EFTA01433374.pdf

Subject: Re: From DB's Rod Lache: General Motors Co - AV Opportunity: It's Better than We Thought; Reiterating Buy (upgrade to Buy of 9/24/17 also attached) [I] From: Stewart Oldfield ‹ > Date: Wed, 04 Oct 2017 19:13:55 -0400 To: Joshua Shoshan Classification: For Internal Use Only Cool, thanks. Stewart Oldfield, CFA, CAIA Director Deutsche Bank Trust Company Americas Deutsche Bank Wealth Management New York, NY 10154 Tel: Mobi blackberry Emai Securities offered through Deutsche Bank Securities Inc. From: Joshua Shoshan Sent: Wednesday, October 04, 2017 11:14 PM To: Stewart Oldfield Subject: FW: From DB's Rod Lache: General Motors Co - AV Opportunity: It's Better than We Thought; Reiterating Buy (upgrade to Buy of 9/24/17 also attached) [I] Classification: For internal use only Stewart, fyi . . • From: Joshua Shoshan Sent: Wednesday, October 04, 2017 5:57 PM To: Paul Barrett - Al ha Group Capital LLC Cc: Vahe Ste ; Martin Zeman Xavier Avila Liam Osullivan Davide-A Sferrazza Subject: From DB's Rod Lache: General Motors Co - AV Opportunity: It's Better than We Thought; Reiterating Buy (upgrade to Buy of 9/24/17 also attached) EFTA01433374 Greetings, Paul. I attach Rod Lache's report from Monday, and the upgrade of GM from last week. So, back to what we were talking about this morning, this is a fascinating story: GM autonomous vehicles (AV) will be ready for commercial deployment much sooner than people realize. We are talking about AVs without human drivers, and Rod describing large scale commercial operations starting in 2020. Not only is this "Mobility Business" material to GM's numbers, but Rod also believes that the business will be spun off to shareholders. Just think of the potential multiple on a pure play AV/ Mobility company versus the multiple on "GM 1.0". Some of the numerical analysis in the reports is truly compelling: Rod explains that GM will first target densely populated urban areas, at a cost of under $1 per mile to the customer. Uber and Lyft now average $1.53 or more per mile. This is all about what happens to costs when you take out the human driver. Then Rod takes it a step further, and shows the challenge GM's plans will pose to private vehicle ownership, which, e.g., in New York is over $3 per mile (it is cheaper, but still over $1/mile, in other US cities). Rod also discusses GM disrupting the businesses of Uber and Lyft in a big way. Let me end with valuation: In the 9/24 upgrade report (attached), you can see how Rod Lache comes up with his $51 target price. He analyzes the GM Autonomous 2.0 opportunity with a DCF model and arrives at $21 per share of equity value for the AV opportunity. He haircuts that number by 50% (the biz is new and has a lot of risks), so only has $10/share for the autonomous opportunity in his $51 target price for GM. The other $41 comes from GM's 1.0 operation, which is a 10% FCF yield on Rod's $6bn trend FCF forecast, and also translates into 4x GM's 2018 EV/EBITDAP. Let's chat again soon. Best regards, --Josh Deutsche Bank Research General Motors Co EFTA01433375 fcid:[email protected] AV Opportunity: It's Better than We Thought; Reiterating Buy fcid:[email protected] Rod Lache Research Analyst {cid:[email protected]} Shreyas Patil Research Analyst -l ecid:[email protected] {cid:[email protected]} Mike Levin Research Analyst cid:[email protected] EFTA01433376 Open full report 02 October 2017 (11 pages/ 232 kb) General Motors Co {Ticker: GM.N, Closing Price: 40.38 USD, Target Price: 51.00 USD, Recommendation: Buy} We've had the opportunity to discuss details of our GM thesis with a number of people over the past week_ but arguably the most interesting was with GM management themselves. Our takeaway from this meeting was that our key conclusions were spot on... i.e. GM's AV's will be ready for commercial deployment, without human drivers, much sooner than widely expected (within quarters, not years); that businesses built off of this platform will ramp much faster than is widely expected; and that this will be material, even to a company of GM's size. GM is equally convinced that the Mobility Business opportunity will be very significant for their stock (based on feedback regarding the assumptions we used, our estimates may be significantly understated). And GM did not refute the logic that we used to conclude that this business will most likely be spun off to shareholders. We are reiterating our Buy and our $51 target, which we increasingly view as conservative. High level takeaways from our meeting included the following: Much sooner than expected GM confirmed that their AVs are on track for a critical milestone_ they will be safely driving passengers in complex urban environments without a human backup driver within the next few quarters, well ahead of competitors. GM believes that development of their "minimum viable product" (an AV that is commercially deployable without a human driver) is happening much faster than expected, partly as a result of a strong AI foundation (the acquisition of Cruise Automation combined with internal GM capability), 1 MM miles testing/month, and unprecedented speed of hardware/software iteration that comes as a benefit of vertical integration. It will ramp much faster than expected, in order to capitalize on their first mover advantage. GM agreed with our suggestion that large scale commercial operations would EFTA01433377 start relatively soon (we expect this in 2020). GM's operations will first target the most lucrative markets (densely populated cities), which are also arguably the most challenging for AVs. And this will be done in a highly disruptive manner (sub $1 per mile). We believe that this will make GM's service overwhelmingly attractive vs. incumbents such as Uber and Lyft ($1.53+ per mile). But the real goal is to make it more compelling than private vehicle ownership in dense urban centers (Uber, Lyft, etc account for just 0.1% of miles driven; in NYC private vehicle ownership costs >$3 per mile; in SF, Philadelphia, Washington, Boston avg. costs are >$1 per mile). A few details gleaned from our discussions led us to conclude that GM is most likely planning to go to market through their own Transportation as a Service platform, competing with Lyft and Uber (GM will be highly disruptive to those players; GM does not intend to sell the technology to unaffiliated third parties; and GM appears to have thought through many details of how the TaaS service will operate). We also believe that the faster ramp could evolve into a competitive moat, as the company's AI develops more rapidly (i.e. Their product will be better/more capable than most others), and their network establishes natural monopolies in key cities. The economics of their plan appear even more attractive than we had modeled. Useful life/avg miles per vehicle is a key cost driver (depreciation accounts for $0.24 of the $0.53 cost per mile assumed in our model). And GM believes that this cost is likely to be much more favorable than we've assumed, since their platform will be EV based, they will be engineered for long life cycles (400,000-1,000,000 miles, vs. the 210,000 miles that we assumed), and GM is planning for field refurbishment/overhaul of wear items (e.g. Interiors), similar to the practice of the aviation industry. Even using the low-end of GM's expectations reduces our estimate depreciation/- mile from $0.24 to —$0.13, an almost 50% reduction. Running this through our model, the changes could increase our estimated PV by —4x (to $120 bn from $30 bn) Another key benefit of the EV platform is that it facilitates easier automation, significantly lower fuel costs ($0.03-$0.04 per mile, vs. the —$0.11/mile that we assumed in our gas-powered vehicle model), and lower maintenance costs. These also imply significant upside to our model. GM also suggested that their Mobility business will be more cash generative than we assumed, as an asset-backed financing market will form to support the large capital deployments being planned. This would meaningfully mitigate the massive Capex requirements that we anticipate (i.e. just launching 10,000 cars at $50,000/vehicle is $0.5 bn of fleet CAPEX). And GM did not refute the logic we used to conclude that the business will be spun. In response to our questions about potential for a spin, GM pointed out that they've established a track record of taking aggressive and sometimes unconventional measures to unlock value for shareholders. And GM acknowledged that a competitively advantaged AV based Mobility Platform EFTA01433378 would attract a larger universe of growth investors, something that they have been seeking to achieve for years. Many growth investors are are already expressing their views on potential for disruption, driving valuations of Uber, Tesla, Delphi, Autoliv, and Nvidia. Indeed, GM acknowledged implicitly weaker access to capital/cost of capital resulting from GM's lower valuation. This has resulted in one competitive disadvantage that GM may not be able to fix while the business remains internal to GM. We'd also note potential advantages from involvement of "strategic" investors in an independent mobility entity (particularly if an investor were to facilitate access to the China market). Bottom Line We are seeking to avoid hyperbole in discussing the implications for GM's stock. But clearly, the opportunity is very large. As we pointed out in our upgrade, even a small percentage of the 3+ trillion miles driven in the U.S., and 7 trillion globally, represents a massive opportunity. We believe that our $15 bn assumed valuation for Maven (we incorporated just $10 per share into our target) is very conservative. We derived a $30 bn ($20 per GM share) valuation through our DCF_ and note that this analysis primarily focused on the U.S. Mobility market... International Markets, and adjacent opportunities (e.g. Delivery, Data) could easily double this. As noted above, GM also pointed out that a number of our financial assumptions are conservative. We're reiterating our Buy. Key risks for GM include cyclicality, and execution on an aggressive Auto 2.0 plan. Open full report EFTA01433379 Click/ copy this link into a browser to access the report: http://pull.db- gmresearch.com/p/324-4CFE/249301878/09b52532-d5a3-4013- babd-51a38bb08ff5_604.pdf. If you have any difficulty accessing the report, please forward this email with the word 'PDF' in the subject line to [email protected]. After 90 days you can access the report on our web site: http://gm.db.com. You have received this mail because you have subscribed to GM.N For changes to your current research subscription, visit https://gm.db.com/- rsm or email [email protected]. Please refer to the applicable legal disclaimers in the full report. Mail Reference:09b52532-d5a3-4013-babd-51a38bb08ff5 604/[email protected] fhttp://pull.db-gmresearch.com/p/CG-176191-30305720-2-324-UK1-0569/0/1 fcid:[email protected] Joshua Shoshan Director I Key Client Partners - US DB Securities Inc Deutsche Bank Wealth Management 10154-0004 New York, NY, USA e . Fax Mobi Emai EFTA01433380 All trade execution information contained herein is being provided as an accommodation at your request in advance of your receipt of the official trade confirmation(s). Additional trade detail information available upon request. The terms of the trade(s) may be subject to change prior to settlement, and therefore the official trade confirmation(s) and account statements issued by Deutsche Bank shall govern. 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