Initiating Coverage of Advanced Transportation: The Road Ahead With

Initiating Coverage of Advanced Transportation: The Road Ahead with Natural Gas and Electrification
February 18, 2014
Aditya Satghare asatghare@fbr.com 646.885.5472 Benjamin Tainter btainter@fbr.com 703.312.9763
Energy & Natural Resources Research: Advanced Transportation FBR CAPITAL MARKETS & CO.
2014 FBR CAPITAL MARKETS & CO.
Institutional Brokerage, Research, and Investment Banking
Important disclosures can be found at the end of this report.

Table of Contents Initiating Coverage of Advanced Transportation: The Road Ahead with Natural Gas and Electrification ................................. 2 Summary & Recommendation................................................................................................................................................ 2 Key Points ............................................................................................................................................................................... 2 Our Investment Thesis Is Focused on Five Key Areas ............................................................................................................. 3 Brief Overview ........................................................................................................................................................................ 7 Key Models ............................................................................................................................................................................. 9 FBR Global Auto Model......................................................................................................................................................... 10 Premium Vehicle Segment.................................................................................................................................................... 11 Market Analysis: Three Key Segments.................................................................................................................................. 13 An Overview of Global CAFE Standards ................................................................................................................................ 17 FBR Global Electrification Model .......................................................................................................................................... 19 Global Separator Model........................................................................................................................................................ 29 Material Handling: Market Overview and Cost of Ownership.............................................................................................. 43 Investment Risks ................................................................................................................................................................... 51 Power Solutions International, Inc. (PSIX) ................................................................................................................................ 52 Westport Innovations Inc. (WPRT) ........................................................................................................................................... 62 Tesla Motors, Inc. (TSLA) .......................................................................................................................................................... 70 Polypore International, Inc. (PPO) ............................................................................................................................................ 88
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February 18, 2014

Coverage Initiated
Initiating Coverage of Advanced Transportation: The Road Ahead with Natural Gas and Electrification Summary & Recommendation
Transportation is a major source of petroleum consumption and carbon dioxide (CO2) emissions, and improvements to existing power trains and use of alternative fuels will drive a major change in the transportation landscape over the coming years. We define the advanced transportation landscape to include technologies that improve the efficiency of traditional internal combustion (IC) engine power trains, electric vehicles (EVs), natural gas vehicles and associated fueling infrastructure, fuel cells for mobile applications, and electric vehicle charging stations. We are launching coverage of four companies: We rate Power Solutions International, Inc. (PSIX), and Westport Innovations Inc. (WPRT) Outperform, and we rate Tesla Motors, Inc. (TSLA) and Polypore International, Inc. (PPO) Market Perform.
Key Points
We expect natural gas to increase its share as a transportation fuel, especially in medium- and heavy-duty trucks, and expect the nations trucking fleet to begin a sustained transition toward natural gas engines. We expect a third of new truck shipments to use natural gas as a fuel by the end of this decade, up from less than 5% today, and see the industry at an inflection point with increased engine availability and attractive pricing on new products. Increased competition within storage solutions, such as compressed natural gas (CNG) tanks, will meaningfully lower incremental costs and will only increase the attractiveness of using natural gas as a fuel. We also see a sizable buildout in fueling infrastructure for natural gas trucks through the end of this decade, and we see a 15%+ fuel displacement opportunity for distillate fuel oil used for on-highway applications. In sectors such as material handling, liquefied petroleum gas (LPG) and natural gas should continue to take share from diesel forklifts due to tightening emission standards and lower operating costs. We also expect electrification to play an increasing role in automotive power trains, accessory electrification, and propulsion for applications such as material handling. It is important to note that, despite decades of improvements to IC engines, current engines can achieve only about 25%40% overall efficiency due to friction, heat, and combustion losses. On the other hand, a fully electric power train can achieve efficiencies upward of 80%, and that coupled with the lower relative cost of electricity versus gasoline can lead to substantially lower operating costs. Looking across our various subsectors, we believe that investors are underappreciating the wide-scale reach of natural gas as a transportation fuel, especially in trucking and material handling applications. While the passenger electric vehicle landscape will evolve rapidly, we believe that this near- to medium-term transition is fully priced in at current stock prices. Select opportunities, however, can be found in areas such as electrification of material handling. We also expect select technologies such as fuel cells, an extension of electrification, to make an impact in material handling. We see Power Solutions as a key beneficiary of increased natural gas penetration in areas such as oil and gas, material handling, stationary power, and on-road trucking. We see earnings growth potential of at least 25% from the companys rapidly increasing product portfolio. Westport is expected to remain a controversial name; however, we believe that recent management changes should transition Westport to a specialty fuel systems provider with sustained profitability and healthy margins. With low investor sentiment and interest, multiple new announcements in 2014 should also serve as a positive catalyst for the stock. We are strong believers in Teslas ability to continue to produce cutting-edge electric vehicles but believe that the current stock is fully pricing in Teslas transition to a Porsche-type manufacturer by the end of this decade. This carries higher execution risk, and we do see the risk/reward to be compelling at current levels. Polypore is expected to retain its high market share within lithium separators, an important component in the electric vehicle supply chain. At current levels, however, the stock is pricing in a meaningful penetration scenario for electric vehicles over the next three to five years. We also see limited upside to our estimates until the next generation of electric vehicles is launched in 2016/2017. Page 2
Our Investment Thesis Is Focused on Five Key Areas

Electric Vehicles
We believe that all the leading original equipment manufacturers (OEMs) now have more detailed product development and launch schedules, including scalable platforms and common architectures. This should enable the OEMs to create varying models from mild hybrids to plug-in hybrid electric vehicles (PHEVs), using similar platforms and architectures, as well as varying sizes of battery and other power train components. We believe that full EV platform development and new models will be somewhat limited by range and battery cost limitations.
We expect OEMs like Nissan Motor Co. Ltd. (NSANY) (Infiniti) and BMW to focus on full EV development, while OEMs like Ford Motor Company (F), Volkswagen AG (VW), Toyota Motor Corporation (TM), and General Motors Company (GM) place a greater emphasis on hybrids and plug-in hybrids. Overall, we expect EV/PHEV penetration to be less than 1% of global lightvehicle (LV) sales by 2015 and 3% by 2020. China continues to remain a wildcard in these forecasts, and developments there will need to be monitored closely, especially given continued government incentives to promote electric vehicles. Also important is the number of joint ventures created to launch electric-only passenger brands in China. Tesla will continue to stand out as one of the only viable full EV manufacturers, given its proprietary power train and battery technology, and we expect industry competition to Tesla to be limited. Teslas key challenge will remain the on-time and on-cost development of the Model X and the Gen 3, managing capital needs to introduce new variants to the Model S, and competing with traditional automakers for vehicle safety and connectivity content. Given its relatively smaller size, supply-chain management around power train components will remain critical for the company. While we remain positive on Teslas evolution into a successful premium auto manufacturer, we believe the shares are fairly valued at current levels. Teslas evolution into a Porsche-type automaker with industry-leading sustainable margins is fully captured at current prices, in our opinion. Further upside will be largely dependent on establishing a manufacturing presence in China and the Gen 3 vehicle achieving unit volumes closer to name plates such as the BMW 3 series within only a few years of launch. We do not see real clarity on this until at least 2017.
Natural Gas
We expect the nations trucking fleet to begin a meaningful transition to natural gas, which we believe will only accelerate from the 2015 time frame. Product availability has increased meaningfully, and pricing is now what we term as commercial pricing, which has led to a multifold increase in orders from the larger fleets who were early adopters, as well as substantial interest from the smaller fleets. We see further cost-reduction potential due to increased competition in natural gas storage tanks, and we expect to see industry consolidation among tank suppliers. While new natural gas engines will dominate the market, we also see dual-fuel technologies to continue to make inroads, and given the fragmented landscape of dual-fuel providers, we would expect to see industry consolidation. Natural gas will also continue to increase its share within the material handling sector, at the expense of diesel engines, and we expect this trend to manifest itself further in the U.S. and also in China over the coming years.
Power Solutions is our Top Pick within this sector. Within transportation applications, we see the company being a major beneficiary from the penetration of natural gas engines in the mediumto heavy-duty truck markets. The companys trucking engines have a meaningful weight and cost advantage over those of larger manufacturers, and we also see Power Solutions continuing to increase its market share globally within the material handling sector. The rapidly tightening emissions landscape, which necessitates the use of expensive emission-control equipment such Page 3
as exhaust gas recirculation (EGR) and selective catalytic reduction (SCR) systems, will further increase the competitiveness of the companys natural gas product offerings.
Technology providers such as Westport and engine manufacturers such as Cummins Inc. (CMI) will continue to maintain their high market shares on natural gas engine shipments. Westport is expected to remain a controversial name, and sentiment remains negative, but we believe that the market is underestimating the profit opportunity from the transition to a technology provider with selected manufacturing expertise, increasing R&D efficiency and benefits from further penetration into heavy-duty applications. The light-duty truck market is large with approximately 2.7 million sold in 2013, and the top 10 brands sold about 2 million units. We estimate a near-term addressable market of about 600,000. However, this segment remains underpenetrated despite the launch of natural gas product offerings for a number of high-volume platforms through a network of third-party qualified vehicle modifiers (QVMs) for GM and Ford and factory-installed natural gas engines by Chrysler Group LLC. We will be monitoring this market closely as it moves beyond the early adopters in the telecom and utility segment. The spread between natural gas and diesel fuel and the long-term stability of this spread remain key drivers for the ongoing shift toward natural gas engines. Natural gas prices have rebounded rapidly from their lows and are currently above $5.00/MMBtu due to higher weather-driven demand, and several factors such as liquefied natural gas (LNG) exports and coal plant retirements could affect long-term prices. Taking these factors into account, along with the contribution from unconventional plays, the FBR exploration & production team anticipates a tightening of the natural gas markets over the coming year and forecasts long-term natural gas prices of $5/MMBtu, in line with current prices and 35% above the 2013 average price of approximately $3.70/MMBtu. As we highlight later, natural gas prices would have to remain above $7/MMBtu for a sustained period of time before economics deteriorate and slow down the shift to natural gas vehicles. Natural gasrelated transportation stocks have underperformed recently with the rapid rise in gas prices, and any further pullback on higher near-term gas prices would present a further buying opportunity.
Other Technologies
In this category, we include technologies such as fuel cells for vehicles, ultracapacitors for start-stop and hybrid applications in passenger and medium-duty applications, and microturbine propulsion units in medium-duty applications. While it is too early to estimate potential market adoption, a number of auto manufacturers such as Toyota and Hyundai Motor Company (HYMTF) have announced plans to introduce fuel cell vehicles in the 2015/2016 time frame. We are also seeing increased investment dollars put to work by OEMs such as VW and GM to potentially introduce fuel cell products. Fuel cells can deliver a driving range at a more affordable cost than current-generation lithium batteries; however, infrastructure in the form of hydrogen fueling stations will remain a key barrier to overcome.
Ultracapacitors have a number of advantages over lithium batteries including speed of discharge and longer life; however, the need to manage ever-increasing hotel loads requires higher energy densities, which is a key drawback of ultracapacitors. We, however, see applications with stop-start characteristics, especially in the medium-duty applications, to be the key area of use for ultracapacitors.
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Infrastructure
Both electric vehicles and natural gas vehicles require their independent charging and refueling infrastructure. Electric vehicles can charge both at home and in public, while commercial natural gas vehicles need to be refueled in return-to-base locations and public fueling stations.
The lack of standardization in EV charging has the potential to slow down overall adoption rates and is creating multiple charging networks in the U.S. For example, Tesla operates its own proprietary supercharger network, Nissan is selling chargers and fast chargers based on the Chademo protocol, while a group of U.S. and European companies are launching chargers based on the SAE protocol. We see the potential for utilities to enter this segment and facilitate industry consolidation.
Component Supply Chain

Our attention here is focused on battery separators, which are one of the key components used in lithium-ion (Li-ion) batteries and play a major role in battery safety and longevity. We expect separator manufacturing to be dominated by a few large players (Asahi Group Holdings Ltd. and Polypore) and do not believe that newer entrants will be able to make major inroads in the market. We estimate the market to be currently oversupplied in terms of installed separator capacity. However, the pace of Teslas growth has the potential to change the industry supply/demand balance given the high separator content in its vehicles.
Polypore is expected to remain one of the leading players for lithium-ion separators used in consumer electronic and electric vehicle applications. We, however, expect the shares to remain range-bound in the near term, as PPO continues to price in meaningful industry adoption of electric vehicles over the next few years. Earnings will also continue to be affected by relatively low capacity utilization and the shift toward PHEVs. Further sustained stock upside will be dependent on wins on high-content/volume models, such as the upcoming Tesla Gen 3, and recapture of market share in consumer electronics.
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The Debate
Debatable Point
Will markets begin to appreciate the extent of natural gas penetration in light-, medium-, and heavy-duty power trains?
Our Thoughts
We expect to see meaningfully higher production levels from engine manufacturers such as the Cummins Westport joint venture, sizable orders from trucking fleets, a number of new engine launches in the medium-duty category, and a competitive pricing environment, which should result in industry volumes more than doubling over 2013 levels. Installed fueling infrastructure will also benefit the new sales process. Light-duty penetration will need to be monitored for signs of traction away from earlyadopter customers.
Time Frame
Impact
3 to 6 Months
Will material handling in China and the U.S. surprise to the upside?
Increased product availability and operating cost savings could have a meaningful positive impact on material handling shipments in 2014 in China. Within the U.S., we see natural gas forklifts continuing to increase share, despite competition from electrics, given advantages in certain duty cycles.
6 to 12 Months
Will the large number of new electric vehicle launches affect the premium segment in 2014?
Several high-profile launches are expected in 2014, such as the Tesla Model X, Cadillac ELR, BMW I3, VW Golf E, and MercedesBenz B Class Electric. Among these vehicles, only the Tesla Model X could have a meaningful impact in its category, but this is more a 2015 story given the late-2014 launch. Within the mid-size segment, we await the launch of the new Chevy Volt in 2015/2016, which should come with increased range, a more powerful engine, and better pricing.
12 Months
Will increased natural gas price volatility negatively affect sentiment?
Recent weather-related spikes have seen prices go above $5/MMBtu. Although we see limited impact on actual economics unless gas rises above $7/MMBtu on a sustained basis, sentiment toward natural gas stocks could weaken on any further weatherrelated spike. Our FBR forecasts call for long-term prices of $5/MMBtu.
3 Months
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Brief Overview
Below, we detail the key areas of the advanced transportation landscape and the main players within each segment.
IC Engine Power Train Improvement

These mainly include engine technologies such as turbo charging, supercharging, and variable valve timing; transmission systems such as dual-clutch transmissions; and newer gear box designs such as 8- to 10-speed transmissions. Thermal management systems are also expected to play a key role in increasing overall engine efficiency, and we also include advancements such as electric all-wheeldrive systems (AWD) in this category. Todays automobile is extremely complex, with the need to monitor a large number of power train and vehicle parameters also leading to increased sophistication in sensor systems. Public companies. BorgWarner Inc. (BWA) has the best-in-class industry portfolio spanning IC engine and drive train products. Sensata Technologies Holding N.V. (ST) is the leader in sensors used to monitor various parameters for power train, emission, and vehicle safety. Private companies. These companies have mostly focused on implementing more innovative solutions to existing IC engine designs, such as redesigning key IC engine components, including pistons, combustion chambers, or new engine designs such as opposed piston structures and better rotary Wankel designs. Lead times to bring new and radical designs to market have been very long given lengthy testing requirements. Some of the leading players here include Transonic Combustion, Pinnacle Engines, Inc., Liquid Piston, and EcoMotors International.
Electric Vehicles
We classify vehicle electrification technologies into power train electrification, electrification of ancillary systems, and key components used in electrification sub-systems. Power train electrification can be broadly classified into (a) mild hybrids without acceleration assist, (b) mild hybrids with acceleration assist, (c) full hybrids, (d) plug-in hybrids, and (e) full electric vehicles. Key ancillary electric vehicle systems include electric power steering (EPS) and electric HVAC systems (A/C compressor). Key electric vehicle components include batteries and their components (anode, cathode materials, electrolytes, and separators), power train components (motors), power train control systems (inverters and motor controllers), and transmission components (gear boxes). Public companies (OEMs). Most of the leading auto OEMs have introduced some type of electric vehicles. Start-stop or mild hybrid systems have been introduced by Ford, BMW, GM, and Mercedes (a Daimler AG [DDAIF] brand) in the U.S. Buick (a GM brand) has introduced mild hybrid systems with accelerative assist or e-Assist; Toyota and Ford are leading manufacturers of full hybrid models. Tesla is the leading electric vehicle manufacturer, along with Nissan and BMW. GM has the popular Volt PHEV platform. Smaller players such as Kandi Technologies Group, Inc. (KNDI) manufacture lowspeed electric vehicles in markets such as China and are looking to expand their U.S. presence. Public companies (components). Within components, Johnson Controls, Inc. (JCI) remains the leading supplier of start-stop batteries followed by Exide Corporation (XIDE). Electric vehicle batteries are manufactured by LG Chem (LGLD), Samsung Electronics Co. Ltd. (SSNLF), Panasonic Corporation (PCRFY), GS Yuasa (6674-JP), and The Dow Chemical Company (DOW). Key components such as lithium battery separators are manufactured by Polypore, and glass mat separators used in start-stop batteries are manufactured by Owens Corning Inc. (OC). One of the key raw materials used in electric vehicle batteries is lithium and is mined by companies such as FMC Corporation (FMC), Rockwood Holdings, Inc. (ROC), Sociedad Quimica y Minera S.A. (SQM), Orocobre (OCE-AU), and Canada Lithium Corp. (CLQ-CA). A few vehicles have also begun to use ultracapacitor-based mild
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hybrid systems, and Maxwell Technologies, Inc. (MXWL) is the largest manufacturer of ultracapacitors. Private companies. Several private companies are developing next-generation lithium-based batteries. Key among those include Envia Systems and Sakti 3. Similar to private companies pursuing advances in IC engine power trains, lead times to bring new designs to market are long due to rigorous testing requirements.
Grid Storage
Storage batteries used in electric vehicles have numerous applications when used in grid support applications, such as frequency regulation and peak shaving. Electric vehicles could also be used to provide vehicle-to-grid services and perform some of these functions on a micro level. While this remains an evolving market, we see numerous opportunities where electric vehicles and their storage systems, both new and used, find their way into providing grid support services.
Natural Gas Vehicles

These include mainly medium- and heavy-duty trucks, which use either a dedicated or dual-fuel natural gas engine. Natural gas engines are also used in light-duty trucks, although most of these trucks use bi-fuel systems, which can run on both gasoline and natural gas. Passenger vehicles can also run on natural gas, although the market for these vehicles has mostly developed in emerging markets, with only limited impact in the U.S. Natural gas offerings with the Class 7/8 truck category are relatively more mature than electric vehicles, with all major truck OEMs now offering a natural gas product. Public companies (OEMs). The key truck OEMs are PACCAR Inc. (PCAR), which includes the Kenworth and Peterbilt brand, and Volvo (VOLVY), which also includes Mack, Freightliner (Daimler), and Navistar (NAV) through its international brand. The leading natural gas engine manufacturers include Cummins, through its Cummins Westport joint venture, Power Solutions, and Weichai Power Co. Ltd. (2338-HK) in China. Weichai Power Co. Ltd. and China Yuchai International Limited (CYD) are the leading engine manufacturers in China. Dual-fuel systems for natural gas engines are manufactured by American Power Group (APGI), Ecodual, Clean Air Power (CAP-GB), and OmniTek Corp. (OMTK). Public companies (components and fueling systems). Westport is one of the leading manufacturers of natural gas components used in natural gas engines globally. Fuel Systems Solutions, Inc. (FSYS) supplies natural gas engine components for light-duty truck engines, material handling, and industrial applications. Other component manufacturers include Quantum Fuel Systems Technologies Worldwide, Inc. (QTWW), a leading manufacturer of natural gas storage tanks.
Infrastructure
Both electric and natural gas vehicles require a large refueling infrastructure. With electric vehicles expected to be used mainly for passenger applications, the charging infrastructure can be divided into residential (110, 240V) and commercial categories (Level 2 and DC fast charge). Leading manufacturers include Siemens AG (SIE-DE), Leviton Manufacturing Co., Inc. , and Schneider Electric (SU-FR), and parts are sold either through a partnership with the OEMs or through independent electrical contractors. OEMs such as Tesla have begun to install their proprietary supercharger network around the country, and Nissan is manufacturing Level 3 DC fast chargers based on the Japanese Chademo protocol. Public companies (EV infrastructure). Tesla is soon expected to have the largest supercharger network in the nation and in select European countries. Involvement from utilities has been limited with NRG Energy, Inc. (NRG), through its wholly owned subsidiary NRG EV, operating a network of 70 sites in California, Washington, D.C., Dallas, and Houston. Car Charging Group, Inc. (CCGI) owns and operates public car charging equipment throughout the country, and following the purchase of Page 8
Ecotalitys Blink Assets and Blink Network, CCGI now owns and operates more than 13,400 charging stations. Private companies (EV infrastructure). ChargePoint, Inc., formerly Coulomb Tech, manages a network of more than 15,000 charging spots around the country. Greenlots provides similar services, such as charging stations installation, support, and network management to EV charging station owners. EV-Charge America and Clipper Creek, Inc. are manufacturers of EV charging stations for both commercial and residential use.
Natural Gas Fueling Stations

The availability of a public or dedicated fueling infrastructure is even more important for commercial natural gas vehicles. Several public and private players have begun to build fueling infrastructure, with the ability to dispense either compressed natural gas or liquid natural gas or both. Some of the constraints in this buildout are the large capital outlays to build infrastructure, securing LNG feedstock supply, and location constraints to open stations given low levels of current fleet penetration. Public companies (natural gas). Clean Energy Fuels Corp. (CLNE) operates the largest network of natural gas refueling stations in the country. Trillium CNG, a subsidiary of Integrys Energy Group, Inc. (TEG), is a provider of CNG fueling services through an extensive network of both public and private fueling stations. Private companies (natural gas). Private companies such as Blue Energy Fuels (owned by ENN Group Co. Ltd. in China) are also working to build and maintain networks of LNG refueling stations.
Key Models
We are introducing the following key models, which drive our market opportunity forecast across the key segment verticals. Our global auto model forms the basis for our penetration forecasts for EV/PHEV and hybrid vehicles, and the premium segment model highlights the expected inroads to be made by electric vehicles within this high-value segment. The global electrification model details our EV/PHEV and hybrid forecasts and forms the basis for the separator model, a key component within the EV supply chain. Complementing these models is the global acid battery model, which forms the basis for global start-stop penetration. Within the natural gas segment, our natural gas trucking model details our forecasts for natural gas penetration within the heavy-duty trucking segment. The material handling model details the market opportunity by weight class and power train while highlighting the relative cost economics of each power train. FBR global auto modeldetails our forecast for global passenger vehicles sold, along with penetration and forecasts of key product technologies.
Global premium vehicle modeldetails our forecast for premium passenger vehicles sold globally. Relevant to understanding market share gains by electric vehicles, given that most of the electric vehicles sold this decade will compete in this category.
Global lead acid battery modeldetails our forecast for traditional lead acid batteries sold worldwide, which then forms the basis for our start-stop advanced absorbed glass mat (AGM) forecast. FBR global electrification modeldetails our forecast for EVs, PHEVs, and hybrids through the end of this decade.
Global separator modeldetails the market opportunity for lithium-ion separators, a key component of lithium-ion batteries.
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FBR natural gas trucking modeldetails our forecast for natural gas trucking penetration across Class 68 trucks.
Natural gas fueling station modeldetails our forecast for U.S. natural gas fueling stations.
FBR material handling model and cost calculatordetails the market opportunity for the material handling market by power train.
Material handling cost calculatorhighlights the relative cost advantages of electric and natural gas/LPG forklifts.
FBR Global Auto Model

We forecast global auto production to increase 3.7% to close to 85 million units in 2014, up from about 82 million units in 2013. Driving this is continued growth in North America (+5%), China (+7%), other Asia (+4%), and South America (+3%). We expect a modest recovery in Europe with volumes up about 2%, although key questions remain about the right level of long-term structural demand. We are roughly in line with the consensus for 2014. Through 2018, we expect global auto production to reach close to 96 million units. Passenger vehicles are expected to account for about 65% of global auto production, or about 65 million units. Global Light-Vehicle Production
100 90 80 70 60 50 40 30 20 10 0
2013-2020 CAGR by Region China: 7.0% North America: 2.0% Europe: 0.8% Rest of Asia: 3.8% Rest of World: 3.9%
2006
2016
2000
2001
2002
2003
2004
2005
2007
2008
2009
2010
2011
2012
2013
2014
2015
2017
2018
2019
North America
Source: FBR Research
Europe
China
Rest of Asia
Rest of World
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2020
2014 FBR CAPITAL MARKETS & CO. Global Projected Vehicles Sales
35.0 33.0 31.0
vehicles (millions)
2013-2020 CAGR by Region China: 6.49% North America: 2.31% Europe: 0.55% Rest of Asia: 3.38%
29.0 27.0 25.0
23.0
21.0 19.0 17.0 15.0 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China
North America
Europe
Rest of the World
Premium Vehicle Segment

We believe it is important to understand the market dynamics within the premium vehicle segment, as electric vehicles, plug-in hybrids, and high-performance hybrids are expected to have prices that overlap this segment. We acknowledge that our definition of premium vehicles might differ from some third-party forecasters, but we are including that segment of the market where we see the most potential for overlap. Tesla has the potential to make the highest impact in this segment, given its high-performance all-electric power trains and luxury features, while manufacturers such as BMW, through its i brand, offer a unique city mobility experience. We also believe that the overlap between the premium segment and mid-segment EV/PHEVs will increase as manufacturers such as Mercedes gain traction with the CLA class, BMW launches the 2 series, and Audi AG launches the A3. These entry-level vehicles are designed to increase the overall market reach by targeting entry-level prices close to $30,000. This price tag will not be too far away from the price of a well-loaded Chevy Volt after accounting for the $7,500 tax credit. We define the market to include luxury vehicles such as the BMW 5 series and Mercedes E class; entry-level luxury such as the BMW 3 series and Mercedes C class; and SUVs such as the BMW X3 and Mercedes M class, all the way to the Porsche Panamera and Range Rover. While we expect some impact in 2014, it will become important to monitor the impact on sales within this category in 2015, especially as Tesla launches the Model X, BMW launches the i3, Mercedes the B class, and GM is expected to launch the new Chevy Volt in 2015/2016, with improved range, a more powerful range extender engine, and an attractive price. We expect overall luxury vehicle sales to increase from 3.2 million to 4.2 million through the end of this decade, accounting for about 4% of global light-vehicle sales. Within this, we expect high-singledigit growth rates in the entry-level luxury category, especially in the Asian markets (China will be a key driver), along with an increasing proportion of SUVs, again from Asian markets. The luxury market is expected to be one of the fastest-growing segments of the automotive industry, and our estimates do not fully take into account the market potential in China. With many industry participants calling for low-double-digit growth in the premium category in China, this market has the potential to surprise to the upside.
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2014 FBR CAPITAL MARKETS & CO. Global Luxury and Passenger Vehicle Sales
120.0 100.0 Global LV Sales CAGR 2012-2015: 3.3% 2012-2020: 3.4% 2015-2020: 3.0% 72.4 Luxury Sales CAGR 2012-2015: 2.7% 2012-2020: 3.1% 2015-2020: 2.8% 85.2
98.0
80.0
60.0 40.0 20.0
3.2
0.0
3.7
2013 2014 2015 2016 2017
Global LV Sales
4.2
2018 2019 2020
2012
Global Luxury Sales

Base-Case Luxury Auto Sales

Entry Level % chg Luxury Sedan % chg SUV % chg Global Total Luxury Sales % chg 2012 1,385,763 1,274,863 539,840 3,200,465 2013 1,441,349 4.0% 1,335,937 4.8% 566,091 4.9% 3,343,377 4.5% 2014 1,499,548 4.0% 1,375,748 3.0% 619,362 9.4% 3,494,658 4.5% 2015 1,568,966 4.6% 1,419,865 3.2% 617,084 -0.4% 3,605,916 3.2% 2016 1,653,356 5.4% 1,464,780 3.2% 620,266 0.5% 3,738,402 3.7% 2017 1,719,310 4.0% 1,495,979 2.1% 623,328 0.5% 3,838,617 2.7% 2018 1,784,656 3.8% 1,539,450 2.9% 627,103 0.6% 3,951,209 2.9% 2019 1,853,970 3.9% 1,582,864 2.8% 631,067 0.6% 4,067,901 3.0% 2020 1,917,144 3.4% 1,631,196 3.1% 634,397 0.5% 4,182,737 2.8%
Source: FBR Research and Automotive News
Upside-Case Luxury Auto Sales

Entry Level % chg Luxury Sedan % chg SUV % chg Global Total Luxury Sales % chg 2012 1,385,763 1,274,863 539,840 3,200,465 2013 1,441,349 4.0% 1,335,937 4.8% 566,091 4.9% 3,343,377 4.5% 2014 1,508,076 4.6% 1,387,826 3.9% 623,669 10.2% 3,519,571 5.3% 2015 1,594,663 5.7% 1,440,172 3.8% 623,340 -0.1% 3,658,175 3.9% 2016 1,695,389 6.3% 1,493,223 3.7% 628,102 0.8% 3,816,714 4.3% 2017 1,780,634 5.0% 1,543,383 3.4% 631,163 0.5% 3,955,180 3.6% 2018 1,872,731 5.2% 1,599,051 3.6% 636,294 0.8% 4,108,077 3.9% 2019 1,988,002 6.2% 1,655,487 3.5% 641,642 0.8% 4,285,130 4.3% 2020 2,065,544 3.9% 1,706,268 3.1% 646,382 0.7% 4,418,195 3.1%
We believe that luxury car sales will be a key component of overall passenger vehicle sales growth over the remainder of the decade. Although luxury vehicles only make up a small portion of auto sales, luxury is a high-ticket part of the market given that these vehicles cost 3x4x typical mass market passenger vehicles. We divide the luxury market into three main segments: entry-level or mid-size sedans, luxury sedans, and SUVs. Currently, the key manufacturers in this category include industry leaders such as Mercedes, BMW, Audi, Porsche (PAH3-ETR), Cadillac, Lexus, Infiniti, and Jaguar Land Rover, a division of Tata Motors Limited (TTM).
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Market Analysis: Three Key Segments

Premium Luxury
This category consists of unit sales of 1.37 million annually in 2013, with about 233,000 vehicles sold in the U.S., about 690,000 sold in Europe, and 350,000 in the rest of the world (ROW). Luxury Sedan 2013E
Entry Level
This category consists of about 1.4 million vehicles, with about 410,000 sold in the U.S. and about 640,000 in Europe and 390,000 in the rest of the world. Mid-Size Car (Entry Level) 2013E
Page 13
Luxury SUV
This category consists of about 560,000 vehicles sold globally, with the U.S. accounting for 370,000 and the rest of the world for about 194,000. Luxury SUV 2013E
2012 Annual Sales Volumes: Luxury Sedan, Luxury SUV, Mid-Size VehicleTop Brands
1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 A6 E Class BMW 5 Total M Class BMW X5 Lexus Range RX Rover Total A4 C Class BMW 3 Total
Luxury Sedan
Luxury SUV
Mid-Size
1.4M
1.3M
539K
284K 314K 359K 142K 57K 67K 38K 330K 307K 300K
The exhibit above highlights sales by name plate for the most successful brands in this category, with average global name plate sales close to 300,000 vehicles. The success of the three leading brands in this category can be attributed to consistently delivering high-quality, differentiated automobiles and developing a strong global brand. As a result, these brands have been able to sustain premium category pricing while continuing to grow the segment. The exhibit below highlights a potential scenario in the U.S. luxury and mid-size luxury market, the key point being that the success of companies like Tesla will lead to market share shifts within the luxury segment. The top three auto manufacturers are bound to respond with more vehicle content, both in terms of connectivity and safety features, and more competitive pricing given cheaper procurement and larger R&D resources. We will be monitoring this trend closely, especially in 2015 when Tesla starts large-scale production of the Model X.
Page 14
2014 FBR CAPITAL MARKETS & CO. Luxury Sedan Demand Progression in North America
260K
100%
90%
237K
252K
Tesla, 10%
272K
Tesla, 17%
Other, 26%
Other, 25% Other, 31%
80% 70% 60% Infiniti M, 9% 50%

Lexus LS, 10%
S-Class, 9% Cadillac, 15% Cadillac, 6% Audi A6, 8% Cadillac, 10% Audi A6, 9%
E-Class, 28%
Other, 29%
Cadillac, 9%
40% 30% 20% 10% 0% 2005

5 Series E-Class
Audi A6, 8%
E-Class, 19%
E-Class, 23%
E-Class, 21%
5 Series, 20%
5 Series, 24%
5 Series, 18% 2020 - Base Case

Audi A6 Cadillac S-Class
5 Series, 17% 2020 - Upside

Other Tesla
2012
Lexus LS Infiniti M
Entry-Level Luxury Demand Progression in North America

434K
100% Tesla, 10%
90%
422K
502K
532K
Tesla, 15%
Other, 20%
Other, 21%
80% Audi A4, 11% 70% 60% 50%

40% C Class, 14%
Audi A4, 8%
C Class, 21% Audi A4, 9% Audi A4, 8%
Cadillac CTS, 14% Cadillac CTS, 11% C Class, 19% Infiniti G37, 16% Infiniti G37, 14% Cadillac CTS, 9%
C Class, 18%
30% 20% 10% 0%
Cadillac CTS, 9%
3 Series, 25%
3 Series, 24%
3 Series, 20%
3 Series, 18%
2005
3 Series Infiniti G37
2012
Cadillac CTS C Class
2020 - Base Case

Audi A4 Lincoln Other Tesla
2020 - Upside
Page 15
We focus our attention on two key components that are affected by the shift in the markets toward electrified power trains: traditional lead acid batteries and lithium-ion separators. Traditional lead acid batteries will be affected as a shift toward absorbent glass mat (AGM) batteries used for start-stop applications reduces demand for traditional lead acid batteries. Also affected will be the supply chain for lead acid batteries, and manufacturers of key components such as lead acid separators (Polypore) will see a negative impact to their overall shipments, while those that supply glass mat separators (Owens Corning) to AGM batteries should benefit. As detailed in our lead acid model below, we see an annual impact of 100 bps to lead acid shipment growth globally, or about 50% of incremental growth. Lithium-ion separators, on the other hand, should see a meaningful positive impact on total demand from the increased penetration of electrified power trains. The two major sources of demand for the separators will be from consumer electronics, which use between 0.05 M2 and 0.64 M2, and automobile batteries, for which hybrids use on average 85 M2, while EV/PHEV vehicles use on average 425 M2 of separator. As a result, as the market share of PHEV, EV, and hybrid vehicles increases, the demand for separators should increase proportionally. Global Lead Acid Battery Shipment Model
Global
Total Shipments (M Units) Shipments - Total Batteries OE - % chg Aft Mk t - % chg Total growth Shipment Break down (M Units) Shipments - Flooded % chg Shipments - AGM % chg Mark et Opportunity Unit Pricing ($) % chg Market Size - Flooded ($B) 2011 390 2012 400 4.7% 2.0% 2.5% 391 1.8% 9 50.0% $51 1.0% $20 2013E 410 4.6% 2.0% 2.5% 398 1.8% 12 32.7% $51 1.0% $20 2014E 420 4.1% 2.0% 2.4% 405 1.7% 15 25.0% $52 1.0% $21 2015E 430 3.8% 2.0% 2.4% 411 1.4% 19 27.3% $52 1.0% $21 2016E 440 3.4% 2.0% 2.3% 416 1.3% 24 23.8% $53 1.0% $22 2017E 450 3.3% 2.0% 2.3% 421 1.3% 28 20.2% $53 1.0% $22 2018E 460 3.4% 2.0% 2.3% 427 1.4% 33 15.9% $54 1.0% $23 2019E 470 3.3% 2.0% 2.3% 432 1.2% 38 15.5% $54 1.0% $23 2020E 481 3.3% 2.0% 2.3% 437 1.2% 43 14.9% $55 1.0% $24
CAGR
2013-2015E 2013-2020E
Total Battery Shipments 2.4% 2.3% Flooded Shipments 1.6% 1.4% AGM Shipments 26.1% 20.3% Impact from AGM Growth 0.8% 0.9%
384 6
$50 $19
Page 16
An Overview of Global CAFE Standards

Vehicle fuel efficiency standards are designed to reduce fuel consumption and CO2 emissions and lower dependence on foreign oil. The U.S., EU, Canada, China, and Japan have introduced fuel efficiency standards and have introduced or passed fuel improvement targets over the next 10 15 years. Fuel consumption and CO2 targets are measured in MPG, Km/L, or grams of CO2 per km and are based mainly on the U.S. combined or European Union NEDC drive cycle. Currently, Japan and Europe lead the world in fuel efficiency standards, while the U.S. has among the lowest fuel efficiency standards. These standards are implemented on either a voluntary or mandatory basis, with most standards being implemented on a mandatory basis. Converted to the U.S. corporate average fuel economy (CAFE) basis, most standards globally call for a 3%5% annual improvement in fuel economy over the next 1015 years. The European Union is expected to remain the leader in fuel economy. The exhibits below detail country/region-specific standards. Historical Fuel Economy and Current/Proposed Standards
Source: FBR Research and The International Council on Clean Transportation (ICCT)
Page 17
2014 FBR CAPITAL MARKETS & CO. Historical CO2 Emission and Current/Proposed Standards
Source: FBR Research and The International Council on Clean Transportation (ICCT)
The U.S. Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHSTA) introduced the final ruling in August 2012 that would extend CAFE standards to model years 20172025. The ruling covers passenger cars, light-duty trucks, and medium-duty passenger vehicles and would require fleet-wide CO2 targets of 163 gallons/mile, equivalent to 49.5 MPG to 54.5 MPG, or roughly a doubling from current levels in fuel economy. In terms of CO2, this would result in a decrease in CO2 emissions from 2016 levels of 250 gallons/mile to 163 gallons/mile. These targets will be applied on the entire mix of a manufacturers fleet and can be achieved through improvements in fuel economy, as well as technological improvements such as increased air conditioning efficiency. These standards are based on vehicle footprint and should result in different standards for different sizes (compact, mid-size, full-size) of passenger vehicles; in other words, larger vehicles will have higher targets. In addition, credits will be given to improvements to air conditioner (AC) systems and the use of electrification technologies such as start-stop, EV/PHEVs, and fuel cell power trains. In the real world, this is expected to translate into fuel economy targets (vehicle sticker) ranging from 40 MPG to 50 MPG for full-size to compact cars and 26 MPG to 38 MPG for large pickup trucks to small SUVs. Electric vehicles, plug-in electrics, and CNG vehicles would also have an added multiplier through 2021 (2.0x1.5x), which would increase their weight in fleet-wide calculations. Hybridization of full-size pickup trucks will also be eligible for up to a 20 gallons/mile CO2 credit.
Page 18
FBR Global Electrification Model

Global Electrification Model
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Vehicle Sales; US, Europe, China (M Units) EV/PHEV Start-Stop AGM Start-Stop AGM (Incl. Replacement) Start-Stop Li-ion Hybrid - other Other Gasoline Revenues ($M) EV/PHEV Start-Stop AGM Start-Stop Li-ion Average Penetration EV/PHEV Penetration Start-Stop AGM Penetration Start-Stop Li-ion Penetration Hybrid Penetration (excl. Li-ion) Global Battery Supply Opportunity ($M)
47.5 0.0 3.1 0.9 44
48.4 0.0 3.6 0.7 45
49.7 0.1 5.5 8.9 0.0 1.1 44
51.3 0.1 7.1 11.9 0.0 1.4 44
54.3 0.3 8.4 14.9 0.0 1.5 46
56.7 0.5 10.1 19.0 0.1 1.6 46
58.0 0.7 12.1 23.5 0.6 1.7 45
59.4 0.9 13.9 28.3 0.9 1.8 44
61.3 1.3 15.4 32.8 1.5 2.0 43
63.2 1.6 17.1 37.8 1.7 2.1 43
64.9 1.8 18.9 43.5 1.8 2.3 42
$36 $0 $0 0.0% 6.5% 0.0% $36
$490 $686 $0 0.1% 7.4% 0.0% 1.5% $1,175
$915 $1,063 $4 0.2% 11.1% 0.0% 2.2% $1,983
$1,304 $1,429 $41 0.3% 13.9% 0.1% 2.7% $2,774
$3,061 $1,749 $37 0.6% 15.5% 0.1% 2.7% $4,847
$4,806 $2,174 $101 0.9% 17.8% 0.3% 2.8% $7,081
$5,796 $2,629 $470 1.2% 20.8% 1.1% 2.9% $8,895
$7,356 $3,091 $594 1.6% 23.5% 1.4% 3.1% $11,041
$9,852 $3,506 $920 2.2% 25.1% 2.4% 3.2% $14,278
$11,052 $3,957 $1,008 2.5% 27.0% 2.7% 3.4% $16,016
$12,107 $4,445 $1,022 2.8% 29.2% 2.8% 3.5% $17,573
Our electrification model summarizes our key forecasts for light-vehicle electrification potential through the end of this decade. Our key forecasts are as follows:
Our electrification model includes electric vehicles (EVs), plug-in hybrids (PHEVs), hybrids (mild, dual-motor), start-stop, and lithium-ion start-stop. EVs include full electric power trains (Tesla Model S, Nissan Leaf), plug-in hybrids (Chevy Volt, BMW i3, Toyota Prius), and start-stop (BMW 35 Series, Chevy Malibu, Ford Fusion). Expect start-stop to use AGM; electric power trains will still only represent 6% of light-vehicle sales in key markets such as the U.S., Europe, and China. Start-stop vehicles are expected to represent about 30% of total light vehicles sold in these markets by 2020. Geographical differences will see Europe having about 70% penetration, the U.S. close to 15%, and China less than 5%. The pace of adoption of start-stop in the U.S. and China remains somewhat uncertain, but these two markets could be a source of potential upside. Europe remains a very mature market for start-stop. Lithium-ion-based mild hybrid systems will begin to be introduced around 2016/2017. The U.S. will lead the way in EV/PHEV sales, with total sales approaching 330,000 by 2015 and 1 million units by the end of this decade. High-volume manufacturers should be able to benefit from the $7,500 tax credit at least until 2016/2017. The current time line for new model introductions should enable a smooth transition as new vehicles will come with improved driving and cost characteristics, more than offsetting the lack of the tax credit. Our U.S. model is driven by our bottom-up analysis of various electric vehicle models, based on their expected launch dates and our projected volume estimates. We will look to add further detail to our Asian and European models as more information becomes available on model launches and timing. China remains the wild card for EVs/PHEV. Despite very modest near-term sales, the policy environment continues to remain very supportive, and a number of foreign joint ventures should see the launch of EV-only brands. Total battery supply opportunity remains large at $4.8 billion by 2015 and $17 billion by 2020. Page 19
The exhibits below detail the global revenue opportunity by type of technology and electrification opportunity by geography. Global Revenue Opportunity from Vehicle Electrification
$20 $18 $16 $14 $12 $11 $9 $7 $5 $3 $1 $2 $14 $16 $18
($B)
$10 $8
$6
$4 $2 $0 2010 2011 2012
2013
2014
2015
2016
2017
2018
2019
2020
Start-Stop AGM
Start-Stop Li-ion
EV/PHEV
Global Vehicle Electrification Opportunity

80.0 70.0 60.0
59.4 61.3 63.2 29%
35% 30%
64.9 58.0
(M Units)
50.0
47.5 48.4
49.7
51.3
54.3
56.7 18%
25% 20% 15%
40.0 30.0 20.0 10.0 0.0

7.4%
10% 5% 0%
2010
2012
2014E
2016E
2018E
2020E
EV/PHEV & Hybrid Start-Stop Li-ion EV/PHEV & Hybrid Penetration Source: FBR Research
Start-Stop AGM Other Gasoline Start-Stop AGM Penetration
Page 20
2014 FBR CAPITAL MARKETS & CO. China Vehicle Electrification Opportunity
35.0
3.0%
30.0
28.0 26.4 23.5 22.2

19.3
29.7
25.0
24.9
2.0%
20.8
(M Units)
20.0
16.7
15.0
17.1
17.9
1.0%
10.0
5.0
0.0
0.0%
2010
Other
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
EV/PHEV Sales Li-Ion Penetration %
Start-Stop AGM Sales EV/PHEV Penetration %
Start-Stop Li-Ion Sales AGM Penetration %
Europe Vehicle Electrification Opportunity

25.0 100%
86%
20.0
90% 80%
19.3
18.7 17.3 16.8

17.1
17.4
17.4
17.4
17.7
18.1
18.1
70%
15.0
(M Units)
51%
60% 50%
10.0
40%
30% 5.0 20% 10% 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Other
0% 2020
EV/PHEV Sales EV/PHEV Penetration %
Start-Stop AGM Sales AGM Penetration %
Start-Stop Li-Ion Sales Li-Ion Penetration %
Page 21
2014 FBR CAPITAL MARKETS & CO. U.S. Vehicle Electrification Opportunity (Units)
18.0 16.4 16.0
14.5
17.1
17.1
17.1
17.1
17.1
17.1
16% 14% 12%

10%
15.2
15%
14.0 12.6
12.0
11.5
(M Units)
10.0 8% 8.0
6.0 6%
7%
4.0 2.0 0.0 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E EV/PHEV Sales Other Li-Ion Penetration % Start-Stop AGM Sales EV/PHEV Penetration % Start-Stop Li-Ion Sales AGM Penetration %
4% 2% 0%
Global AGM Opportunity by Region

$5,000 $4,500 100% 90%
$4,000 $3,500 $3,000
80% 70% 60% 50% 40% 30%

20% 10%
($M)
$2,500 $2,000 $1,500

$1,000 $500
$0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
0%
China Start-Stop Revenue (AGM) U.S. Start-Stop AGM Revenue Europe Penetration %
Europe Start-Stop Revenue (AGM) U.S. Penetration % China Penetration %
Page 22
Fuel Economy ImprovementKey Components

Automakers can meet the improvements in fuel economy by targeting a number of areas within a vehicle, such as improvements in power train, transmission, body structure, tires, and use of electrical accessories. Key areas of improvement within these categories include engine downsizing, turbo charging, gasoline direct injection, dual-clutch transmissions, 7- to 10-speed transmissions, aluminum body structure, low-resistance tires, electrical power steering, and switching to diesel engines. While diesel engines can offer substantial fuel economy savings, the uptake of diesel engines in markets such as the U.S. could be limited by consumer preferences and increased costs to comply with stringent emission mandates. Vehicle electrification also remains a key component to improving the fuel economy of existing vehicles through start-stop hybrids, hybrids with energy storage batteries to full electric vehicles, or plug-in hybrids. We define vehicle electrification to include AGM batteries used in start-stop models, nickel metal hydride (NiMH)-based hybrids, dual-motor hybrids, Li-ion-based hybrid systems, disruptive start-stop technologies using ultra capacitors, and plug-in hybrids/pure electric vehicles. The key decision in implementing different fuel improvement technologies remains the trade-off between the incremental cost of the technology and the associated fuel economy improvement. The exhibits below detail the cost/benefit trade-off of using different technologies for increasing fuel economy and the incremental cost of using each technology. In terms of improvement to the vehicle power train and transmission, we see components such as electrical power steering and lowresistance tires offering a 2%6% improvement in fuel economy at an incremental cost of $200 $250. Improvements in transmission can improve fuel economy by 3%7% at an incremental cost of $500$600. Lightweight body structures can improve fuel economy by 6%8% at an incremental cost of $900 per vehicle. In terms of power train improvement, we see engine downsizing/turbo charging and gasoline direct injection as two key technologies to improving fuel consumption by 12%15% at an incremental cost of $800$1,400. Our analysis does not cover diesel engine power train improvements, such as homogeneous charge compression ignition (HCCI), which offer the potential to significantly improve the fuel economy of diesel engines. The exhibit below highlights the incremental costs for improvements to the IC engine. Incremental Costs to Consumers with Improved Fuel Economy (Gasoline and Diesel)
$2,000 $1,800 $1,600
Turbocharging/ Downsizing $1,400 Aluminum Body Structure $900 7/8 Speed Transmission $600 Dual-Clutch Electrical $500 Power Steering $250
Diesel Engine $2,000
$1,400 $1,200 $1,000

$800 $600 $400 $200 $0 0%
Gasoline Direct Injection $800
Low-Resistance Tires $200
5%
10%
15%
20%
25%
Page 23
Vehicle electrification technologies have the potential to significantly improve fuel economy, albeit at much higher incremental costs. However, technologies such as start-stop have the potential to offer 3%8% improvement in fuel economy at an incremental cost of $500$800. Lithium-ion-based hybrids and mild hybrids using NiMH can offer fuel economy improvement of 20%30% at an incremental cost of $2,200$2,700. Dual-mode hybrids can increase fuel economy by more than 50% at an incremental cost of $3,000$3,500. The exhibit below highlights the incremental costs and improvements to fuel for start-stop technologies in hybrid vehicles. Diesel engines offer another option to increase fuel economy by 25%30% at an incremental cost of $2,000 per vehicle. Diesel vehicles have benefited from significant improvements in turbo charging and account for a sizable portion of the European market, as well as large emerging markets such as India. We, however, believe that diesel vehicles will remain a small part of the U.S. market, given historical customer aversion to diesel vehicles and the incremental cost of meeting emission regulations. Incremental Costs to Consumers with Improved Fuel Economy (Hybrid and Diesel)
$3,500 $3,000 $2,500 $2,000
Li-ion Hybrid (Start-Stop) $2,250 Diesel $2,000 NIMHMild Hybrid $2,700 NIMH-Hybrid (Dual-Mode) $3,000
$1,500 $1,000 $500 $0

0%
Mild Hybrid (Start-Stop) $500
25%
50%
75%
Pure electric vehicles and plug-in hybrids offer a significant improvement in fuel economy, an estimated 100%200%, but at a higher incremental cost of $13,000$15,000, or around $5,500 $7,500 including subsidies.
Page 24
Incremental Costs to Consumers with Improved Fuel Economy (Hybrid, PHEV, and BEV)
$8,000
30-50 Mile PHEV $7,500
$7,000
$6,000 $5,000
100 Mile BEV $5,500
$4,000
$3,000 $2,000 $1,000 $0 0%
Mild Hybrid (Start-Stop) NIMHMild Hybrid NIMH-Hybrid (Dual-Mode)
Li-ion Hybrid (Start-Stop)
50%
100%
150%
200%
250%
Based on our analysis, we estimate that the average payback for non-electrification technologies is 2.06.0 years, or an average of approximately 4.5 years. For vehicle electrification, we see the most attractive payback on start-stop with AGM of around 3.0 years, with an average of 5.0 years for hybrid-based improvements. Currently, electric vehicles/plug-in hybrids offer a payback of 3.54.5 years, if one were to include the $7,500 tax credit, excluding which payback would be 7.08.0 years. Given the cost-reduction potential of Li-ion batteries, we expect payback periods to improve substantially to 1.52.5 years, or 4.55.5 years excluding subsidies. The exhibits below highlight payback periods for IC engines, hybrids, and EV/PHEV, respectively. Gasoline Incremental Cost to Consumer versus Payback Period
7.0 6.0
Aluminum Body Structure 6.0 Turbocharging/ Downsizing 5.5
Payback (years)
5.0
4.0 3.0
Electrical Power Steering 3.8
7/8 Transmission 4.6 Gasoline Direct Injection 3.6
Dual-Clutch 4.2 Low-Resistance Tires 2.2
2.0
1.0
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Incremental Cost to Consumer

Page 25
2014 FBR CAPITAL MARKETS & CO. Hybrid Incremental Cost to Consumer versus Payback Period
6.0 5.5 5.0
Payback (years)
NIMHMild Hybrid 5.7
4.5 4.0 3.5 3.0 2.5

Mild Hybrid (Start-Stop) 2.9
Li-ion Hybrid (Start Stop) 4.1
NIMH-Hybrid (Dual-Mode) 4.9
Li-ion Hybrid (Start-Stop) 3.4
2.0
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 Incremental Cost to Consumer $ 2011 Scenario 2016 Scenario
EV/PHEV Incremental Cost to Consumer versus Payback Period

5.0 4.5 4.0
100 Mile BEV 3.7 30-50 Mile PHEV 4.4
Payback (years)
3.5 3.0 2.5

100 Mile BEV 1.7 30-50 Mile PHEV 2.6
2.0
1.5
1.0
0.5
0.0 $2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Incremental Cost to Consumer $ 2011 Scenario 2016 Scenario

Page 26
The exhibits below depict the road map to get from the current CAFE values for both a compact and a mid-size car using a standard four-cylinder engine. Since CAFE standards are footprint-based, we present the fuel economy improvement potential for a compact car, which would have to reach CAFE targets of 5661 MPG, and for a mid-size car, which would have to reach CAFE targets of 5156 MPG. While we see sizable potential for fuel economy improvements from power train, transmission, and chassis advancements, we do not see these improvements as sufficient to reach CAFE targets without the introduction of electrification into the drive train. Improved Fuel Economy Road Map I (30 MPG Car)
Technologies such as start-stop offer an easy solution to get to CAFE targets, as demonstrated in the exhibit above; however, we believe that AGM start-stop will not in itself be sufficient to meet CAFE, especially for mid-size and full-size vehicles. We believe automakers will have to increase penetration of lithium-ion start-stop and hybrid systems, which offer accelerative boost capabilities (given energy storage capabilities of lithium-ion), and increase their lineup of full electrics and plug-in electrics.
Page 27
2014 FBR CAPITAL MARKETS & CO. Improved Fuel Economy Road Map (Mid-Sized Car)
Improved Fuel Economy Road Map II (30 MPG Car)
Page 28
Global Separator Model

Our global separator model below details our assumptions for total lithium separator demand through 2015 in the three key segments of EV/PHEV, hybrids, and non-transportation applications, such as consumer electronics and grid storage. Global Lithium-Ion Separator Model (Base-Case Scenario)
Global Li-ion Separator Sales
Separator Demand (Million Sq. M.) EV/PHEV EV % of Total Hybrids Hybrids % of Total Consumer Electronics/Other CE /Other % of Total Total % Change Revenue Opportunity ($M) EV / PHEV Industry Hybrids Industry Consumer Electronics Industry Total % Change 62 10% 112 19% 416 71% 590 24% $116 $185 $728 $1,029 15% 72 11% 119 18% 461 71% 652 11% $128 $186 $767 $1,081 5% 142 18% 126 16% 509 66% 776 19% $241 $187 $803 $1,231 14% 234 26% 133 15% 548 60% 916 18% $365 $190 $823 $1,378 12% 307 29% 141 13% 598 57% 1,046 14% $441 $194 $852 $1,487 8% 412 34% 153 13% 650 53% 1,214 16% $544 $204 $879 $1,627 9% 561 39% 166 12% 706 49% 1,434 18% $682 $215 $909 $1,805 11% 628 40% 179 11% 770 49% 1,578 10% $702 $226 $941 $1,869 4% 695 40% 191 11% 842 49% 1,729 10% $715 $235 $978 $1,928 3% 38.3% 7.1% 9.0% 15.0%
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
CAGR 2013-2020
27.9% 3.4% 3.5% 8.6%
We expect total separator demand to increase to 920 million square meters by 2015 and 1.7 billion square meters by 2020. Transportation will account for close to 60% of this incremental growth. We expect the key drivers of demand to be EVs/PHEVs accounting for about 60% of incremental demand through 2020, consumer electronics and other accounting for 33% of incremental demand, and hybrids accounting for the remainder. Within non-transportation, the key categories driving incremental demand are smartphones, tablets, power tools, and grid storage.
We estimate that the industry is currently oversupplied, but new capacity additions are necessary to meet demand post-2015. The exhibits below highlight the expected mix between separators used in EV PHEVs, hybrids, and other non-transportation applications. Also below, we highlight the mix between the various nontransportation applications through 2015, key being consumer electronics and grid storage applications.
Page 29
2014 FBR CAPITAL MARKETS & CO. Global Li-Ion Separator Demand (Million Square Meters)
2,000 1,800 1,600 1,400 1,200 1,000
800 916
Million Sq. M. 1,729
Upside: 1,976
Upside: 939
590
600
400 200 0 2012 Consumer Electronics/Other 2015E Hybrids 2020E EV/PHEV
% Mix EV/PHEV Hybrids CE/Other Total
2012 10% 19% 71% 100%
2015E 26% 15% 60% 100%
2020E 40% 11% 49% 100%
Global Li-Ion Separator Revenue Opportunity ($ in Millions)

$2,250 $2,000 $1,750 $1,500 $1,250 $1,000 $750 $500 $250 $0
$116 $728 $715 $365
$185
$M
2020E Upside: $2.2B
$235 2015E Upside: $1.4B $190

$978
$823
2012 EV / PHEV Industry

2015E Consumer Electronics Industry
2020E Hybrids Industry
Page 30
2014 FBR CAPITAL MARKETS & CO. Global Consumer Electronics/Other Separator Market
Million Sq. M. 1000
2015 Upside: 1,089 M Sq. M.
842
800
2015 Upside: 572 M Sq. M.
600
416
548
400
200
0
2012 2015E 2020E
Smartphone
Tablet
Laptop PC
% Mix Smart Phones Tablets Laptops Power Tools Grid Storage Other Total
Power Tools
2012 12.4% 9.4% 31.5% 15.0% 0.6% 31.1% 100% 2015E 17.9% 17.0% 24.4% 14.1% 1.1% 25.5% 100%
Grid Energy Storage

2020E 25.6% 26.0% 16.7% 10.8% 2.4% 18.6% 100%
Other
FBR Natural Gas Trucking Model

Natural gas as fuel can be used in light, medium-duty, and heavy-duty trucks. It can be used in two forms: CNG, or compressed natural gas, which is typically compressed to 3,600 psi, and LNG, or liquefied natural gas, which is typically stored at 200F to 280F and can be used both as cold or unsaturated LNG or warm, saturated LNG. LNG is delivered to vehicle tanks at low pressures ranging from 40 psi to 140 psi. While natural gas engines offer meaningful operating fuel cost savings ranging from 30% to 40%, several other considerations, such as duty cycles, incremental maintenance expenses, miles driven per year, the need to install on-site fueling, and availability of public fueling stations, are taken into account by fleet operators before switching over to CNG/LNG trucks. The difference between diesel and CNG/LNG prices at the pump is a key driver of annual operating cost savings, which in turn determines the payback to the operator after incurring the additional expense of buying a natural gas truck or a dual-fuel truck. We use our payback estimator to calculate typical paybacks for different levels of fuel price spread, after taking into account that most truck operators are targeting paybacks between two and three years. Our payback estimator takes into account the annual fuel savings by using CNG/LNG, as well as incremental operating expenses, loss of payload due to increased fuel storage system weight, cost impact from lower range, and the incremental cost of installing CNG/LNG engines on new trucks. We then determine the proportion of the existing trucking fleet that would meet their target paybacks, depending on annual miles driven.
Page 31
We also compare the level of fuel price spread for different combinations of input natural gas prices and diesel prices. Our key takeaways are as follows:
Natural gas trucks currently meet economic return thresholds for a number of regional haul applications. A duty cycle of at least 60,000 annual miles is needed to meet return thresholds for short-haul applications. For long-distance trucking, the current lack of a 15L product in the market will limit wide-scale adoption in the near term. These thresholds should only increase over time as product costs decline, and introduction of larger engines such as the 13L HPDI from Volvo, 15L Cummins Spark, and new offerings from the Westport 2.0 HPDI series will enhance the attractiveness in long-distance applications. Despite meaningful price declines, we continue to see above-normal mark-ups in the industry with fuel storage and delivery components. We believe increasing volumes and technological improvements (higher power output, emission system advancements) should lower installed product prices by 20%30% over the next two to three years. Industry participants believe that economies of scale should deliver further cost savings, once penetration levels reach double digits in the industry. We see the potential for this to be achieved in 2015. While fuel prices introduce a degree of volatility to this analysis, we would point out that the diesel to CNG/LNG spread would have to decline to below $1.00/diesel gallon equivalent (DGE) (currently $1.50$2.00/DGE) on a sustained basis to make natural gas uneconomical as a fuel source. Similar to component pricing for long-haul truck engines, CNG/LNG pricing also incorporates above-normal pricing premiums, which should provide a cushion in the event of declining diesel prices. We believe that a minimum fuel spread of $1.00/DGE should be maintained even in a scenario where natural gas rises to $7.00/MMBtu and oil prices decline to $65/barrel. Key drivers here are improving economics of LNG production at scale (similar analysis can be applied to CNG production).
CWI 11.9L Payback2013
Page 32
2014 FBR CAPITAL MARKETS & CO. CWI 11.9L Payback2015
LNG EconomicsDGE Spread >$1.00, Oil at $65, Natural Gas at $5.00 and $7.00
Page 33
FBR Natural Gas Trucking Model

The exhibits below detail the key assumptions supporting our natural gas trucking model.
We are using normalized trucking volumes as a base for our natural gas shipment assumptions. Trucking is a very cyclical industry, with peak-to-trough declines/increases of 30%40%, driven by both macro factors and emission regulations. We rely on third-party industry experts such as ACT for our near-term assumptions, opting to base our forecasts on normalized North America industry volumes of 250,000 for Class 8 shipments. This translates into normalized U.S. shipment volumes of about 220,000. Our model segments the natural gas trucking opportunity within the Class 8 sector by annual miles driven and engine displacements. We arrive at our total Class 8 penetration by summing the three key displacement buckets up to 12L, 12L14L, and 14L16L. We expect total market penetration of 14% by 2015, 24% by 2017, and 35% by 2020. While 2013 was an important year for new engine launches, we expect to see real traction only in 2014 and beyond. By 2015, the trucking industry will likely have wide-ranging availability of natural gas engines with about 53% of models offering some kind of natural gas option. Natural gas engines are able to deliver power and torque curves very similar to diesels and, excluding the very high output applications, should be able to provide similar drivability as diesels. Penetration in the long-haul heavy-duty market will be largely dependent on Cummins launching the 15 Spark Ignited in 2015/2016, Westport launching its HPDI 2.0 with captive engine divisions of large OEMs, and Volvo gaining traction in the long-haul market through its 13.0L HPDI offering in 2014. For Class 57, we assume natural gas engine volumes of 15,000 annually, which gives only limited benefit to new launches such as the Cummins 6.7L, as well new launches from Power Solutions through its 8.8L engine. The exhibits below detail our Class 8 penetration and opportunity forecast by 14L16 L and up to 12L displacement.
Page 34
2014 FBR CAPITAL MARKETS & CO. North American Truck Volumes Class 58
Source: FBR Research and ACT
Class 8 Truck Opportunity

Total Class 8 Natural Gas Shipment Forecast and Penetration
90,000 78,594 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 6,722 2013 3% 5% 8% 20,844 32,339 18% 13% 45,645 31% 27% 22% 20% 10% 0% -10% 2014 2015 2016 2017 2018 2019 2020 55,013 68,313 50% 40% 30% 60%
11,684
Total Class 8 Units
Market Penetration
Page 35
Truck Industry Launch Road Map

NGV Current Offering and Launches
Manufacturer Peterbilt LH Peterbilt Other Kenworth LH Kenworth Other Paccar LH Paccar Other Total Paccar Navistar LH Navistar Other Total Navistar Freightliner LH Freightliner Other Total Freightliner Mack LH Mack Other Total Mack Volvo LH Volvo Other Total Volvo Other LH Total LH Total Other TOTAL Models 27 26 53 2 12 14 7% 46% 26% 6 4 10 9 16 25 33% 62% 47% Total Models 5 4 5 3 10 7 17 3 5 8 5 4 9 4 6 10 5 4 9 NGV Offering 1 4 0 2 1 6 7 0 1 1 1 2 3 0 2 2 0 1 1 % Penetration 20% 100% 0% 67% 10% 86% 41% 0% 20% 13% 20% 50% 33% 0% 33% 20% 0% 25% 11% Launches (2013) 1 0 2 2 3 2 5 1 0 1 1 0 1 1 1 2 0 1 1 Total 3 3 3 3 6 6 12 1 3 4 1 2 3 1 3 4 0 2 2 % Penetration 60% 75% 60% 100% 60% 86% 71% 33% 60% 50% 20% 50% 33% 25% 50% 40% 0% 50% 22% 2 2 3 5 0 5 1 1 2 3 0 3 2014 Launch 2015 Launch Total 3 3 3 3 6 6 12 1 3 4 1 2 3 1 3 4 3 2 5 5 12 16 28 44% 62% 53% % Penetration 60% 75% 60% 100% 60% 86% 71% 33% 60% 50% 20% 50% 33% 25% 50% 40% 60% 50% 56%
NGV Offerings of Current Truck Models

70% 62% 53% 50% 46%
40%
60%
62%
47%
44%
30% 26% 20%
33%
10%
7%
0%
2012 % Penetration Long Haul
2013 Other Total Models
2015
Page 36
2014 FBR CAPITAL MARKETS & CO. 2013 OEM NGV Truck Availability
Peterbilt
Ann. Units Sold 27,000 Current LH Models 386 389 587 579 384 5 Current Other Models 320 365 367 382 348 567 4 Diesel Engine ISX 11.9 ISX 11.9, ISL 9, Paccar MX 12.9L ISX 12, ISX 15, Paccar MX 12.9L ISL 9 Paccar PX 9, Paccar PX 7 Paccar MX 12.9L HP / Torque 310-425 / 1150-1650 200-425 / 520-1650; 380-500 / 1450-1850 310-425 / 1150-1650; 550 / 18500; 380-500 / 1450-1850 200-360 / 520-800 260-380hp; 280-360hp 380-500 / 1450-1850 4 400-475 / 1750 ISL G 8.9L Diesel Engine ISX 15, Paccar MX 12.9L ISX 15, Paccar MX 12.9L ISX 15, Paccar MX 12.9L ISX 15 / ISX 12, Paccar MX 12.9L ISX 11.9, ISL 9 Paccar MX 12.9L HP / Torque 550 / 1850; 380-500 / 1450-1850 550 / 1850; 380-500 / 1450-1850 550 / 1850; 380-500 / 1450-1850 550 / 1850; 380-500 / 1450-1850 310-425 / 1150-1650; 380-500 / 1450-1850 ISL G 8.9L, ISX 12-G 1 NG Engine ISL G 8.9L ISL G 8.9L, ISX 12-G HP / Torque 320 / 1000 320 / 1000; 400/1450 475 / 1750 320 / 1000 320 / 1000; 400/1450 ISX 12 G 1 New Launches ISX 12 G ISX 12 G Applications Vocational Refuse Vocational Mixer Vocational / Dump Truck Short Haul Vocational Vocational NG Engine HP / Torque 400-475 / 1750 New Launches Applications Long Haul Long Haul Long Haul Long Haul Tanker, LTL
Kenworth
Ann. Units Sold 45,000 Current LH Models T660 T680 T700 W900 T800 5 Current Other Models T440 T470 T800 SH 3 PACCAR TOTAL 72,000 17 7 5 Diesel Engine PX-8, ISL 9 PX-8 Paccar MX 12.9L HP / Torque 260 / 660; 260-380 / 720-1250 260 / 660 380-500 / 1450-1850 2 Diesel Engine Paccar MX 12.9L Paccar MX 12.9L Paccar MX 12.9L Paccar MX 12.9L Paccar MX 12.9L HP / Torque 380-500 / 1450-1850 380-500 / 1450-1850 380-500 / 1450-1850 380-500 / 1450-1850 380-500 / 1450-1850 0 NG Engine ISL G 8.9L ISL G 8.9L HP / Torque 320 / 1000 320 / 1000 ISX 12 G 2 2 New Launches ISX 12 G Applications Vocational / LTL Vocational ISX 12 G NG Engine HP / Torque New Launches ISX 12 G Applications Long / Regional Haul Long Haul Long Haul Long / Regional Haul Long / Regional / other
Navistar
Ann. Units Sold Current LH Models LoneStar Prostar 9900 Series 3 Current Other Models TransStar DuraStar TerraStar PayStar WorkStar 5 Navistar Total 8 Diesel Engine Cummins ISX 15 Maxxforce 13 / ISX15 Cummins ISX 15 HP / Torque 550/2050 475 / 1700; 500 / 1850 600/2050 NG Engine HP / Torque 400 / 1450 New Launches ISX 12 G Applications Long Haul Liquid / dry bulk, beverage, LH, Regional Haul Long Haul
Diesel Engine MaxxForce 13 Cummins ISB 6.7 6.4L MaxxForce 7 Navistar 13L SCR, Cummins ISX 15 MaxxForce DT diesel 7.6L
HP / Torque 475 / 1700 300 / 660 300 / 660 365-475 / 1250-1700; 455-602 / 1650-2050 300 / 860
0 NG Engine ISL G 8.9L
HP / Torque 320 / 1000
1 New Launches
Applications Beverage, liquid / dry bulk, regional haul Beverage, Const. Emerg, Gov., Landscaping Utility, Pickup / delivery, landscsaping, Gov. Construction, mixer, waste, government Construction, Emerg., Mixer, Waste, Utilty, Gov.
1 1
0 1
Freightliner
Ann. Units Sold Current LH Models Cascadia Evolution Cascadia Coronado 122SD Cascadia 113 5 Current Other Models M2 106 M2 112 108SD 114SD 4 Freightliner Total 9 Diesel Engine 14.8 Detroit DD15, Detroit DD13 Detroit DD15 / Cummins ISX15 DD13, DD15, DD16, Cummins ISX 15 DD13, DD15, DD16, Cummins ISX 15 HP / Torque 455-505 / 1550-1750; 350-470 / 1250-1650 505 / 1750; 550 / 1850 470/1650; 505/1750; 550/1850, 600/2050 470/1650; 505/1750; 550/1850, 600/2050 NG Engine HP / Torque New Launches Applications Long Haul Long / Regional Haul Long / Regional Haul Long / Regional Haul Long / Regional Haul
ISX12 G 1 NG Engine ISL G 8.9L ISL G 8.9L 2 3
400/1450
ISX12 G 1 New Launches
Diesel Engine Cummins ISB 6.7, ISL 9 Detroit DD13 Cummins ISB 6.7, ISL 9 Cummins ISC 8.3, ISL 9
HP / Torque 200-325 / 520-750; 260-380 / 720-1250 350-470 / 1250-1650 200-325 / 520-750; 260-380 / 720-1250 260-350 / 660-1000; 260-380 / 720-1250
HP / Torque 320 / 1000 320 / 1000
Applications Dump, fire & emerg, food & beverage, refuse Regional haul, tanker, food & bev, refuse Sewer vac, dump, refuse, utility Mixer, crane, dump, fire & emerg, plow, refuse
0 1
Mack
Ann. Units Sold Current LH Models Pinnacle Sleeper Axle Back Pinnacle Daycab Pinnacle Special Edition Rawhide Pinnacle Special Edition Smartway 4 Current Other Models Mack Granite Mack Rawhide Mack Granite MHD TerraPro Cabover TerraPro Low Entry Mack Titan 6 Mack Total 10 Diesel Engine 11L MP7 / 13L MP8 11L MP7 / 13L MP8 11L MP7 / 13L MP8 11L MP7 / 13L MP8 HP / Torque 325-405 / 1260-1560; 415-505 / 1460-1760 325-405 / 1260-1560; 415-505 / 1460-1760 325-405 / 1260-1560; 415-505 / 1460-1760 325-405 / 1260-1560; 415-505 / 1460-1760 NG Engine HP / Torque 400 / 1450 400 / 1450 400 / 1450 400 / 1450 New Launches ISX 12 G Applications LD / regional hauling, bulk hauling Long haul / regional / bulk Long haul / regional / bulk Long haul / regional / bulk
Diesel Engine 11L MP7 / 13L MP8 11L MP7 / 13L MP8 9L Cummins ISL MP7 and MP8 MP7 Mack MP10 16L
HP / Torque 325-405 / 1260-1560; 415-505 / 1460-1760 325-405 / 1260-1560; 415-505 / 1460-1760 345 / 1150 325-405 / 1260-1560; 410-505 / 1460-1760 325-405 / 1260-1560 515-605 / 1860-2060
0 NG Engine
ISL G 8.9L ISL G 8.9L 2 2
HP / Torque 400 / 1450 400 / 1450 400 / 1450 320 / 1000 320 / 1000
1 New Launches ISX 12 G
Applications Dump, mixer, tandem steer mixer, roll off Dump, mixer, tandem steer mixer, roll off Shorter runs / light duty cycles Refuse / Concerte pumper Rear loader/ front loader/ side loader Logging/oil field/coal/heavy equip/ heavy haul
1 2
Volvo
Ann. Units Sold Current LH Models Volvo VN 670 Volvo VN 730 Volvo VN 780 Volvo VN 630 Volvo VN 430 5 Current Other Models Volvo VHD Volvo VHD 430 Volvo VNL 300 Daycab Volvo VNM 200 Daycab 4 Volvo Total 9 Diesel Engine Volvo D13, D16, Cummins ISX 15 Volvo D13, D16, Cummins ISX 15 Volvo D13, D16, Cummins ISX 15 Volvo D11, Volvo D13, Volvo D16, Cummins ISX 15 Volvo D11, Volvo D13, Volvo D16, Cummins ISX 15 HP / Torque 375-500 / 1450-1750; 550 / 1850; 550 / 1850 375-500 / 1450-1750; 550 / 1850; 550 / 1850 375-500 / 1450-1750; 550 / 1850; 550 / 1850 405 / 1450; 500 / 1750; 550 / 1850; 550 / 1850 405 / 1450; 500 / 1750; 550 / 1850; 550 / 1850 NG Engine HP / Torque New Launches Applications Long haul Heavy duty / Long haul Long haul regional hauling 0 NG Engine 0 New Launches
Diesel Engine Volvo D11, Volvo D13 Volvo D11, Volvo D13, Volvo D16, Cummins ISX 15 Volvo D11, Volvo D13, Volvo D16, Cummins ISX 15 Volvo D11, Volvo D13
HP / Torque 325-405 / 1250-1450; 375-500 / 1450-1750 405 / 1450; 500 / 1750; 550 / 1850; 550 / 1850 405 / 1450; 500 / 1750; 550 / 1850; 550 / 1850 325-405 / 1250-1450; 375-500 / 1450-1750
HP / Torque
Volvo D13-LNG, ISX 12-G455 / 1750; 400/1450 ISL G 8.9L 300 / 1000 1 1
ISX 12 G
Applications Vocational Vocational Regional / Specialty hauling regional, bulk and specialty hauling
1 1
Source: FBR Research and company Web sites
Page 37
14L16L Model Penetration and Total Opportunity of Long-Haul Trucks

18 16 16 14 12
10
30%
25% 23% 18% 14% 10%
20%
15%
8 6 4 3 2 0 2013 2014 2015 2016 2017 2018 2019 2020 1% 0% 0% 0% 5% 4 5% 10%
Long Haul Models NGV Model % Penetration
NGV Models Customer % Penetration
Total 14L16L Shipment Forecast and Penetration
Page 38
Up to 12L Model Penetration and Total Opportunity of Long-Haul Trucks

35 30 25 53% 20 15 10 5 0 2013 2014 2015 NGV Models 2016 2017 2018 2019 2020 3% 9% 38% 12 23% 19% 15% 5% -5% 38% 47% 15 29% 32% 47% 53%
41%
75% 32 63% 63% 44% 20 35% 25% 65% 55% 45%
LH Models
NGV Model % Penetration
Customer % Penetration
Total Up to 12L Shipment Forecast and Penetration

45,000 40,000 35,000 30,000 27,816 22,758 18,656 16,406 15,000 10,000 5,000 3% 5,672 9% 0% 10,453 20,508 23% 27,891 25,566 29% 32% 41% 30% 20% 10% 30,141 37,797 38,281 35,547 44% 40% 50% 40,531 60%
25,000
20,000
19%
2013
2014
2015
2016
2017
2018
2019
2020
CWI up to 12L Units
Total up to 12L Units
Total Market Penetration
Page 39
Class 8 Segment Mix

2012 Class 8 Volumes by Market Mix
300,000
300,000
11%
280,054
250,000
246,384
200,000
250,000
250,000
3% 10% 8%
8,402
28,005
Other
Volvo
22,404
Mack
200,000
29%
150,000
81,216
150,000
Freightliner
100,000
100,000
21% 11%
58,811 30,806
International
Peterbilt
50,000
50,000
Kenworth
18%
0
50,410
2012
300,000
2013
FBR Normalized Volumes

300,000
Market by Manufacturer
4%
250,000
5%
11,202 14,003
<11L
200,000
250,000
28%
78,415
35%
98,019
up to 80K
200,000
11L-12L
150,000
150,000
17%
47,609
70K100K
12L-14L
100,000 100,000
56%
50,000
156,830
14L-16L
50,000
55%
154,030
>100K
Market by Engine
Market by Miles Driven
Class 8 Volume and Market Opportunity Forecast Detail

Class 8 NGV Forecast by Displacement
Page 40
Opportunity for Class 57

Total Shipment Forecast and Penetration for Class 57
Fuel Displacement Opportunity

Based on our natural gas trucking model, we have estimated the total fuel consumption and potential diesel displacement opportunity by shifting to natural gas. We base our estimate on about 12% of the combined fleet running on natural gas by 2020.
The impact on diesel consumption from the shift to natural gas is more pronounced than the impact to natural gas. We estimate incremental gas consumption of 2 Bcf/d to 2.5 Bcf/d by 2020, or about 3%4% of total demand by 2020, per the estimate by FBRs E&P team. We estimate a reduction in diesel fuel of 6.5 billion gallons by 2020, or about 15% of total diesel consumed in the on-road segment. For 2012, the U.S. consumed 57 billion gallons of distillate fuel oil.
Natural Gas Class 58 Fleet Penetration

5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0.4% 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Diesel Trucks
14% 11.9% 12% 10% 8% 4.4% 1.6% 6% 4% 2% 0% Natural Gas Trucks % Fleet Penetration
Page 41
2014 FBR CAPITAL MARKETS & CO. On-Highway Diesel Fuel Consumption Replacement
Source: FBR Research and the U.S. Energy Information Administration
Natural Gas Required for Transportation As a Portion of Total U.S. Production
Page 42
Material Handling: Market Overview and Cost of Ownership

A Large Global Sector, High Cyclicality in Developed Markets, Steady Growth in Emerging Markets
We estimate that total global forklift sales in 2012 were approximately 944,000 for all classes of forklifts. The single-largest market for forklifts was Europe, with approximately 355,000 forklifts sold in 2012. Europe was followed closely by China, with 290,000 forklifts sold and North America with 180,000. We estimate that 48,000 forklifts were sold in South America and 70,000 in Japan and the rest of Asia. We estimate total 2012 annual forklift sales to be in the range of $30 billion to $35 billion. Global Forklift Market Sales
1200000 1000000 800000 600000 400000 200000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E
Forklift Sales
Europe
North America
South & Central America
A/P, China and Japan
Source: FBR Research and the Industrial Truck Association
While the emerging market economies have seen generally steady growth in forklift sales over the past decade or so, the developed markets, particularly the U.S. and Europe, have exhibited high levels of economic cyclicality. Different classes of forklifts are also exposed to different sectors of the economy, such as the heavier forklift classes, which are more dependent on nonresidential construction. During the last downturn, between the 2006 peak and 2009 trough, U.S. forklift sales dropped by 104,000, or 54%. The majority of that drop was experienced in the market for the typically larger and internal combustion engine Class IV and V forklifts, which experienced a 66% drop in sales over the same period. Despite this cyclicality, several trends are evident in the market:
Continued shift toward electric forklifts in Classes IIII. This is driven by both tightening emission standards and economic attractiveness of electric forklifts in certain duty cycles. LPG, or propane forklifts, have increased their market share at the expense of diesel, again driven by tightening emission standards and a low overall cost of ownership.
Page 43
2014 FBR CAPITAL MARKETS & CO. Historical U.S. Forklift Market Sales
250000
200000
U.S. Forklift Sales
150000
100000
50000
Aggregate Forklift Deliveries

Source: FBR Research and Industrial Truck Association
Historical U.S. Forklift Market Sales by Class

100000 90000
80000
70000
Forklift Sales
60000 50000
40000
30000 20000
10000
0
1990
1992
1994
1996
1998
1999
2001
2003
2005
2007
2009
2011
1991
1993
1995
1997
2000
2002
2004
2006
2008
2010
Class I & II
Class III
Class IV & V
Page 44
2012
2014 FBR CAPITAL MARKETS & CO. Historical U.S. Market Share by Forklift Class
60%
50%
40%
30%
20%
10%
0%
Class I & II
Class III
Class IV & V
The global market is dominated by a few very large manufacturers, the largest being Toyota and Kion Group AG (KGX), with a combined 44% global market share. In the U.S. market, some of the larger players include Toyota, Hyster-Yale Materials Handling, Inc. (HY), Crown Equipment Corporation, and Kimberly-Clark Corporation (KMB). In China, the market is dominated by local manufacturers; Anhui Forklift Truck Group and Hangcha Group combined control approximately 47% of the Chinese market. The remaining market in China is divided largely between smaller Chinese manufacturers with only a small presence from foreign competitors such as Toyota Motor Corporation, The Linde Group (LN:GR), Jungheinrich Group (JUN3:GR), Hyster-Yale Materials Handling, Inc., and Mitsubishi Motors Corp. Top Manufacturers by Global Market Share
Toyota Motor Corp.
17%
Kion Group
23%
Jungheinrich Group Hyster-Yale Materials Handling Crown Equipment Corp. UniCarriers Americas Corp.
4% 5% 6% 21% 7%
Komatsu Utility Co. Mitsubishi Caterpillar Forklift
8%
9%
Other
Source: FBR Research and Modern Materials Handling
Page 45
The range of products and their prevalence in certain geographic markets vary widely. The U.S. Occupational Safety and Health Administration (OSHA) classifies forklifts based upon engine type and function and identifies six classes of forklift. Class I and Class II lift trucks are defined as electrically powered rider trucks with either cushion or pneumatic tires. The difference between I and II is that Class II lift trucks are used in narrow-aisle or reach applications, which means they are generally smaller and have a wider range of designs. Class III lift trucks are electrically powered hand/rider trucks and are generally used for moving heavy objects across distances. Class IV and Class V are similar in form and function to Class I trucks, the difference being that they are powered by IC engines, and, as a result, these lift trucks are usually larger and have higher weight capacities than their electric counterparts. The principal difference between the Class IV and V lift trucks is that Class IV trucks have cushion or solid tires while Class V trucks have pneumatic tires. Class VI trucks are tractors, powered either by electric motor or IC engine, which are used for pulling trailers or objects between locations. Lastly, Class VII, which consists of rough terrain forklift trucks, refers to any forklifts typically intended for use on unimproved natural terrain or construction sites.
Transition to Electric, Natural Gas Well Underway

There are three major sources of forklift power trains: electric, LPG, and diesel. For each fuel type, there are certain scenarios in which one is far more suitable than the other. For instance, large lift trucks with weight classifications above 12,000 lbs are powered almost exclusively by diesel and occasionally LPG. On the other end of the spectrum, Class III trucks, or hand trucks, exclusively use electric power. Different geographic markets differ by which type of power source they use. For instance, in most developed markets, the percentage of electric-powered versus IC forklifts is much higher. In Western Europe, electric lift trucks comprised 81% of the Western European lift truck market. That figure is slightly skewed given that warehouse trucks, which are similar to Class III in definition, make up 62% of the entire European lift truck market. Developing countries, on the other hand, tend to favor ICpowered trucks instead. We estimate that more than 70% of all the lift trucks sold in China are powered by IC engines. When that figure is compared with North America or Eastern Europe, which had only 40% and 37% of their lift trucks powered by IC engines, it is clear that geography, as well as weight classification, can have a large effect on the distribution of forklift fuel type.
Page 46
2014 FBR CAPITAL MARKETS & CO. Forklift Market Characteristic by Geographic Region
Source: FBR Research and company reports and presentations
While load-carrying requirements and duty cycles determine the type of forklifts used, there is an area of overlap in the largest portion of the market, which we identify as medium-duty lift trucks. These lift trucks would typically be used in warehouses and can be exclusively indoor, indoor/outdoor, or outdoor-only trucks, which have a weight capacity range of 3,000 lbs to 12,000 lbs and would all be generally classified as Class I, II, IV, or V under the OSHA classification system. We then further classified this market into light-medium-duty, medium-duty, and heavy-mediumduty ranges to gain a better sense of where and why a particular type of fuel would be chosen. Forklift Market Segment Descriptions and Examples
Segment Descriptions
Segment Light-Medium-Duty Medium-Duty Heavy-Medium-Duty Segment Light-Medium-Duty Weight Range 3,000lbs-5,000lbs 5,000lbs-7,000lbs 7,000lbs-12,000lbs Fuel Type Electric Propane/Natural Gas Diesel Electric Propane/Natural Gas Diesel Electric Propane/Natural Gas Diesel Approximate Cost per Lift Truck Diesel/Gasoline LPG Electric $29,000 $28,000 $46,000 $35,000 $33,000 $53,000 $53,000 $51,000 $85,000 Model J30-40XN S30-45FT, S40FTS H30-35FT, H40FTS J45-70XN S40-70FT H40-70FT E80XN S80-120FT H80-120FT Class Class I Class IV Class V Class I Class IV Class V Class I Class IV Class V Approximate HP Required 15-40hp 50-70hp 90-100hp Approximate Engine Size 2L 2-3L 3-4L
Typical Hyster Forklift per Segment

Weight Rating' Engine Manufacturer Engine Size, HP 3,000lbs-4,000lbs N/A 16.1 HP Hoist Motor, 6.4-6.7 HP Traction Motor 3,000lbs-4,000lbs Mazda 2.0L, 40HP 3,000lbs-4,000lbs Yanmar 2.6L 39HP 4,500lbs-7,000lbs N/A 21.5-32.2HP Hoist Motor, 13.4HP Traction Motor 4,000lbs-7,000lbs Mazda, GM 2.2L, 2.4L, 51HP ,66HP 4,000lbs-7,000lbs Yanmar 2.6L, 3.3L , 46HP, 58HP 8,000lbs-12,000lbs N/A 35.5-48.3 Hoist Motor, 28.2-28.8HP Traction Motor 8,000lbs-12,000lbs GM 4.3L, 98HP 8,000lbs-12,000lbs Kubota (Tier IV certified) 3.8L, 74HP
Medium-Duty
Heavy-Medium-Duty
Source: FBR Research and Hyster Company
Page 47
Within the medium-duty segment, each fuel type has both its advantages and disadvantages. Advantages and Disadvantages by Type
Electric Advantages Low operating costs given a low cost of electricity No direct emissions, completely safe to operate indoors Lower annual maintenance costs than an IC engine Liquefied Propane Gas Lower fuel costs than diesel Relatively low emissions, mostly safe to operate indoors Lower up-front costs, very low infrastructure costs, as propane is a low pressure system Limitations of propane, such as lower octane rating, and lower energy density, have limited impact on performance of forklift engines versus on-road vehicles. Fuel is still much more expensive than electricity Higher annual maintenance costs than electric Fueling infrastructure and associated safety needs Diesel Lower upfront costs for the lift truck Easily accessible fuel Low infrastructure costs Especially suitable in heavy-duty applications
Disadvantages
Higher up-front costs for batteries and charging station Need to maintain multiple batteries per forklift to account for charging times and battery cool down times Higher cost of the forklift Battery costs and electricity usage increase significantly with weight rating
Highest fuel costs and lower fuel efficiency than propane Relatively high emissions, cannot operate indoors unless in a well-ventilated area Higher maintenance costs than electric lift trucks
Hydrogen Fuel Cell Forklifts

The alternative to a battery-powered electric lift truck is to use hydrogen fuel cells instead of a battery pack. This technology, although new, has been tried at scale in a number of facilities, including a Walmart distribution center in Calgary, Canada, and a large BMW plant in South Carolina where BMW expects to save about 4 million kwh per year over the lead acid alternative. Using hydrogen fuel cells in place of lead acid batteries does come with some additional costs, but ones that can be mitigated with scale. For instance, to use hydrogen fuel cells, the facility will require either to have pure hydrogen shipped in or to have a hydrogen production facility located on site, both of which can be prohibitively expensive unless the fleet of lift trucks is large. The additional cost is mitigated by reduced electricity consumption and by tax credits, which cover 30% of the cost of the fuel cell up to $3,000 per kWh. These benefits and the added benefits of reducing the net environmental effect to near zero make hydrogen power a plausible alternative to the lead acid battery in certain scenarios.
Cost Analysis
Below is our analysis of the total cost of ownership per truck for a 40-truck fleet. It shows that for each class of truck, the lowest cost of ownership can yield different results. It is important to remember that for each application, the required duty cycle can still result in a power train choice that is not the lowest cost option. In the light-medium-duty segment, electric-powered forklifts are the most cost-effective investment, but as forklifts become larger in the medium-duty segment, the total cost of LPG and electric forklifts is comparable, and in the heavy-medium-duty segment, LPG becomes the cheapest choice by far. Diesel forklifts are the best solution in heavy-duty applications in remote locations and outdoor scenarios. Fuel cells, while not the cheapest solution, have a major advantage in terms of fueling time. Furthermore, the total cost of ownership of fuel cell forklifts is highly dependent on fleet size and cost of fueling infrastructure, and the cost of each fueling station can vary significantly. Our cost calculator does not take into account any labor savings from decreased charging times, which in some cases can make fuel cell forklifts competitive with electrics.
Page 48
2014 FBR CAPITAL MARKETS & CO. Five-Year Cumulative Cost per Lift Truck (40-Truck Fleet)
160000
140000
120000
Total Cost in $
100000 80000
60000
40000 20000
0
Electric Light-Medium-Duty
LPG Medium-Duty
Diesel
Fuel Cell
Heavy-Medium-Duty
Cumulative Cost and Payback Period Analysis for Light-Medium-Duty Lift Trucks
Cumulative Cost and Payback Period Analysis for Medium-Duty Lift Trucks
Page 49
Cumulative Cost and Payback Period Analysis for Heavy-Medium-Duty Lift Trucks
Given the cost characteristics of the industry, we see a shift toward more electric forklifts in virtually all geographic markets with the exception of Western Europe, where the shift has largely already occurred. In developed countries such as the U.S. and Japan, there is still a significant amount of cost savings that can be realized from a further shift toward electric power. In still developing regions, where fleets are largely, or in Chinas case, almost entirely comprised of IC engine lift trucks, there will be a gradual shift toward more electric forklifts. As time goes on, we believe that the case for a shift toward electric drive will become even more compelling as emissions standards become more stringent in developing countries, and as battery technology continues to evolve, which may eventually make electrically powered forklifts competitive in the more rigorous applications.
Forklift IC Engines
Although we anticipate a continued shift toward more electric-powered forklifts, the IC engines will play an important role due to limitations posed by weight requirements, duty cycles, and relatively high cost of batteries. Within the IC market, we do see a continued shift from diesel engines toward LPG and CNG. As emissions standards continue to become more stringent and Tier IV EPA standards go into effect in 2015, the diesel option will become increasingly more expensive, leaving room for the lower-emission natural gas engines to acquire more market share. The engine options are generally stratified by size, with a large number of smaller manufacturers providing diesel engines for less demanding applications, while the largest engines are provided by larger industrial engine manufacturers such as Cummins and Volvo. The Propane engines, however, are almost exclusively provided by larger manufacturers, such as GM, Toyota, and Mazda Motor Corp. (MZDAF). LPG and natural gaspowered forklift engines are typically converted to natural gas by third-party manufacturers like Power Solutions.
Page 50
2014 FBR CAPITAL MARKETS & CO. Major Manufacturers of Forklift IC Engines
Engine Manufacturer List

LPG GM Mazda Toyota Hyundai Crown/John Deere Engine Size Range 3.0-4.3L 2.0-2.2L 2.2-3.7L 2.4L 2.4L Horsepower Range 67-100HP 40-48HP 48-84HP 70HP 59HP Diesel Kubuta Yanmar Cummins Toyota Iveco Volvo Wuxi Duetz Engine Size Range 3.8L 2.6-3.3L 4.5-11.0L 2.5-7.7L 4.5L N/A N/A 3.6L Horsepower Range 74HP 46-61HP 155-370HP 53-168HP 99HP N/A N/A 74HP
Source: FBR Research and company Web sites
Investment Risks
Volatility in natural gas fuel prices. The adoption of natural gas as a fuel source is highly dependent on the spread between diesel fuel and natural gas fuel (DGE equivalent), and we estimate that a minimum spread of $1.00/DGE is needed to incentivize customers to make the switch. While we believe that lower processing costs and economies of scale will keep the spread above $1.00/DGE even if natural gas reaches $7.00/MMBtu and oil declines to $65/barrel, such an increase could have a negative impact on the pace of adoption of natural gas. Volatility in LPG/propane prices. LPG is widely used as a fuel in applications such as material handling, and a rapid increase in the cost of propane could have a negative impact on operating cost savings. Such an increase could increase the competitiveness of other fuel sources such as forklifts powered by batteries and fuel cells. Slower-than-expected adoption of natural gas trucks. The pace of adoption of natural gas trucks depends on multiple factors, such as incremental capital costs, fuel cost savings, availability of infrastructure, applicability to the current duty cycle, and ongoing operating and maintenance costs. Trucking fleets typically undergo lengthy trials to ensure that natural gas trucks fit their duty cycle, and any delay in converting early trials to large-scale orders could have a negative impact on overall industry sales. Slower-than-expected consumer adoption of electric vehicles. The pace of adoption of electric vehicles depends on consumer willingness to pay the incremental capital costs, offset by fuel cost savings. Electric vehicles generally have 30% of the range of a typical IC engine vehicle, and this remains a key drawback of electric vehicles. We see a path for these impediments to be overcome, but slower-than-expected adoption of electric vehicles could have a negative impact on our industry forecasts. Increased competition from advancements in IC engines. Internal combustion engines continue to improve rapidly in terms of fuel efficiency, and the recent launch of multiple new diesel models in the U.S. could increase competition for electric vehicles, especially hybrids. A faster-than-expected improvement in fuel economy for traditional IC engines could have a negative impact on electric vehicle sales.
Page 51
Energy & Natural Resources: Advanced Transportation

Power Solutions International, Inc. (PSIX $68.29)

Wood Dale, IL
February 18, 2014
Coverage Initiated
Outperform
Price Target: $80.00
STOCK DATA
52-Week Range Three-Month ADTV Dividend Yield Market Cap (mil) Shares Outstanding (mil) Beta Enterprise Value (mil) Fiscal Year-End $19.5 - $78.96 48,641 0.0% $701 10 1.05 $705 December 2013E $0.21A $0.23A $0.24A $0.23 $0.92 2014E $0.31 $0.36 $0.43 $0.48 $1.58 2015E $0.63 $0.66 $0.68 $0.71 $2.69
Solid Natural Gas Engine Portfolio; Expanding Rapidly into Underpenetrated Markets Summary and Recommendation
We are initiating coverage of Power Solutions International, Inc. (PSIX) with an Outperform rating and a 12-month price target of $80 per share. Power Solutions is a leading manufacturer of a wide range of natural gas engines used in oil and gas, material handling, and on-road applications, areas where natural gas penetration is expected to increase materially over the next three to five years. The companys capital-light business model, expanding product portfolio, and supply-chain optimization, along with market share gains in key target markets, should result in 25%30% earnings growth over the next three to five years, with meaningful upside potential in an accelerated natural gas market adoption scenario. We would not be surprised to see some profit taking, especially around quarterly earnings, given the stock runup in the last 12 months, and would view any potential pullback as a further buying opportunity.
EARNINGS DATA
EPS 1Q 2Q 3Q 4Q FY
Excludes nonrecurring charges. Includes stock-based comp.
FINANCIAL DATA
2013E FY Revenues FY EBITDA FY EBIT EV/EBITDA P/E 238 18 15 39.2x 74.2x 2014E 324 32 27 22.0x 43.2x 2015E 414 52 46 13.6x 25.4x
Key Points
Expanding product line to meet the needs of untapped markets. We believe that Power Solutions expanding portfolio of natural gas engines should be a major beneficiary of the expanding use of natural gas in large markets, such as oil and gas production and transportation, global material handling, and on-road trucking in the U.S. Power Solutions is entering markets with very low penetration rates, such as oil and gas (less than 10%) and on-road trucking (less than 3%), and more mature markets, such as material handling. Therefore, we see the potential for meaningful market share gain. Capital-light model enhances earnings leverage. The companys capitallight business model, short product development times in stationary and off-road applications, and internal efforts to lower component procurement costs should lead to meaningful earnings growth over the next few years. We see the potential for earnings to grow to $4.00 per share in a more modest industry penetration scenario to $7.00 per share in our upside scenario, which could result in meaningful stock upside from current levels. Volatility could be a further buying opportunity. While PSIX has appreciated meaningfully over the last 12 months, we expect further upside as multiple new product and partnership announcements in 2014 increase inventor confidence in the companys long-term growth trajectory. As the companys product mix shifts toward higher customized packages, quarterly earnings variability could increase, and any potential pullback on this should be a further buying opportunity.
BALANCE SHEET DATA

3Q13 Cash & Equivalents Total Debt Stockholders' Equity $8 $12 $51
$ in millions
Pricing as of February 14, 2014.
Aditya Satghare asatghare@fbr.com . 646.885.5472 Benjamin Tainter btainter@fbr.com . 703.312.9763
The Debate
Debatable Point
When will investors have further evidence of the companys rapidly expanding product portfolio?
Our Thoughts
Time Frame
Impact
We expect 2014 to be a year of multiple new product and partnership announcements, especially in oil and gas and on-road trucking.
12 Months
When will the capital-light business model deliver meaningful earnings leverage? Could a changing business mix increase stock volatility?
We expect increased investments in manufacturing capacity of higher-horsepower engines and on-road trucking engines, along with increased product volumes in material handling, to deliver more than 30% earnings leverage in 2014.
12 Months
A shift toward more customized and higher-unit-pricing engine packages could lead to increased quarterly volatility. Any potential pullback should be a further buying opportunity.
12 Months
Investment Thesis
We are initiating coverage of Power Solutions International, Inc. with an Outperform rating. We see meaningful upside potential over the next three to five years as Power Solutions expands its natural gas engine portfolio, enters new markets such as oil and gas and on-road trucking, and increases its market share in material handling. The companys capital-light business model should deliver 25%30% earnings growth over the next few years, with upside potential if industry adoption of natural gas engines accelerates further. We would view any near-term stock volatility as a further buying opportunity, especially given the meaningful stock runup over the last 12 months.
Valuation
We base our $80 price target on about a 20x multiple of our 2017 EPS estimate of $4.20. We use 2017 as our valuation year, as we believe the company will reach product maturity in its oil and gas offering and on-road trucking business, setting the stage for sustained further growth off relatively low penetration levels. Our 20x multiple also results in a PEG of less than 1.0x, given our EPS growth estimate of 30% through 2017. We also believe that upside potential, in a faster industry adoption scenario, could result in materially higher earnings than our 2017 EPS estimate, due to Power Solutions broad product portfolio, increased market share, and capital-light business model. In our blue sky scenario, a stock price of $80 would imply about a 10x multiple on our estimated blue sky 2017 EPS.
Catalysts/Milestones

New product launches in the oil and gas segment and expanding partnerships with engine OEMs. New orders in the medium-duty on-road trucking segment, with the newly developed internal engine platform and other base engines. Increased traction in the material handling market in China.
Page 53
2014 FBR CAPITAL MARKETS & CO. Power Solutions International Product Offerings
Source: Company presentation
Material handlingEngines mainly range in size from 1.0L to 4.3L, and higher-output models offer 5.0L to 8.8L. Typical power outputs range from 20 HP to 100 HP. Heavy dutyEngines range in size from 8.1L to 22L, with typical power outputs ranging from 150 HP to 550 HP. Portfolio expansion should enable greater penetration into the oil and gas markets and on-road trucking. Power Solutions is launching a new 61L engine, which will expand its range in the 1,000 KW+ category. The on-road expansion consists mainly of 4.8L to 8.8L engines, with power outputs of 150 HP to 300 HP.
Oil and Gas, Trucking, and Material Handling Are Large Markets with Low Natural Gas Penetration Rates
We estimate the oil and gas supply HP needs in the U.S. oil and gas plays to increase from 5.3 million HP in 2013 to 6.8 million HP by 2017. Our penetration scenarios lead to a natural gas penetration forecast of between 0.8 million HP and 2.6 million HP by 2017. See our Oil and Gas section from our power generation report.
Page 54
2014 FBR CAPITAL MARKETS & CO. Oilfield Horsepower Natural Gas Engine Opportunity
PSIX Oilfield Revenue Scenarios

600
Revenue Opportunity ($M)
500 400 300 200 100 72 0 2014 Bear Case 2015 Base Case 2016 Bull Case 2017 91 213 339 479
234
184 93 98
114
143
82
Material handling in the U.S., Europe, and China accounts for 796,000 units sold globally. The U.S. market sells about 57,000 IC enginepowered forklifts and about 25,000 heavy-duty forklifts, where Power Solutions has the potential to increase its market share.
Page 55
2014 FBR CAPITAL MARKETS & CO. Material Handling Market Overview
In developed markets such as the U.S. and Europe, forklift demand has shifted away from internal combustion enginepowered forklifts to electrically powered versions. The economics for the lightto medium-duty forklifts generally favor the use of electric motors; however, for heavier-duty forklifts, or forklifts used outdoors and in construction, IC engines are generally more practical. Given the economic benefits to using electric forklift trucks, we expect to see a continued shift away from IC forklifts in most warehouse and lighter-duty applications. We also expect LPG and natural gas powered forklifts to continue to grab share away from diesel given the tightening emissions climate and increased availability of natural gas engines.
Page 56
Market Size and Power Solutions Expected Market Share of Combined U.S. and China
350000 300000 10%
9%
7% 6% 5% 4% 3%
Percentage Market Share
28% 24%
19%
8%
Total Forklift Sales
250000
200000 150000
100000
50000 0 2013 U.S. Class IV & V 2014 U.S. Class VII 2015 China 2016 2017
2%
1% 0% Expected PSIX Blended Market Share
Source: FBR Research and the Industrial Truck Association
Material Handling Revenue Opportunity Potential for Power Solutions

160
140 120 100
105 82 70 59 77 87 60
152
Material Handling Revenue Scenarios

125
97
35%
30%
25% 20% 15% 10%
Percentage of Material Handling Revenue 33% Coming From China
80
60 40 20
60
61
15%
11% 7%
15%
7% 8%
5%
0%
8%
7%
0 2014 Bear Case 2015 Base Case 2016 Bull Case 2017
2014
2015
2016
2017
Bear Case
Base Case
Bull Case
The on-road trucking markets account for about 240,000 Class 8 trucks sold and 430,000 Class 5 and 7 trucks sold. Penetration rates remain very low, at less than 3%, and we see a meaningful growth opportunity for natural gaspowered trucks over the coming decade.
Page 57
2014 FBR CAPITAL MARKETS & CO. Class 8 TrucksNatural Gas Penetration Estimates
Class 57 TrucksNatural Gas Penetration
Engine Sourcing and Value Add by Power Solutions
Power Solutions typically sources its engine base blocks from large and established engine OEMs. The base blocks can be either diesel or gasoline and come in either turbo-charged or nonturbo-charged form. The company then modifies the engines to run on a variety of natural gas fuel. Power Solutions also becomes the manufacturer of record, or MOR, for these newly modified engines and is responsible for warranty and replacement parts for these engines. Typical modifications include adding new turbo chargers, engine control module (ECM) calibrations, natural gas fuel injectors, cooling packages, and three-way catalyst emission systems. Most of the converted engines meet new emission standards with little engine modifications and the use of standard three-way catalysts, unlike the use of more expensive systems such as SCR systems on new diesel engines. Power Solutions provides in-house engineering, component sourcing, assembly, integration, and testing services to create a new natural gas product. Page 58
Solid Earnings Growth under Multiple Scenarios and Market Penetration Forecasts
Power Solutions product portfolio spans multiple end markets with very low natural gas penetration rates, and the company has the potential to further increase its market share in select target markets. Our scenario analysis captures the companys expected growth under various scenarios, and we see the potential for at least 20%25% over the next two to five years. We also see the potential for meaningfully higher earnings growth, in the range of 30%35% if the oil and gas industry transitions to natural gas at an accelerated pace and if Power Solutions is successful in increasing its market share in U.S. material handling and is successful with material handling product launches in China.
2017 EPS Scenarios
Working Capital Needs Should Increase Meaningfully As Power Solutions Transitions into Larger and Customized Engine Packages and Expands Internationally
We see working capital needs increasing by $42 million from 2013 to 2016, which can be met through a combination of internal cash flow generation and potentially external financing. Our model assumes that Power Solutions raises some growth capital through 2016 to fund its rapidly expanding product portfolio.
Page 59
Risks
Warranty issues on natural gas engine products. Power Solutions sells natural gas engines to a number of customers in multiple industries ranging from oil and gas to material handling to on-road trucking. The company is the manufacturer of record, or MOR, for most of the engines it sells and provides warranties on the engines. Any adverse warranty development could have a negative impact on earnings, as well as new business potential. Increased working capital requirements from changing product mix toward larger and more customized engine packages. Power Solutions will typically source base engine blocks from a number of engine OEMs and convert the engines to natural gas with their own components, thereby tying up working capital until the engines are sold to customers and payment received. A mix shift toward larger, more customized engine packages will increase working capital requirements, which will have to be managed efficiently. Increased competition from large-engine OEMs. Power Solutions is looking to enter markets that are currently served by large-engine OEMs selling either a traditional diesel engine or a natural gas product. Some of these OEMs have meaningfully greater resources, and increased competition through new product launches or pricing competition could have a negative impact on profitability. Pricing spread between natural gas and diesel. The demand for natural gas engines is dependent on the pricing spread between natural gas and diesel. Any meaningful decline in this spread could negatively affect the demand for natural gas engines.
Company Profile
Power Solutions International, Inc., based in Wood Dale, Illinois, was originally established as a global distributor of GM Industrial Engines and was originally a part of Power Great Lakes, until Power Solutions became the parent company. The original company, Power Great Lakes Inc., was founded by William Winemaster and his son, Gary Winemaster, as a distributor of Perkins engines. Power Solutions is leading manufacturer and supplier of industrial and on-road natural gaspowered engines, with products ranging from 0.97L to 21.9L. The company operates under three other brands in addition to the Power Solutions name. These are Power Great Lakes, Inc., which is the largest distributor of Perkins Engines in North America; MasterTrak, Inc., which provides advanced telematics solutions for engine monitoring; and Auto Manufacturing, Inc., which manufactures Auto Clutch, a power take-off (PTO) clutch built for use in heavy-duty side load applications. Through its brands, Power Solutions provides turnkey solutions to original equipment manufacturers in the industrial, construction, agricultural, and on-road markets and, after the introduction of the 61L engine coming soon, the oilfield services market.
Page 60
Income StatementPower Solutions International, Inc. (PSIX)

$ in Millions
Proprietary to FBR Capital Markets & Co. February 18, 2014 Aditya Satghare . 646.885.5472 . asatghare@fbr.com Source: Company documents and FBR Research
Page 61

Westport Innovations Inc. (WPRT $17.30)

Vancouver, BC, Canada
February 18, 2014
Coverage Initiated
Outperform
STOCK DATA
52-Week Range Three-Month ADTV Dividend Yield Market Cap (mil) Shares Outstanding (mil) Beta Enterprise Value (mil) Fiscal Year-End $16.03 - $35.4 1,106,706 0.0% $1,129 65 1.78 $961 December 2013E ($0.57)A ($0.61)A ($0.48)A ($0.53) ($2.20) 2014E ($0.56) ($0.61) ($0.49) ($0.56) ($2.22) 2015E ($0.50) ($0.52) ($0.38) ($0.41) ($1.82)
Business Model Transformation, Commercial Focus Should Significantly Improve Profitability Summary and Recommendation
We are initiating coverage of Westport Innovations Inc. (WPRT) with an Outperform rating and a 12-month price target of $25 per share; we see an attractive risk/reward profile at current levels. We expect Westport to undergo a business model transformation over the next three to five years and to evolve into a specialized natural gas fuel systems provider with technological expertise and select manufacturing partnerships. Investor sentiment on WPRT remains low, primarily due to concerns surrounding the companys path to profitability. We, however, believe that increasing R&D efficiency, managements focus on cost control, and new partnerships for the HPDI 2.0 product and highhorsepower applications should increase investor comfort in Westports ability to profitably participate in the increasing use of natural gas in the on-road trucking, high-horsepower, and light-duty segments.
EARNINGS DATA
EPS 1Q 2Q 3Q 4Q FY
FINANCIAL DATA
2013E FY Revenues FY EBITDA FY EBIT EV/EBITDA P/E 164 -95 -137 -10.1x -7.9x 2014E 209 -107 -152 -9.0x -7.8x 2015E 340 -64 -127 -15.0x -9.5x
Key Points
Business model transformation should lead to meaningfully higher profitability. We believe that Westports transition into an advanced fuel systems provider with high-technology expertise and select manufacturing partnerships should enable it to capture the rapidly growing market opportunity that is arising from the use of natural gas engines in on-road trucking, high-horsepower, and off-road applications. We also expect a meaningful increase in Westports R&D efficiency as new development contracts become more customer funded, and selling, marketing, and overhead cost controls should provide long-awaited operating leverage to the business model. Investor sentiment remains low, but 2014 should see multiple industry and company-specific announcements. We acknowledge that investor sentiment on the stock remains low, but we expect limited negative news flow in the near to medium term. This, coupled with an improving industry environment for natural gaspowered vehicles and stationary engines in 2014, should set the stock up for outperformance on the back of new product expansions and industry partnerships. Attractive risk/reward profile and broad product portfolio could result in meaningful stock upside in a faster industry adoption scenario. In a business-as-usual scenario, we see the downside for the stock at $15; we believe that managements actions on cost control and improved pricing realization could add up to $8 per share in value, and our upside scenario of faster industry adoption could add up to $17 per share. Our $25 price target assumes that management executes on its cost-control and targeted commercialization road map, while only giving a modest benefit for faster industry adoption in a few target areas. We also see sufficient cash on the balance sheet to fund the business plans through at least 2017. Institutional Brokerage, Research, and Investment Banking
BALANCE SHEET DATA

$ in millions
The Debate
Debatable Point
Will we see increased volatility during the business models transition?
Our Thoughts
Stock volatility could increase as investors digest the implications of the change in Westports business model and managements increased focus on cost control. Low investor expectations and negative stock sentiment could limit near- to medium-term upside until we see positive evidence from management actions or company-specific customer wins.
Time Frame
Impact
3 to 6 Months
Will investors begin to appreciate the breadth of Westports technology portfolio?
We expect 2014 to be characterized by meaningfully higher volumes for the Cummins Westport 12L engine, the launch of the Volvo 13L, new contract announcements for the HPDI 2.0 product, and further signs of penetration into the high-horsepower segment.
12 Months
When will investors see evidence of Westports ability to break even and achieve meaningful profitability?
We expect greater market penetration to be complemented by signs of increasing R&D efficiency through new contract wins and tight SG&A control, which should provide increased visibility into future profit potential.
12 Months
Investment Thesis
We are initiating coverage of Westport Innovations Inc. with an Outperform rating. We believe that Westports business model transformation into a specialized natural gas fuel systems provider, coupled with increasing R&D efficiency and cost controls, should enable the company to profitably participate in multiple new market segments. Low investor sentiment, as well as the potential for multiple upside catalysts in 2014, could lead to meaningful outperformance as we move through the year. In addition, managements focus on R&D efficiency and cost control should enhance earnings leverage as Westport participates in the growth of multiple natural gasdriven end markets.
Valuation
We base our $25 price target on a 17x multiple on our 2020 EPS estimate (excluding Cummins Westport Inc. [CWI]) of $2.80 and on $4.30 per share in proceeds from the CWI sale, discounted back at a 10% cost of equity. We believe that this valuation methodology captures the value potential to Westport from monetizing the CWI joint venture, along with a more mature product penetration scenario, which we expect Westport to achieve by the latter part of this decade.

Increasing volumes of the 12L Cummins Westport natural gas engine in multiple sectors of the trucking model. New contract announcements and partnerships for the new HPDI 2.0 product and further signs of penetration into the high-horsepower market. New tank orders for Westports proprietary LNG/CNG tank system. Further evidence of the successful launch of Volvos 13L engine. Page 63
Broad Portfolio Offering Should Enable Westport to Target a Number of High-Potential Areas
Westport has the broadest product portfolio in the advanced transportation industry; it is focused on natural gas fueling and storage systems. The companys existing portfolio includes components and kits for light-duty applications; light-duty industrial natural gas engines; and fueling and storage for light-, medium- and heavy-duty trucks. For the trucking market, the core of Westports technology is the HPDI, or high-pressure direct Injection system, which combines a diesel pilot injection system with natural gas fuel injection to achieve superior power and torque curves. The HPDI technology maintains the power and torque characteristics of traditional diesel systems, which become increasingly important in highhorsepower applications. Westport also has a proprietary natural gas storage system specifically designed for LNG-driven trucks. The fueling system can be used for the recently launched 11.9L ISX G Cummins Westport natural gas engine and is designed to operate with cold (unsaturated) LNG, which enhances the operating range, unlike most of the systems in the market, which operate on warm (saturated) LNG. Different configurations are available for in-tank pumps, which can either be driven hydraulically or through an electric system. Although competition in CNG tanks is expected to increase meaningfully, we see limited competition within LNG tanks, with adoption rates driven primarily by the adoption of LNG in the market.
Product Expansion into Higher Revenue and Profit Opportunities Could Add Meaningfully to Profitability
We see recent product expansions with the launch of HPDI 2.0 enabling Westport to potentially tie up captive engine divisions of large truck OEMs. HPDI 2.0 is a meaningful improvement from the first-generation of HPDI and should result, according to our estimates, in approximately a 30%40% cost reduction over the initial system while providing all the benefits of high power and torque. This system can be further complemented by the companys in-house storage solution to form a complete natural gas solution. While development and testing times can take several years, we expect to see products in the field from this new architecture over the next two to three years. We expect to see increasing natural gas engine penetration in high-horsepower applications such as oil and gas, mining, marine, and locomotives. Westport is actively involved with industry leader Caterpillar to develop solutions for the mining and locomotive markets. The exhibit below details our market forecast for new horsepower added in the U.S. oil and gas fields. We see the potential for Westport to target the fracking pump segment with its HPDI solutions, given the 30,000 HP units involved in a fracking fleet and the varying power and torque needs of operating a fracking pump. Similar opportunities also exist in drilling applications. Opportunities for operating and producing wells remain somewhat limited for Westport and could be met by a more traditional spark-ignited natural gas solution.
Page 64
2014 FBR CAPITAL MARKETS & CO. Forecasted Oilfield Horsepower Requirements
(Millions)
7
6 5 4 3 2 1
Incremental Additional HP 2013-2015 720,000 2015-2017 760,000

New Production HP, 3.4M
Annual Horsepower Available
Hydraulic Fracturing HP, 1.7M
Hydraulic Fracturing
HP, 1.9M
Hydraulic Fracturing
HP, 2.4M
Drilling HP, 0.7M
Drilling HP, 0.7M
Drilling HP, 0.9M
2013E
2015E
2017E
Multiple Levers to Create Share Value through Internal Management Actions and Faster Industry Adoption
We see multiple levers to create shareholder value, including a targeted focus on commercializing key products, increasing R&D efficiency, improved cost control, and potentially faster industry adoption. We broadly bucket Westports portfolio into three categories: high market potential, medium market potential, and low market potential.
High Potential
HPDI 2.0 LNG tanks High-horsepoweroil and gas, mining, locomotive, and marine Light-dutyWestport Wing
Medium Potential
China HPDIupsell opportunity through the Weichai joint venture or by selling directly to Weichai.
Low Potential
Components and kitswe see limited potential for natural gas in passenger vehicles and believe that electrification will play a more important role here. Light-duty industrial applicationsa broad product portfolio with a strong base block engine is required.
Chinacommodity natural gas systems through the Weichai joint venture. We believe that recent management changes will lead to increased product commercialization, but we expect Westport to see the most success in its high-potential category. Page 65
Increasing R&D Efficiency

The early-stage and technology-focused nature of Westport makes it difficult to compare the companys R&D efficiency to that of more established players. While current R&D efficiency is low, we expect the management team to take multiple steps to correct this, such as customer funding of development contracts, while optimizing the focus areas to high-volume opportunities. We do not expect Westport to maintain its current R&D run-rates, and if maintained, we expect them to be offset by an increasing proportion of customer-funded contracts and/or service revenue. We have used various metrics to arrive at an estimated 30% R&D to new revenue (post 2016) ratio, which is a substantial improvement over prior levels, and we expect overall R&D to trend down to about 7% of sales by 2020.
Risk/Reward Profile Attractive at Current Levels

In all of our scenarios for WPRT, we assume that Cummins exercises the option to buy out the Cummins Westport joint venture in 2020 at a 1.3x EBIT multiple. In a business-as-usual scenario, we arrive at a downside price target of $15 and estimate that management actions on cost and product pricing can add about $8 per share in value, and faster industry penetration can add another $17 per share in value (the exhibit below highlights our scenarios and assumptions behind each key target market). Price Target Scenario: Low Increased Penetration
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2014 FBR CAPITAL MARKETS & CO. Price Target Scenario: High Increased Penetration
Risks
Warranty issues and potential recalls on new products sold. Westport sells a number of natural gas engine components and storage solutions to a wide range of customers globally and provides warranties on these components. Its Cummins Westport joint venture sells the 8.9L and 11.9L natural gas engine. Any adverse warranty development could have a negative impact on earnings, as well as new business potential. Slower-than-expected customer uptake of HPDI 2.0. Westport is looking to enter into strategic partnerships with engine OEMs or captive engine divisions of large OEMs to launch natural gas engines based on the HPDI 2.0 architecture. Any delay in securing new partnerships could have a negative impact on future earnings. Inability to secure attractive R&D cost-sharing agreements with customers. Westports ability to generate healthy profitability is highly dependent on improving its R&D efficiency, which in turn depends on securing customer cost-sharing agreements. The inability to secure these agreements could limit future margin expansion potential and cash flow. Limited pickup in light-duty natural gas penetration, which could result in a continued drag on earnings. Westport has committed sizable resources to growing its light-duty natural gas WING system, especially with the recent acquisition of BAF Technologies, Inc. The light-duty market has shown only limited customer interest, and a lack of meaningful sales pickup could continue to be a drag on earnings. Pricing spread between natural gas and diesel. The demand for natural gas engines is dependent on the pricing spread between natural gas and diesel. Any meaningful decline in this spread could negatively affect the demand for natural gas engines.
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Company Profile
Westport Innovations Inc. was founded by David Robert Demers in 1995 and is headquartered in Vancouver, Canada. Westport is a developer of natural gas and liquefied natural gas technologies. The company offers a range of engines, fueling systems, conversion kits, and other natural gas technologies for both on-road highway applications and heavy-duty off-road applications. The company operates four business segments: (1) Westport Heavy Duty, which engages in the engineering, design, and marketing of heavy-duty natural gas engine products; (2) Westport Light Duty, which provides natural gas engines and fuel systems for the OEM and light-duty automotive markets; (3) Cummins Westport, which designs, manufactures, and distributes spark-ignited natural gas engines and generation systems; and (4) Weichai Westport, which develops, manufactures, and sells engines for the on-road, marine, and power generation markets.
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Income StatementWestport Innovations Inc. (WPRT)

$ in Millions
Proprietary to FBR Capital Markets & Co. February 18, 2014 Aditya Satghare . 646.885.5472 . asatgahre@fbr.com Source: Company documents and FBR Research
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Tesla Motors, Inc. (TSLA $198.23)

Palo Alto, CA
February 18, 2014
Coverage Initiated
Market Perform
STOCK DATA
52-Week Range Three-Month ADTV Dividend Yield Market Cap (mil) Shares Outstanding (mil) Beta Enterprise Value (mil) Fiscal Year-End $33.8 - $202.72 10,529,964 0.0% $24,173 122 1.13 $24,037 December 2013E $0.10A $0.08A ($0.07)A $0.14 $0.25 2014E $0.22 $0.19 $0.48 $0.60 $1.50 2015E $0.48 $0.61 $0.71 $0.79 $2.60
More Revolutionary Vehicles Ahead, but Stock Pricing in Best-in-Class Industry Profitability Summary and Recommendation
We are initiating coverage of Tesla Motors, Inc. (TSLA) with a Market Perform rating and a 12-month price target of $150 per share. Although we are strong believers in managements ability to execute and launch differentiated products in todays competitive auto landscape, we believe that the current stock price fully reflects Teslas evolution into what we believe will be one of the most profitable premium auto manufacturers by the end of this decade. Execution risk going forward is meaningfully higher as Tesla manages multiple product launches and expands into new geographies, and the risk/reward profile at current levels does not appear very attractive. We believe that sustained upside in the stock from current levels will be dependent on rapid success of the Gen 3 model and sizable expansion in China, and we expect limited clarity on these items until at least 2016.
EARNINGS DATA
EPS 1Q 2Q 3Q 4Q FY
FINANCIAL DATA
2013E FY Revenues FY EBITDA FY EBIT EV/EBITDA P/E 1,936 135 41 178.7x 792.9x 2014E 2,825 338 218 71.1x 132.2x 2015E 3,279 537 373 44.8x 76.2x
Key Points
Evolution into a premium manufacturer, with solid margins already priced into the stock. We believe that the current stock price fully captures Teslas evolution into a premium auto manufacturer with sustainable industry-leading margins similar to those of Porsche. We acknowledge managements strong execution to date and believe the company is capable of achieving such margins over the coming decade, compared with the multi-decade history and time line for companies such as Porsche in reaching this goal. Further stock upside from current levels will be largely dependent on rapid success of the Gen 3 model and on establishing a manufacturing presence in China, and we do not expect additional clarity on these metrics until 2016 at the earliest. Potential headwinds and increased execution risk. Teslas ability to launch a revolutionary electric vehicle with the Model S is now proven. However, we see increased execution risk as the company moves into multiple new geographies, managing the expansion of the supercharging network and the allocation of internal resources between continued improvements to the Model S and launches of the Model X and the Gen 3. We do believe that the Gen 3 will be able to stand out in an increasingly competitive entry- to mid-level luxury segment, given new launches of the C/CLA classes from Mercedes, an expanded lineup from BMW, and upcoming new models from Audi and Jaguar. Expect continued stock volatility. We expect the stock to remain volatile in the near to medium term, and our upside and downside scenarios lead to a fair value of $100 and $200, respectively, which leads to our price target of $150, indicating limited sustained upside potential over the next 12 months. Institutional Brokerage, Research, and Investment Banking
BALANCE SHEET DATA

$ in millions
The Debate
Debatable Point
When will investors gain additional clarity on the sales potential of the Model X and especially the Gen 3?
Our Thoughts
Time Frame
Impact
In 2014, Tesla plans to expand international sales of the Model S, and it will focus on launching the Model X in 2H14. We expect only limited clarity on the potential for Model X sales in 2014, and Gen 3 visibility should become clearer in 2016 or 2017.
12 Months
Will the Model X be the next Porsche Cayenne?
The Model X will go head to head with the likes of the Porsche Cayenne and the Range Rover. We acknowledge that the Model X will be revolutionary, but the Cayenne should prove to be a tough competitor with its solid on- and off-road pedigree. We do not expect Porsche Cayennetype volumes for the Model X in the near to medium term.
12 Months
Will increasing overall capital intensity surprise investors?
We see the potential for investors to be negatively surprised by the increasing capital intensity of ongoing Model S upgrades, the buildout of the power train supply chain, the launch of new variants of the Model S, and the initial launches of the Model X and Gen 3. We are strong believers in Teslas engineering and design capabilities, but the auto industry is very capital intensive.
12 Months
Investment Thesis
We are initiating coverage of Tesla Motors, Inc. with a Market Perform rating, as we believe the current stock price fully accounts for Teslas evolution into one of the most profitable premium auto manufacturers by the end of this decade, with sustainable margins similar to those of Porsche. Furthermore, we acknowledge managements strong execution track record to date but see meaningfully higher execution risk ahead and, therefore, do not find the risk/reward profile attractive at current levels. Finally, sustained upside from current levels will be dependent on rapid success of the Gen 3 and on the establishment of a manufacturing presence in China, and we expect only limited clarity on these items until at least 2016.
Valuation
We believe the right normalized multiple for TSLA is between 8x and 11x, compared with luxury auto manufacturers at 6x8x. This is a 10%50% premium to valuations of luxury automakers, reflecting the expected continued growth of Teslas global market share. We arrive at our price target by taking the midpoint of our upside and downside scenarios. We see a downside of $100 per share or 9x base-case 2017E EBITDA, and we see an upside of $200, or 13x our upside 2017E EBITDA, resulting in a price target of $150.

Preview of Model X preproduction prototype and further clarity on power train characteristics and in-vehicle content. Teaser shots of the Gen 3 and further clarity on vehicle features. Signs of Model S success in international markets, especially in large markets such as China and Germany, as well as early signs of a demand build for Model X. Page 71
Revolutionary Models AheadCore Expertise Lies in Power Train, Chassis Design, and Integration
Teslas core expertise lies in developing and manufacturing fully electric power trains, as well as in its chassis design and integration capabilities. Tesla has maintained a commanding advantage over the competition in terms of both battery cost and overall battery performance. We estimate a current cost advantage in battery pack manufacturing of about 30%, when compared with large-scale prismatic battery packs, such as those assembled in Nissans plant in Tennessee. Teslas battery packs have an energy density advantage of about 30%, which is then coupled with the companys state-of-the-art battery management systems. We expect Tesla to maintain a cost/performance advantage of about 20%30% in the near to medium term, and we expect the company to be at the forefront in advances in battery capacity, performance, and cost. We expect the next generation of battery systems for Tesla, based on similar battery chemistries, to debut in 2016 or 2017 (should coincide with the launch of Gen 3). Long term, we see Tesla as being agnostic to battery chemistry and expect the company to be a user/collaborator in multiple new battery chemistries that we expect to be introduced to the market in the latter part of this decade. We see Teslas electric power train capabilities as similar to leading internal combustion (IC) engine technology from manufacturers such as Audi, which pioneered the use of turbo-charged engines in vehicles; BMW with its high-output in-line six cylinders and now the turbo-charged versions of these engines; and Mercedes with its highly reliable four- and six-cylinder gasoline and diesel engines. It is important to note that electric power trains can be modified to deliver varying power/torque configurations by using different cell configurations and inverter/software combinations. IC engines, on the other hand, need different core assemblies, such as cylinder blocks/heads, turbos, and cooling systems, which increase development and manufacturing costs. Part commonality within IC engine families can be between 40% and 60%, and electric power trains can also achieve substantial part commonality. Therefore, we believe that Tesla, with its similar battery chemistries, has a more costefficient method of, and rapid turnaround time for, delivering multiple power train configurations versus its competitors. Teslas portfolio should develop into 10-plus models by the end of this decade.
Model S: planned refresh in 2016, new model in 2018. Introduction of all-wheel drive (AWD) and right-hand drive models. Coupe versions and grand touringtype version possible. Model X: expected launch in 2014, mid-cycle refresh in 2017.
Gen 3: should launch in 2016/2017, mid-cycle refresh in 2020. We expect each model to be launched in two to three configurations, each with a 60 kWh and 85 kWh power train, except the Gen 3, which we expect to start with a 40 KWh battery pack. We also expect Tesla to replicate the performance line across its product lineup similar to the AMG from Mercedes, M from BMW, and S line from Audi. We also expect to see industry-leading AWD systems, in terms of both performance and weight, from Tesla.
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2014 FBR CAPITAL MARKETS & CO. Evolution of Teslas Portfolio
Potential to Evolve into One of the Most Profitable Automobile Manufacturers over the Coming Decade
We believe that Tesla has the potential to achieve industry-leading profit margins, similar to leaders such as Porsche and recently Jaguar, by transforming itself into one of the top five luxury auto manufacturers globally. We see two possible scenarios for Tesla. In both scenarios, the Gen 3 or the mid-size vehicle should play a critical role in achieving meaningful global volumes and further expanding the reach and awareness of Teslas brand.
Base case. In our base case, we estimate annual volumes of 150,000 units by 2020, relatively low volumes but respectable margins in the mid-teens. Tesla would continue to exclusively manufacture vehicles at its plant in Freemont and export to markets such as Europe and Asia. Upside. In our upside case, we estimate annual volumes of 300,000 units by 2020, but Tesla will need to build overseas manufacturing facilities to sell into the fast-growing Asian market. In this scenario, Tesla would become a very profitable manufacturer with margins exceeding 20%.
In both of these scenarios, 2016/2017 will be important for the company as it launches the Gen 3 vehicle. In all key markets, we typically expect sales to progress from early adopters, hybrid buyers, and the green conscious who can afford luxury vehicles but have had limited choices so far and from premium vehicle buyers and then premium luxury or entry-level luxury buyers. We expect Tesla to remain a premium brand, even within its category, similar to a BMW today. The increasing availability of the supercharger network should continue to widen customer participation from each segment. Base-Case Scenario
Total Units Revenues EBITDA Margin 2012 2,653 $413 2013E 22,450 $1,936 2014E 36,400 $2,825 4.6% 2015E 56,000 $3,279 5.8% 2016E 75,000 $5,389 13.6% 2017E 106,000 $7,564 15.7% 2018E 141,000 $9,614 16.3% 2019E 151,000 $10,179 16.4% 2020E 151,000 $10,179 15.5%
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2014 FBR CAPITAL MARKETS & CO. Upside Scenario

Total Units Total Revenues (M) EBITDA Margin
FY 2012 FY 2013E FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E 3,002 20,650 39,500 55,000 79,000 126,000 181,000 271,000 301,000 413 1,868 2,911 4.1% 3,127 4.5% 5,736 15.7% 9,100 18.6% 12,897 20.0% 17,945 21.5% 19,454 21.4%
We expect Teslas margins to be closer to those of Porsche and Jaguar than to those of Mercedes, BMW, and Audi. Industry EBITDA Margins versus Our Tesla Projections
Source: Mercedes Benz, Audi, BMW, Porsche, and Jaguar annual reports
We see two demand scenarios for Tesla. In either scenario, Tesla should evolve into a highly profitable auto manufacturer. Entry-Level ScenarioBase Case
Total U.S. % chg Total Europe % chg Total Other % chg Global Entry-Level Total U.S. EU Other Total Tesla Entry-Level Volume U.S. EU Other Total 10,000 24,000 5,000 1,000 30,000 40,000 10,000 10,000 60,000 50,000 10,000 10,000 70,000 50,000 10,000 10,000 70,000 2012 394,399 6.0% 644,387 -6.0% 346,977 18.0% 1,385,763 2013E 408,355 3.5% 642,059 -0.4% 390,935 12.7% 1,441,349 2014E 2015E 431,037 440,707 5.6% 2.2% 640,016 658,479 -0.3% 2.9% 428,495 469,780 9.6% 9.6% 1,499,548 1,568,966 Tesla Market Share 2016E 460,662 4.5% 677,533 2.9% 515,161 9.7% 1,653,356 2.2% 2017E 459,239 -0.3% 695,024 2.6% 565,047 9.7% 1,719,310 5.2% 0.7% 0.2% 1.7% 2018E 464,580 1.2% 711,056 2.3% 609,020 7.8% 1,784,656 8.6% 1.4% 1.6% 3.4% 2019E 472,315 1.7% 725,169 2.0% 656,486 7.8% 1,853,970 10.6% 1.4% 1.5% 3.8% 2020E 474,570 0.5% 734,851 1.3% 707,723 7.8% 1,917,144 10.5% 1.4% 1.4% 3.7%
0.6%
10,000
Source: FBR Research and company reports
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2014 FBR CAPITAL MARKETS & CO. Luxury Sedan ScenarioBase Case
Total U.S. % chg Total Europe % chg Total Other % chg Global Luxury Sedan Total U.S. EU Other Total U.S. EU Other Total 2012 233,780 16.0% 686,722 354,360 1,274,863 1.1% 2013E 254,980 9.1% 695,954 1.3% 385,003 8.6% 1,335,937 7.1% 0.6% 1.7% 18,110 4,340 22,450
0.2% 2,653
2,653
2014E 2015E 2016E 267,645 275,529 276,998 5.0% 2.9% 0.5% 697,316 705,642 719,479 0.2% 1.2% 2.0% 410,788 438,695 468,302 6.7% 6.8% 6.7% 1,375,748 1,419,865 1,464,780 Tesla Market Share 7.6% 9.7% 10.6% 1.5% 1.2% 1.3% 0.8% 1.4% 1.4% 2.5% 2.9% 3.1% Tesla Luxury Sedan Volume 20,400 26,650 29,250 10,200 8,200 9,000 3,400 6,150 6,750 34,000 41,000 45,000
2017E 263,008 -5.1% 732,971 1.9% 500,000 6.8% 1,495,979 10.3% 1.2% 1.8% 3.0% 27,000 9,000 9,000 45,000
2018E 259,036 -1.5% 746,741 1.9% 533,673 6.7% 1,539,450 9.6% 1.2% 2.1% 2.9% 24,750 9,000 11,250 45,000
2019E 254,242 -1.9% 760,574 1.9% 568,048 6.4% 1,582,864 8.8% 1.2% 2.4% 2.8% 22,500 9,000 13,500 45,000
2020E 251,996 -0.9% 774,462 1.8% 604,737 6.5% 1,631,196 8.9% 1.2% 2.2% 2.8% 22,500 9,000 13,500 45,000
SUV ScenarioBase Case

Total U.S. % chg Total Europe/Other % chg Global SUV Total U.S. EU/Other Total U.S. EU Other Total 2012 359,893 12.0% 179,947 12.0% 539,840 2013E 372,428 3.5% 193,663 7.6% 566,091 2014E 2015E 371,617 370,251 -0.2% -0.4% 247,745 246,834 27.9% -0.4% 619,362 617,084 Tesla Market Share 0.1% 2.2% 0.0% 0.8% 0.1% 1.6% Tesla SUV Volume 500 8,000 2,000 500 10,000 2016E 372,160 0.5% 248,106 0.5% 620,266 3.2% 3.2% 3.2% 12,000 5,000 3,000 20,000 2017E 373,997 0.5% 249,331 0.5% 623,328 4.0% 6.0% 4.8% 15,000 10,000 5,000 30,000 2018E 376,262 0.6% 250,841 0.6% 627,103 4.0% 8.0% 5.6% 15,000 10,000 10,000 35,000 2019E 378,640 0.6% 252,427 0.6% 631,067 4.0% 7.9% 5.5% 15,000 10,000 10,000 35,000 2020E 380,638 0.5% 253,759 0.5% 634,397 3.9% 7.9% 5.5% 15,000 10,000 10,000 35,000
Longer term, Teslas volume potential will likely be determined by the success of models such as the Gen 3 and by success with multiple versions of the Model S and the Model X. Entry-Level ScenarioUpside Case
Total U.S. % chg Total Europe % chg Total Other % chg Global Entry-Level Total U.S. EU Other Total U.S. EU Other Total 2012 394,339 6.0% 644,387 -6.0% 346,977 18.0% 1,385,703 2013E 408,355 3.6% 642,059 -0.4% 390,935 12.7% 1,441,349 2014E 434,765 6.5% 640,016 -0.3% 433,295 10.8% 1,508,076 2015E 2016E 448,536 468,725 3.2% 4.5% 648,479 677,533 1.3% 4.5% 487,648 549,131 12.5% 12.6% 1,584,663 1,695,389 Tesla Market Share 2.1% 2017E 470,358 0.3% 695,024 2.6% 615,252 12.0% 1,780,634 5.1% 0.7% 0.2% 1.7% 24,000 5,000 1,000 30,000 2018E 482,866 2.7% 711,056 2.3% 678,808 10.3% 1,872,731 8.3% 1.4% 1.5% 3.2% 40,000 10,000 10,000 60,000 2019E 517,844 7.2% 725,169 2.0% 744,990 9.7% 1,988,002 14.5% 2.8% 4.7% 6.5% 75,000 20,000 35,000 130,000 2020E 527,386 1.8% 734,851 1.3% 803,307 7.8% 2,065,543 15.2% 4.1% 5.6% 7.5% 80,000 30,000 45,000 155,000
0.6% Tesla Entry-Level Volume 10,000
10,000
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2014 FBR CAPITAL MARKETS & CO. Luxury Sedan ScenarioUpside Case
Total U.S. % chg Total Europe % chg Total Other % chg Global Luxury Sedan Total U.S. EU Other Total U.S. EU Other Total 2012 233,780 16.0% 686,722 354,360 1,274,863 1.1% 2013E 254,980 9.1% 695,954 1.3% 385,003 8.6% 1,335,937 5.9% 0.9% 1.6% 15,000 6,000 21,550 2014E 273,842 7.4% 697,316 0.2% 416,669 8.2% 1,387,826
0.2% 2,653
2,653
2015E 2016E 283,077 284,563 3.4% 0.5% 705,642 719,479 1.2% 2.0% 451,453 489,180 8.3% 8.4% 1,440,172 1,493,223 Tesla Market Share 7.3% 8.8% 8.8% 1.7% 2.1% 2.1% 1.2% 1.1% 1.2% 2.7% 3.1% 3.1% Tesla Luxury Sedan Volume 20,000 25,000 25,000 12,000 15,000 15,000 5,000 5,000 6,000 37,000 45,000 46,000
2017E 280,132 -1.6% 732,971 1.9% 530,281 8.4% 1,543,383 12.5% 2.0% 1.9% 3.9% 35,000 15,000 10,000 60,000
2018E 286,188 2.2% 746,741 1.9% 566,123 6.8% 1,599,051 14.0% 2.0% 2.6% 4.4% 40,000 15,000 15,000 70,000
2019E 292,087 2.1% 760,574 1.9% 602,825 6.5% 1,655,487 15.4% 2.6% 2.5% 4.8% 45,000 20,000 15,000 80,000
2020E 289,794 -0.8% 774,462 1.8% 642,012 6.5% 1,706,268 15.5% 2.6% 3.1% 5.0% 45,000 20,000 20,000 85,000
SUV ScenarioUpside Case

Total U.S. % chg Total Europe/Other % chg Global SUV Total U.S. EU/Other Total U.S. EU Other Total 2012 359,893 12.0% 179,947 12.0% 539,840 2013E 372,428 3.5% 193,663 7.6% 566,091 2014E 2015E 374,201 374,004 0.5% -0.1% 249,467 249,336 28.8% -0.1% 623,669 623,340 Tesla Market Share 0.7% 2.1% 0.0% 0.8% 0.4% 1.6% Tesla SUV Volume 2,500 8,000 2,000 2500 10000 2016E 376,861 0.8% 251,241 0.8% 628,102 4.0% 2.8% 3.5% 15,000 5,000 2000 22,000 2017E 378,698 0.5% 252,465 0.5% 631,163 5.3% 5.9% 5.5% 20,000 10,000 5,000 35,000 2018E 381,777 0.8% 254,518 0.8% 636,294 6.5% 9.8% 7.9% 25,000 10,000 15,000 50,000 2019E 384,985 0.8% 256,657 0.8% 641,642 6.5% 13.6% 9.4% 25,000 15,000 20,000 60,000 2020E 387,829 0.7% 258,553 0.7% 646,382 6.4% 13.5% 9.3% 25,000 15,000 20,000 60,000
Management Will Need to Execute Flawlessly in Several Areas

International Expansion
Expanding manufacturing capacity. Tesla will need a local manufacturing base to expand meaningfully into Asia, especially the Chinese market. Tie-ups can be challenging given limited safeguards regarding technology protection and transfer agreements. European expansion into high-volume markets can be challenging. Although a number of countries offer subsidies for electric vehicles, sales volumes have remained modest so far. Europe has also lagged behind the U.S. in developing an electric vehicle charging infrastructure in large markets, although Tesla is addressing this issue by building a supercharger network. Certain smaller markets such as Norway offer a sizable near- to medium-term opportunity for Tesla, where electric vehicles benefit meaningfully from lower fees and taxes, such as the lower new registration fees, public parking fees, exemption from toll payments, and access to bus lanes. These incentives are in place until 2018 or until the country reaches 50,000 electric vehicles. These incentives can make electric vehicles very attractive, with Teslas Model S being cheaper to own than both a Volkswagen Passat and a Mercedes E class. On the other hand, markets such as Germany, the home market to the top three luxury brands, could prove more challenging. Asian expansion. A China strategy is critical for any luxury vehicle manufacturer. Competition is intense, from both German and domestic companies. German brands such as Audi lead the market, Page 76
with BMW and Mercedes also delivering strong annual sales in the region. We do not doubt the appeal of Tesla to the ultra-rich in China, but Tesla will have to forge local relationships to make a meaningful impact on the market. Porsche, for example, sells about 31,000 vehicles annually in China, though at a higher price point than BMW, Audi, Mercedes, Porsche, and Jaguar. These five brands, through their local tie-ups, sell more than 1 million vehicles annually and account for 85% of the premium luxury vehicle market in China. Of these brands, BMW, Audi, and Mercedes have local manufacturing tie-ups, while Porsche relies on its plants in Germany and Jaguar is in the process of building a China plant. While joint ventures in China have been successful, many of them have taken multiple years to reach profitability. Tesla will also have to appeal to buyers who place a greater significance on brand and backseat comfort while combining vehicle performance and operating cost. Pricing premiums in China can be meaningful even after adjusting for import duties on vehicles and the value-added tax (VAT) in China. Import duties are 25%+ on finished cars, and the VAT is about 10% higher than state sales tax in the U.S. Teslas recent strategy of introducing the Model S in China at a price of about $125,000, is a first for the Chinese market, and we will look to closely monitor the traction Tesla receives with this strategy. The four exhibits below highlight the average price premium in China. BMW Product Mix in China
Z4 0% X5 7% X3 8% X6 3% 3 Series 19% 1 Series 4%
X1 9%
7 Series 7% 6 Series 1% 5 Series 36%
Source: FBR Research and BMW presentations
BMW Pricing Mix in China

BMW 1 Series 3 Series 5 Series 6 Series 7 Series X1 X3 X5 X6 Z4 Average
Source: BMW
$ $ $ $ $ $ $ $ $ $ $
China Avg Price 48,429 76,976 111,009 214,258 239,001 52,550 89,350 190,281 239,237 109,002 137,009
$ $ $ $ $ $ $ $ $ $ $
US Avg Price 40,450 43,743 59,815 85,283 94,960 33,967 42,150 58,200 65,100 56,233 57,990
$ $ $ $ $ $ $ $ $ $ $
Premium 7,978.80 33,232.75 51,194.02 128,974.44 144,041.78 18,583.73 47,200.40 132,080.53 174,136.80 52,768.27 79,019
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2014 FBR CAPITAL MARKETS & CO. Porsche Product Mix in China
911 3% Panamera 29% Boxster/Cayman 4%
Cayenne 64%
Source: FBR Research and Porsche annual report
Porsche Pricing Mix in China
Porsche 911 Boxster/Cayman Cayenne Panamera Average

Source: Porsche
$ $ $ $ $
China Avg Price 315,947 142,680 278,720 278,080 253,857
$ $ $ $ $
US Avg Price 115,935 57,225 83,371 110,311 91,711
$ $ $ $ $
Premium 200,012 85,455 195,349 167,769 162,146
Engineering and Product Development Capabilities

Engineering and product development capabilities will need to be further strengthened. As Tesla evolves into a multiproduct company from the Model S to the Model X to the Gen 3, there will be increasing demand on the product development team to manage multiple platform builds, undertake product refreshes, and build versions for multiple countries. We agree that the softwarerich nature of power train controls should make it easier to handle multiple power train builds, versus some competitors, but Tesla will need to shore up its resources in platform design, chassis development, and integration. We also expect Tesla to place a greater emphasis on developing similar architectures, across Model S, Model X, and Gen 3, such as the MQB architecture by Volkswagen and BMWs common architecture in its expanding 2, 4, and 6 Series line-ups. Gen 3: achievable but a challenging target in a highly competitive segment. The mid-size or entrylevel luxury segment remains very competitive, and buyers are a lot more price conscious than in the premium luxury segment. The segment is dominated by the BMW 3 series, the most successful midsize luxury vehicle in recent history, followed by the Mercedes C Class and Audi A4. Cadillac has recently shown that BMW is not untouchable with the launch of the ATS, and the updated Lexus IS 350 and Infiniti Q50 are formidable competitors. Teslas Gen 3 will have to offer certain class-leading features while also competing with performance-oriented offerings such as the 335i, S4, C350, and the IS 350 Sport. We also expect the base versions of the Gen 3 to face competition from newer entry-level luxury models such as the Mercedes CLA, BMW 2 Series, and the Audi A3. For the Gen 3 in the U.S., we see a path toward a base price of about $40,000, or potentially about $32,500 with various tax credits and the potential to generate at least 20% gross margins. We expect technological improvements on the Model S to serve as the starting point for further cost reductions and platform modifications on the Gen 3. The exhibit below details our view of features of the Gen 3, which incorporate meaningful improvements in battery energy density, cost, and weight reduction of the vehicle.
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2014 FBR CAPITAL MARKETS & CO. Model S versus Gen 3: Estimate of Key Parameters
Length (Inches) Width (Inches) Wheelbase (Inches) BHP Torque (ft-lbs.) Battery Pack (kWh) Curb Weight (lbs) Accl 0-60 (Seconds) Range (Miles) Model S 196.0 77.3 116.5 302 317 60 4300.0 5.9 210 Diff (10) (4) (5) (67) (17) (20) 420 0.3 (30)
Gen 3 186.0 73.3 111.5 235 300 40 3,880 6.2 180
Source: FBR Research and company Web site
Model S Gross Margins Could Approach 35% at Scale Production
Estimated Cost-Reduction Road Map

$100,000 $90,000
$83,700
Price
$80,000
$70,000 $60,000 $8,000
Price Price $2,000 $8,000

$51,700 $65,700
$50,000 $40,000 $30,000 $20,000 $10,000

$0
$14,000
1Q13 COGS
Lower Component Cost
Lower Labor
Lower Hours
4Q13E COGS
Lower 2016E COGS Component Cost
We expect cost reductions in Model S to form the basis for further reductions in the Gen 3 vehicle. We see a $40,000 base price excluding tax credits as achievable if Tesla executes on its costreduction plans.
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2014 FBR CAPITAL MARKETS & CO. Model S to Gen 3 Pricing Estimates
Model S to Gen 3 Model S Price $77,000 Model S COGS Battery Cost Reduction Size $/kWh Total Other Components BIW Interior / Electronics Chassis, Suspension Gen 3 COGS Gen 3 Selling Price Options Base Price % GP
$50,700
25 350 $8,750 $5,100 $600 $2,500 $2,000 $36,850 $46,000 $6,000 $40,000 20%
Estimated Model S to Gen 3COGS Model S to Gen

$60,000 $50,700 $50,000 $40,000 $30,000 $20,000 $10,000 $0 $8,750
Base Price $5,100 $36,850
Model S COGS
Battery Cost Reduction
Other Cost
Gen 3 COGS
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2014 FBR CAPITAL MARKETS & CO. Current Competition and Attributes
Length (Inches) Width (Inches) Wheelbase (Inches) BHP Torque (ft-lbs) Curb Weight (lbs) Accl 0-60 (Seconds) Braking 70 - 0 (Seconds) Gen 3 186.0 73.3 111.5 235 300 3,880 6.5 180 BMW 335i 182.5 71.3 110.6 300 300 3605 4.8 164 Cadillac ATS 182.8 71.1 109.3 320 275 3560 5.6 163
Lexus IS 350 183.7 71.3 110.2 305 277 3705 5.6 177
Average 183.0 71.2 110.0 308.3 284.0 3623 5.3 168.0
Source: FBR Research and company web sites
Model X. The Model X will be entering a very competitive landscape with the likes of the Porsche Cayenne, Range Rover, and the higher-end models of the BMW X5 and Mercedes M and G classes. The Porsche Cayenne was one of the most successful launches in recent history, and if the Model X delivers Cayenne-type performance and handling with its unique power train, we could see the Model X reach annual volumes of 50,000. The Porsche Cayenne was very well received in the market, whose only choice for a high-end SUV was the Range Rover. The Cayenne accounts for approximately half of Porsches global sales, 65% of Chinese sales, and 45% of U.S. sales. It is unlikely that there is room for two Cayenne-type vehicles in the market, which is mostly dominated by U.S. and Chinese sales. Therefore, success of the Model X could cause some significant market share shifts in this segment. Some limitations remain to developing the SUV category due to its narrower geographical focus (mainly U.S. focused) and the need to meet a wide range of demands for a single vehicle space, off-road capability, and utility/value. For the more traditional premium SUVs, successful brands sell about 35,000 to 45,000 units annually, with only one vehicle (Lexus RX) achieving sales of more than 80,000. Our sales estimate of 35,00060,000 falls in between these ranges, and the upper end is close to the volumes of the Porsche Cayenne.
Distribution Channel and Retail Stores

Distribution channel and retail store strategy would need to be adjusted at scale. To deliver 150,000300,000 in annual volumes, Tesla would have to operate an extensive retail store network. Assuming each store sells 40 to 50 vehicles per month, Tesla would need 300 to 600 stores to reach the target. Tesla could eventually consider a dual-retail strategy through a mix of owned retail and third-party stores.
Competitive Environment
Competition will take notice; cannot be a win-all situation. We expect Teslas competition to come mainly from large established manufacturers such as BMW, Audi, Mercedes Benz, Porsche, and Jaguar. Although Tesla is currently taking market share from multiple brands, including some hybrid brands, we see the real competition as being the premium brands in the market. We see BMW as a formidable competitor, and it is very likely that Tesla could grab share from the derivative architectures of its popular brands (6 Series, 4 Series). In terms of electric vehicles, we do not expect any real impact on Tesla sales from the BMW i3 or the Cadillac ELR. Yet, competition from BMW and Cadillac will have to be monitored closely, given the scalability of those platforms. While Tesla offers a unique driving experience and vehicle electronics, other luxury brands continue to offer a higher level of in-cabin comfort options and active safety features, and Tesla will have to keep investing in new technology to compete with some of the larger OEMs. We would also not be surprised to see increased competition from the finance subsidiaries of BMW, Mercedes, and Audi, especially in markets such as the U.S. We expect the luxury category to add about 800,000 annual vehicles between 2012 and 2020, and we estimate that Tesla will account for about 150,000 to 300,000, or approximately 20%40% of annual incremental volumes.
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Capital Intensity
High capital intensity of multiple new launches, new model variants, power train supply chain, geographic expansion, and charging networks. We estimate a total capex commitment of about $5 billion through 2020 to meet facility expansion goals and to be used toward tooling for new models and maintenance capex. Teslas Estimates 2020 Footprint
2,500,000
Luxury Sedan 2.8 %-5.2% LT Mkt Share

2,000,000 1.6M 1,500,000
Luxury SUV 5.5%-9.5% LT Mkt Share
Entry-Level 3.7%-8.1% LT Mkt Share

1.8M
1.9M
1.2M
1,000,000
634K
500,000 361K
45K
-
85K
155K 35K 60K 70K
Model S Model S Top 4 - Base - Upside Case
Total
Model X Model X Top 4 - Base - Upside Case
Total
Gen 3 - Gen 3 - Top 4 Base Upside Case
Total
Luxury Sedan Demand Progression in North America

260K
100% Tesla, 10%
90%
237K
252K
272K
Tesla, 17%
Other, 26%
80% 70% 60% Infiniti M, 9% 50%

Lexus LS, 10%
S-Class, 9% Cadillac, 15% Cadillac, 6% Audi A6, 8% Cadillac, 10% Audi A6, 9%
E-Class, 28%
Other, 29%
Cadillac, 9%
40% 30% 20% 10% 0% 2005

5 Series E-Class
Audi A6, 8%
E-Class, 19%
E-Class, 23%
E-Class, 21%
5 Series, 20%
5 Series, 24%
5 Series, 18% 2020 - Base Case

Audi A6 Cadillac S-Class
5 Series, 17% 2020 - Upside

Other Tesla
2012
Lexus LS Infiniti M
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2014 FBR CAPITAL MARKETS & CO. Entry-Level Luxury Demand Progression in North America
434K
100%
422K
502K
Tesla, 10%
532K
Tesla, 15%
90%
Other, 20%
Other, 21%
80% Audi A4, 11% 70% 60% 50%

40% C Class, 14%
Audi A4, 8%
C Class, 21% Audi A4, 9% Audi A4, 8%
Cadillac CTS, 14% Cadillac CTS, 11% C Class, 19% Infiniti G37, 16% Infiniti G37, 14% Cadillac CTS, 9%
C Class, 18%
30% 20% 10% 0%
Cadillac CTS, 9%
3 Series, 25%
3 Series, 24%
3 Series, 20%
3 Series, 18%
2005
3 Series Infiniti G37
2012
Cadillac CTS C Class
2020 - Base Case

Audi A4 Lincoln Other Tesla
2020 - Upside
Projected Tesla Capital Expenditures

Capex Detail ($ millions) Maintenance Capex Model X Tooling/Assembly Gen 3 Tooling/Assembly Expansion-Model S Expansion-Model X Expansion-Gen 3 Roadster II Testing Facilities Model S II Tooling Total
$800 $350 $500 $350 $250 $1,500 $250 $350 $350 $4,700
Financials
The exhibits below highlight our base case and upside scenario. In both cases, we estimate that Tesla generates EBITDA margins greater than 15%, among the highest in the industry. While we have attempted to capture the impact of new product launches and development costs, margins could differ from our forecasts in any given year, depending on the pace of new product development. We focus primarily on EBITDA as the basis for our valuation. Our capex assumptions through 2020 in both scenarios range from $4.0 billion to $6.0 billion. We view Teslas model as self-funding and do not see the need for additional capital in the foreseeable future.
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2014 FBR CAPITAL MARKETS & CO. Base-Case Scenario
Upside Scenario
Page 84
Valuation
Tesla is an automobile company in the early stages of growth, trying to build revolutionary automobiles in a nascent product category and to compete with large, established auto manufacturers. The company, therefore, has no direct comps in the market. We believe that the right methodology to value TSLA is based on a luxury peer group, adjusting for differences in the long-term growth potential of the company. We believe Tesla will reach somewhat of a mature phase in 2017, following the launch of the Gen 3 in 2016 or 2017, reaching a more steady state of maturity in 2020, after launching the next-generation Model S, Model X, and Roadster. We believe the right normalized multiple for TSLA is between 8x and 11x, compared with luxury auto manufacturers at 6x8x. This is a 10%50% premium to valuations of luxury automakers, reflecting the expected continued growth of Tesla and the potential increase in market share from relatively low levels. At current levels, we believe that the stock is pricing in success of the Model S, with sales of about 45,00050,000 units in three to four years; the successful launch of the Model X, with about 35,000 units sold approximately three years from launch; and the successful launch of the Gen 3 at an attractive price point, with sales of about 70,000 units three years after the launch. We believe that margins north of 20% EBITDA are currently being priced into the stock. We also believe that upside for the stock in this scenario is limited to $165 per share, which reflects about 15x our 2017 EBITDA estimate of approximately $1.6 billion. While execution in the auto industry is challenging even for the best of management teams, in the event of any potential execution issues, we see downside in the stock to $100 per share, or about 9.7x our 2017 EBITDA estimate. We acknowledge that TSLAs high-growth aspect and the stocks momentum could continue to take shares higher, but for the stock to see meaningful upside from current levels, we believe that Tesla would have to manufacture in China and sell about two times the volume of our base-case scenario. This implies that Tesla would need to sell approximately 150,000 Gen 3 vehicles about three years from launch and that the Model S and Model X would need to achieve combined volumes of 150,000 units. We do not expect to gain any real clarity on this scenario until the company launches the Gen 3 in 2016 or 2017. Base-Case Price Target Range
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2014 FBR CAPITAL MARKETS & CO. Upside Price Target Range
Risks
Warranty issues and potential recalls on new vehicles sold. Tesla provides a four-year, 50,000-mile new vehicle warranty, an eight-year or 125,000-mile warranty on the 65 KWh battery pack, and an eight-year, unlimited warranty on the 85 KWh model. While the company accrues a warranty reserve each quarter, an adverse warranty development or potential product recall could have a negative impact on profitability and operating cash flow. Supply chain difficulties, especially related to the power train supply chain and components. Similar to most other auto manufacturers, Tesla is dependent on third-party suppliers for key components used in the Model S. Any disruption in supply or inability to meet Teslas growing production volumes could have a negative impact on the company. Increased competition from large, premium luxury OEMs. Tesla competes in the premium vehicle segment with competitors who have greater resources, supplier leverage, and product distribution. Increased competition from these companies in terms of new product launches or pricing competition could negatively affect Teslas product volumes. Demand creation in overseas markets, which have relatively lower consumer appetites for electric vehicles than the U.S. market. Tesla is looking to expand in markets such as Europe and China, which have thus far shown only limited appetite for electric vehicles. Slower-than-expected sales in these markets could have a negative impact on Teslas profitability.
Company Profile
Tesla Motors, Inc. was founded by Jeffrey B. Straubel, Elon R. Musk, and Marc Tarpenning in 2003 and is headquartered in Palo Alto, California. Tesla designs, develops, manufactures, and sells fully electric vehicles and advanced electric vehicle power train components. It also provides services for the development of electric power train components and sells those components to other auto manufacturers, such as Toyota. The company began selling its first electric vehicle, the Tesla Roadster, in 2008, and the more recent Tesla Model S was first delivered in 2012. The company also announced the Tesla Model X in February 2012, with production expected to begin by late 2014.
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Income StatementTesla Motors, Inc. (TSLA)

$ in Millions
Page 87

Polypore International, Inc. (PPO $33.30)

Charlotte, NC
February 18, 2014
Coverage Initiated
Market Perform
STOCK DATA
52-Week Range Three-Month ADTV Dividend Yield Market Cap (mil) Shares Outstanding (mil) Beta Enterprise Value (mil) Fiscal Year-End $31.19 - $48.41 538,728 0.0% $1,518 46 0.90 $2,137 December 2013E $0.27A $0.40A $0.24A $0.27 $1.18 2014E $0.22 $0.38 $0.40 $0.41 $1.40 2015E $0.34 $0.50 $0.53 $0.58 $1.95
Strong Market Position, but Limited Upside until Second-Generation Vehicles Are Launched Summary and Recommendation
We are initiating coverage of Polypore International, Inc. (PPO) with a Market Perform rating and a 12-month price target of $37 per share. We believe that PPO is currently pricing in meaningful penetration of electric vehicles and plugin hybrids, and we do not see the potential for industry shipments or earnings upside until second-generation vehicle models are launched in 2015/2016. Although several high-profile electric vehicle launches in 2014 could positively affect stock sentiment, we believe that Polypore will have to demonstrate increased market share in both the electric vehicle and consumer electronic segment for the stock to see meaningful upside from current levels. In the near to medium term, we expect PPO to remain range-bound between the low $30s and mid $40s until drivers for earning acceleration become more evident.
EARNINGS DATA
EPS 1Q 2Q 3Q 4Q FY
FINANCIAL DATA
2013E FY Revenues FY EBITDA FY EBIT EV/EBITDA P/E 641 158 103 13.5x 28.2x 2014E 711 183 128 11.7x 23.8x 2015E 788 210 155 10.2x 17.1x
Key Points
Current stock price incorporates meaningful electric vehicle penetration over the next five years. We believe that the current stock price accounts for meaningful industry penetration of electric vehicles over the next three to five years, with about 500,000 EVs and PHEVs sold globally by 2015. As about 90,000 EVs and PHEVs were sold globally in 2013, we see limited upside to our industry shipment estimates through 2015. We believe that electrification will play a major role in the automotive landscape over the coming decade; however, the second-generation models of vehicles including Chevy Volt, Nissan Leaf, and Ford Energi are needed to achieve wider penetration levels such as seen by hybrids. We do not expect this until 2015/2016 at the earliest and, hence, see limited potential for upside to our individual name plate forecasts through 2016. Expect continued competition in consumer electronics. While we expect increasing competition in the automotive separator segment, we believe that Polypores competitive advantage through its dry separator manufacturing process will enable it to maintain industry-leading market share (greater than 35%) in the automotive segment. The consumer electronics segment, however, could continue to see only limited growth due to strong industry pricing competition and the use of predominantly wet separator technology in consumer electronic applications. Limited potential for multiple expansion in the absence of market share gains. We believe that the current valuation of low-double-digit EBITDA and a 25x+ earnings multiple should limit further multiple expansion in an environment of limited upside surprises for industry shipments. Giving Polypore the benefit of market share gains, we arrive at an upside stock price range in the mid $40s. Further upside from here will be more dependent on multiple expansion due to increased market share and greater visibility on upside to industry EV/PHEV shipments. Institutional Brokerage, Research, and Investment Banking
BALANCE SHEET DATA

$ in millions
The Debate
Debatable Point
Will new launches in 2014 have a short-term positive impact on the stock?
Our Thoughts
New launches in 2014 such as the BMW i3 and Golf E and continued success with the Tesla Model S could create positive industry sentiment, benefiting Polypores stock in the near to medium term.
Time Frame
Impact
3 to 6 Months
Will Polypore recapture some of the lost consumer electronics market share?
Industry competition remains high, and Polypores dry manufacturing process is at a disadvantage in certain consumer electronic applications. We expect some recapture of lost market share but expect consumer electronics to somewhat limit earnings growth.
12 Months
Will we see increased disclosure from the management team?
We urge the management team to provide incremental segment disclosure, which could have an overall positive impact on investors appreciating Polypores long-term competitive advantage in this business.
12 Months
Investment Thesis
We are initiating coverage of Polypore International, Inc. with a Market Perform rating and a $37 price target. The current stock is pricing in meaningful adoption of EVs/PHEVs over the next three to five years, and we see limited upside to our industry shipment forecast until second-generation models are launched in 2015/2016. A number of high-profile launches could positively affect stock sentiment, but Polypore will have to demonstrate increased market share in both electric vehicles and consumer electronics for the stock to see sustained upside. We expect PPO to remain range-bound in the low $30s to mid $40s until drivers for earnings acceleration become more evident.
Valuation
We base our $37 price target on a low-double-digit multiple of our 2017 EBITDA estimate. We believe that this EBITDA multiple is appropriate given Polypores attractive margin profile (greater than 30% EBITDA margins) and ability to grow earnings by mid-teens annually through 2017. This translates into a P/E multiple of 13x our 2017 EPS estimate. Our downside scenario of a low-$30 stock is based on an 11x EBITDA multiple of our 2017 estimate, which translates into a stock price of $31.70. Our upside scenario of a mid-$40 stock is based on a 15x EBITDA multiple of our 2017 upside estimate, capturing increased market share by Polypore in both electric vehicles and consumer electronics.

New supply wins on EV/PHEV vehicle platforms. New supply wins on new consumer electronic devices. Continued success in the lead acid market in China. Continued manufacturing execution leading to increasing product margins.
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Broad Product Portfolio Serving Multiple End Markets

Polypore manufactures separators used in the following key industries:
Lead acid separators. Polypore primarily manufactures polyethylene (PE) separators, which are used for starting, lighting, and ignition (SLI) applications in passenger and commercial vehicles. The recent sale of the Microporous business has resulted in Polypore exiting from separators used in industrial deep-cycle applications. Lithium-ion separators. Polypore manufactures the dry type lithium-ion separators, which are used in large-format electric vehicles, plug-in hybrids, and dual-motor hybrid applications. These separators are also used in consumer electronics, such as mobile phones, audio/video players, laptops, tablets, and cameras. The major types of lithium separators offered are polypropylene (PP) and PE monolayers or coated, multilayer PP and PE separators. Polypore has 14 operating facilities on a global basis. The companys top three facilities are located in Owensboro, Kentucky; Charlotte, North Carolina; and Prachinburi, Thailand. Among the 14 manufacturing plants, Polypore produces lithium separators in three facilities: Charlotte, North Carolina; Shanghai, China; and Ochang, South Korea, with additional lithium separator capacity from the companys newest facility in Concord, North Carolina. The remaining facilities produce lead acid separators. Healthcare separators. Polypore produces filtration membranes and modules that are used in healthcare filtration equipment and specialty applications, such as equipment used for hemodialysis and blood oxygenation.
Separators used in industrial applications. Polypore produces filtration membranes for micro-, ultra- and nanofiltration and gasification/degasification of liquids. The end markets for filtration membranes include water treatment, food and beverage processing, pharmaceuticals, semiconductors, and flat-panel display manufacturing.
Our Earnings Forecasts Are Driven by Our Industry Models

Global auto model. We expect light-vehicle sales to increase at a 3.4% CAGR through 2020, with markets such as China growing at a 6.4% CAGR.
Global Auto Model

120.0
Global LV Sales CAGR

2012-2015: 2012-2020: 2015-2020:
72.4
100.0
Vehicles Sold (millions)
3.3% 3.4% 3.0%
98.0 85.2
80.0 60.0 40.0 20.0
0.0
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Page 90
Global electrification model. We expect EVs/PHEVs to reach annual sales of 0.6 million globally by 2015 and 1.6 million by 2020, which translates into a penetration rate of 2.5%. Hybrid vehicles including dual-motor and other mild hybrids are expected to reach annual sales of 1.3 million by 2015 and 2.0 million by 2020 and achieve penetration rates of 2.5% and 3.1%.

2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Vehicle Sales; US, Europe, China (M Units) EV/PHEV Start-Stop AGM Start-Stop AGM (Incl. Replacement) Start-Stop Li-ion Hybrid - other Other Gasoline Revenues ($M) EV/PHEV Start-Stop AGM Start-Stop Li-ion Average Penetration EV/PHEV Penetration Start-Stop AGM Penetration Start-Stop Li-ion Penetration Hybrid Penetration (excl. Li-ion) Global Battery Supply Opportunity ($M)
47.5 0.0 3.1 0.9 44
48.4 0.0 3.6 0.7 45
49.7 0.1 5.5 8.9 0.0 1.1 44
51.3 0.1 7.1 11.9 0.0 1.4 44
54.3 0.3 8.4 14.9 0.0 1.5 46
56.7 0.5 10.1 19.0 0.1 1.6 46
58.0 0.7 12.1 23.5 0.6 1.7 45
59.4 0.9 13.9 28.3 0.9 1.8 44
61.3 1.3 15.4 32.8 1.5 2.0 43
63.2 1.6 17.1 37.8 1.7 2.1 43
64.9 1.8 18.9 43.5 1.8 2.3 42
$36 $0 $0 0.0% 6.5% 0.0% $36
$490 $686 $0 0.1% 7.4% 0.0% 1.5% $1,175
$915 $1,063 $4 0.2% 11.1% 0.0% 2.2% $1,983
$1,304 $1,429 $41 0.3% 13.9% 0.1% 2.7% $2,774
$3,061 $1,749 $37 0.6% 15.5% 0.1% 2.7% $4,847
$4,806 $2,174 $101 0.9% 17.8% 0.3% 2.8% $7,081
$5,796 $2,629 $470 1.2% 20.8% 1.1% 2.9% $8,895
$7,356 $3,091 $594 1.6% 23.5% 1.4% 3.1% $11,041
$9,852 $3,506 $920 2.2% 25.1% 2.4% 3.2% $14,278
$11,052 $3,957 $1,008 2.5% 27.0% 2.7% 3.4% $16,016
$12,107 $4,445 $1,022 2.8% 29.2% 2.8% 3.5% $17,573
Start-stop and lithium-ion start-stop will have a meaningful impact on growth rates for traditional lead acid batteries. We expect annual start-stop shipments of 18.5 million by 2015 globally and 34.6 million by 2020, resulting in a 1.0% impact on annual sales of lead acid batteries.
Global Start-Stop Opportunity

70.0
60.0 50.0
(M Units)
35.0%
59.4
40.0
47.5
48.4
49.7
51.3
54.3
56.7 18%
58.0
61.3
63.2
64.9 29%
30.0% 25.0% 20.0%
30.0
20.0 10.0 0.0
2010 2011 2012 2013E EV/PHEV Other Gasoline Start-Stop Li-ion Penetration 2014E 2015E 2016E Start-Stop AGM EV/PHEV Penetration 2017E
15.0%
7.4%
10.0% 5.0% 0.0%

2018E 2019E 2020E Start-Stop Li-ion Start-Stop AGM Penetration
Page 91
2014 FBR CAPITAL MARKETS & CO. Global Lead Acid Shipments
Global
Total Shipments (M Units) Shipments - Total OE - % chg Aft Mkt - % chg Total growth
2011
390
2012
409 4.7% 5.0% 4.9%
2013
423 5.3% 3.0% 3.5%
2014
438 4.9% 3.0% 3.4% 423 2.6% 15 31.3% $52 1.0% $22
2015
452 4.3% 3.0% 3.3% 431 1.9% 21 42.9% $52 1.0% $22
2016
464 3.5% 2.5% 2.7% 437 1.4% 27 28.6% $53 1.0% $23
2017
475 3.5% 2.0% 2.3%
2018
485 3.0% 2.0% 2.2%
2019
496 3.0% 2.0% 2.2%
2020
CAGR
2012-2015
2012-2020 507 3.0% Total Battery Shipments 2.0% 3.4% 2.7% 2.2% 455 0.9% 52 15.6% Flooded Shipments 2.1% 1.5% AGM Shipments 63.6% 34.7%
Shipment Breakdown (M Units) Shipments -Flooded 386 404 412 % chg 4.7% 1.9% Shipments - AGM 4 5 11 % chg 33.3% 133.3% Market Opportunity Unit Pricing ($) % chg Mkt Size - Flooded ($B) $50 $19 $51 1.0% $20 $51 1.0% $21
443 447 451 1.3% 1.0% 0.8% 32 38 45 18.5% 18.8% 18.4% $53 1.0% $24 $54 1.0% $24 $54 1.0% $24
$55 Impact from AGM Growth 1.0% 1.2% 1.2% $25
Our separator model captures our vehicle shipment forecasts and expectations for consumer electronic demand. We arrive at global separator demand of 916 million square meters to 939 million square meters by 2015 and 1,729 million square meters to 1,976 million square meters by 2020.
We estimate that current industry capacity is about 1 billion square meters and excess capacity in the industry could be as high as 40%. Based on our expectation for vehicle and consumer shipment growth through the end of this decade, we expect current industry capacity to meet demand expectations through 2016. The rise of manufacturers such as Tesla should increase the amount of separator content in batteries, although we are using our Tesla shipment forecasts to calculate a blended mix for industry separators.
Global Separator ModelBase Case

Global Li-ion Separator Sales
Separator Demand (Million Sq. M.) EV/PHEV EV % of Total Hybrids Hybrids % of Total Consumer Electronics/Other CE/Other % of Total Total % Change Revenue Opportunity ($M) EV/PHEV Industry Hybrids Industry Consumer Electronics Industry Total % Change 62 10% 112 19% 416 71% 590 24% $116 $185 $728 $1,029 15% 72 11% 119 18% 461 71% 652 11% $128 $186 $767 $1,081 5% 142 18% 126 16% 509 66% 776 19% $241 $187 $803 $1,231 14% 234 26% 133 15% 548 60% 916 18% $365 $190 $823 $1,378 12% 307 29% 141 13% 598 57% 1,046 14% $441 $194 $852 $1,487 8% 412 34% 153 13% 650 53% 1,214 16% $544 $204 $879 $1,627 9% 561 39% 166 12% 706 49% 1,434 18% $682 $215 $909 $1,805 11% 628 40% 179 11% 770 49% 1,578 10% $702 $226 $941 $1,869 4% 695 40% 191 11% 842 49% 1,729 10% $715 $235 $978 $1,928 3% 38.3% 7.1% 9.0% 15.0%
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
CAGR 2013E-2020E
27.9% 3.4% 3.5% 8.6%
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2014 FBR CAPITAL MARKETS & CO. Global Separator ModelUpside Case
Global Li-Ion Separator Sales
Separator Demand (Million Sq. M.) EV/PHEV EV % of total Hybrids Hybrids % of total Consumer Electronics / Other CE/Other % of total Total % chg Revenue Opportunity ($M) EV/PHEV Industry Hybrids Industry Consumer Electronics Industry Total % chg 62 10% 112 19% 416 71% 590 24% $116 $185 $728 $1,029 15% 72 11% 119 18% 461 71% 651 10% $128 $186 $765 $1,080 5% 142 18% 126 16% 510 66% 778 19% $241 $187 $805 $1,233 14%
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
CAGR 2013E-2020E
234 25% 133 14% 572 61% 939 21% $365 $190 $857 $1,413 15%
307 28% 141 13% 652 59% 1,100 17% $441 $194 $929 $1,563 11%
412 32% 153 12% 738 57% 1,303 18% $544 $204 $999 $1,747 12%
561 36% 166 11% 840 54% 1,567 20% $682 $215 $1,080 $1,977 13%
628 36% 179 10% 954 54% 1,761 12% $702 $226 $1,166 $2,094 6%
695 35% 191 10% 1089 55% 1,976 12% $715 $235 $1,264 $2,215 6%
38.3% 7.1% 13.1% 17.2%
27.9% 3.4% 7.4% 10.8%
We arrive at two earnings scenarios for Polypore:
In our base case, we expect revenues of $239 million by 2015 and $312 million by 2017. In our upside case, we expect revenues of $276 million by 2015 and $391 million by 2017.
Global Polypore Lithium-Ion Revenue OpportunityBase Case

Polypore
EV/PHEV Market Share Hybrid Market Share Consumer Electronics Market Share EV/PHEV Demand (Million Sq. M.) Hybrid Market Demand (Million Sq. M.) Consumer Electronics Market Demand (Million Sq. M.) EV/PHEV Revenue ($M) Hybrid Market Revenue ($M) Consumer Electronics Market Revenue ($M) Polypore Lithium-Ion Separator Revenue ($M)
2012
40% 17% 9% 25 19 37 46 31 65 $143
2013E
38% 16% 8% 27 19 37 49 30 61 $140
2014E
35% 16% 9% 50 20 46 84 30 72 $186
2015E
34% 16% 10% 80 21 56 124 30 85 $239
2016E
32% 16% 12% 98 23 72 141 31 102 $274
2017E
32% 16% 12% 132 24 78 174 33 106 $312
2018E
32% 16% 12% 180 27 85 218 34 109 $362
2019E
32% 16% 12% 201 29 92 225 36 113 $374
2020E
32% 16% 12% 223 31 101 229 38 117 $384
CAGR 2013E2020E
7.1% 15.5%
3.4% 9.7% 15.5%
Source: FBR Research and company documents
Page 93
2014 FBR CAPITAL MARKETS & CO. Polypore Earnings SummaryBase Case
2013E Lithium-Ion Separator Revenues ($ in Millions) Industry Revenue EV/PHEV 314 Industry Revenue Consumer 767 Polypore EV/PHEV Revenue Polypore Consumer Electronics Revenue Blended Market Share Lead Acid Revenue HC/Industrial Total Revenue Net Income Basic EPS
2014E 428 803 112 72 15% 338 201 723 70 $1.47
2015E 556 823 154 85 17% 355 212 806 97 $2.04
2016E 635 852 172 102 18% 369 216 859 117 $2.45
2017E 748 879 206 106 19% 384 227 923 140 $2.90
75 56 13% 317 193 641 44 $1.17
Global Polypore Lithium-Ion Revenue OpportunityUpside Case

Polypore
EV/PHEV Market Share Hybrid Market Share Consumer Electronics Market Share EV/PHEV Demand (Million Sq. M.) Hybrid Market Demand (Million Sq. M.) Consumer Electronics Market Demand (Million Sq. M.) EV/PHEV Revenue ($M) Hybrid Market Revenue ($M) Consumer Electronics Market Revenue ($M) Polypore Lithium-Ion Separator Revenue ($M)
2012
40% 17% 9% 25 19 37 46 31 65 $143
2013E
38% 16% 8% 27 19 37 49 30 61 $140
2014E
38% 16% 10% 54 20 51 91 30 81 $202
2015E
38% 18% 12% 89 24 69 139 34 103 $276
2016E
38% 20% 14% 117 28 91 167 39 130 $336
2017E
38% 22% 14% 156 34 103 207 45 140 $391
2018E
38% 22% 14% 213 37 118 259 47 151 $458
2019E
38% 22% 14% 239 39 134 267 50 163 $480
2020E
38% 22% 14% 264 42 152 272 52 177 $501
CAGR 2013E2020E
12.0% 22.5%
8.2% 16.4% 11.7%
Source: FBR Research and company documents
Polypore Earnings SummaryUpside

2013E Lithium-Ion Separator Revenues ($ in Millions) Industry Revenue EV/PHEV 428 Industry Revenue Consumer 765 Polypore EV/PHEV Revenue Polypore Consumer Electronics Revenue Blended Market Share Lead Acid Revenue HC/Industrial Total Revenue Net Income Basic EPS
2014E 556 805 121 81 15% 333 201 736 61 $1.28
2015E 635 857 173 103 18% 349 212 837 109 $2.30
2016E 748 929 206 130 20% 363 216 915 144 $2.99
2017E 897 999 252 140 21% 377 227 996 170 $3.50
78 61 12% 317 193 650 46 $1.22
Page 94
Risks
Increased competition in lithium separators from large players in Asia. The lithium separator industry is highly concentrated, and Polypore competes with a number of large Asian players, which have meaningfully greater financial resources than Polypore. Increased competition from these Asian companies either in terms of new product development or price competition could have a negative impact on Polypores earnings. Continued pricing pressure and high levels of industry competition in the consumer electronics segment from Asian companies. The consumer electronics lithium separator industry is highly competitive, with a number of smaller Asian players in the market. Unlike the electric vehicle market, the requirements for product quality and longevity are much lower, and Polypore is more susceptible to market competition. Polypores dry separator process, while a large competitive advantage in the electric vehicle market, could somewhat limit participation in certain segments of the consumer electronics supply chain. Product recalls and warranty issues, especially in the automotive segment. Automotive separators are expected to deliver performance in a harsh operating environment for about seven to 10 years versus two to four years for typical consumer electronic applications. Any increased level of warranty claims in the automotive segment could have a negative impact on Polypores profitability. Changes in overall penetration of EV/PHEVs and hybrids in the marketplace. Growth in demand for lithium-ion separators heavily depends on sales of electric/plug-in hybrid vehicles. Weaker-thanexpected sales of these vehicles could result in lower demand for separators and, in turn, for Polypores products.
Company Profile
Polypore International, Inc., headquartered in Charlotte, North Carolina, is a global manufacturer and developer of microporous membranes, with locations in the U.S., Asia, Europe, and South America, and it is the only company in the world focused exclusively on this product. Polypore has four key businesses: energy storage for electronics, energy storage for transportation and industrial applications, separations media used in healthcare, and separations media used in industrial and specialty filtration applications. Many of the membranes that Polypore develops are used frequently in batteries, especially lithium-ion batteries found in consumer electronics and electric vehicles.
Page 95
Income StatementPolypore International, Inc. (PPO)

$ in Millions
Page 96
*Closing price of last trading day immediately prior to the date of this publication unless otherwise indicated
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Initiating Coverage of Advanced Transportation: The Road Ahead with Natural Gas and Electrification

February 18, 2014

Aditya Satghare asatghare@fbr.com 646.885.5472 Benjamin Tainter btainter@fbr.com 703.312.9763

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

Important disclosures can be found at the end of this report.

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

Our Investment Thesis Is Focused on Five Key Areas

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

Component Supply Chain

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

Will increased natural gas price volatility negatively affect sentiment?

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

IC Engine Power Train Improvement

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

Natural Gas Vehicles

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

Natural Gas Fueling Stations

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

FBR Global Auto Model

Institutional Brokerage, Research, and Investment Banking

29.0 27.0 25.0

Rest of the World

Premium Vehicle Segment

Institutional Brokerage, Research, and Investment Banking

Global Luxury Sales

Base-Case Luxury Auto Sales

Source: FBR Research and Automotive News

Upside-Case Luxury Auto Sales

Source: FBR Research and Automotive News

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

Market Analysis: Three Key Segments

Source: FBR Research and Automotive News

Source: FBR Research and Automotive News

2014 FBR CAPITAL MARKETS & CO.

Institutional Brokerage, Research, and Investment Banking

Source: FBR Research and Automotive News

Source: FBR Research and Automotive News

Institutional Brokerage, Research, and Investment Banking

Other, 25% Other, 31%

80% 70% 60% Infiniti M, 9% 50%

40% 30% 20% 10% 0% 2005

5 Series, 18% 2020 - Base Case

5 Series, 17% 2020 - Upside

Source: FBR Research and Automotive News

Entry-Level Luxury Demand Progression in North America

80% Audi A4, 11% 70% 60% 50%

Other, 33% Other, 31%

C Class, 21% Audi A4, 9% Audi A4, 8%

30% 20% 10% 0%

2020 - Base Case