to the industry’s.


29

Table 14: Korean OEMs US product pipeline 2013e-2016e 2013e 2014e 2015e 2016e Hyundai Santa Fe - Mid CUV Kia Forte - Sedan & Coupe Hyundai Veracruz - Large CUV Hyundai Tucson - Small CUV Kia Cadenza - Sedan Hyundai Genesis- Sedan & Coupe Kia Sorento - Small CUV Kia Soul - Hatchback Hyundai Elantra - Sedan Hyundai Sonata - Sedan % of volume replaced : 9% % of volume replaced : 7% % of volume replaced : 10% % of volume replaced : 46% Source: BofA Merrill Lynch Global Research

Chart 51: 2013 Hyundai Santa Fe

Source: Hyundai Motor Company

Chart 52: 2014 Kia Forte (Cee’d shown)

Source: Kia Motors UK

Chart 53: 2013 Kia Cadenza

Source: Kia Motors America

Chart 54: 2015 Hyundai Genesis (2013 coupe shown)

Source: Hyundai Motor Company


30


31

Implications for suppliers & dealers


33

Implications for suppliers Proprietary technology trumps all for suppliers in our view, though exposure to profitable and growing OEMs is extremely important for the growth, profitability, and returns of suppliers. Therefore, assuming all else equal, suppliers most exposed to OEMs with the highest replacement rates and lowest average age are at an advantage. At the highest level this is a positive sign for BorgWarner, whose exposure is relatively diversified, and a potential near-term benefit for NA-focused suppliers such as Magna and American Axle (Chart 55).

Chart 55: Supplier Exposure to OEMs – 2011

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Honda

Renault / Nissan

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VW

BMW

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Source: Company Filings

Implications for dealers Similar to suppliers, and assuming all else equal, dealers that are most exposed to the OEMs with the highest replacement rates and lowest average age are best off, in our view. This should translate into better new car sales and earnings growth in the short term, and, importantly, feeds into the recurring parts and service profit stream in the long term as units in operation grow. The following chart summarizes the public groups' new vehicle exposures by brand.

Chart 56: Dealer Exposure to OEMs - 2011

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Proprietary technology trumps all for suppliers, in our view, though exposure to profitable and growing OEMs is extremely important for their growth, profitability, and returns.

Similar to suppliers, and assuming all else equal, dealers that are most exposed to the OEMs with the highest replacement rates and lowest average age are best off.


34


35

Appendix


37

Appendix Chart 57: New model volume mix industry summary, 2013e-2016e model year

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Chart 58: Total number of models offered in the US market

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Chart 59: Average showroom age by product segment

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The mix of industry new model launches is fairly balanced. However, there is significant variation among automakers based on different points in their product cycles.

New models continue to comprise a larger and larger portion of the total number of models offered in the US.

Even among segments there is a general convergence around an average showroom age between two and three years.


39

Magna Intl (MGA; C-1-7; $42.04) We believe Magna is one of the highest-quality auto suppliers in our coverage universe, with proprietary technology, a relatively solid balance sheet, and good customer diversification. We also expect the company to be a consolidator and capitalize on weaker competitors by winning take-away business. Our PO of $65 represents an EV/EBITDA of roughly 6x using our 2012 estimates, which is above the historical range. We believe a higher-than-historical multiple is warranted given that MGA has recently completed several shareholder-friendly actions that should alleviate corporate governance concerns, which historically resulted in the stock trading at a discount to the group average of 4-6X. In addition, we view MGA as one of the best operators in the supply industry, and an important partner for OEMs with global platforms. Downside risks to our price objective: 1) a further decline in the auto sales cycle below our forecasts for US SAAR, 2) further stress in large customers, most notably the Detroit Three, 3) a rapid and substantial rise in steel and other raw material costs.

Link to Definitions Industrials Click here for definitions of commonly used terms. Analyst Certification I, John Murphy, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

US - Automotives Coverage Cluster Investment rating Company BofA Merrill Lynch ticker Bloomberg symbol Analyst BUY American Axle AXL AXL US John Murphy, CFA Asbury Auto ABG ABG US John Murphy, CFA BorgWarner BWA BWA US John Murphy, CFA CarMax, Inc. KMX KMX US John Murphy, CFA Cooper Tire CTB CTB US John Murphy, CFA Dana Holding Corporation DAN DAN US John Lovallo II, CFA Delphi Automotive DLPH DLPH US John Murphy, CFA Ford Motor F F US John Murphy, CFA General Motors Company GM GM US John Murphy, CFA Group 1 Auto GPI GPI US John Murphy, CFA Johnson Controls JCI JCI US John Murphy, CFA Lear Corp. LEA LEA US John Murphy, CFA Lithia Motors A LAD LAD US John Murphy, CFA Magna Intl MGA MGA US John Murphy, CFA Penske Auto Group PAG PAG US John Murphy, CFA Sonic Automotive SAH SAH US John Murphy, CFA Tenneco TEN TEN US John Murphy, CFA TRW Automotive TRW TRW US John Murphy, CFA NEUTRAL AutoNation, Inc. AN AN US John Murphy, CFA Goodyear GT GT US John Murphy, CFA LKQ Corporation LKQX LKQX US John Lovallo II, CFA Visteon Corporation VC VC US John Murphy, CFA

http://research1.ml.com/C?q=q2kgl3P0V!1PgH4NMmvsSQ


43

FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation). Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*

Buy ≥ 10% ≤ 70% Neutral ≥ 0% ≤ 30%

Underperform N/A ≥ 20% * Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.

INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch Comment referencing the stock.

Price charts for the securities referenced in this research report are available at http://pricecharts.ml.com, or call 1-800-MERRILL to have them mailed. MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: American Axle, BorgWarner, Ford Motor, General

Motors, Magna Intl. MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months: American Axle. The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: American Axle, BorgWarner,

Ford Motor, General Motors, Magna Intl. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: American

Axle, BorgWarner, Ford Motor, General Motors, Magna Intl. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: American Axle, BorgWarner,

Ford Motor, General Motors, Magna Intl. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: American Axle, BorgWarner,

Ford Motor, General Motors, Magna Intl. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company

within the next three months: American Axle, BorgWarner, Ford Motor, General Motors, Magna Intl. MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 8th day

of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 8th day of a month reflect the ownership position at the end of the second month preceding the date of the report: American Axle, BorgWarner.

MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: American Axle, BorgWarner, Ford Motor, General Motors, Magna Intl.

The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: American Axle, BorgWarner, Ford Motor, General Motors, Magna Intl.

BofA Merrill Lynch Research personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking revenues.


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Other Important Disclosures

Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments.

BofA Merrill Lynch Global Research policies relating to conflicts of interest are described at http://www.ml.com/media/43347.pdf. "BofA Merrill Lynch" includes Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and its affiliates. Investors should contact their BofA

Merrill Lynch representative or Merrill Lynch Global Wealth Management financial advisor if they have questions concerning this report. Information relating to Non-US affiliates of BofA Merrill Lynch and Distribution of Affiliate Research Reports: MLPF&S distributes, or may in the future distribute, research reports of the following non-US affiliates in the US (short name: legal name): Merrill Lynch

(France): Merrill Lynch Capital Markets (France) SAS; Merrill Lynch (Frankfurt): Merrill Lynch International Bank Ltd., Frankfurt Branch; Merrill Lynch (South Africa): Merrill Lynch South Africa (Pty) Ltd.; Merrill Lynch (Milan): Merrill Lynch International Bank Limited; MLI (UK): Merrill Lynch International; Merrill Lynch (Australia): Merrill Lynch Equities (Australia) Limited; Merrill Lynch (Hong Kong): Merrill Lynch (Asia Pacific) Limited; Merrill Lynch (Singapore): Merrill Lynch (Singapore) Pte Ltd.; Merrill Lynch (Canada): Merrill Lynch Canada Inc; Merrill Lynch (Mexico): Merrill Lynch Mexico, SA de CV, Casa de Bolsa; Merrill Lynch (Argentina): Merrill Lynch Argentina SA; Merrill Lynch (Japan): Merrill Lynch Japan Securities Co., Ltd.; Merrill Lynch (Seoul): Merrill Lynch International Incorporated (Seoul Branch); Merrill Lynch (Taiwan): Merrill Lynch Securities (Taiwan) Ltd.; DSP Merrill Lynch (India): DSP Merrill Lynch Limited; PT Merrill Lynch (Indonesia): PT Merrill Lynch Indonesia; Merrill Lynch (Israel): Merrill Lynch Israel Limited; Merrill Lynch (Russia): Merrill Lynch CIS Limited, Moscow; Merrill Lynch (Turkey I.B.): Merrill Lynch Yatirim Bank A.S.; Merrill Lynch (Turkey Broker): Merrill Lynch Menkul Değerler A.Ş.; Merrill Lynch (Dubai): Merrill Lynch International, Dubai Branch; MLPF&S (Zurich rep. office): MLPF&S Incorporated Zurich representative office; Merrill Lynch (Spain): Merrill Lynch Capital Markets Espana, S.A.S.V.; Merrill Lynch (Brazil): Bank of America Merrill Lynch Banco Multiplo S.A.

This research report has been approved for publication and is distributed in the United Kingdom to professional clients and eligible counterparties (as each is defined in the rules of the Financial Services Authority) by Merrill Lynch International and Banc of America Securities Limited (BASL), which are authorized and regulated by the Financial Services Authority and has been approved for publication and is distributed in the United Kingdom to retail clients (as defined in the rules of the Financial Services Authority) by Merrill Lynch International Bank Limited, London Branch, which is authorized by the Central Bank of Ireland and is subject to limited regulation by the Financial Services Authority – details about the extent of its regulation by the Financial Services Authority are available from it on request; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co., Ltd., a registered securities dealer under the Financial Instruments and Exchange Act in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Limited, which is regulated by the Hong Kong SFC and the Hong Kong Monetary Authority; is issued and distributed in Taiwan by Merrill Lynch Securities (Taiwan) Ltd.; is issued and distributed in India by DSP Merrill Lynch Limited; and is issued and distributed in Singapore by Merrill Lynch International Bank Limited (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd. (Company Registration No.’s F 06872E and 198602883D respectively) and Bank of America Singapore Limited (Merchant Bank). Merrill Lynch International Bank Limited (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd. are regulated by the Monetary Authority of Singapore. Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), AFS License 235132 provides this report in Australia in accordance with section 911B of the Corporations Act 2001 and neither it nor any of its affiliates involved in preparing this research report is an Authorised Deposit-Taking Institution under the Banking Act 1959 nor regulated by the Australian Prudential Regulation Authority. No approval is required for publication or distribution of this report in Brazil. Merrill Lynch (Dubai) is authorized and regulated by the Dubai Financial Services Authority (DFSA). Research reports prepared and issued by Merrill Lynch (Dubai) are prepared and issued in accordance with the requirements of the DFSA conduct of business rules.

Merrill Lynch (Frankfurt) distributes this report in Germany. Merrill Lynch (Frankfurt) is regulated by BaFin. This research report has been prepared and issued by MLPF&S and/or one or more of its non-US affiliates. MLPF&S is the distributor of this research report in

the US and accepts full responsibility for research reports of its non-US affiliates distributed to MLPF&S clients in the US. Any US person receiving this research report and wishing to effect any transaction in any security discussed in the report should do so through MLPF&S and not such foreign affiliates.

General Investment Related Disclosures: This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer,

to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report.

Securities and other financial instruments discussed in this report, or recommended, offered or sold by Merrill Lynch, are not insured by the Federal Deposit Insurance Corporation and are not deposits or other obligations of any insured depository institution (including, Bank of America, N.A.). Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. No security, financial instrument or derivative is suitable for all investors. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the value or risks related to the security or financial instrument may be difficult to obtain. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. Past performance is not necessarily a guide to future performance. Levels and basis for taxation may change.

This report may contain a short-term trading idea or recommendation, which highlights a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company. Short-term trading ideas and recommendations are different from and do not affect a stock's fundamental equity rating, which reflects both a longer term total return expectation and attractiveness for investment relative to other stocks within its Coverage Cluster. Short-term trading ideas and recommendations may be more or less positive than a stock's fundamental equity rating.

BofA Merrill Lynch is aware that the implementation of the ideas expressed in this report may depend upon an investor's ability to "short" securities or other financial instruments and that such action may be limited by regulations prohibiting or restricting "shortselling" in many jurisdictions. Investors are urged to seek advice regarding the applicability of such regulations prior to executing any short idea contained in this report.

Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. Investors in such securities and instruments, including ADRs, effectively assume currency risk.

UK Readers: The protections provided by the U.K. regulatory regime, including the Financial Services Scheme, do not apply in general to business coordinated by BofA Merrill Lynch entities located outside of the United Kingdom. BofA Merrill Lynch Global Research policies relating to conflicts of interest are described at http://www.ml.com/media/43347.pdf.

Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments.


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MLPF&S or one of its affiliates is a regular issuer of traded financial instruments linked to securities that may have been recommended in this report. MLPF&S or one of its affiliates may, at any time, hold a trading position (long or short) in the securities and financial instruments discussed in this report.

BofA Merrill Lynch, through business units other than BofA Merrill Lynch Global Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames, assumptions, views and analytical methods of the persons who prepared them, and BofA Merrill Lynch is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report.

In the event that the recipient received this report pursuant to a contract between the recipient and MLPF&S for the provision of research services for a separate fee, and in connection therewith MLPF&S may be deemed to be acting as an investment adviser, such status relates, if at all, solely to the person with whom MLPF&S has contracted directly and does not extend beyond the delivery of this report (unless otherwise agreed specifically in writing by MLPF&S). MLPF&S is and continues to act solely as a broker-dealer in connection with the execution of any transactions, including transactions in any securities mentioned in this report.

Copyright and General Information regarding Research Reports: Copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated. All rights reserved. iQmethod, iQmethod 2.0, iQprofile, iQtoolkit, iQworks are service marks

of Merrill Lynch & Co., Inc. iQanalytics®, iQcustom®, iQdatabase® are registered service marks of Merrill Lynch & Co., Inc. This research report is prepared for the use of BofA Merrill Lynch clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of BofA Merrill Lynch. BofA Merrill Lynch Global Research reports are distributed simultaneously to internal and client websites and other portals by BofA Merrill Lynch and are not publicly-available materials. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets) without first obtaining expressed permission from an authorized officer of BofA Merrill Lynch.

Materials prepared by BofA Merrill Lynch Global Research personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of BofA Merrill Lynch, including investment banking personnel. BofA Merrill Lynch has established information barriers between BofA Merrill Lynch Global Research and certain business groups. As a result, BofA Merrill Lynch does not disclose certain client relationships with, or compensation received from, such companies in research reports. To the extent this report discusses any legal proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consult their own legal advisers as to issues of law relating to the subject matter of this report. BofA Merrill Lynch Global Research personnel’s knowledge of legal proceedings in which any BofA Merrill Lynch entity and/or its directors, officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based on public information. Facts and views presented in this material that relate to any such proceedings have not been reviewed by, discussed with, and may not reflect information known to, professionals in other business areas of BofA Merrill Lynch in connection with the legal proceedings or matters relevant to such proceedings.

This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of any securities. None of MLPF&S, any of its affiliates or their research analysts has any authority whatsoever to make any representation or warranty on behalf of the issuer(s). BofA Merrill Lynch Global Research policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis.

Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional.

The information herein (other than disclosure information relating to BofA Merrill Lynch and its affiliates) was obtained from various sources and we do not guarantee its accuracy. This report may contain links to third-party websites. BofA Merrill Lynch is not responsible for the content of any third-party website or any linked content contained in a third-party website. Content contained on such third-party websites is not part of this report and is not incorporated by reference into this report. The inclusion of a link in this report does not imply any endorsement by or any affiliation with BofA Merrill Lynch. Access to any third-party website is at your own risk, and you should always review the terms and privacy policies at third-party websites before submitting any personal information to them. BofA Merrill Lynch is not responsible for such terms and privacy policies and expressly disclaims any liability for them.

Subject to the quiet period applicable under laws of the various jurisdictions in which we distribute research reports and other legal and BofA Merrill Lynch policy-related restrictions on the publication of research reports, fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.

Certain outstanding reports may contain discussions and/or investment opinions relating to securities, financial instruments and/or issuers that are no longer current. Always refer to the most recent research report relating to a company or issuer prior to making an investment decision.

In some cases, a company or issuer may be classified as Restricted or may be Under Review or Extended Review. In each case, investors should consider any investment opinion relating to such company or issuer (or its security and/or financial instruments) to be suspended or withdrawn and should not rely on the analyses and investment opinion(s) pertaining to such issuer (or its securities and/or financial instruments) nor should the analyses or opinion(s) be considered a solicitation of any kind. Sales persons and financial advisors affiliated with MLPF&S or any of its affiliates may not solicit purchases of securities or financial instruments that are Restricted or Under Review and may only solicit securities under Extended Review in accordance with firm policies.

Neither BofA Merrill Lynch nor any officer or employee of BofA Merrill Lynch accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents.


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Team Page John Murphy, CFA +1 646 855 2025 Research Analyst MLPF&S [email protected] John Lovallo II, CFA +1 646 855 2942 Research Analyst MLPF&S [email protected] Elizabeth Lane +1 646 855 2547 Research Analyst MLPF&S [email protected] Michael Tuteral +1 646 743 0217 Research Analyst MLPF&S [email protected] >

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