Volkswagen has long taken an optimistic view on how it would be affected by the
industry downturn, but the company is now beginning to suffer. Nevertheless, we
remain positive on its long-term outlook. We believe it will emerge as a winner from
the current industry crisis, since it possesses sufficient scale, an excellent product
image and no financial constraints.
We have previously considered Porsche the best vehicle for gaining exposure to
Europe’s largest car-maker. However, we believe that VW’s preference shares are now
a better instrument for investing in this long-term growth story at reasonable value.
We downgrade Porsche from Overweight (V) to Underweight (V) since we believe the
company has paid too high a price for its majority VW stake. We also reduce our target
price to EUR28 from EUR70. We downgrade VW ordinary shares from Neutral (V) to
Underweight (V) and set a new target price of EUR200 (old: EUR220). We initiate
coverage of VW's preference shares with an Overweight (V) rating and a target price
of EUR53.

We are cutting our estimates for Volkswagen substantially, but retain
our long-term positive view of the company. We believe it will
emerge a winner from the current industry crisis, given its size,
excellent product image and the absence of financial constraints.
Nevertheless, our lowered estimates on VW have a significant
impact on our ratings portfolio: we are becoming negative on
Porsche, since we believe it paid too much for the VW stake. Our
instrument of choice for investment in VW is now VW preference
shares. Our best-case scenario implies upside potential of more
than 150% to the current share price. In that regard we continue to
accelerate regarding our positive view on Volkswagen, but are
hitting the brakes on our Porsche rating.

The downturn takes its toll on Volkswagen
As recently as October 2008 Volkswagen was confident that it could escape the industry downturn
through a series of model launches. Towards the end of Q4 2008, however, the company was forced to
face reality, and management has become a lot more cautious in its 2009 outlook. The company expects
global car demand to decline by 15%, but forecasts that its own unit sales will ‘only’ decline around 10%
in 2009. In its unit sales projections, management was no longer even able to rule out a loss, at least in Q1
2009. After taking this subdued outlook into account, we substantially cut our estimates for FY 2009 and
the years thereafter in this report. Mainly as a result of the PPA (purchase price allocation) depreciation
from Scania, we expect VW’s net income to do no more than break even in 2009.
Still long term positive on VW, but negative on Porsche
Nevertheless, we remain optimistic about Volkswagen on a long-term basis. We believe the company will
emerge a winner from the current crisis owing to its currently adequate size, excellent product image and
the absence of financial constraints, given its net cash position of EUR11bn (Q3 2008). While
competitors’ long-term strategy is increasingly determined by short-term cash needs, Volkswagen has
sufficient liquidity to weather the downturn without cutting R&D spending or postponing model
launches. In our view, once Volkswagen has implemented its new production platform strategy in 2012, it
could become much more profitable than its peers. We therefore consider the company’s current
weakness as a good opportunity for buying into the long-term story via the preference shares.

Takeover by Porsche still affecting VW story
We acknowledge that the Volkswagen story is not only driven by its operational business, but also by the
ongoing takeover by Porsche. But even if the Volkswagen ordinary share price is artificially high and far
too expensive from a fundamental point of view, there are alternative ways to invest in Volkswagen. In
this report we recap how Porsche is hedging its increased stake in Volkswagen and identify the drivers for
its future performance. For legal and cash-related reasons, we do not believe Porsche will increase its
stake to 75%.
Stock ratings
Volkswagen ordinary shares (VOWG.DE); downgrade from Neutral (V) to
Underweight (V); price target EUR200 (previously EUR220)
As the market learned in October 2008 the share price increase was mainly driven by Porsche’s share
purchases and its hedging strategies on the VW ordinary share price. The synthetic forwards used for the
hedging are still in place and the associated delta-hedge of the forward counterparty limits the share price
decline of VW ordinary shares. We are, nonetheless, changing our rating on the stock with this report: we
have always been cautious about shorting the stock, but since we do not believe Porsche will increase its
stake to 75%, we have no choice now but to downgrade the stock from Neutral (V) to Underweight (V).
Sooner or later Porsche will have to close its option positions on VW, increasing the free float and
leading, in our view, to a lower VW ordinary share price. The most difficult task is determining a target
price for the VW ordinary shares. For the time being, we believe the strike prices of the synthetic
forwards will serve as a floor for the VW ordinary share price. According to EUREX market statistics,
95% of Porsche’s synthetic forwards on VW should have a strike price in the range of EUR100-200. To
avoid a margin call on the short puts, we believe Porsche will have an active interest in ensuring that the
VW ordinary share price does not decline below EUR200, which we have therefore adopted as our new
share price target. Ignoring these aspects, we believe the fundamental value of the VW ordinary shares is
only around EUR74. We consider that to be the real downside if Porsche closes its VW options positions
completely.
Volkswagen preference shares (VOWG_p.de); initiation of coverage with an
Overweight (V) rating and a target price of EUR53
We now view VW preference shares as the instrument of choice for investment in VW. We see them as a
better-value investment than Porsche and the VW ordinary shares, and offer an opportunity to participate
in the long-term upside potential of the VW Group. We expect the preference shares to outperform the
sector if VW delivers on its promise to gain market share globally. We initiate coverage on the VW
preference shares with an Overweight (V) rating and a target price of EUR53. Even though we believe it
is fairly unlikely that Porsche will ever be able to pass a domination agreement at VW, this would be the
definitive upside trigger for VW preference shares. According to §305 of the German share law, Porsche
must make a mandatory offer to VW preference shareholders if it passes a domination agreement at VW.
An appropriate price for such an offer remains open to question, but we believe Porsche would need to
pay at least the book value per share, which currently stands at EUR97.

Porsche (PAH3_p.DE); downgrade from Overweight (V) to Underweight (V);
price target EUR28 (previously EUR70)
We are not making substantial changes to our estimates for the Porsche core business, and our positive
view on FY2010 (ending July) remains largely intact. Nevertheless, Porsche’s share price is, for now at
least, less driven by its operating performance than by the valuation of the VW stake, and the question of
if and when Porsche will increase its stake from 51% to 75%. As we pointed out in our December 2008
update, Porsche’s VW acquisition greatly exposes it to the success (or failure) of Volkswagen. In this
regard, Porsche could even be viewed as a warrant on the VW story, since the acquisition is largely debt
financed. As we are cutting our estimates for VW substantially, we conclude that Porsche has paid too
high a premium for its VW stake – and the leverage now represents a downside risk. We are therefore
cutting our target price for Porsche sharply, to EUR28 from EUR70 previously. As a result, we
downgrade our rating on the stock from Overweight (V) to Underweight (V). We now view VW
preference shares as the instrument of choice for gaining exposure to VW.

目录

VW hit by the crisis too 6
Company guidance for 2008 and 2009 6
Our forecast for FY 2008/Q4 2008 8
Our forecasts for 2009 and beyond 9
Why we like VW long term … 18
A wealth of strategic advantages 18
Volkswagen already has sufficient scale 18
Outstanding production platform strategy 19
Excellent segment exposure 20
Outstanding product image 21
Solid financial position allows sound long-term product
planning 23
Persistent noise: takeover by
Porsche 24
Timetable of the acquisition 24
We do not expect to see a stake increase to 75% 24
How Porsche has hedged its VW share purchases 27
Details of Porsche’s VW options position 30
Company profiles 32
Volkswagen Ords (VOW GY) 33
Volkswagen Prefs (VOW3 GY) 39
Porsche 48
Appendix 66
Disclosure appendix 72
Disclaimer 76