BWA Stock Pitch

Annie Wang, David Chui, Derek Wei, Mitesh Amarthaluru, Albert Li

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Table of Contents

I. Investment Thesis

II. Industry Overview

III.Company Overview

IV.Financials

V. Valuation

I. Investment Thesis

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BorgWarner Inc. (NYSE: BWA)

Recommendation: Buy Current Price: $54.78 Price Target: $60.65 (11% upside)

BorgWarner is a leading global manufacturer of engine and drivetrain components that increase power output, improve fuel economy,

and reduce emissions. With increasingly strict fuel efficiency and emissions regulations, BorgWarner offers quality products—

particularly turbochargers—that capitalize on this trend. The recent decline in the stock price creates an especially compelling

investment opportunity.

Increased regulations on fuel efficiency and emissions around the world

Automakers switching from naturally-aspirated engines to turbocharged engines

Strong balance sheet allows for acquisition and growth opportunities

Trading near 52 week low

Investment Highlights

Investment Risks

Cyclical nature of auto industry and global economic slowdown

High operating leverage may harm EPS

Rise in costs of inputs

Foreign exchange fluctuations

Current environment of low gas prices may reduce short term demand for BWA products

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BWA 5 Year Stock Performance

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BWA 52 Week Stock Performance

52 week high: $67.49

52 week low: $48.40

Current stock price: $54.78

II. Industry Overview

Global Light Vehicle Sales

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Asia/China Auto Market

North American light vehicle production rose 5% in 2014 and is expected to rise 2-3% in 2015-16

Quarterly U.S. Light Vehicles Sales on a SAAR Basis vs. Regression Model

US Auto Market

China LV SAAR

11.2

11.4

11.6

11.8

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12.2

12.4

12.6

12.8

European Auto MarketEurope LV SAAR

BorgWarner Future Geographic Strategy

The company expects the Chinese light vehicle turbocharger market to more than double from 4.2 million units in 2014 to 8.6 million by 2019

Global Regulations

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Worldwide Emissions Targets

Worldwide Fuel Efficiency Targets

Globally

New regulations demanding decreased fuel consumption and emissions across the globe

Europe: 130 g/km of CO2 in 2015, 95 g/km in 2020 (2013 avg of 126.7 g/km)

Penalty of up to €95 per g/km, per vehicle

China: 34 mpg in 2015, 47 mpg in 2020

Japan: 39.5 mpg in 2015, 48 mpg in 2020

Taxes based on engine displacement and/or carbon emissions (both annual taxes and one-time tax at purchase)

Europe: Annual tax, sliding scale based on CO2 emissions

China: 40% tax on cars with engines >4.0L

Japan: Annual tax, sliding scale based on displacement

U.S.

CAFE (Corporate Average Fuel Economy) regulations are intended to improve fuel economy

Amended in 2007 by Energy Independence and Security Act

Obama administration issued mandate of 54.5 mpg by 2025

Penalty: $5.50 per 0.1 mpg under the standard, multiplied by manufacturer’s total production for USA market

Gas Guzzler Tax: levied on passenger car models that get less than 22.5 mpg

Turbochargers

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Why Turbochargers?

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Turbocharged Car Sales as a Percentage of Total Car Sales

Benefits

Significantly reduces fuel consumption, emissions, and engine displacement for the same amount of power

Other technologies generally result in only marginal reductions in fuel consumption/emissions

More efficient than alternative compressor technologies, such as superchargers

Relatively high barriers to entry (both in terms of technology and customer relationships)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Others

Korea

Japan

China

India

North America

Europe

Worldwide

2012 2017

III. Company Overview

BorgWarner

Overview 2014 Sales by Region & OEM

Engine Drivetrain

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Global product leader of powertrain solutions that improve performance, increase fuel efficiency, and reduce emissions

Headquartered in Auburn Hills, Michigan

2 operating segments:

Engine: Develops air management components to optimize engine performance

Drivetrain: Manufactures components for automatic and dual-clutch transmissions and AWD

Turbochargers for light duty vehicles represented 26% of total sales in 2013

Products are mainly sold to OEMs. 80% of net sales were for light vehicles, 9% for commercial vehicles, 6% for off-road vehicles, and 5% for aftermarket distributors

Engine segment accounts for 2/3 of BWA sales

$5.0BB of sales in 2013

Main products include turbochargers, timing systems, emission systems, thermal systems, diesel cold start and gasoline ignition technology

Benefitted from increased global demand for turbochargers

Supplies turbochargers to many light duty OEMS, including BMW, Daimler, Fiat, Ford, Geely, General Motors, Hyundai, Renault, and Volkswagen. Other OEM customers include Caterpillar, John Deere, and Navistar

Products improve fuel economy, reduce emissions, and enhance performance

Drivetrain segment accounts for 1/3 of BWA sales

$2.4 BB of sales in 2013

Drivetrain portfolios include friction, mechanical and controls components for automatic transmissions and torque management products for AWD vehicles

Leader in DCT (dual clutch transmission) technology

Benefits from global trend of higher fitments of AWD

Customers include Volkswagen, Ford, and BMW

2011: Acquired Traction Systems division of Haldex Group, which makes products for FWD-based AWD and complements the RWD-based AWD components in BWA’s portfolio

Engine Products

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Turbochargers Exhaust powered compressor that forces more air into the engine. Increases power, reduces fuel consumption and emissions

Variable Valve Timing Allows engines to vary air flow depending on engine speed. Increases power, reduces fuel consumption and emissions

Emissions Gas Recirculation Sends some exhaust back into the engine intake. Reduces fuel consumption and emissions (particularly NOx emissions)

Ignition & Thermal Control Systems Products related to regulating ignition and engine temperature. Reduces fuel consumption and emissions

Drivetrain Products

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Dual-Clutch Transmissions Uses standard manual transmission components with computer-controlled shifting that allows for both the convenience of an automatic and the fuel efficiency and driving experience of a manual

Automatic Transmission Components

Variety of components used in automatic transmissions

All-Wheel-Drive and4-Wheel-Drive Components

Transfer cases, differentials, and other parts needed for AWD and 4WD drivetrains. Products for both FWD-based and RWD-based cars

Recent Acquisitions

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Acquisition of Haldex’s Traction Systems Division

Wahler specializes in exhaust gas recirculation products. The company generated revenue of $350 million in 2013 and employs 1,250 people in Germany, Brazil, U.S., China and Slovakia. Customers include Daimler, Volkswagen, BMW, and General Motors

Acquisition strengthens BorgWarner's strategic position as a producer of complete EGR systems and creates additional market opportunities in both passenger and commercial vehicle applications

Acquisition of Gustav Wahler

Haldex is a well-respected manufacturer of all-wheel drive products with strong European presence

Acquisition expands BorgWarner’s existing portfolio of front and rear-wheel drive components

IV. Financials

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Historical Performance

2011A 2012A 2013A

Net Sales $7,115 $7,183 $7,437

Engine 5,051 4,913 5,022

Drivetrain 2,085 2,299 2,447

Inter-segment Eliminations (20) (29) (32)

COGS 5,704 5,716 5,879

Gross Profit $1,410 $1,467 $1,558

SG&A 621 629 640

Other Expenses (Income) (8) 85 63

Operating Income $798 $753 $855

Equity Earnings 38 43 44

Net Interest Expense 70 35 29

EBT $766 $761 $869

Income Taxes 195 239 218

Net Income $571 $522 $651

Net Income Attributable to NCI 21 22 27

Net Income attributable to BWA $550 $501 $624

Diluted EPS $2.22 $2.09 $2.70

Growth in Net Sales 26% 1% 4%

Gross Profit Margin 20% 20% 21%

EBIT Margin 11% 10% 11%

Net Income Margin 8% 7% 8%

V. Valuation

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Comps

Company % of 52 P/E P/E P/E EV/EVITDA EV/EVITDA EV/EVITDA Net Debt/

Name Ticker Price Week High TTM FY1 FY2 TTM FY1 FY2 Equity

Magna MG-T $105.82 84% 13.0 10.9 9.8 6.5 5.8 5.5 N/M

JTEKT 6473-TO ¥1,959.00 91% 15.9 14.6 12.7 13.2 11.0 12.8 0.44

Valeo FR-FR € 121.70 96% 18.5 17.0 14.3 7.6 7.0 6.2 0.21

Denso 6902-TO ¥5,429.00 91% 16.5 15.9 13.8 7.2 7.2 6.7 N/M

TRW Automotive TRW-US $103.15 96% 12.0 13.3 12.3 7.2 7.2 6.7 0.21

Mean 15.2 14.4 12.6 8.4 7.6 7.6 0.29

Median 15.9 14.6 12.7 7.2 7.2 6.7 0.21

High 18.5 17.0 14.3 13.2 11.0 12.8 0.44

Low 12.0 10.9 9.8 6.5 5.8 5.5 0.21

BorgWarner BWA-US $54.78 81% 19.1 16.8 15.1 10.2 9.3 8.5 0.14

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DCF (Base Case)

2014E 2015E 2016E 2017E 2018E 2019ETerminal

Value

Revenue $8,292 $8,623 $8,968 $9,327 $9,700 $10,088

EBITDA 1,410 1,467 1,525 1,586 1,650 1,716

Less: D&A 332 346 359 374 389 404

EBIT $1,078 $1,121 $1,166 $1,213 $1,261 $1,311

Plus: Equity Income 47 49 51 53 56 58

Less: Tax 318 331 344 359 373 389

After Tax EBIT $808 $840 $873 $907 $943 $981

Plus: D&A 346 359 374 389 404

Less: Capex 431 448 466 485 504

Less: Changes in Working Capital 50 52 54 56 58

Unlevered Free Cash Flow $704 $732 $761 $791 $822

Terminal Value 18,015

Unlevered FCF 704 732 761 791 822

Discount Period 1 2 3 4 5 5

Discount Rate 0.1 0.1 0.1 0.1 0.1 0.1

Discounted Cash Flow 640 605 572 540 511 11,186

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Price Target

DCF Price Target

Assumption: Revenue growth rate of 4% for base, 6% for bull, and 2% for bear

Base: $59.00

Bull: $64.15

Bear: $54.21

Comps Price Target

Assumption: 10.5x EV/EBITDA multiple

Price Target: $62.30

Weighted Price Target

Equal weight applied to DCF price target and comps price target

Base: $60.65 (10.7% upside)

Bull: $63.22 (15.4% upside)

Bear: $58.25 (6.3% upside)

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