abb - credit suisse

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DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access 20 February 2013 Europe/Switzerland Equity Research Electrical Equipment (Capital goods - Engineering (Europe)) ABB (ABBN.VX) INITIATION FOCUS LIST STOCK A transforming business We initiate on ABB with an Outperform rating and add it to Credit Suisse’s European Focus List (TP of SFr26, 24% potential upside): We forecast 15% avg. EPS growth in FY13-15E versus 7% for ABB’s peers, while our blue-sky scenario indicates 25% growth. Our estimates are 7% ahead of consensus. Consensus underestimating Automation growth potential: Driven by cyclical recovery (China) and strong structural growth drivers in EM, we think ABB’s Automation business will grow 6% organically in FY13/14 (cons. 3%). In addition, a strong market position, acquisition capacity, barriers to entry and a concentrated market should allow further market share gains. Margin recovery in PP: We expect a stronger EBIT margin recovery than consensus (13.8% vs. 12.9% in FY14) due to improved new order pricing and cost savings. We see solid medium-term growth potential in the US due to the age of the installed base, new energy sources, equipment monitoring, stricter regulation and the housing recovery driving T&D investment. Stimulus in China’s rail and wind markets could boost growth further. Strong acquisition capacity: ABB’s target range of 1.5-2x ND/EBITDA could provide $12-18bn of excess cash in FY13E (17-25% potential EPS accretion). Re-levering up to 0.5x (FY12: 0.0x) could lift earnings by 8%. Underappreciated returns profile: ABB generates the highest CFROI® in our Electricals coverage yet is priced for CFROI to fade to 10% with margins falling to 9% over the next 10 years. This compares with the HOLT® DCF (using the mid-range of ABB’s targets) deriving a CFROI of c16% over the next 5 years and CS estimates of 16.9% operating margins in FY15E. Valuation: After a 15% underperformance vs. peers (12 months), ABB trades on FY14E 12.4x / 8.5x PE / EV/EBITA (9% / 8% sector discount). Catalysts: Automation and Power World, Orlando (FL), 25 March. Share price performance 15 20 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Price Price relative The price relative chart measures performance against the SMI PRICE which closed at 7530.69 on 15/02/13 On 15/02/13 the spot exchange rate was SFr1.23/Eu 1. - Eu .75/US$1 Performance Over 1M 3M 12M Absolute (%) 6.6 25.6 9.2 Relative (%) 3.9 10.3 -11.4 Financial and valuation metrics Year 12/12A 12/13E 12/14E 12/15E Revenue (US$ m) 39,336.0 42,827.4 45,663.8 48,486.1 EBITDA (US$ m) 5,240.20 6,727.32 7,536.29 8,092.52 Adjusted Net Income (US$ m) 2,987.8 3,731.0 4,212.1 4,568.4 CS adj. EPS (US$) 1.30 1.62 1.83 1.99 ROIC (%) 14.25 18.86 21.04 21.95 P/E (adj., x) 17.49 14.02 12.42 11.45 P/E rel. (%) 111.8 97.8 96.1 99.1 EV/EBITDA 10.7 8.1 7.0 6.3 Dividend (12/13E, US$) 0.81 IC (12/13E, US$ m) 21,033.54 Dividend yield (%) 3.6 EV/IC 2.6 Net debt (12/13E, US$ m) 1,783.8 Current WACC 9.0 Net debt/equity (12/13E, %) 9.3 Free float (%) 100.0 BV/share (12/13E, US$) 8.1 Number of shares (m) 2,314.74 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates. Rating OUTPERFORM* Price (15 Feb 13, SFr) 20.97 Target price (SFr) 26.00¹ Market cap. (SFr m) 48,540.17 Enterprise value (US$ m) 54,487.5 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Simon Toennessen 44 20 7883 6893 [email protected] Andre Kukhnin CFA 44 20 7888 0350 [email protected] Max Yates 44 20 7883 8501 [email protected] Jonathan Hurn, CFA 44 20 7883 4532 [email protected] Specialist Sales: David Arnold 44 20 7883 3549 [email protected] Credit Suisse HOLT®: Ian Gray 44 20 7883 6116 [email protected]

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DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

20 February 2013

Europe/Switzerland

Equity Research

Electrical Equipment (Capital goods - Engineering (Europe))

ABB (ABBN.VX) INITIATION FOCUS LIST STOCK

A transforming business

We initiate on ABB with an Outperform rating and add it to Credit Suisse’s European Focus List (TP of SFr26, 24% potential upside): We forecast 15% avg. EPS growth in FY13-15E versus 7% for ABB’s peers, while our blue-sky scenario indicates 25% growth. Our estimates are 7% ahead of consensus.

■ Consensus underestimating Automation growth potential: Driven by

cyclical recovery (China) and strong structural growth drivers in EM, we think

ABB’s Automation business will grow 6% organically in FY13/14 (cons. 3%).

In addition, a strong market position, acquisition capacity, barriers to entry

and a concentrated market should allow further market share gains.

■ Margin recovery in PP: We expect a stronger EBIT margin recovery than

consensus (13.8% vs. 12.9% in FY14) due to improved new order pricing

and cost savings. We see solid medium-term growth potential in the US due

to the age of the installed base, new energy sources, equipment monitoring,

stricter regulation and the housing recovery driving T&D investment.

Stimulus in China’s rail and wind markets could boost growth further.

■ Strong acquisition capacity: ABB’s target range of 1.5-2x ND/EBITDA

could provide $12-18bn of excess cash in FY13E (17-25% potential EPS

accretion). Re-levering up to 0.5x (FY12: 0.0x) could lift earnings by 8%.

■ Underappreciated returns profile: ABB generates the highest CFROI® in

our Electricals coverage yet is priced for CFROI to fade to 10% with margins

falling to 9% over the next 10 years. This compares with the HOLT® DCF

(using the mid-range of ABB’s targets) deriving a CFROI of c16% over the

next 5 years and CS estimates of 16.9% operating margins in FY15E.

■ Valuation: After a 15% underperformance vs. peers (12 months), ABB

trades on FY14E 12.4x / 8.5x PE / EV/EBITA (9% / 8% sector discount).

■ Catalysts: Automation and Power World, Orlando (FL), 25 March.

Share price performance

15

20

Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12

Price Price relative

The price relative chart measures performance against the SMI

PRICE which closed at 7530.69 on 15/02/13

On 15/02/13 the spot exchange rate was SFr1.23/Eu 1. -

Eu .75/US$1

Performance Over 1M 3M 12M Absolute (%) 6.6 25.6 9.2 Relative (%) 3.9 10.3 -11.4

Financial and valuation metrics

Year 12/12A 12/13E 12/14E 12/15E Revenue (US$ m) 39,336.0 42,827.4 45,663.8 48,486.1 EBITDA (US$ m) 5,240.20 6,727.32 7,536.29 8,092.52 Adjusted Net Income (US$ m) 2,987.8 3,731.0 4,212.1 4,568.4 CS adj. EPS (US$) 1.30 1.62 1.83 1.99 ROIC (%) 14.25 18.86 21.04 21.95 P/E (adj., x) 17.49 14.02 12.42 11.45 P/E rel. (%) 111.8 97.8 96.1 99.1 EV/EBITDA 10.7 8.1 7.0 6.3

Dividend (12/13E, US$) 0.81 IC (12/13E, US$ m) 21,033.54 Dividend yield (%) 3.6 EV/IC 2.6 Net debt (12/13E, US$ m) 1,783.8 Current WACC 9.0 Net debt/equity (12/13E, %) 9.3 Free float (%) 100.0 BV/share (12/13E, US$) 8.1 Number of shares (m) 2,314.74

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.

Rating OUTPERFORM* Price (15 Feb 13, SFr) 20.97 Target price (SFr) 26.00¹ Market cap. (SFr m) 48,540.17 Enterprise value (US$ m) 54,487.5

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Simon Toennessen

44 20 7883 6893

[email protected]

Andre Kukhnin CFA

44 20 7888 0350

[email protected]

Max Yates

44 20 7883 8501

[email protected]

Jonathan Hurn, CFA

44 20 7883 4532

[email protected]

Specialist Sales: David Arnold

44 20 7883 3549

[email protected]

Credit Suisse HOLT®: Ian Gray

44 20 7883 6116

[email protected]

20 February 2013

ABB (ABBN.VX) 2

Picturing the story Figure 1: Consensus is underestimating the growth potential in Automation in FY13/14E…

Figure 2: …despite a pick-up in IP growth historically resulting in even stronger Automation growth globally

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2008 2009 2010 2011 2012 2013E 2014E

Org

an

ic g

row

th (

%)

ABB Automation - Organic growth (incl. CSe)

Org. growth forecasts (Cons)

Industrial production Process Factory

Year EM Developed Global Global Global

2003 8.4% 1.0% 3.7% -0.3% 11.3%

2004 10.6% 2.4% 5.4% 5.1% 13.0%

2005 8.3% 2.1% 4.4% 8.4% 9.1%

2006 9.5% 2.9% 5.5% 11.4% 11.4%

2007 10.0% 2.8% 5.7% 8.8% 11.5%

2008 5.0% -2.7% 0.5% 10.6% 2.4%

2009 0.8% -13.4% -7.2% -5.1% -19.5%

2010 12.6% 7.1% 9.6% -3.3% 20.6%

2011 7.6% 2.8% 5.0% 9.7% 13.8%

2012E 5.1% 0.7% 2.8% 3.1% 4.2%

2013E 6.8% 1.3% 4.0% 4.4% 6.0%

2014E 7.3% 2.4% 4.8% 5.2% 7.1%

Historic avg 8.1% 0.6% 3.6% 5.0% 8.2%

vs Global IP * 1.5x 2.0x Source: Company data, SME, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates

Figure 3: Market seems to be solely focussing on the margin development of the Power Products business…

Figure 4: …while ignoring that 68% of ABB’s profits are derived from its more attractive Automation business

12

14

16

18

20

22

24

10%

11%

12%

13%

14%

15%

16%

Q1

11

Q2

11

Q3

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Q4

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Q1

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Q2

12

Q3

12

Q4

12

Sh

are

pri

ce (

SF

r)

EB

IT m

arg

in (

%)

Power Product - EBIT margin ABB share price

Power32%

Automation68%

Source: SME, Credit Suisse estimates Source: Company data

Figure 5: Compared to consensus we forecast a stronger margin improvement in PP…

Figure 6: …at times when the top-line could be supported by higher transmission investment in the US

12%

13%

14%

15%

16%

17%

18%

19%

2007 2008 2009 2010 2011 2012 2013E 2014E

Marg

in (

%)

EBIT margin - Power Products (CSe) Consensus estimates

8.6 8.9 9.5 10.3 10.211.1

13.5

16.0

0

5

10

15

20

2006 2008 2010 2012E 2011-16E

Inv

estm

en

t (U

SD

bn

) avg. annual expected spend

Source: Company data, SME, Credit Suisse estimates Source: EEI, Business Information Group, Quanta Services

Figure 7: Due to the focus on PP margins we think ABB has underperformed its peers by 15% over the last 12m

Figure 8: We highlight that ABB generates the second highest CFROI®s within the wider Electrical Eng. universe

-25%

-20%

-15%

-10%

-5%

0%

5%

Fe

b-1

2

Mar-1

2

Ap

r-12

May-1

2

Jun

-12

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2

Au

g-1

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p-1

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2

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-13

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b-1

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Rela

tive p

erf

orm

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ce (

%)

ABB share performance spread vs. Electricals (ex ABB)

-5%

0%

5%

10%

15%

20%

So

mfy

AB

B

Le

gra

nd

Schne

ider

Va

con

Als

tom

Sa

ft

Ph

oen

ix M

eca

no

PK

C G

rou

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en

Pysm

ian

Hu

ber &

Suhn

er

Gam

esa

SG

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arb

on

Zu

mto

bel

Ve

sta

s

Vo

n R

oll

Ne

xan

s

CF

RO

I (%

)

CFROI LFY CFROI - 12mth fwd

Source: the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse HOLT®

20 February 2013

ABB (ABBN.VX) 3

Table of contents Picturing the story 2 Investment summary 4 ABB ABBN.VX 7 Automation 8

Glance at ABB’s market position in Automation 9 Solid sales growth potential in Automation in 2013/14 11 ABB should benefit from Robotics and Oil & Gas / Petrochemicals 16 Consensus underestimates ABB’s growth potential in Automation 20 Higher Service sales could trigger higher valuation 21

Power 24 Glance at ABB’s market position in Power 25 Drivers for higher US T&D spend going forward 26 Benefits from Chinese government stimulus 29 Stronger margin upside potential in Power Products 32

Scope for acquisitions 36 Inorganic sales growth target could imply $8-12bn acquisition spend (FY13-15E) 37 Acquisition focus should continue to be on faster growing Automation markets 38 Potential large Automation deals that might make strategic sense 40

Valuation 44 Sum of the parts 44 Discounted cash-flow 45 ABB through the Credit Suisse HOLT lens 46 ABB’s share price has lagged the sector 50 Credit Suisse versus consensus estimates 51 Multiple comparisons 52

Divisional analysis 53 Discrete Automation & Motion 54 Low Voltage Products 56 Process Automation 57 Power Products 60 Power Systems 62

Financial statements 64 Appendix 68

Company targets (2011–15) 68 Acquisition history 69 ABB’s cost savings programme in detail 70 Description of companies used in SOTP 71 Vendor data—Automation & Power 73 PEERs map 75

20 February 2013

ABB (ABBN.VX) 4

Investment summary We initiate on ABB with an Outperform rating and a TP of SFr26 (24% potential

upside). We add ABB to the Credit Suisse European Focus List.

In our view ABB shares offer an attractive investment opportunity owing to a combination

of strong medium term growth potential within the company’s Automation division (68% of

group profits), margin recovery within ABB’s Power Products business, sizable acquisition

potential and strong return generation. We derive EPS growth of 15% over the next three

years compared to 7% for its Electrical peers while our blue-sky scenario offers 25%

earnings growth. We focus on the following:

■ Consensus underestimating the growth potential in Automation

■ Margin recovery and medium term growth potential in Power Products

■ Acquisition capacity of $12-18bn could lead to 17-25% EPS accretion

■ Market materially underestimating ABB’s strong returns profile

Consensus underestimating the growth potential in Automation

■ ABB’s strong market position in Automation – We view Industrial Automation as

one of the most attractive end-markets within Capital Goods in the medium to long

term due to its potential for cyclical recovery (correlation to industrial production) yet

more importantly, in our view, strong structural growth drivers particularly in emerging

markets. Given ABB generates 68% of its group profits from products and services

exposed to Automation end-markets, we believe the company is well positioned to

benefit from this trend.

■ Attractive structural growth drivers – We are forecasting ABB’s Automation

business to grow revenues on average by 6% organically over the next two years

compared to consensus forecasts of 3%. In our view, consensus is underestimating

structural growth drivers such as high wage inflation in emerging markets based on a

strongly growing middle-class and government efforts to push up wages (c.10% in

China) as well as low penetration rates (see Figure 10), which should trigger higher

Automation investment in the medium term. In addition, we believe that ABB’s leading

market position in several product areas, its acquisition capacity, geographical

diversity, limited threat from new entrants, a high degree of market consolidation and

limited capacity additions by incumbents should allow the company to gain market

share. Near-term, we think that leading indicators improving in China, strong

Automation potential in the US and Europe possibly stabilising should boost organic

growth to higher levels seen last fiscal year.

Figure 9: Automation markets have structurally outgrown industrial production in the past in x, unless otherwise stated

Figure 10: One key structural growth driver is a low penetration rate in emerging markets Robot density=Number of robots per 10k manufacturing employees

Industrial production Process Factory

Year EM Developed Global Global Global

2003 8.4% 1.0% 3.7% -0.3% 11.3%

2004 10.6% 2.4% 5.4% 5.1% 13.0%

2005 8.3% 2.1% 4.4% 8.4% 9.1%

2006 9.5% 2.9% 5.5% 11.4% 11.4%

2007 10.0% 2.8% 5.7% 8.8% 11.5%

2008 5.0% -2.7% 0.5% 10.6% 2.4%

2009 0.8% -13.4% -7.2% -5.1% -19.5%

2010 12.6% 7.1% 9.6% -3.3% 20.6%

2011 7.6% 2.8% 5.0% 9.7% 13.8%

2012E 5.1% 0.7% 2.8% 3.1% 4.2%

2013E 6.8% 1.3% 4.0% 4.4% 6.0%

2014E 7.3% 2.4% 4.8% 5.2% 7.1%

Historic avg 8.1% 0.6% 3.6% 5.0% 8.2%

vs Global IP * 1.5x 2.0x

0

50

100

150

200

250

300

350

Japan

Kore

a

Germ

any

Italy

US

Spain

Taiw

an

Fra

nce

Sw

itzerl…

Austra

lia

UK

Chin

a

Bra

zil

Russia

India

Ro

bo

t d

en

sit

y (

x)

Robot density Global average

Source: Thomson Reuters, Credit Suisse estimates Source: World Bank, IFR, United Nations, BLS

20 February 2013

ABB (ABBN.VX) 5

Margin recovery and medium term growth potential in Power Products

■ Improved pricing to benefit margins – ABB’s margin erosion within its Power

Products division had been a key area of market concern for a prolonged period of

time. Fuelled by material price discounts of up to 30% by Korean transformer

manufacturers in the US, ABB’s profitability in this business declined sharply (see

Figure 11). Yet, following the US antidumping ruling in mid 2012 pricing pressure has

abated and ABB’s operating margins have stabilised for five quarters in a row.

Contrary to consensus estimates, we believe that ABB’s PP division will see a

stronger margin recovery towards the end of FY13 and in FY14 from improved pricing

momentum on new orders last fiscal year (average lead time 12-18 months in PP).

While the pricing pressure is unlikely to fully disappear, we believe that utilities, which

are typically very conservative, might prefer well established, technologically advanced

players such as ABB given pricing will be a less critical factor going forward (versus

the period 2009-10). In addition, we think ABB will continue to focus strictly on its cost

savings programme (3-5% of cost of sales annually) biased towards the Power

division (60% of total savings in Power in FY12).

Figure 11: Improved new order pricing last year should lead to a stronger recovery in PP margins…

Figure 12: …while ABB continues to focus on cost savings, particularly within its Power division

12%

13%

14%

15%

16%

17%

18%

19%

2007 2008 2009 2010 2011 2012 2013E 2014E

Ma

rgin

(%

)

EBIT margin - Power Products (CSe) Consensus estimates

-50

0

50

100

150

200

250

300

-1.0%

0.0%

1.0%

2.0%

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1Q

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3Q

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4Q

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2Q

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3Q

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4Q

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Ne

t s

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s (

US

Dm

)

Sa

vin

gs

/ P

ric

e e

ros

ion

(%

)

Productivity savings Product price erosion (negative)

Net savings (Savings - Price erosion)

Source: Company data, SME, Credit Suisse estimates Source: Company data

■ Medium-term growth potential from higher US and Chinese Transmission and

Distribution spend – Our channel checks have highlighted the potential for improved

pricing in the US based on a pick-up in transmission and distribution (T&D) investment

spend. Driven by rising reliability issues due to the age of the installed base (>30

years or more for transformers), on-going economic growth, new energy sources such

as renewables, increased equipment monitoring, harsher regulation and a continuous

recovery of the housing market (3-year lag to distribution investment), US utilities

appear likely increase their investment spend in the transmission and distribution

market. Following improved power order momentum in China (+13% in Q412), we

think ABB will increasingly benefit from higher government stimulus particularly related

to offshore wind and infrastructure investments such as rail.

Acquisition capacity of $12-18bn could lead to 17-25% EPS accretion

Due to an explicit target of 3-4% inorganic sales CAGR, we expect ABB to continue to use

its balance sheet mainly for acquisition purposes rather than share buybacks or special

dividends. Following 75% of acquisition spend in Automation (FY08-H112), we believe that

strong structural growth opportunities mean most of the spending will continue to be in

Automation. More precisely, we believe that ABB will expand its market position further in

PLC’s and attractive end-markets such as Oil & Gas as well as growing its Service

business via strategically sensible deals. While management recently flagged that ABB

does not target large deals in the short term, we believe that size will be a less critical

issue if a potential deal makes strategic sense. We highlight potential larger acquisition

targets in this report and estimate that based on ABB’s leverage target range of 1.5-2x net

debt / EBITDA management has $12-18bn of acquisition capacity in FY13.

20 February 2013

ABB (ABBN.VX) 6

Market materially underestimating ABB’s strong returns profile

■ Limited volatility in cash return despite competitive and cyclical pressure – ABB

has maintained its CFROI within a range of 14-16% over the last five years. Achieving

this level of returns is impressive and puts ABB firmly within the top decile of Global

Capital Goods companies and at the top end of the Electrical Equipment industry in

Europe. The company’s ability to maintain high and stable cash returns has resulted in

qualifying for a HOLT eCap (extended fade window of 10 years instead of 5 years) – a

distinction which only 7% of companies in the HOLT database qualify for.

■ ABB priced for CFROI to fade to 10% and margins to 9% – The market is currently

pricing ABB’s CFROI to fade to 10% over the next 10 years which, should this happen,

will represent an 8 year low (see Figure 13). If we use the HOLT DCF model using the

mid-range of ABB’s group targets on sales and margins we derive a CFROI of c16%

over the next five years translating into a share price of SFr27.50 (30% potential

upside). If we use the 10 year fade window, ABB’s EBITDA margins are priced to

deteriorate down to 9% by 2021 (CSe 16.9% in FY15), which represents nearly a

600bps decline from the 14.8% margins ABB generated in FY12. In addition to rising

PP margins, group margins should benefit from stronger Power Systems margins due

to management’s decision to exit EPC contracts as well as targeting a higher share of

group Service sales (20-25% target by FY15 from 17% in FY12).

■ Shares underperformed by 15% over last 12 months / 2014 valuation attractive –

We derive a TP of SFr26 by using an average of our SOTP, DCF and Credit Suisse

HOLT analysis. Following an underperformance of 15% (12 months), ABB trades on

FY14E 12.4x / 8.5x PE / EV/EBITA, implying a 9% and 8% peer discount, respectively.

Figure 13: ABB is currently priced for CFROI to fade to 10%

Figure 14: ABB has significantly underperformed its Electrical peers over the last 12 months

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ABB share performance spread vs. Electricals (ex ABB) Source: Credit Suisse HOLT Source: the BLOOMBERG PROFESSIONAL™ service

Blue-sky scenario suggesting 25% annual earnings growth potential in FY13-15E

Figure 15: Blue-sky scenario – Impact on earnings forecasts Blue sky scenarios FY13E FY14E FY15E Avg. Description

CS EPS forecasts (base) 1.62 1.83 1.99

Growth 25% 13% 8% 15%

EPS accretion

Stronger Automation sales growth 2% 6% 11%

Faster top-line growth assumption particularly in China/Europe

leading to double digit organic sales growth in FY14/15E with

margins closer to the top end of ABB's guidance range in FY15

Faster margin re-acceleration in Power

Products1% 3% 4%

Our current forecasts reflect a margin re-acceleration in PP from

14.8% in FY12 to 15.5%/15.9% in FY13/14 (cons 15.1%/15.4%).

In our blue-sky scenario we estimate margins of 16.5% in FY14

(still >200bps off FY09) mainly due to improved pricing.

Use of excess cash 5% 8% 11%

Based on financial headroom targets (1.5-2x) ABB has

acquisition firepower of $12-18bn in FY13. We use a leverage of

0.5x in our blue-sky scenario as we find this more realistic.

CS EPS forecasts (blue-sky) 1.75 2.16 2.53

Growth 35% 23% 17% 25% median multiple (2009-2012)

PE multiple 15.3x discounted back, FX adjusted to SFr

Potential target price (blue-sky) 30 Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 7

ABB ABBN.VX Price (15 Feb 13): SFr20.97, Rating: OUTPERFORM, Target Price: SFr26.00

Income statement (US$ m) 12/12A 12/13E 12/14E 12/15E

Sales revenue 39,336 42,827 45,664 48,486 EBITDA 5,240 6,727 7,536 8,093 Depr. & amort. (1,486) (1,444) (1,489) (1,574) EBIT (CS) 4,058 5,435 6,158 6,629 Net interest exp. (220) (244) (261) (236) Associates — — — — Other adj, 435 76 36 36 PBT (CS) 4,274 5,266 5,933 6,429 Income taxes (1,030) (1,401) (1,592) (1,726) Profit after tax 3,244 3,865 4,341 4,703 Minorities (108) (113) (119) (125) Preferred dividends — — — — Associates & other (148) (21) (10) (10) Net profit (CS) 2,988 3,731 4,212 4,568 Other NPAT adjustments (284) (55) (26) (26) Reported net income 2,704 3,675 4,186 4,542

Cash flow (US$) 12/12A 12/13E 12/14E 12/15E

EBIT 4,058 5,435 6,158 6,629 Net interest (220) (244) (261) (236) Cash taxes paid — — — — Change in working capital (411) (233) (366) (726) Other cash & non-cash items 352 (109) (214) (263) Cash flow from operations 3,779 4,849 5,317 5,405 CAPEX (1,230) (1,293) (1,430) (1,502) Free cash flow to the firm 2,549 3,556 3,887 3,902 Acquisitions (3,694) — — — Divestments — — — — Other investment/(outflows) (588) — — — Cash flow from investments (5,575) (1,257) (1,340) (1,422) Net share issue/(repurchase) 90 — — — Dividends paid (1,747) (1,985) (2,122) (2,267) Issuance (retirement) of debt 5,452 — — — Other (6,250) — — — Cash flow from financing activities

(2,455) (1,985) (2,122) (2,267) Effect of exchange rates 90 — — — Changes in Net Cash/Debt (4,161) 1,606 1,855 1,715 . Net debt at start (771) 3,390 1,784 (71) Change in net debt 4,161 (1,606) (1,855) (1,715) Net debt at end 3,390 1,784 (71) (1,786)

Balance sheet (US$ m) 12/12A 12/13E 12/14E 12/15E

Assets Cash and cash equivalents 6,875 8,481 10,336 12,051 Accounts receivable 11,575 11,778 12,558 13,576 Inventory 6,182 6,731 7,176 7,620 Other current assets 3,370 3,370 3,370 3,370 Total current assets 28,002 30,359 33,440 36,617 Total fixed assets 5,947 6,419 6,921 7,455 Intangible assets and goodwill 13,727 13,220 12,680 12,105 Investment securities — — — — Other assets 1,394 1,394 1,394 1,394 Total assets 49,070 51,392 54,435 57,571 Liabilities Accounts payable 6,441 6,802 7,385 7,752 Short-term debt 2,537 2,537 2,537 2,537 Other short term liabilities 9,996 10,153 10,430 10,799 Total current liabilities 18,974 19,492 20,352 21,088 Long-term debt 7,534 7,534 7,534 7,534 Other liabilities 5,116 5,116 5,116 5,116 Total liabilities 31,624 32,142 33,002 33,738 Shareholders' equity 16,906 18,723 20,921 23,336 Minority interest 540 526 512 497 Total equity & liabilities 49,070 51,392 54,435 57,571 Net debt (US$ m) 3,390 1,784 (71) (1,786)

Per share data 12/12A 12/13E 12/14E 12/15E

No. of shares (wtd avg) 2,295 2,298 2,297 2,297 CS adj. EPS (US$) 1.30 1.62 1.83 1.99 Dividend (US$) 0.73 0.81 0.87 0.93 Dividend payout ratio 55.81 49.80 47.20 46.56 Free cash flow per share (US$)

1.11 1.55 1.69 1.70

Key ratios and valuation

12/12A 12/13E 12/14E 12/15E

Growth(%) Sales 3.5 8.9 6.6 6.2 EBIT (13.0) 33.9 13.3 7.7 Net profit (13.1) 24.9 12.9 8.5 EPS (9.9) 17.8 11.4 8.2 Margins (%) EBITDA margin 13.3 15.7 16.5 16.7 EBIT margin 10.3 12.7 13.5 13.7 Pretax margin 10.9 12.3 13.0 13.3 Net margin 7.6 8.7 9.2 9.4 Valuation metrics (x) EV/sales 1.4 1.3 1.1 1.0 EV/EBITDA 10.7 8.1 7.0 6.3 EV/EBIT 13.8 10.0 8.5 7.6 P/E 17.4 14.0 12.4 11.4 P/B 3.1 2.8 2.5 2.2 Asset turnover 0.80 0.83 0.84 0.84 ROE analysis (%) ROE stated-return on equity

16.5 20.6 21.1 20.5 ROIC 14.3 18.9 21.0 22.0 Interest burden 1.1 1.0 1.0 1.0 Tax rate 26.8 27.0 27.0 27.0 Financial leverage 0.60 0.54 0.48 0.43 Credit ratios (%) Net debt/equity 19.4 9.3 (0.3) (7.5) Net debt/EBITDA 0.65 0.27 (0.01) (0.22) Interest coverage ratio 18.4 22.2 23.6 28.1

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities

(EUROPE) LTD. Estimates.

15

20

Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12

Price Price relative

The price relative chart measures performance against the SMI PRICE which

closed at 7487.13 on 15/02/13

On 15/02/13 the spot exchange rate was SFr1.23/Eu 1. - Eu .75/US$1

20 February 2013

ABB (ABBN.VX) 8

Automation ABB’s Automation division generates more than two thirds of group profits – a share which

has risen from c50% in 2008. We believe the market is underestimating the expansion

potential in Automation supported by two sizable, well integrated acquisitions in the US

and the scope for further deals going forward. Driven by strong structural growth drivers

particularly in emerging markets, we think Automation is one of the most attractive end-

markets within Capital Goods in the medium term. Although most industrial end-markets in

EM (such as China) are likely to grow at a slower pace going forward, we think Automation

will be an exception. ABB has a strong market position to benefit from these trends.

Within this section, we focus on the following topics:

■ Glance at ABB’s market position in Automation – ABB’s breadth of automation

products and services offerings, its diversity and market leading position in several

areas within Automation (e.g. Distributed Control Systems (DCS)) puts ABB into a

sweet spot to benefit from the growth potential within an attractive end-market, in our

view. We believe ABB offers the opportunity to invest into above average growth

markets such as Oil & Gas, Petrochemicals, Transport, Power Generation and

Automotive equipment (particularly in emerging countries) and to benefit from strong

underlying growth and in addition structurally driven Automation expansion within

those markets.

■ Solid sales growth potential in Automation in 2013/14E – The global Automation

market should grow at around 6% in the medium term, hence its historic trend of IP+

(industrial production) growth should continue. Driven by structural growth drivers in

emerging markets such as demographic shifts (growing middle class) and government

efforts to push up wages we expect the global industrial automation market to grow at

~1.5x global IP over the next cycle versus ~1.3x during the last cycle. ABB’s strong

market position, the limited threat from new entrants, a high degree of market

consolidation and limited capacity additions by incumbents should allow ABB to gain

market share. We forecast average organic growth for ABB over the next two years of

6%.

■ Consensus underestimates ABB’s potential in Automation – We think consensus

growth estimates (organically) over the next two years are too conservative,

particularly in FY13 (consensus 0% vs. CS 5%). With Chinese leading indicators

improving, Europe potentially stabilising throughout the year and a more positive

development in the US (note that other automation players such as Rockwell surprised

positively in the US last quarter), we believe ABB’s organic growth in Automation has

seen its trough last year. We believe consensus estimates are too bearish, particularly

for Discrete Automation & Motion (DA&M), where our sales forecasts are 7-10%

ahead of the Street in FY13/14. Our analysis indicates that at times of elevated

economic activity consensus estimates have often been too bearish over the past five

years (see Figure 56).

■ Higher Service sales could trigger higher valuation – ABB aims to increase the

revenues portion from Services from 17% in FY12 to 20-25% by 2015. Given the

significantly higher levels of profitability from Service contracts we believe this will be

margin supportive medium term. Following the company’s successful acquisitions of

Baldor and Thomas & Betts, ABB has considerably improved its installed base

particularly in North America, which in our view should lead to higher Service business

over time. We note that ABB’s target will put the company on a similar Service level to

its peers (on average; ex Legrand). Due to the fact that in our view higher Service

contribution has been a driver for higher valuation in the past we believe the market

might also acknowledge this improvement with a higher valuation for ABB. Currently

ABB’s peers trade at an 8% premium on FY14 EV/EBITA estimates.

20 February 2013

ABB (ABBN.VX) 9

Glance at ABB’s market position in Automation

Compared to its peers, ABB has one of the broadest product offerings in Automation,

ranging from a variety of plant level controls to a raft of plant instrumentation products

such as sensors, drives or motion control products such as motors. ABB represents one of

the few Automation companies that generates a sizable revenue portion from both discrete

and process automation. As we highlight further below in this report, this is relatively rare

in the industry given limited synergy potential between products used: for example, in an

oil refinery (process) and an automotive production facility (discrete). Yet, ABB has

managed to build strong market positions within respective product areas in both process

and discrete automation markets such as a market leading position in DCS within process

as well as a strong robotics and motors market position in factory automation.

Figure 16: ABB’s position in the Automation value chain

Major players

PLM: Autodesk, Dassault, Siemens

ERP: Oracle, SAP

MES: Aspen, CDC Software, Invensys, Siemens

SCADA: ABB, Invensys, Siemens

DCS: ABB, Honeywell, Siemens, Yokogawa

PLC: ABB, Omron, Mitsubishi, Rockwell,

Schneider, Siemens

V ^ V ^

Computerized Numerical

Control (CNC)CNC: Fanuc, Siemens

V ^ V ^ V

V ^ V ^ Human Machine Interface (HMI)

Drives Sensors

Robots

MotorsMachine

Vision

HMI: ABB, Invensys, Mitsubishi, Siemens,

Schneider

Plant

InstrumentationValves Sensors Machine Tools

Sensors: ABB, Eaton, Honeywell, Omron

Machine Vision: Cognex, Teledyne

Drives: ABB, Danaher Mitsubishi

Robots: ABB, Fanuc, Kuka

Machine Tools: Gildemeister, Mori Seiki

Motors: ABB, Emerson, GE, Regal Beloit,

Rockwell, Schneider, Siemens, Weg,

Yaskawa

Plant Level

Controls

Supervisory Control and Data Analysis (SCADA)

Process Factory

Distributed Control

System (DCS)

Programmable Logic

Controller (PLC)

Enterprise Level

Controls

Product Lifecycle Management (PLM)

Enterprise Resource Planning (ERP)

Manufacturing Execution System (MES)

Source: Credit Suisse research

While ABB’s Automation business generated around half of group sales in FY09, stronger

organic growth and falling profitability in the company’s Power division has meant that

Automation became an even more important contributor to the company’s group

performance over time. Today, Automation generates the majority of group sales and due

to a stronger margin profile more than two-thirds of group profits. We note that the

business shift towards a higher Automation exposure has been even more pronounced in

emerging countries such as China. In FY08 ABB’s Automation business generated 45% of

sales in China while in H112 this division already contributed 58% to total Chinese sales.

20 February 2013

ABB (ABBN.VX) 10

Figure 17: Automation generates 58% of group sales… Figure 18: …and 66% of group EBITDA in FY13 on CSe

Discrete Automation &

Motion22%

Low Voltage17%

Process Automation

19%

Power42%

Discrete Automation &

Motion28%

Low Voltage21%

Process Automation

17%

Power34%

Source: Credit Suisse estimates Source: Credit Suisse estimates

We show ABB’s Automation business split in Figure 19. Across its three subdivisions, ABB

generates the majority of its revenues from motors and generators, supported by the

acquisition of Baldor in the US, followed by low voltage drives and products related to oil,

gas and petrochemical end-markets.

Figure 19: ABB’s total Automation business split Figure 20: ABB has a market leading position in DCS

0%2%4%6%8%

10%12%14%16%18%20%

% o

f A

uto

mati

on

sale

s

ABB

0%

5%

10%

15%

20%

25%

1999 2001 2003 2005 2007 2009 2011

Ma

rket

sh

are

(%

)

Main competitors: Emerson, Honeywell, Invensys, Siemens, Yokogawa (alphabetical order)

Source: Company data, Credit Suisse estimates Source: Company data, ARC DCS Worldwide Outlook

In both figures below we go into more detail as to which end-markets ABB is most

exposed to as well as outlining the company’s main customers. While in Automation ABB

tends to work closer together with industrial-related customers (60% of group customers),

the company’s Power business naturally builds a closer relationship to utility companies

offering products such as transformers, circuit breakers or gas-insulated switchgears. If we

split up ABB’s industrial customers amongst their respective end-markets we note that the

company has the most significant end-market exposure to minerals and metals as well as

to oil, gas and petrochemicals, both accounting for 15% and 10%, respectively.

Figure 21: ABB’s customers split (2011) 3-year rolling average

Figure 22: ABB’s end-market split (2011) in US$ millions, circled = Industrial customers

Industrial customers

(direct / indirect)

60%

Utlity customers

(direct)40%

Power Transmission

20%

Minerals & metals15%

Oil, gas & petrochemicals

10%

Power generation

10%

Power distribution

10%

Marine5%

Pulp & paper5%

Discrete manufacturing, automotive &

transport5%

Buildings5%

Other15%

Source: Company data Source: Company data

20 February 2013

ABB (ABBN.VX) 11

Solid sales growth potential in Automation in 2013/14

We believe that Automation will be one of the most attractive end-markets in Capital

Goods in the medium term backed by solid sales growth potential due to a combination of

strong structural drivers in emerging markets (high wage inflation, low penetration rates)

and the potential for a cyclical rebound in more developed markets such as Europe and

the US if economic data continues to improve (see more details in the note from our

Global Cap Goods team, Global Industrial Automation – The next growth phase, 14th

August 2012)

Underpinned by industry data and the historic correlation with industrial production the

global Automation market looks set to grow at around 6% over the next three years with

growth economies outpacing more mature markets and factory automation outgrowing

process automation (see Figure 28). In both figures below we show the difference in size

between the total automation market and the industrial automation market. Due to ABB’s

customer exposure, the latter should be more relevant.

Figure 23: Total automation market size / growth estimate Figure 24: Industrial automation market split

2010 2015E

$285bn

$380bn

6% CAGR

Discrete manufacturing

25%

Process manufacturing

25%Oil & Gas

20%

Mining & minerals

10%

Utilities10%

Hybrid manufacturing

10%

$180bn market size (2012)

Source: Company data Source: Company data, ARC DCS Worldwide Outlook

We highlight historic Automation sector spend in Figure 25, which shows a pick-up in

growth particularly in emerging markets, which expanded at c.8% on average between

2000 and 2010. We view the growth forecasts for developed markets as too conservative

if the European economy begins to improve and capital restraints in the US resulting from

the ‘fiscal cliff’ do not significantly impact manufacturing growth over the next two years.

Figure 25: Automation sector spend in $tr, spend by oil & gas, mining, iron & steel, electricity, gas & steam, basic industrial chemicals, pulp & paper, infrastructure construction sectors

0

1

2

3

4

5

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

Au

tom

ati

on s

ecto

r sp

end

($tr

)

Developed markets Emerging markets

1990-2000

3.3% pa

2000-2005

7.4% pa

2005-2010

8.8% pa

2010-2015

6.9% pa

1990-2000

0.9% pa

2000-2005

1.0% pa

2005-20103.2% pa

2010-2015

2.1% pa

Source: Company data, Global Insight, Credit Suisse research

20 February 2013

ABB (ABBN.VX) 12

ABB should outgrow Automation markets

Owing to ABB’s strong market position, the limited threat from new entrants, a high degree

of market consolidation and limited capacity additions by incumbents we believe ABB has

the potential to grow at a faster pace than the global automation market (note that we

forecast average organic growth of 7% for ABB between 2013-15E) driven by ABB’s

excellent market position within the Automation value chain (as highlighted above in

Figure 16), which should for example enable the company to win a greater amount of large

integrated automation projects.

We think that market-leading players such as ABB are not under imminent threat from new

market entrants in emerging markets. During our last field trip China in November 2012

Rockwell’s China head emphasised that it would likely take new market participants a

minimum of ten years to replicate the technology of market leading Western players. While

he admitted that it might be quicker for instrumentation products such as drives and

motors, the minimum time of ten years was particularly pertinent for plant level controls

products such as DCS’s where ABB holds a market leading position. Furthermore, we

believe that ABB should continue to gain market share on the back of

1) a significant focus on product quality given controls products are often a very critical

component within the Automation process and 2) ABB’s potential to use its strong cash-

flow generation for selective M&A deals.

According to ABB the key growth drivers in Automation are:

■ Factory Automation

■ User of energy (Oil & Gas)

■ Transportation and mobility

■ Energy efficiency

■ Commodity demand

For obvious reasons order growth in ABB’s Automation tends to follow trends in industrial

production (in developed markets) pretty well. We note that macro forecasts are becoming

increasingly more optimistic for 2013 and beyond (see Figure 27). History suggests that

this should lead to stronger investment particularly in the areas of manufacturing.

Following a year of weaker GDP growth especially in Europe and China we expect more

automation investment to come through and improved growth rates for Automation players

such as ABB (see Figure 26).

Within the divisional section at the back of this report we go into further detail around the

cyclicality of ABB’s specific divisions. While the company’s Power business in particular

Power Systems is clearly more exposed to customers operating in late cyclical end-

markets we note that due to the high Process Automation exposure (customers: e.g. oil &

gas, petrochemical companies) ABB’s total automation business tends to be less short-

cycle than one might assume. ABB’s only pure short-cycle division is Low Voltage

Products, which accounts for roughly 20% of ABB’s group sales. Figure 26 demonstrates

the impact from the later cyclical process business particularly throughout the last

downturn.

20 February 2013

ABB (ABBN.VX) 13

Figure 26: ABB Automation order growth vs industrial production growth

Figure 27: CS macro forecasts – More positive trends in China and Europe

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Q10

9

Q20

9

Q30

9

Q40

9

Q11

0

Q21

0

Q31

0

Q41

0

Q11

1

Q21

1

Q31

1

Q41

1

Q11

2

Q21

2

Q31

2

Q41

2E

Q11

3E

Q21

3E

Q31

3E

Q41

3E

IP g

row

th (

%)

Org

. g

row

th (

%)

ABB Automation - Org. order growth IP - Eurozone

IP - US IP - China

Macro forecasts 2012E 2013E 2014E Trend for 2013/14

Global Real IP 3.1% 3.5% 4.0%

IP 2.8% 4.0%

US Real IP 2.3% 1.9% 2.5%

Euro Area Real IP -0.4% 0.5% 1.5%

NJA Real IP 6.3% 6.8% 7.0%

China Real IP 7.7% 8.0% 8.2%

IP 10.0% 10.9% 11.4%

Source: The BLOOMBERG PROFESSIONAL™ service, Company

data, Credit Suisse estimates

Source: Credit Suisse estimates

We believe industrial automation will continue to outgrow industrial production. Automation

relative to IP could potentially see higher growth this cycle compared with the previous

one, given the emergence of several new growth themes.

■ Much of China’s recent output growth has been driven by construction and

infrastructure build-outs. Industrial vendors supplying these markets will likely see

lower trend growth going forward. Automation however will likely benefit from two

emerging trends in China: (1) wage inflation is accelerating; and (2) the increased

government emphasis on consumption;

■ The global capex outlook for key automation end-markets such as Petrochemicals is

stronger today in our view compared to last cycle;

■ The efficacy of discrete automation is becoming increasingly apparent, yet penetration

remains low in many markets, offering scope for increased penetration to drive growth.

Below, we show bottom-up Process and Factory Automation market growth (generated by

a wide sample of automation vendors that we track), in the context of Industrial Production.

Figure 28: Automation market growth forecasts in x, unless otherwise stated; * excluding outliners

Figure 29: ABB – CS org. sales forecasts by subdivision in US$ millions, unless otherwise stated

Industrial production Process FactoryYear EM Developed Global Global Global2003 8.4% 1.0% 3.7% -0.3% 11.3%2004 10.6% 2.4% 5.4% 5.1% 13.0%2005 8.3% 2.1% 4.4% 8.4% 9.1%2006 9.5% 2.9% 5.5% 11.4% 11.4%2007 10.0% 2.8% 5.7% 8.8% 11.5%2008 5.0% -2.7% 0.5% 10.6% 2.4%2009 0.8% -13.4% -7.2% -5.1% -19.5%2010 12.6% 7.1% 9.6% -3.3% 20.6%2011 7.6% 2.8% 5.0% 9.7% 13.8%2012E 5.1% 0.7% 2.8% 3.1% 4.2%2013E 6.8% 1.3% 4.0% 4.4% 6.0%2014E 7.3% 2.4% 4.8% 5.2% 7.1%Historic avg 8.1% 0.6% 3.6% 5.0% 8.2%vs Global IP * 1.5x 2.0x

-15%

-10%

-5%

0%

5%

10%

15%

20%

2008 2009 2010 2011 2012 2013E 2014E

Org

an

ic g

row

th (

%)

Organic growth - DA&M Organic growth - Process

Organic growth - LV

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates

In order to derive a clearer picture of how ABB’s respective Automation markets are

expected to grow, we have created Figure 30, in which we specifically list growth

expectations for a variety of Automation markets in which ABB operates. Our conclusion

from Figure 30 is that ABB’s markets should grow close to 6% on average over the next

three years. As mentioned above, we believe that ABB has the potential to outgrow its

respective markets due to a strong competitive position in a raft of its marketplaces.

20 February 2013

ABB (ABBN.VX) 14

Figure 30: Growth estimates in ABB’s Automation markets and regions in millions, unless otherwise stated

Growth estimates ABB's Automation markets 2011 2012E 2013E 2014E 2015E

Industrial Control Systems (ICS) 7.3% 6.6% 5.0% 6.4% 6.2%

SCADA 7.2% 4.3% 4.5% 5.3% 6.0%

DCS 7.3% 8.3% 5.0% 6.7% 6.2%

PLC 7.6% 6.2% 6.5% 8.1% 6.9%

Field Devices 5.9% 4.1% 5.3% 5.3% 5.5%

Robotics 6.6% 7.5% 8.5% 7.5% 7.5%

Sensors 5.6% 3.6% 3.6% 4.2% 4.2%

Motion & Drives 4.9% 1.5% 3.7% 4.3% 4.4%

Others 6.5% 6.0% 6.0% 6.0% 6.0%

Total 6.9% 5.9% 5.0% 6.1% 6.0%

ABB's Automation market growth by region 2011 2012E 2013E 2014E 2015E

Americas 6.6% 7.5% 6.1% 6.3% 5.5%

Europe 6.5% 3.3% 2.0% 3.8% 3.9%

APAC 7.4% 7.0% 7.2% 8.5% 8.8%

ROW 8.7% 7.8% 7.0% 6.9% 6.9%

Total 6.9% 5.9% 5.0% 6.1% 6.0% Source: Markets and Markets, Credit Suisse estimates

Structural growth drivers such as high wage inflation and rising penetration rates in

emerging markets will force Automation investment

We believe on-going high wage inflation (c.10%) in emerging markets such as in China will

continue to pressurise corporate profitability levels, putting China’s cost competitive

manufacturing at risk. In order for China to remain a manufacturing powerhouse it is vital

in our view to significantly invest into Automation. For us to exactly pinpoint the time of

higher investment coming through is difficult yet we believe that turning economic

momentum can certainly be one important trigger point.

Although Chinese companies are likely to have little choice in upgrading their automation

investment / manufacturing technology, one could argue that multi-national companies

could simply move their production to countries with cheaper labour costs. We note though

that many other emerging markets are also seeing a substantial increase in wages, and

their base level today is not substantially lower than China’s.

Figure 31: Wage growth CAGR (2007-2011) in US$, unless otherwise stated

Figure 32: Hourly manufacturing costs (2011) in US$, unless otherwise stated

3%2%

8%

10%

9%

4%

Developed Developed(Ex Japan)

EmergingMkts Total

NJAEmerging

LatAmEmerging

EMEAEmerging

$39 $39

$10 $8

$10 $12

Developed Developed(ex Japan)

Emergingmarkets

NJAemerging

LatAmemerging

EMEAemerging

Source: BLS Source: BLS

We think Non-Japan Asia has the largest growth opportunity for investments as this region

accounts for 35% of the world’s manufacturing output, but has a robot density of only 11

per 10,000 manufacturing employees (Figure 33) compared with developed markets which

produce 50% of manufacturing output and yet have a significantly higher robot density of

149. In Figure 33 we show the robot density, which we use a proxy to quantify the level of

20 February 2013

ABB (ABBN.VX) 15

automation, by country, clearly demonstrating that countries such as China or India

currently have considerably lower penetration levels compared to more developed markets

such as Japan, the US or Germany.

Figure 33: % of global output and robots per employee in x, unless otherwise stated

Figure 34: Robot density for select countries (2011) Robots per 10,000 manufacturing employees, unless otherwise stated

50%41%

50%

7%

35%

8%

149

88

11 711

6

Developed Developed(ex Japan)

EmergingMarkets Total

EMEAEmerging

NJAEmerging

LatAmEmerging

% of Global Manufacturing Output

Number of Robots per 10,000 Manufacturing Employees

0

50

100

150

200

250

300

350

Japan

Kore

a

Germ

any

Italy

US

Spain

Taiw

an

Fra

nce

Sw

itzerla

nd

Austra

lia

UK

Chin

a

Bra

zil

Russia

India

Ro

bo

t d

en

sit

y (

x)

Robot density Global average

Source: World Bank, IFR, United Nations Source: World Bank, IFR, United Nations, BLS

Potential pick-up in China could boost organic growth for Automation players

Recent momentum in Chinese indicators (manufacturing PMIs, consumer confidence) and

the new leadership appear likely to spur increased economic activity. If this holds true then

we believe this should bode well for stronger Automation investment going forward.

We show recent corporate momentum in Figure 35 below. Despite a more stable trend

compared to H112, we continue to see earnings volatility as seen in Rockwell’s operating

performance over the last two quarters. Following strong organic sales growth of 11%

during the company’s Q4 (Jul-Sep12) management stated that growth rates in China fell

by more than 9% (seen in the total Asian region) during Q113 (Sep-Dec12). On the

earnings call management continued to cite tight credit availability (similar reason heard

for H112) and delayed order momentum as key explanations why growth in China has not

yet consistently picked up. On a more positive note Rockwell cited better order than sales

performance which might indicate a turning point in momentum starting to kick-in.

We believe there is upside risk to our organic growth forecasts in Automation if there is a

more pronounced pick-up in Chinese Automation investment than we currently assume.

Figure 35: Growth momentum in China/Asia Growth rate specification for included companies: ABB=Asia; Emerson=China; GE=China; GEA=China; Hollysys=China; Omron=China; Rockwell=China; Schneider=Asia; Siemens=China; Yokogawa=Asia

-20%

-10%

0%

10%

20%

30%

40%

50%

Ma

r-09

Jun

-09

Se

p-0

9

De

c-0

9

Ma

r-10

Jun

-10

Se

p-1

0

De

c-1

0

Ma

r-11

Jun

-11

Se

p-1

1

De

c-1

1

Ma

r-12

Jun

-12

Se

p-1

2

De

c-1

2

Sa

les

gro

wth

(%

)

ABB Emerson Rockwell Automation Average (all companies)

Source: Company data, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 16

ABB should benefit from Robotics and Oil & Gas /

Petrochemicals

As we highlighted further above ABB has quite a diverse end-market exposure, yet oil &

gas and petrochemical companies represent one of the most important end-markets

accounting for roughly 10% of ABB’s customer base. In addition, we believe that product

areas in factory automation such as Robotics or Motors should continue to generate solid

growth rates in the medium term. We focus on the following:

■ Oil & Gas / Petrochemicals (see points 1 and 2 below) – Strong underlying growth

in Oil & Gas, refining capacity growth in emerging markets and a better outlook for

developed markets, particularly the US

■ Robotics – Above average growth potential within Automation Instrumentation

Oil & Gas / Petrochemicals (1) – Strong underlying growth in Oil & Gas and refining

capacity growth in emerging markets

Oil & Gas represents an important end-market within global industrial automation

(accounting for 20% of the total market; see Figure 24) and strong growth drivers explain

why Automation players such as ABB aim to further expand in this market. ABB operates

mainly in the upstream market (exploration and production) and sells control systems,

drives, cables or electrical solutions to its customers.

Figure 36: ABB’s end-market split in Process Automation Figure 37: ABB’s end-market split in DA&M

Chemical, Oil & Gas35%

Metals & Mining25%

Marine15%

Pulp & Paper10%

Power Generation

5%

Other10%

Discrete

Manufact.20%

Power Generation

10%

Buildings5%

Oil & Gas, Petrochemical

10%

Minerals & Metals25%

Transport10%

Water5%

Other15%

Source: BP Stats, OGJ, Credit Suisse estimates Source: OGJ, Credit Suisse estimates

In order to provide an indication of the growth potential in this market we have highlighted

expectations for offshore rig counts and tubulars in the figures below.

Figure 38: Growth expectations for offshore rig count in x, unless otherwise stated

Figure 39: Growth expectations for tubulars in x, unless otherwise stated

Source: IHS Petrodata Source: IHS Petrodata

20 February 2013

ABB (ABBN.VX) 17

We see two distinct drivers for higher automation investment by the Petrochemical

industry in this cycle compared with prior cycles: (1) increased efforts by emerging Asian

countries to develop domestic refinery / chemical processing capacity; (2) low gas prices

stimulating increased petrochemical plant investments in the US.

After declines in global refining capacity in 2011 and 2012, we are likely to see strong

capacity additions growth over the coming years. On a quarterly basis, refining capacity

additions are set to peak around Q314 / Q115.

We note that at the last Capital Markets Day in September 2012 ABB outlined its plans to

increase its relevance particularly in the oil & gas market. ABB aims to become the

preferred partner for the oil & gas industry supported by an expanding product portfolio.

Figure 40: Addition to global refining capacities in mbopd, unless otherwise stated

Figure 41: Quarterly capacity addition forecasts in mbopd, unless otherwise stated

(1.0)

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

199

51996

199

71

99

81

99

92

00

02001

200

22

00

32

00

42

00

52

00

62

00

72

00

82

00

92

01

02

01

12

01

2E

201

3E

201

4E

201

5E

mb

op

d

(400)

(200)

-

200

400

600

800

1,000

1,200

1,400

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Q3

14

Q4

14

Q1

15

Q2

15

mb

op

d

Source: BP Stats, OGJ, Credit Suisse estimates Source: OGJ, Credit Suisse estimates

A large portion of the capacity growth is due to new refineries in China (27% / 49% of

global additions in 2012 / 2013 respectively – Figure 42 and Figure 43) and India (33% /

12% of additions in 2012 / 2013 respectively). In China, our Asia O&G team believes that

key drivers of growth are domestic demand and the desire to reduce the dependence on

imports.

In India, public sector companies are building more capacity – this is potentially because

they are looking to reduce the country’s dependence on private sector refiners.

Figure 42: Refining capacity additions (2012E) Figure 43: Refining capacity additions (2013E)

China

India

Rest of Asia

Middle East

North America

South America

Others

(0.8) (0.6) (0.4) (0.2) - 0.2 0.4 0.6mbopd

China60%

India12%

Middle East12%

North America11%

Rest of Asia3%

South America

1%

Others1%

Source: OGJ, Credit Suisse estimates Source: OGJ, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 18

Petrochemicals/Oil & Gas (2) – Better outlook for developed markets, particularly

the US

The recent history of downstream petrochemical investment in the US and Western

Europe has been fairly poor. However, this is changing in the US, given technology

changes in extraction, in particular around hydraulic fracturing technology, which is leading

to substantial production increases in natural gas. The effect on natural gas prices has

been particularly evident over the past 12 months; our Energy Team expects this to persist.

Figure 44: US natural gas reserve/production change Figure 45: US natural gas price

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Gro

wth

yo

y (

%)

US Dry Natural Gas Production US Dry Natural Gas Reserves

0

2

4

6

8

10

12

14

Feb-0

8

May-0

8

Aug-0

8

Nov-0

8

Feb-0

9

May-0

9

Aug-0

9

Nov-0

9

Feb-1

0

May-1

0

Aug-1

0

Nov-1

0

Feb-1

1

May-1

1

Aug-1

1

Nov-1

1

Feb-1

2

May-1

2

Aug-1

2

Nov-1

2

Feb-1

3

Pri

ce (

US

D p

er

MM

Btu

)

US Natural Gas Price Source: The BLOOMBERG PROFESSIONAL™ service Source: The BLOOMBERG PROFESSIONAL™ service

Low gas prices are positive for process automation investment because the cheap

feedstock is resulting in improved economics for companies to invest in US petrochemical

capacity, potentially with a view to increasing exports. According to ICIS, for instance,

currently planned US ethylene capacity additions total 32% of existing capacity.

Figure 46: Announced ethylene capacity expansions in US$bn, unless otherwise stated

Company Project Capacity (tonnes) Location Cost ($bn) Start-up

ExxonMobil Chemical New cracker 1.5mn Baytow n, Texas NA 2016

Chevron Phillips Chemical New cracker 1.5mn Cedar Bayou, Texas NA Q1 2017

Dow Chemical New cracker w orld-scale US Gulf Coast NA 2016-17

Shell New cracker w orld-scale US Northeast NA 2016-17

Formosa Plastics New cracker 800000 Point Comfort, Texas 1.7 2016

Dow Chemical Restart 390000 St. Charles, Louisiana NA end 2012

Westlake Chemical Expansion 108863 Lake Charles, Louisiana NA H2 2012

Williams Expansion 272158 Geismar, Louisiana .35-.40 Q3 2013

INEOS Debottleneck 115000 Chocolate Bayou, Texas NA end 2013

Westlake Chemical Expansion 113399 Lake Charles, Louisiana NA 2014

LyondellBasell Expansion 386000 La Porte, Texas NA 2014

Considered expansions

Sasol New cracker 1.0-1.4m Lake Charles, Louisiana 3.5-4.5 NA

Indorama Ventures New cracker 1.3m NA NA 2018

LyondellBasell Expansion NA Channelview , Texas NA NA

SABIC New cracker w orld-scale US NA NA

Braskem New cracker NA US NA NA

Occidental Chemical New cracker NA Ingleside, Texas NA NA

Aither Chemicals New cracker NA US Northeast 0.75 2016

PTT Global Chemical New cracker NA NA NA NA Source: ICIS

Robotics – Above-average growth potential within Automation Instrumentation

We believe the global robotics market will grow at c.8% on average over the next three

years compared to the total automation instrumentation sector expanding at c.5%. Given

ABB’s top 5 market share position (see Figure 47), we think the company should be a

major beneficiary from this trend. Robotics accounts for 15% of DA&M revenues yet due to

a stronger growth profile we believe that the sales contribution from Robots will surge

20 February 2013

ABB (ABBN.VX) 19

closer to 20% over the next few years. In the most recent quarter management noted a

very strong performance of the company’s Robotics division.

Figure 47: Industrial robot market share Figure 48: Automation Instrumentation market split by revenues

Yaskawa23%

Fanuc22%

Kuka15%

ABB13%

Fujikoshi8%

Kawasaki8%

Other11%

Sensors

30%

Machine Vision20%

Robotics17%

Relays & Switches

16%

Motion Drives12%

Others5%

Source: Credit Suisse research Source: Credit Suisse research

In Figure 49 we have shown growth expectations for the robotics market by region. While

the Americas was forecasted to grow very strongly in 2012, current expectations imply that

growth will level out around 6% by 2015E. In 2013 the APAC region should continue

outgrowing other regions and account for more than 60% of generated Robotics revenues.

Figure 49: Robotics market growth forecasts by region Figure 50: Robotics sales generation by region (2013E)

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

2011 2012E 2013E 2014E 2015E

Gro

wth

(%

)

Americas Europe APAC ROW Total

Americas15%

Europe17%

APAC61%

ROW7%

Source: Markets and Markets, Credit Suisse estimates Source: Markets and Markets, Credit Suisse estimates

The example of Japan from the 1970s and 1980s, and the growth trend in China in recent

years, suggest that China is now entering its inflection point, with discrete automation

investment set to accelerate (see Figure 51). As highlighted further above in this report,

the robot density in emerging markets still falls significantly behind that in developed

regions, particularly relative to hourly wage costs.

Figure 51: Robot stock (base year = 1974 for Japan, 1999 for China) Robot stock in units, unless otherwise stated

Figure 52: Robot density relative to hourly wage cost in different regions in US$, robot density per 10,000 manufacturing employees

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

T+0 T+5 T+10 T+15 T+20 T+25 T+30

Japan

China

$39 $39

$10 $8 $10 $12

149

88

11 7 116

Developed Developed(Ex Japan)

EmergingMkts Total

NJAEmerging

LatAmEmerging

EMEAEmerging

Hourly Cost (USD) Robot Density

Source: IFR, Credit Suisse estimates Source: IFR, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 20

We note that Robotics peer company Kuka reported preliminary FY12 results at the

beginning of February highlighting a strong order backlog in Robotics, which has grown

35% in the last fiscal year driven by “considerable demand in China”. The company

expects strong demand in the coming years and consequently is building a new plant for

robot assembly in China.

Consensus underestimates ABB’s growth potential

in Automation

We believe consensus estimates for ABB’s Automation business are too bearish. The

Street currently forecasts flat organic growth in this division in 2013 compared to our

forecasts of 5% organic growth.

Figure 53: Consensus expects org. growth in Automation to be lower than in 2012 despite signs of Chinese leading indicators improving, Europe returning to GDP growth and positive Automation momentum in the US

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2008 2009 2010 2011 2012 2013E 2014E

Org

an

ic g

row

th (

%)

ABB Automation - Organic growth (incl. CSe) Org. growth forecasts (Cons)

Source: SME, Credit Suisse estimates

In our view consensus expectations, particularly for ABB’s DA&M business, are too

conservative. As described in our top down section on growth drivers above we think that

due to a potential pick-up in shorter-cycle end-markets mainly in emerging markets (and

the US) factory automation will outgrow Process over the next two years. We forecast ABB

to grow DA&M revenues at around 6% (medium term market growth expectations) in

FY13, accelerating to 8% thereafter. Our reported EBIT forecasts in Automation are 8-10%

ahead of consensus over the next two years (see Figure 54).

Figure 54: We are more optimistic about sales and profits in Automation in 2013/14E in USD millions, unless otherwise stated

CS forecasts 2013E 2014E Consensus 2013E 2014E CS vs. cons 2013E 2014E

Sales Sales Sales

DA&M 10,193 11,009 DA&M 9,559 10,046 DA&M 6.6% 9.6%

Process 8,606 9,209 Process 8,439 8,850 Process 2.0% 4.1%

LP 8,017 8,498 LP 7,714 8,118 LP 3.9% 4.7%

Total 26,816 28,715 Total 25,713 27,013 Total 4.3% 6.3%

Reported EBIT Reported EBIT Reported EBIT

DA&M 1,651 1,816 DA&M 1,503 1,647 DA&M 9.9% 10.2%

Process 1,001 1,104 Process 978 1,053 Process 2.4% 4.8%

LP 1,278 1,467 LP 1,145 1,275 LP 11.7% 15.1%

Total 3,930 4,387 Total 3,625 3,975 Total 8.4% 10.4%

Source: Vara Research consensus, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 21

Figure 55: ABB’s current cons. EPS growth forecasts are lagging the correlation to US/EU IP seen historically

Figure 56: At times of elevated economic activity, ABB has beaten consensus earnings estimates

-70%

-45%

-20%

5%

30%

55%

80%

-20%

-15%

-10%

-5%

0%

5%

10%

Ja

n-0

5

Ju

l-05

Ja

n-0

6

Ju

l-06

Ja

n-0

7

Ju

l-07

Jan-0

8

Ju

l-08

Ja

n-0

9

Ju

l-09

Ja

n-1

0

Ju

l-10

Ja

n-1

1

Ju

l-11

Ja

n-1

2

Ju

l-12

EP

S g

row

th, ro

llin

g (

%)

IP g

row

tht

(%)

IP - US IP - EU ABB - Consensus EPS (1yr rolling fw)

-20%

-15%

-10%

-5%

0%

5%

10%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2007 2008 2009 2010 2011 2012

EP

S (

US

D)

EPS estimates (1 year prior to reporting) EPS reported by ABB IP - US

Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service

Higher Service sales could trigger higher valuation

By 2015 ABB aims to raise its group sales contribution from Services to 20-25% from 17%

last year. As we highlight in Figure 57 ABB has over time gradually improved its revenue

share from its Service business from around 15% five years ago.

Figure 57: ABB targets 20-25% of group sales from Service revenues by 2015E

15% 15% 16% 17% 16% 17%

20-25%

0%

5%

10%

15%

20%

25%

30%

2007 2008 2009 2010 2011 2012 2015E

Reven

ue s

pli

t (%

)

Service Product/Systems

Source: Company data, Credit Suisse research

Although ABB does not split out margins from its Service and Products/Systems business,

we believe that based on disclosures from other Capital Goods companies it is fair to

assume that its aftermarket revenues will generate a significantly higher profitability. Due

to ABB’s increasing contribution from Service revenues over the last few years ABB

should have seen a positive margin effect from a better Service/Product mix.

We note that ABB lagged its peers with respect to its revenue contribution from Services

(see Figure 59) in the past and won’t reach the Service revenue averages of the

Electricals and Mechanicals sector even if we take ABB’s new target of 20-25% into

account. However, this is mainly due to the following reasons:

■ The Mechanicals generally tend to have a stronger contribution from Aftermarket

revenues on the back of a market-leading position in often less penetrated markets.

■ The Services share of the Electricals (31%) is mainly boosted by Legrand (c60% of

group sales from Service). If we exclude Legrand from the Electricals group, we derive

an average of 24% which falls within ABB’s target range of 20-25%, hence does not

put ABB at a disadvantage.

20 February 2013

ABB (ABBN.VX) 22

Acquisitions of Baldor and Thomas and Betts should drive higher Service demand

We highlight in Figure 58 ABB’s split between Service and Product/Systems revenues for

each of the company’s divisions. As the graph demonstrates the company has the most

significant Service offering in its Process Automation business due to:

■ Selling of a service package often in combination with original equipment such as a

control system

■ Solid 10% exposure to turbochargers which have a high service business

■ Stronger software business in Process than in Discrete Automation

Although customers in DA&M often tend to maintain the product themselves, we believe

that both DA&M and Low Voltage have good potential to grow their Service business.

While in DA&M only the Robotics business currently has a strong service business

(c.35%) we think that due to the two sizable acquisitions in Automation (Baldor in DA&M

and Thomas and Betts in LV) ABB has significantly expanded its installed base (+10,000

distributors split between Baldor 4,000 and T&B >6,000) in the North American market,

which over time should lead to an increase in Service demand. While the T&B does not

have a Service business and won’t develop one in our view, we think that Baldor has good

potential to build an aftermarket business from currently using third-party providers.

Figure 58: Split between Service and Products/Systems revenues per division

85%

60%

95% 90% 85%

15%

40%

5% 10% 15%

0%

25%

50%

75%

100%

DA&M PA LV PP PS

Reven

ue s

pli

t (%

)

Products/Systems Service

Source: Company data

20 February 2013

ABB (ABBN.VX) 23

Companies on a higher valuation multiple tend to have a stronger Service offering

We believe that ABB’s target of 20-25% could be conservative given the company’s

installed base in some of its end-markets and a focus on raising the Service share via

acquisitions. While it might seem too optimistic to assume ABB will increase its Service

share to average levels of the Mechanicals, we think that a share beyond 25% could be

achievable. We highlight in Figure 59 that higher margin companies often trade on a

higher valuation multiple and conclude that if ABB successfully raises its share of more

profitable Service revenues the market might reflect this in form of a higher valuation.

Figure 59: A higher Service revenue contribution suggests a higher valuation multiple for Capital Goods companies

% of Group revenues

from Service

EBITA margin

(FY13E)

EBITA margin

(FY14E)

EV/Sales

(FY13E)

EV/Sales

(FY14E)

EV/EBITA

(FY13E)

EV/EBITA

(FY14E)

ELECTRICALS

Alstom 30% 7.0% 7.2% 0.64 0.59 9.1 8.2

Legrand 60% 19.5% 19.6% 2.17 2.06 11.1 10.5

Philips 10% 10.2% 10.3% 0.96 0.89 9.3 8.6

Schneider 37% 14.0% 14.3% 1.48 1.39 10.6 9.7

Siemens 20% 12.4% 12.6% 1.06 0.97 8.5 7.7

MECHANICALS

Alfra Laval 26% 17.3% 18.0% 1.96 1.80 11.3 10.0

Assa Abloy 67% 16.8% 17.0% 2.13 1.95 12.6 11.4

Atlas Copco 41% 21.4% 21.8% 2.34 2.08 10.9 9.6

Electrolux 15% 6.4% 6.5% 0.46 0.42 7.2 6.5

Kone 54% 14.5% 15.0% 2.24 2.06 15.5 13.7

Metso 45% 9.4% 9.7% 0.76 0.71 8.1 7.4

Sandvik 28% 15.0% 15.9% 1.64 1.48 10.9 9.3

Schindler 61% 12.9% 13.6% 1.63 1.49 12.6 11.0

SKF 18% 12.0% 13.6% 1.39 1.28 11.6 9.4

Average Electricals 31% 12.6% 12.8% 1.26x 1.18x 9.8x 8.9x

Average Mechanicals 39% 14.0% 14.6% 1.62x 1.47x 11.2x 9.8x

Average Total 37% 13.5% 13.9% 1.49x 1.37x 10.7x 9.5x

ABB 18% 12.7% 13.5% 1.28x 1.15x 9.9x 8.5x Source: Company data, Credit Suisse estimates

In Figure 60 we provide a sample of ABB’s service offering across its divisions.

Figure 60: ABB’s Service offering across its divisions

ABB's Service portfolio

Service agreements Maintenance Extensions upgrades & retrofits

Installation & commissioning Repairs End of life services

Training Engineering & consulting Replacement

Spares & consumables Advanced services

Source: Company data

20 February 2013

ABB (ABBN.VX) 24

Power ABB’s Power division is the primary reason why ABB’s shares continue to lag the

performance of the wider Capital Goods sector as well as its direct Electrical peers in our

view. It seems as if the market ignores the potential within the company’s Automation

division and despite margin stabilisation in Power Products for several quarters awaits

further evidence that the deterioration in profitability caused by emerging market

competition won’t repeat itself. While we think it would be wrong to rule this out

completely, we would argue that the main transformer costs (raw materials: copper &

steel, labour, shipping) are easily traceable, hence the US Department of Commerce will

likely monitor the development carefully in order to protect local manufacturing going

forward. Contrary to consensus expectations, we believe that ABB’s Power Product

margin has stronger upside potential based on better pricing trends and a strict, on-going

cost savings focus. We have backed up our argument with channel checks, which have

flagged the potential for improved pricing as well as higher US T&D spending in the

medium term benefiting players with a strong market position such as ABB.

Within this section we focus on the following topics:

■ Glance at ABB’s market position in Power – Similar to the company’s Automation

division ABB’s geographical balance, well established market leading position in

several products categories and long lasting experience and expertise should serve

the company well to benefit from structural growth trends in emerging (e.g. strong

electricity consumption) as well as in developed markets (e.g. energy efficiency focus).

ABB generates more than 70% of its Power revenues from transformers, substations

systems and high/medium voltage products such as gas insulated switchgears, circuit

breakers or protection systems.

■ Drivers for higher US T&D spend going forward – While strongly growing electricity

consumption will be a much more significant driver in emerging markets than in

developed regions, we believe various growth drivers will force utilities to increase

their capex spend in countries such as the US in the medium term. Given that the age

of the installed base tends to be on average more than 30 years old, utilities will in our

view either upgrade their equipment over time or install back-up equipment to avoid

blackouts. Our channel checks indicate that the reliability factor accounts for roughly

50% of new investment spend. Furthermore, we think that drivers such as on-going

economic growth, new energy sources (e.g. renewables), monitoring, regulation and a

recovery of the housing market could further boost T&D spending.

■ Benefits from Chinese government stimulus – China accounts for c11% of ABB’s

group revenues of which the company generates c42% from its Power divisions. With

a strong exposure to high and medium voltage products (c.80% of Chinese sales) we

believe ABB is well positioned to benefit from a re-accelerated government stimulus in

several key end markets such as rail and wind. Given the huge focus on energy

efficiency going forward, China targets 100GW of installed wind capacity by 2015,

implying an increase of 15GW per year. Following a two-year setback due to

corruption allegations and the fatal accident in Wenzhou, leading to a more cautious

approach by the government, the Ministry of Rail has recently indicated that the

railway programme, targeting a doubling in spend between 2011-15, remains

unchanged. Due to the fact that ABB manufactures various products such as MV

switch gears for the rail industry (one of the higher margin products within Power), we

think ABB should benefit from a re-focus on economic stimulus by the government.

■ Margin upside potential in Power Products – Contrary to consensus estimates we

believe that ABB’s Power Products division has stronger margin upside potential

towards the end of FY13 and in FY14 due to better pricing momentum on new orders

last fiscal year (average lead time 12-18 months) and an on-going focus on cost

20 February 2013

ABB (ABBN.VX) 25

savings. ABB has seen an easing in order pricing since Q212 following the

antidumping ruling in the US against aggressive price discounts of Korean transformer

manufacturers. While the pricing pressure is unlikely to fully disappear, we believe that

utilities, which are typically very conservative, might prefer well established,

technologically advanced players such as ABB given pricing will be a less critical

factor going forward (versus the period 2009-10).

Glance at ABB’s market position in Power

Despite the fact that in recent years Automation has become ABB’s major sales and profit

contributor, the company’s Power division continues to generate roughly a third of ABB’s

operating income. Divided into Power Products and Power Systems, the former

contributes the lion’s share to Power EBIT and we believe the share will stay at similar

levels going forward as we expect Power Product margins to rise while ABB’s initiative to

exit lower margin contracts (EPC projects) within Power Systems should lift profitability

levels.

Figure 61: Power generates 42% of group sales… Figure 62: …and 34% of group EBITDA in FY13 on CSe

Power Products

24%

Power Systems

18%

Automation58%

Power Products

26%

Power Systems

8%

Automation66%

Source: Credit Suisse estimates Source: Credit Suisse estimates

Within the company’s Power Products division, transformers generate about half of

divisional sales while relative to the total of PP and PS revenues it still accounts for c30%.

We assume that in countries such as the US the sales contribution from transformers is

higher compared to emerging countries such as China where the company has a stronger

exposure to high and medium voltage products (see section on China further below).

Within Power Systems ABB generates most of its sales from T&D substations which often

contain transformers as well as protection, switching and control equipment.

We highlight ABB’s end-market exposure in Power below, which shows a relatively

balanced portfolio in PP and higher skew towards Transmission within Power Services

leaving the total Power (PP & PS) with a larger exposure to the transmission end-market.

Figure 63: ABB – Global product split in Power circled showing products related to the Power Products division

Figure 64: ABB – Global end-market split in Power

29%

15% 14% 14%11%

9% 9%

0%

5%

10%

15%

20%

25%

30%

35%

Tra

nsfo

rmers

Substa

tion

s

Hig

h v

olta

ge

pro

ducts

Me

diu

m v

olta

ge

pro

ducts

Grid

Syste

ms

Pow

er

Gen

era

tion

Ne

twork

Ma

nag

em

ent

33%

15%25%

26%

20%

23%

28%

45%

36%

13%20% 16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Power Products Power Systems Total Power

Industry Distribution Transmission Generation Source: Company data Source: Company data, Credit Suisse research

20 February 2013

ABB (ABBN.VX) 26

Similar to the split by end-markets, ABB’s geographical split shows a higher dependence

on one market, i.e. Europe, and a pretty balanced split between the Americas and Asia.

The stronger exposure to Europe derives from an over proportionally higher Systems

business (40% in Europe). Given the superior growth potential in emerging markets,

particularly Asia, in the medium term we believe it is fair to assume that the revenue

contribution will rise from currently around 25% at the expense of developed markets,

particularly Europe.

Figure 65: ABB – Geographical sales split in Power Figure 66: Org. growth and margin development in Power

34%40% 37%

27% 20% 24%

30%

18%25%

9%22%

15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Power Products Power Systems Total Power

Europe Americas Asia MEA

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 2012

Gro

wth

& M

arg

ins

(%

)

EBIT margins - Power Products EBIT margins - Power Systems

Organic growth - Power Products Organic growth - Power Systems

Source: Company data Source: Company data

Drivers for higher US T&D spend going forward

While strongly growing electricity consumption in emerging countries continues to be a

material driver for higher T&D investment, the growth rates in developed markets have

slowed down over the past decade. Irrespectively of lower consumption levels we believe

there are various growth drivers, which will force utilities to increase their capex spend in

the medium term.

Figure 67: Electricity consumption in developed countries Figure 68: Electricity consumption in emerging countries

2009 2012E 2015E

Other Commercial sector Residential sector

Transport sector Industry sector

+1.2% p.a.

8.5tr GWh 8.9tr GWh 9.2tr GWh

2009 2012E 2015E

Other Commercial sector Residential sector

Transport sector Industry sector

+7.1% p.a.

9.0tr GWh

11.2tr GWh

13.6tr GWh

Source: EIU, Credit Suisse research Source: EIU, Credit Suisse research

Key growth drivers of T&D investment going forward

■ Reliability/age of the infrastructure – Based on our channel checks, we think the

main driver accounting for the majority of T&D investment going forward will be

reliability and age of the infrastructure. Given US T&D build had its biggest push in the

1960s, the average T&D equipment is over 30 years old with a number of transformers

even reaching a lifetime of more than 50 years. Industry experts describe the overall

20 February 2013

ABB (ABBN.VX) 27

T&D system as weak, hence the age of the installed base is likely to become more of

an issue going forward. History suggests that if utilities upgrade their equipment they

tend to upgrade the grid as well. As a result of severe blackouts in the past, utilities

also aim for a back-up of the largest transformer or transmission line. This often

triggers upgrades to the existing equipment as utilities aim to use more powerful

transformers to better absorb the electricity loss if equipment fails.

Figure 69: Age of installed capacity (OECD) Figure 70: US coal plant vintage

0 100 200 300 400 500 600

0 to 10 years

10 to 20years

20 to 30years

30 to 40years

40 to 50years

50+ years

GWCoal Gas Oil Nuclear

0

10

20

30

40

50

60

70

1940-1

944

1945-1

949

1950-1

954

1956-1

959

1960-1

964

1965-1

969

1970-1

974

1975-1

979

1980-1

984

1985-1

989

1990-1

994

1995-1

999

2000-2

004

2005-2

009

2010

GW

No Emission Control FGD&S CR FGD Only SCR Only

Source: Energy Information Administration Source: Energy Velocity, Company data, Credit Suisse estimates

■ Economic growth – While not as material for utilities to make an investment decision,

economic growth still has an influence of c30% on whether utilities upgrade their T&D

equipment, based on our channel checks. Given that GDP growth in the US is

currently forecasted to expand by 2% and 2.5% respectively over the next two years

(by our CS Economics team) we believe that economic growth will be supportive for

an investment decision yet not as significant as structural growth drivers (age of the

installed base; new energy sources). We would highlight that GDP growth tends to be

a more important driver for distribution investment given the closeness to the actual

consumer while transmission investment is mainly driven by utilities’ capex spend.

■ New energy sources – Given the shift towards more renewable energy usage

targeting lower carbon emissions, we believe that this could trigger a significant

investment into T&D equipment. Owing to the fact that power needs to be shifted into

other parts of the country, transmission and distribution equipment often needs to be

upgraded as well. The US currently targets to reduce carbon emission by 17% from

2005 levels by 2020, which could force higher T&D capex spend.

■ Monitoring – Utility companies have increasingly invested in equipment monitoring in

order to avoid system failures. Key monitoring items are the temperature and the load

of equipment such as transformers. In line with utilities aiming to improve the reliability

and efficiency, an increased investment into more intelligent equipment (e.g.

transformers) will play a major role to enable smarter grid applications such as better

outage detection, volt control or quality monitoring.

■ Regulation – The US Department of Energy released a new standard effective at the

beginning of 2010 which targets significantly higher energy efficiency of transformers.

The standard forces an energy reduction of approximately 30% which environmental

interest groups didn’t consider sufficient enough. We believe that the reduction of

carbon emissions and that new potential regulations will continue to be a key topic that

can drive higher T&D investment spend.

20 February 2013

ABB (ABBN.VX) 28

■ Recovery in the housing market – We believe that an on-going recovery in the

housing market could lead to higher investment in the distribution equipment market

as systems might need to be upgraded. Owing to the fact that transmission and

distribution spend tend to lag each other depending on which kicks off first, we believe

that a housing recovery could also trigger stronger transmission investment. The

distribution market appears to follow the housing market with roughly an approximately

three-year lag. Given the continued US housing recovery for the last 12 months we

think the distribution market could see investments kicking in throughout 2014.

Figure 71: Planned US transmission investment expected to accelerate in 2013

Figure 72: North American Electrical Infrastructure Investment estimates

8.6 8.99.5

10.3 10.211.1

13.5

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012E

Inv

estm

en

t (U

SD

bn

)

North American Electrical Infrastructure Investment Est.

• 260,000 miles of transmission in planning in North

America

• US annual transmission spending will average $12-16bn

between 2011 and 2015E vs. average annual spend of

$7.8bn from 2004-2009

• US annual distribution spending will average approx.

$29bn per year between 2010 and 2030 versus average

annual spend of approx. $26bn between 2000 and 2008

• Canadian utilities conservatively estimated to spend more

than $36bn in transmission over the next 20 years; $62bn

on distribution

Source: Edison Electric Institute, Business Information Group Source: Quanta Services, Platts, Wires & Brattle Group, EEI

ABB’s management has flagged in the past that order momentum in the US tends to follow

GDP growth quite well. We show the correlation in Figure 73 and argue that if industrial

production momentum should develop as forecast by our CS Economics team, then ABB

should continue to see strong order momentum within its US Power division.

Figure 73: Solid IP growth should continue to trigger strong order growth in US Power

5%

12%

18%

25%

32%

38%

45%

-1%

0%

1%

2%

3%

4%

5%

Q3

10

Q41

0

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13E

Q2

13E

Q31

3E

Q4

13E

AB

B U

S o

rde

r g

row

th (

%)

US

rea

l G

DP

gro

wth

(q

oq

%)

US GDP growth ABB Power order growth - US Source: Company data, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 29

Benefits from Chinese government stimulus

Improved order momentum should start contributing to sales growth

Accounting for c11% of group revenues, ABB’s China business does not provide investors

with the most significant Chinese exposure across the Capital Goods universe, yet China

plays a more important role for ABB than for its Electrical peers on average (c.7% of group

sales). Similar to the average on a group revenue level ABB’s Chinese business

generates more top line from its Automation business than from its Power division (see

Figure 75).

Figure 74: China accounts for c.11% of group revenues Figure 75: ABB’s sales split in China across the divisions

Europe38%

Americas27%

MEA11%

China11%

RoA13%

Automation58%

Power42%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

As we mentioned at the introductory part of this section, China has a different product

proposition than the Power division on average. ABB generates the majority of its Chinese

Power revenues from high and medium voltage products and not from transformers, which

account for c.50% of Power sales at group level.

Since the middle of 2011, ABB has seen a pick-up in order momentum, with growth rates

accelerating at a double digit rate since Q212. Given an average lead time of roughly 12

months for Power products, we think that ABB could see the positive sales impact

throughout 2013.

Figure 76: ABB generates the majority of Chinese sales in HV and MV rather than transformers in Power

Figure 77: Order growth in ABB’s Power division in China has accelerated

High voltage50%

Medium voltage

30%

Transformers20%

-80%

-60%

-40%

-20%

0%

20%

40%

Q11

0

Q21

0

Q31

0

Q41

0

Q11

1

Q21

1

Q31

1

Q41

1

Q11

2

Q21

2

Q31

2

Q41

2

Ord

er

gro

wth

(%

)

ABB Power order growth - China Linear trendline

Source: Credit Suisse estimates Source: Company data

Focus on energy efficiency / higher rail investment should support top-line growth

We believe that China’s focus on energy efficiency will be a significant driver of T&D

investment going forward. We note that as part of the 12th five-year plan the Chinese

government aims to reduce carbon emission standards by 17% relative to GDP between

2010 and 2015. This implies material investment into renewable energy sources such as

wind and less installation of new coal-fired power plants. We think that new energy

sources such as wind energy will lead to sizable investment into new grid connections,

which should allow China to transfer the energy captured to other regions within the

20 February 2013

ABB (ABBN.VX) 30

country. We think that this is particularly relevant for wind energy as the location of new

wind farms is dependent on optimal wind conditions rather than closeness to the

consumer.

We have highlighted several key topics from China’s 12th five-year plan in Figure 78 that

emphasise the potentially positive impact for ABB.

Figure 78: Key points of the Chinese 12th

five year plan most likely relevant for ABB Relevant topics in China's 12th five year plan

Topic Implications for ABB

Targeting 100GW installed wind power capacity

by 2015 implying 15GW of new capacity installed

each year; 200GW by 2020 (of which 30GW

offshore)

Higher government/utlity spending to improve grid connections and to drive

enhanced equipment performance. Conecting offshore wind farms to the grid

will be a key focus where China could rely on foreign technology

Limit installation of new coal fired power plants &

boost share of wind, solar and nuclear

A higher share of new energy sources often implies installations/upgrades to

the grid as energy needs to be transferred into different regions

Plan expects a doubling in consumer power

consumption per capita

Upgrades to the distribution system implying demand for transformers, circuit

breakers, switches, protection systems

Government aiming to cap electricity

consumption at 8% per year until 2015

Positive: Controlled consumption could make utility spending more

predictable hence easier to forecast for suppliers such as ABB

Negative: Limits the opportunity to grow for suppliers

Stengthen the construction of grid-connections More investment likely as well as potential upgrades to the current T&D

system

Innovation and development of new strategic

industries

Triggering more energy usage which will lead to an expansion of

transmission lines, distribution lines and power products in general

Source: International Energy Agency, China’s National Energy Administration, The BLOOMBERG

PROFESSIONAL™ service

Given the expected rise in government spend in a variety of end-markets particularly in

areas such as infrastructure (rail) and power generation (wind) we believe ABB is well

positioned to benefit from this uptick in spending levels. At this point we believe it is worth

mentioning that during our China industrial trip in November last year we had the

impression that companies that depended on government spending in the

abovementioned end-markets were talking much more positively about business

momentum.

Figure 79: ABB’s medium voltage business should benefit from higher rail investment in RMB millions, unless otherwise stated

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Inve

stm

en

t s

pe

nt

(Rm

b m

n)

Rail Equipment Rail Infrastructure

Source: Ministry of Rail, Credit Suisse estimates

While the investment in the rail sector has dropped significantly in 2011 following record

levels in 2010, the spending levels seem to have improved in 2012 and look set to expand

further in the current fiscal year.

20 February 2013

ABB (ABBN.VX) 31

ABB serves the railway sector across its divisions. From infrastructure investing, which

involves AC/DC substations or distribution transformers, to rolling stock such as traction

motors or turbo chargers, ABB provides a wide variety to its rail customers.

We believe it is worth pointing out that higher government investment in high-speed rail

could lead to margin expansion potential for ABB given its DC circuit breakers, which the

company produces for the high speed rail sector, account for one of the highest margin

businesses within Power Products.

Although the Chinese high-speed rail sector had a two-year setback following corruption

allegations and the fatal accident in Wenzhou triggering a more cautious approach by the

government, according to latest indications by the Ministry of Rail, China’s 2011-15 railway

programme will remain unchanged. The programme implies a doubling in the high-speed

network, reaching 18,000km by 2015.

Pricing trends for major projects have stabilised

Following a significant drop in pricing in 2010 in all major product categories, we believe

the pricing trends for major projects have stabilised over the last two years. A pick-up in

economic and industrial production momentum in the medium term (as expected by our

economists) should be supportive for pricing as it limits the drive for market share gain.

Figure 80: Pricing trend of major projects in HVAC

Price trend of major projects in HVAC (220-500kv)

Transformers (Rmb/kva) 2009 2010 2011 2012

220kv 45 33 35 35

500kv 36 22 23 24

GIS (Rmb'000/set) 2009 2010 2011 2012

220kv NA NA 1450 1480

GCB (Rmb'000/set) 2009 2010 2011 2012

220kv 350 220 205 210

500kv 1030 760 765 750 Source: Credit Suisse research

We show market share trends in China for major product categories in Figure 81 below

and as we can see the T&D product market is quite fragmented. While ABB seems to

have lost market share in gas insulated switchgear and generator circuit breakers last

year, most likely at the cost of local competitors, its transformer market share has

remained stable. We believe that part of the market share loss can be explained by

weaker economic momentum in FY12, where customers might have chosen a cheaper

potentially lower quality local product rather than a technology-advanced foreign product.

Figure 81: Market share trends amongst different product categories in Power Products GIS=Gas insulated switchgear; GCB=Generator circuit breakers

Market share in China

Transformers 2010 2011 2012 GIS 2010 2011 2012 GCB 2010 2011 2012

TBEA 27% 26% 25% China XD 23% 18% 24% Alstom 19% 18% 20%

China XD 15% 13% 14% Shandong Taikai 15% 19% 16% Shangdong Taikai 10% 12% 18%

Tianwei Baobian 7% 11% 8% Pinggao Electric 17% 22% 14% ABB 18% 20% 15%

ABB 4% 6% 6% Shenyang Electric 14% 14% 11% Siemens 15% 15% 14%

Siemens 5% 3% 6% Beijing Switchgear 6% 5% 8% Pinggao Electric 5% 8% 10%

Changzhou Toshiba 6% 10% 2% ABB 5% 6% 1% China XD 15% 13% 8%

Others 36% 31% 39% Pinggao Toshiba 4% 2% 1% Others 18% 14% 15%

Others 16% 14% 25% Source: Credit Suisse research

20 February 2013

ABB (ABBN.VX) 32

Stronger margin upside potential in Power Products

We believe that ABB could see an even stronger increase in its Power Products margin

than consensus estimates are currently implying. We argue as follows:

(1) There should be a positive margin impact towards the end of FY13E and in FY14E

from better pricing on new orders mid FY12, particularly following the antidumping

ruling in the US last July; and

(2) The on-going cost savings priority in Power should support profitability levels.

Positive margin impact towards the end of FY13E and in FY14E from better pricing

on new orders mid-2012, particularly following the antidumping ruling in the US

Following negative transformer pricing of c6-7% for new PP orders in 2010, we have seen

an improved pricing development in the range of negative 2-3% on orders in the recent

quarter. Given the lead time of roughly 12-18 months for Power Products equipment, sales

were still impacted from negative 5-6% in the last quarter but the positive order pricing

since the middle of last year will in our view start to have a positive impact on margin

towards the end of FY13 and in FY14. We think that consensus is currently not reflecting

the combination of an on-going strong cost savings focus and positive margin impact from

less pricing pressure in 2012.

Figure 82: Illustration of the lag between order and sales pricing pressure in PP

2010 2011 Q112 Q212 Q312 Q412

ABB pricing pressure on PP Orders (CSe) ABB pricing pressure on PP Sales (CSe)

Source: Credit Suisse estimates

The following key factors will be margin-supportive, in our view:

■ Antidumping ruling (July 2012) – Driven by sizable transformer price discounts by

Korean producers, the profitability of ABB’s Power Products business deteriorated

between 2009 and 2012 (see Figure 83). The US Department of Commerce has

argued that Korean producers/exporters Hyosung Corporation and Hyundai Heavy

Industries have sold large power transformers in the US at dumping margins between

14.95% and 29.04% vs. an average of 22% for all other Korean producers. As a result,

imports of liquid dielectric large power transformers from South Korea had been

required to deposit dumping duties since February 2012. The ruling will hold for a

minimum of five years.

While the antidumping ruling only affects the Korean companies, we don’t see a

significant risk that other foreign players will flood the market with materially

discounted equipment. Given that the manufacturing costs of transformers such as

20 February 2013

ABB (ABBN.VX) 33

raw materials (copper, steel) as well as labour and shipping costs are relatively easy

to track, we think that the Department of Commerce will monitor the pricing situation

closely to protect local manufacturers.

Figure 83: ABB’s Power Product EBIT margin (CS and consensus) vs. SPX’s medium transformers margins

0%

4%

8%

12%

16%

20%

24%

28%

12%

13%

14%

15%

16%

17%

18%

19%

2007 2008 2009 2010 2011 2012 2013E 2014E

SP

X m

arg

in (

%)

AB

B m

arg

in (

%)

EBIT margin - SPX Medium Transformers (CSe)

EBIT margin - ABB PP (CSe)

EBIT margin - ABB PP (Cons) Source: Company data, SME, Credit Suisse estimates

■ Technological advantage/importance of delivery – Following the antidumping

ruling, we believe that criteria such as technological advantage, quality and service will

play a more important role going forward. According to our channel checks,

companies such as ABB seem to have a competitive advantage with respect to

perceived reliability or lower electricity loss ratios compared to Asian players. As a

lower loss ratio saves costs, the pricing argument becomes less of an issue if there is

a clear technological advantage. We believe this could improve ABB’s pricing

development going forward.

In addition, the dependence on exact delivery of the equipment pays a major role in

the supplier decision-making by utilities. Given that players such as ABB have a long

and established manufacturing base in the US, we think utilities might be more prone

to pick them in this respect over new competition entering the market.

■ Utility conservatism – Utilities tend to be very conservative in their decision-making,

not least in their choice of supplier. When price discounts in the range of c.15-30%

enter the market, we think that even the most conservative company might consider

changing supplier. However, given that price is much less of an incentive in the current

market, this is another reason we would expect utilities to opt for established players

such as ABB.

■ US equipment/systems very customised – Industry experts describe the US T&D

systems being used as more customised compared to the equipment/systems used in

Europe. We believe that this materially limits the threat from new entrants as products

need to be much more specialised depending on the customers.

■ IP momentum could keep raw material prices at ease – History indicates that raw

material prices tend to correlate well with industrial production momentum. Given the

fact that our economists expects industrial production to improve yet not rise

materially, we could see a more stable raw materials development going forward

which should also lead to more stable transformer pricing.

20 February 2013

ABB (ABBN.VX) 34

Figure 84: US transformer prices move in line with prices of its underlying commodities

-70%

-35%

0%

35%

70%

105%

140%

-10%

-5%

0%

5%

10%

15%

20%

Jun

-08

Oct-

08

Fe

b-0

9

Jun

-09

Oct-

09

Fe

b-1

0

Jun

-10

Oct-

10

Fe

b-1

1

Jun

-11

Oct-

11

Fe

b-1

2

Jun

-12

Oct-

12

Fe

b-1

3

Infl

ati

on

(%

yo

y)

PP

I (%

yo

y)

US PPI - Transformers and Power Regulators CS Raw Material Inflation Index

Stabilisation

Source: Thomson Reuters, The BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

On-going cost savings priority in Power should support profitability levels

We believe that ABB will continue to focus the majority of its cost savings on its Power

division, similar to what we have seen in 2012. We think that the market is questioning

whether ABB will be able to cut costs to a similar degree to what we have seen since 2009

($4.1bn in 2009-11, $1.1bn in 2012). Yet, we argue that in addition to the annual target of

c.$1bn savings per annum related to global sourcing, footprint adjustments and

operational efficiency improvement, ABB detected a further $2bn of opex cost savings

opportunities in 2011 ($550m saved at the time) and has said it expects more than $300m

opex savings in FY13. We believe this should support margin levels going forward.

Figure 85: ABB – Cost savings evolution Cost savings as a percentage of cost of sales

Figure 86: Cost savings split in 2012

3.50%2.70% 2.30% 2.30%

1.70%2.70%

0.20% 0.20%

1.30%1.40%

1.60% 1.60%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2009 2010 2011 H1 2012

Sourcing Global Footprint OPEX

tTarget range: 3-5%

Automation35%

Power58%

Indirect sourcing

7%

Source: Company data, Credit Suisse estimates Source: Company data

We highlight ABB’s cost savings by type and value in Figure 87 below.

Figure 87: Cost savings by type and value

Professional SCM 15-20% > 3,000 buyers active

Re-sourcing 10-15% Emerging market, best cost sourcing

Collaboration & consolidation 15-20% Steel procurement and indirect materials

Global footprint Restructuring 5-15% Self-sufficient trading zones

Operational excellence OPEX projects 40-50% Design-to-cost

3-5% COS

Supply chain

Total

Savings

Source: Company data, Credit Suisse research

20 February 2013

ABB (ABBN.VX) 35

In Figure 88 we show the quarterly impact of pricing and cost savings as a percentage of

sales, as provided in ABB’s profit bridge. In 2010 when the pricing impact from orders

taken in 2009 hit the income statement, pricing pressure was c.4-5% of sales. If we look at

the 2011/12 period, the range of pricing pressure has been between 2-3%.

Figure 88: Pricing impact relative to cost savings in USD millions, unless otherwise stated

-50

0

50

100

150

200

250

300

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

Net

sav

ing

s (

US

Dm

)

Sav

ing

s /

Pri

ce e

rosio

n (

%)

Productivity savings Product price erosion (negative)

Net savings (Savings - Price erosion)

Source: Company data

20 February 2013

ABB (ABBN.VX) 36

Scope for acquisitions Following ABB’s acquisitions of Baldor for $4.2bn in FY11 and Thomas and Betts for

$3.9bn in FY12, the company’s strong net cash position in 2009/10 has shifted to a net

debt position of $1.6bn (on simple net debt) by the end of FY12 (see Figure 89). As a

result, we believe that acquisitions of a similar size to Baldor and T&B are less likely in the

short term. We also note that management recently flagged on the Q4 earnings call that

ABB does not target large deals in the short term. However, we view size as a less critical

issue if a potential deal makes strategic sense. In terms of potential uses for cash, we

believe a continued focus on expanding market share in selected areas (PLC’s, Oil & Gas,

Service) via targeted M&A would generally be more attractive than share buybacks or

special dividends.

ABB has an official net debt/EBITDA target range of 1.5-2.0x. Despite more limited

balance sheet strength at present, we estimate that if it were to use its leverage potential

(within guidance range) it would have capacity for $10-14bn of acquisitions in FY13 (see

Figure 89).

Figure 89: ABB – Excess capital from re-leveraging in USD millions, unless otherwise stated

Excess capital from re-leveraging 2010A 2011A 2012A 2013E 2014E 2015E

Total cash and equivalents 8,610 5,767 8,481 10,087 11,942 13,657

Total debt 2,182 3,996 10,071 10,071 10,071 10,071

Simple net debt (cash) excl. minorities (ABB calc.) -6,428 -1,771 1,590 -16 -1,871 -3,586

Net debt/EBITDA -1.3x -0.3x 0.3x 0.0x -0.2x -0.4x

Pension underfunding 700 1,000 1,800 1,800 1,800 1,800

Net debt (cash) incl. pensions excl. minorities -5,728 -771 3,390 1,784 -71 -1,786

EBITDA 4,824 6,014 5,555 6,832 7,636 8,193

Financial headroom

@ 1.5x 10,265 13,326 15,875

@ 2.0x 13,681 17,144 19,971 Source: Company data, Credit Suisse estimates

If we pencil in the financials from a theoretical acquisition into our scenario, and assume

management leverages the business to the top end of its target (2.0x), we calculate $18bn

of capacity in 2013E. Assuming ABB paid 9x for an acquired business (against ABB

trading on 8.5x 2014E EV/EBITDA currently) and was charged interest equivalent to 4% of

incremental gross debt would imply around 30% earnings uplift to our forecasts. Given

ABB’s strong commitment to maintaining its ‘single A’ credit rating, we view any deals

larger than this as unlikely.

Figure 90: M&A scenarios in USD millions, unless otherwise stated

Base case pre-M&A 2013E 2013E 2013E

Net debt -16 -16 -16

EBITDA 6,832 6,832 6,832

Net debt / EBITDA ratio 0.0x 0.0x 0.0x

Acquisition strategy

Extra debt 3,500 12,000 18,000

Incremental EBITDA (assuming 9x multiple paid) 389 1,333 2,000

Cost of deals (4% interest rate on extra debt) 140 480 720

Incremental net income (assuming tax rate of 27%) 182 623 934

Scenario post-M&A

Net debt 3,484 11,984 17,984

EBITDA 7,221 8,166 8,832

Net debt / EBITDA ratio 0.5x 1.5x 2.0x

Incremental Net income uplift 5% 17% 25% Source: Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 37

Inorganic sales growth target could imply $8-12bn

acquisition spend (FY13-15E)

Having discussed ABB’s potential for re-leveraging its business, we want to take a closer

look in this section at the implications of management’s revenue growth targets to 2015. In

addition to an organic sales growth target (7-10% CAGR), ABB has said it aims for 3-4%

inorganic revenue growth per year from 2010 until 2015. We have applied ABB’s growth

rate targets from 2010 onwards (ignoring the reported figures in 2011 and 2012 and

acquisitions such as Baldor and T&B) to get a sense of the annual acquisition potential

implied by the company’s targets. If we apply an EV/Sales multiple of 2.2x (paid on

average for Baldor and T&B), this would imply potential acquisition spend of $8-12bn over

the next three years.

Figure 91: ABB’s stated target for inorganic revenue CAGR from 2010 until 2015E

Figure 92: ABB’s financial acquisition criteria

$32bn

$38bn

2010 2011 2015EOrganic growth Inorganic growth

Organic

3 - 4%potential impact

7 - 10%CAGR

Inorganic

• Cash returns at or above WACC within 3 years

• NPV positive (DCF at WACC + internal hurdles)

• Conservative net debt/EBITDA and gearing ratios

• Maintain single A credit rating

Source: Company data Source: Company data

We highlight our analysis below, estimating the impact from ABB’s inorganic sales growth

target on earnings as well as the potential sales contribution. We calculate a revenue

contribution in the range of $3.8-5.6bn over the next three years.

Figure 93: Potential EPS accretion if ABB meets its own top-line growth targets – we believe consensus does not model future inorganic growth, hence ours and street numbers could turn out to be quite conservative in US$ millions, unless otherwise stated

Revenues 2013E 2014E 2015E

Consensus (IBES) 39,336 41,495 43,474 46,316

Absolute change 2,159 1,979 2,842

Growth (yoy) 5% 5% 7%

Lower guidance range

CAGR: 7% organic; 3% inorganic

Revenues 31,589 42,045 46,249 50,874

Organic change 2,676 2,943 3,237

Inorganic change 1,147 1,261 1,387 3,796

EPS accretion potential to CS numbers -2% 1% 5%

Mid guidance range

CAGR: 8.5% organic; 3.5% inorganic

Revenues 31,589 44,380 49,706 55,671

Organic change 3,368 3,772 4,225

Inorganic change 1,387 1,553 1,740 4,680

EPS accretion potential to CS numbers 3% 10% 16%

Upper guidance range

CAGR: 10% organic; 4% inorganic

Revenues 31,589 46,800 53,353 60,822

Organic change 4,105 4,680 5,335

Inorganic change 1,642 1,872 2,134 5,648

EPS accretion potential to CS numbers 9% 18% 27%

2010 2013E 2014E 2015EAcq.

potential

Acq.

potential2010 2013E 2014E 2015E

2010 2013E 2014E 2015EAcq.

potential

Source: Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 38

Below we show ABB’s low leverage ratio, which should allow sufficient balance sheet

capacity in the event of acquisitions.

Figure 94: ABB has a low leverage ratio versus its peers in x, unless otherwise stated

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Assa

Ablo

y

Sie

me

ns

Als

tom

Schn

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er

Leg

ran

d

Sa

nd

vik

Me

tso

Ph

ilips

SK

F

Ele

ctr

olu

x

Atlas C

op

co

AB

B

Alfa L

ava

l

Ge

beri

t

Ko

ne

Schin

dle

r

Ge

ari

ng

ra

tio

, 2

01

3E

(x

)

Source: Company data, Credit Suisse estimates

Acquisition focus should continue to be on faster

growing Automation markets In terms of end-markets, we believe that ABB will focus mainly on its faster growing

Automation division to support the shift away from more price-competitive Power markets

– a scenario we have already seen in recent years as highlighted in Figure 95, which

shows that ABB has spent around 75% of its acquisition spend on its Automation

business. We highlight potential Automation targets later in this report.

Figure 95: Between 2008 and H112 the majority of M&A spend was concentrated on the Automation business…

Figure 96: …with a strong regional focus on the Americas due to the sizable Baldor and Thomas & Betts deals

40%35%

25%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

DM & PA LP Power

Sp

lit

of

ac

qu

isit

ion

sp

en

d (

%)

Automation: 75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Americas Europe Asia MEA

Sp

lit

of

ac

qu

isit

ion

sp

en

d (

%)

Source: Company data Source: Company data

ABB’s unique market position in Automation

In Figure 97 we show ABB’s global market position in Automation with respect to size

(revenues) and profitability (EBIT margin) versus other Automation players. The graph in

our view demonstrates the rarity of size in this market, with only three players (Siemens,

ABB and Emerson) reaching significant scale. While companies naturally tend to aim for

the top right corner of the graph (higher sales, higher margins) this becomes increasingly

difficult once companies have reached the size of ABB. As a result, we believe the key

focus will tend to be on market share gains without losing profitability.

20 February 2013

ABB (ABBN.VX) 39

Figure 97: Automation Sales vs. EBIT Margin (2012) %, unless otherwise stated

Ametek

Emerson

SMC

Kennametal

Rockwell Automation

ABB

Alfa Laval

GEA

IMI Plc

Rotork

Sulzer

Airtac

Fanuc

Hiwin

Keyence

Siemens

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

- 5,000.0 10,000.0 15,000.0 20,000.0 25,000.0

Automation Sales (USDm)

EB

IT M

arg

in, 2

01

2 (

%)

Source: Thomson Reuters, Credit Suisse research

ABB will likely focus on vertical convergence

Automation vendors have typically focused on one type of control product or one type of

instrument in either discrete or process automation, hence the concentration of companies

of a similar size in Figure 97. We think industrial automation will see an increase in both

horizontal and vertical integration. By horizontally integrated, we mean they compete

globally in both the discrete and process automation markets and by vertically integrated,

we mean a broad offering of instruments and control solutions (high-level enterprise

control systems, low-level instruments, and products in between). Given ABB is already

operating in both discrete and process automation, we believe management will focus on

vertical integration in both markets.

Figure 98: Automation convergence axes

Our view how convergence will take place

Enterprise-level controls

Factory instrumentation

Process Automation Factory Automation

Source: Credit Suisse research

Figure 99: M&A relating to vertical convergence in the Automation market Date Company Target Description

Nov-12 Siemens LMS International PLM

Jun-12 Honeywell INNCOM Software-based energy management solutions

Jan-12 Siemens Ruggedcom Ethernet

Jan-12 Misubishi Messung PLC, HMI

Nov-11 Siemens Vistagy CAD software

Oct-11 Misubishi ICONICS SCADA (20% equity stake)

Sep-11 Siemeens Active SA MES

Jan-11 Rockwell Hiprom Integration software and consulting design

Apr-10 Invensys Skelta Software Business process management software

Jan-07 Siemens UGS PLM Source: Company data, Credit Suisse research

20 February 2013

ABB (ABBN.VX) 40

Figure 100: Discrete Automation players Figure 101: Process Automation players

DHR

EMR

ROK

WEG

ABB

Schneider

Kuka

Siemens (D)

Siemens (IA)

Krones

Fanuc

Keyence

Mitsu Elec

Omron

SMC

THK

Yaskawa

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0% 10% 20% 30% 40% 50%

Reven

ues,

2011

($m

)

2011 EBIT Margin (%)

ABB

Alfa Laval

Emerson

Gea

HOLI

Invensys

SPX Corp

Yokogawa

E+H

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24%

Reven

ues,

201

1 (

$m

)

2011 EBIT Margin (%)

Source: Company data Source: Company data

Potential large Automation deals that might make

strategic sense

Although ABB’s CFO made clear in an investor meeting last December in Zurich that

management would not target sizable deals in the short term, we think that if the right deal

makes strategic sense that size will be a less critical issue. We would expect ABB to take

a closer look at financial metrics such as return generation (as part of the company’s

strategy to lift cash returns), potential market-share gains and/or geographic

additions/expansions to complement product offerings.

ABB has mentioned in previous presentations that it wants to expand further into the

globally faster growing discrete automation end-markets (particularly PLC’s); however, we

wouldn’t rule out further deals within process automation, particularly related to the Oil &

Gas end-markets.

We see three main reasons why ABB might consider a large deal in Automation in the

medium term:

(1) The global Automation market (process and discrete) is not overly fragmented, with

the top five players already accounting for a combined 56% and 83% market share in

process and discrete automation, respectively. Consequently, we believe sizable

players like ABB might consider a larger acquisition particularly in business areas the

company could not historically establish a sizable market position in, such as certain

subsectors of factory automation. We believe the company might specifically target

inorganic growth in factory automation; as highlighted above, market shares are

materially higher than in process automation, making it a harder task to gain market

share.

(2) We believe further convergence across automation will continue (seen recently with

Siemens buying LMS). As we highlight in this report, we think that vertical

convergence tends to be more challenging given the limited synergy overlap between

process and factory automation. We think, however, that players (such as ABB) which

already have a product offering in areas such as discrete automation might consider

buying a larger player in order to more quickly ramp up market share and enhance the

solutions offering for the client. As shown above in Figure 99, we have already seen

several examples of horizontal convergence over the last few months/years.

(3) Lastly, we think that large players such as ABB might try to defend their strong market

position given that the limited fragmentation compared to other industries could allow

smaller players such as Emerson (number two market share in DCS) to significantly

enhance their product offering and become a much bigger threat to ABB.

20 February 2013

ABB (ABBN.VX) 41

Assuming that ABB did decide to undertake another sizable deal, we think it might find

these companies attractive: Invensys (OM), Rotork or Rockwell Automation.

■ Invensys’ Operations Management (OM): We believe that Emerson’s highly

preliminary takeover approach last summer (see Invensys’ statement on 21 June

announcing that discussions with Emerson were no longer ongoing) means that peers

such as ABB will have also taken a closer look at this business. While the statement

didn’t disclose which part of Invensys Emerson was interested in, we would expect it

to have been Operations Management rather than the Controls or the Rail business.

Furthermore, we note that the acquisition of Invensys’ Rail business by Siemens in

November 2012 eliminated the pension liability, which could make Invensys OM more

attractive to Automation players. In our view, the strategic rationale for such a deal

could come from ABB’s greater exposure to software components, which would seem

to complement Invensys’ large installed base well. Figure 102: Invensys Operations Management – End-market split (FY12) in %, unless otherwise stated

Figure 103: Invensys Operations Management – Sales by type (FY12) in %, unless otherwise stated

Oil & Gas33%

General Industrial

27%

Utility14%

Discrete Manufacturing

7%

Petrochemical5%

Other14%

Systems60%

Equipment22%

Software18%

Source: Company data Source: Company data

We show below a summary of Invensys’ Operations Management business.

Figure 104: Invensys Operations Management summary Control & Safety Advanced Applications Equipment

Portion of IOM Sales 62% 21% 17%

Route to market Direct salesDirect/indirect sales & via

distributors/systems integrators

Direct/indirect sales & via

distributors

Competitors

Honeywell, Emerson,

Yokogawa, ABB, Areva

(nuclear), Rockwell, Siemens

Siemens, Rockwell, Honeywell,

AspenTech

Endress & Hauser, Emerson,

Yokogawa, ABB

Current OP BT MarginBrownfield generally higher

than greenfield

Higher - driving margin

expansion with mix shift

Volume dependend -

recovered in FY2010/11

IOM Relative Market Position

Leader in specific industries

(e.g. oil & gas, power) and

solutions (e.g. Triconex)

Strong leader in specific

industries/solutions (e.g.

Mobility; SmiSci-Esscor;

Wonderware)

Niche positions in some

industries

Key Product/ Brand NamesFoxboro I/A Series DCS,

Triconex

Avantis; IMServ; Intela Trac;

SmiSci-Esscor; Skelta;

Wonderware

Eurotherm; Foxboro

Source: Invensys CMD Feb’11

Figure 105 shows how the profitability for companies that equip plants with products such

as a Distributed Control Systems (DCS) increases each year due to stronger service

requirements. Controls products such as a DCS are vital for the plant’s operation and the

shift to a different provider can often be complex, hence plant operators tend to invest in

servicing critical parts.

20 February 2013

ABB (ABBN.VX) 42

Figure 105: The value of replacement profitability in process automation – importance of servicing the installed base in %, unless otherwise stated

0

2

4

6

8

10

12

14

16

18

20

1 2 3 4 5 6 7 8 9 10 11

Pro

fita

bil

ity (

%)

Period

Initial Investment Additional Investment Life-cycle profit %

Source: Company data Credit Suisse research

■ Rockwell Automation: In line with our expectation of more vertical convergence

within Automation, particularly related to players such as ABB, our US Capital Goods

team has highlighted that companies such as Rockwell Automation look increasingly

attractive (see Global Industrial Automation – The next growth phase, 14th August

2012). We note that ABB’s management has expressed interest in further expanding

its PLC product offering and that Rockwell has the second highest PLC market share

with 22% after Siemens. We also note that the PLC market is highly concentrated,

with the top five players owning c83% market share which could make it difficult for

ABB to grow this business organically.

Rockwell operates in the discrete and process automation markets, competing with

players such as Siemens, ABB, Schneider, Honeywell or Emerson. The company has

a high exposure to heavy industries which includes end-markets such as oil and gas,

metals and mining or pulp and paper. Its consumer business is exposed to food and

beverage markets as well as home and personal care and transportation markets

including automotive and tire manufacturing. Rockwell operates globally, yet more

than half of revenues are derived from its home market in North America and c.20%

and c.15% are generated in Europe and Asia, respectively.

Figure 106: Rockwell Automation–End-market split (FY12) in %, unless otherwise stated

Figure 107: Rockwell Automation–Sales by type (FY12) in %, unless otherwise stated

Control Products & Solutions

57%

Architecture & Software

43%

Heavy Industry50%

Consumer32%

Transportation13%

Other5%

Source: Company data Source: Company data

20 February 2013

ABB (ABBN.VX) 43

■ Rotork: In our note, Negative uncertain times, 1st October 2012, we analysed potential

M&A opportunities within the UK Capital Goods sector based on criteria such as

market-implied CFROI. One of our main conclusions was that Rotork screened

particularly well as a potential M&A candidate. Similar to Invensys, Rotork operates

within the process automation market, servicing oil and gas, power, water, marine and

mining companies with flow control products such as electric, pneumatic and hydraulic

valve actuators, gearboxes and precision control instruments. Rotork generates more

than a third of its revenues each from Europe (ex UK) and rest of the world, around

20% from the US and the remaining 20% almost equally split between the UK and

Americas (ex US). Owing to the sizable exposure to the US and ABB’s stating in

presentations its desire to expand its Oil & Gas exposure, we believe that Rotork could

be attractive for Automation players such as ABB, fuelled by the potential benefit from

the shale gas boom in the US (see the Credit Suisse Connection Series report “The

Shale Revolution”, 13 December 2012).

Figure 108: Rotork– End-market split (FY11) in %, unless otherwise stated

Figure 109: Rotork– Sales by type (FY11) in %, unless otherwise stated

Oil & Gas53%

Power20%

Water18%

General industrial

9%

Controls63%

Fluid Systems27%

Gears10%

Source: Company data Source: Company data

20 February 2013

ABB (ABBN.VX) 44

Valuation We value ABB using an average of our SOTP, DCF and Credit Suisse HOLT analysis and

derive a target price of SFr26. We believe the market is materially underestimating the

company’s strong return profile, particularly compared to the rest of the sector. If we use

the HOLT DCF based on the mid-range of ABB’s group targets for sales growth and

profitability, we derive a CFROI of 16% over the next five years, translating into a share

price of SFr27.50 (30% upside potential). We note that the market is currently pricing

ABB’s CFROI to fade to 10% over the next ten years which, should this happen,

represents an 8-year low.

Figure 110: Valuation summary in SFr, unless otherwise stated

Valuation summary

Sum of the parts 25

Discounted cash flow 26

Credit Suisse HOLT 26

Average 26

Current price 21.0

Upside potential 24% Note: the Credit Suisse HOLT figure of SFr 26 is based on our ABB estimates

Source: Credit Suisse estimates, Credit Suisse HOLT

Sum of the parts

In our sum of the parts valuation we use competitors’ multiples based on EV/EBITA. We

prefer EV/EBIT to a PE multiple due to the different taxation and balance sheet qualities of

the individual businesses. Our peer companies are mainly globally operating based in

various countries across Asia, Europe and the US. We provide a description of the

companies we used per division in the Appendix of this note in Figure 183.

Figure 111: Sum of the parts (SOTP) in USD millions, unless otherwise stated

SOTP (FY13E)

US$m EBITA Multiple Fair value

Discrete Automation & Motion 1,751 11.2 19,685

Process Automation 1,011 10.1 10,252

Low Voltage Products 1,343 11.5 15,500

Power Products 1,559 11.5 17,989

Power Systems 529 10.5 5,579

Corporate, Eliminations -503 9.5 -4,779

Firm value of continuing operations 5,691 64,226

Simple net debt -16

Other items -3,331

Net debt + other EV components -3,347

Equity value 60,878

Number of shares 2,295

Equity value per share in US$ 27

Equity value per share in SFr 25 Source: Thomson Reuters, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 45

Discounted cash-flow

We use an EVA-based discounted cash flow model to derive ABB’s fair value. The model

is mainly driven by capital growth (based on expected sales growth and turns) and

expected return on invested capital (ROIC). We apply a WACC of 9% and a terminal

growth of 2% consistent across our coverage.

Figure 112: EVA ®-based DCF model in USD millions, unless otherwise stated

EVA® DCF MODEL 2011A 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Sales 37,990 39,336 42,827 45,664 48,860 52,280 55,940 59,856 64,046 68,529 73,326

Growth 20.3% 3.5% 8.9% 6.6% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

CS Adjusted EBITA 5,310 4,754 5,771 6,454 5,739 6,177 6,649 7,157 7,704 8,294 8,929

Margin 14.0% 12.1% 13.5% 14.1% 11.7% 11.8% 11.9% 12.0% 12.0% 12.1% 12.2%

Tax rate 27.5% 27.0% 27.0% 27.0% 27.4% 27.9% 28.3% 28.7% 29.1% 29.6% 30.0%

NOPAT 3,849 3,470 4,213 4,711 4,165 4,456 4,768 5,102 5,459 5,841 6,250

ROIC 23.2% 15.5% 16.6% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0%

Capital charge @ 9% 1,212 1,752 2,252 2,296 1,715 1,835 1,963 2,101 2,248 2,405 2,574

EVA 2,637 1,718 1,960 2,416 2,450 2,621 2,805 3,001 3,211 3,436 3,676

Discounted EVA 25,166 1,799 2,035 1,894 1,860 1,827 1,794 1,762 1,731 26,799

NPV 64,546

Shares in issue 2,295

Net Debt 3,347

Equity Value 63,321

Share Valuation (USD) 28

Share Valuation (SFr) 26 Source: Company data, Credit Suisse estimates

Figure 113: ABB has historically generated above-average returns as well as non-acquired IC growth between 2004 and 2011

Alfa Laval

Assa Abloy

Atlas Copco

Electrolux

Geberit

Kone

Metso

Sandvik

Schindler

SKFABB

Alstom

LegrandPhilips

Schneider

Siemens

Sector average

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28%

No

n-a

cq

uir

ed

IC

gro

wth

(2004

-11)

Average ROIC (2004-11)

Source: Company data, Credit Suisse research

Partly driven by a low starting base on invested capital, ABB delivered a combination of

above-sector-average ROIC as well as strong invested capital growth between 2004 and

2011. We believe it might be quite difficult for ABB to repeat the peak ROIC levels seen

between 2007 and 2009.

20 February 2013

ABB (ABBN.VX) 46

Figure 114: NOPAT and sales 2004-2011 CAGR by company

Figure 115: ABB has seen the second highest peak returns historically in the sector

-5%

0%

5%

10%

15%

20%

25%

30%A

lsto

m

AB

B

Ko

ne

Leg

ran

d

Alfa L

ava

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Atlas C

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Schn

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Se

cto

r avg

Me

cha

nic

als

Assa

Ablo

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Sie

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SK

F

Sa

nd

vik

Ge

beri

t

Schin

dle

r

Ph

ilips

Ele

ctr

olu

x

CA

GR

(%

)

NOPAT CAGR (2004-11)

Sales CAGR (2004-11)

0%

5%

10%

15%

20%

25%

30%

35%

40%

AB

B

Alfa L

ava

l

Als

tom

Assa

Ablo

y

Atlas C

op

co

Ele

ctr

olu

x

Ge

beri

t

Ko

ne

Leg

ran

d

Me

tso

Ph

ilips

Sa

nd

vik

Schin

dle

r

Schn

eid

er

Sie

me

ns

SK

F

Se

cto

r ave

Me

cha

nic

Ele

ctr

ica

ls

RO

IC (

%)

2012E-2021E Priced In

2004-2011 Historic Average

Peak

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates

ABB through the Credit Suisse HOLT lens

ABB screens as a contrarian in HOLT as (i) it continues to deliver high cash flow returns

(CFROI) and (ii) its valuation shows upside potential on the HOLT default DCF but (iii) its

CFROI revisions remain negative.

Operations/corporate performance

Despite competitive and cyclical pressures, ABB remains a relatively well-run business,

with low year-over-year CFROI volatility as both its margins and asset turns have been

largely rangebound since 2007. This has allowed ABB to maintain its CFROI within the

14-16% range for the past five years (Figure 116). Achieving this level of returns is

impressive and puts ABB firmly within the top decile of Global Capital Goods companies

and at the top end of the Electrical Equipment industry in Europe (Figure 117).

With management using a HOLT-friendly CROI (Cash Return on Invested Capital) and

continuing to focus on maintaining its EBITDA margins, ABB is forecast to deliver a CFROI

of c16% for the next two years. The company is targeting CROI exceeding 20% by 2015.

Figure 116: ABB’s HOLT Relative Wealth Chart Figure 117: ABB CFROI vs. European Electrical Equipment

Source: Credit Suisse HOLT

https://holtlens.credit-suisse.com/dal/LNNBBKQ

Source: Credit Suisse HOLT

https://holtlens.credit-suisse.com/dal/LO5IRTT

20 February 2013

ABB (ABBN.VX) 47

ABB’s ability to maintain high and stable CFROI levels has resulted in it qualifying for a

HOLT eCap (empirical competitive advantage period) which extends the fade window in

HOLT from the standard 5 years out to 10 years. eCaps are awarded to companies that

have historically earned CFROI levels well above the cost of capital and whose returns

have faded more slowly than those of the average company. Globally, only 7% of

companies in the HOLT database qualify for this quantitatively driven award.

Valuation

On the HOLT default DCF, ABB shares show just over 40% upside potential, with the

market pricing ABB’s CFROI to fade to 10% over the next 10 years which, should this

happen, represents an 8-year low. Alternatively, using the HOLT DCF to model in the mid-

range of ABB’s group targets for sales growth of 8.5% p.a. and for operational EBITDA of

16% (September 2012 – Capital Markets Day) results in a CFROI of c16% over the next 5

years. This translates into a share price of nearly 27.50 SFr/share, or 30% upside potential.

Figure 118: Relative Wealth Chart (10yr fade window) Figure 119: ABB’s 2015 Targets: 30% upside in HOLT

Source: Credit Suisse HOLT Source: Credit Suisse HOLT, Credit Suisse estimates

Using the HOLT DCF to instead solve for the sales growth and EBITDA margins implied

by the current share price of SFr21 results in a 5% p.a. sales growth rate and a 60bps

deterioration in margins every year out to 2016. This assumes a conservative 5-year

competitive advantage period and stable asset turns. Using instead the default 10-year

fade window, EBITDA margins are priced to deteriorate down to 9% by 2021 (CSe 16.5%

in FY15), which represents nearly a 600bps decline from the 14.8% margins ABB

generated in FY12.

The market expectations for ABB’s CFROI differ materially from what is currently being

forecasted. Although the market-implied CFROI has increased from the June 2012 low,

the gap with the corresponding forecasts is now at the highest level since early 2009. This

gap, when compared to the European Capital Goods (ex-A&D) sector, is at an extreme

level as ABB is being priced to see the largest percentage decline in its CFROI.

20 February 2013

ABB (ABBN.VX) 48

Figure 120: Forecasted and Market Implied CFROI levels Figure 121: Market Implied CFROI vs. Forecasted CFROI

Source: Credit Suisse HOLT Source: Credit Suisse HOLT

20 February 2013

ABB (ABBN.VX) 49

Figure 122: ABB – HOLT summary page in x, unless otherwise stated

Current Price: USD 22.76 Warranted Price: USD 28.18 Valuation date: 18-Feb-13

Sales Growth (parallel % point change to forecasts) Dec-11A Dec-12A Dec-13E Dec-14E Dec-15E

-2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 20.3 3.5 9.1 6.6 6.2

EBITDA Mgn, % 15.9 13.3 15.7 16.5 16.7

Asset Turns, x 1.05 0.94 0.94 0.91 0.88

CFROI®, % 16.6 12.2 14.0 14.1 13.3

Disc Rate, % 5.7 5.3 4.9 4.9 4.9

Asset Grth, % 1.1 15.3 9.4 9.1 8.4

Value/Cost, x 2.3 5.3 2.2 2.0 1.8

Economic PE, x 13.9 43.7 15.9 14.3 13.7

Leverage, % 16.2 27.3 26.2 26.4 26.8

HO

LT

-

C

red

it S

uis

se

An

aly

st

Sc

en

ari

o D

ata

ABB LIMITED (ABBN)

EB

ITD

A M

arg

in (

pa

rall

el

% p

oin

t

ch

an

ge

to

fo

rec

as

ts)

-2.0% -29% -17% -4%

0.0% -6% 8%

11% 28%

-1.0% -17% -4% 10% 26% 45%

93%

24% 41% 61%

77%1.0% 6% 21% 38% 56%

2.0% 18% 33% 51% 71%

More than

10%

downside

Within 10%More than

10% upside

Source: Credit Suisse HOLT®. CFROI, HOLT, and ValueSearch are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.

* Operating margin (yellow) is EBITDA (grey) plus rental expense and R&D expense

-30.00

-25.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Sales Growth (in %)

0.00

5.00

10.00

15.00

20.00

25.00

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Operating Margin and EBITDA (in %) - see note*

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Asset Turns (x)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20022004200620082010201220142016201820202022

Historical CFROI

HistoricalTransaction CFROI

Forecast CFROI

ForecastTransaction CFROI

Discount Rate

CFROI & Discount Rate (in %)

-25.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

20022004200620082010201220142016201820202022

Historical AssetGrowth Rate

Historical GrowthIncl Intang

Forecast Growth

Forecast GrowthIncl Intang

Normalised GrowthRate

Asset Growth (in %)

Source: Company data, Credit Suisse HOLT

20 February 2013

ABB (ABBN.VX) 50

ABB’s share price has lagged behind the sector

Valuation multiples trading at a discount relative to the sector and the Electricals

Figure 123: ABB trades at a 10% EV/EBIT discount to the sector…

Figure 124: …and has underperformed its Electrical peers by 15% over the last 12 months

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

Jan-1

0

Apr-1

0

Jul-1

0

Oct-1

0

Jan-1

1

Apr-1

1

Jul-1

1

Oct-1

1

Jan

-12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-1

3

EV

/EB

IT (

x)

ABB - EV/EBIT (12m forward) Sector Average

-25%

-20%

-15%

-10%

-5%

0%

5%

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Oct-1

2

Nov-1

2

Dec-1

2

Jan-1

3

Feb-1

3

Re

lati

ve

pe

rfo

rma

nc

e (

%)

ABB share performance spread vs. Electricals (ex ABB)

Source: Thomson Reuters Source: Thomson Reuters

Figure 125: ABB generates consistently higher returns (ROIC) than Schneider…

Figure 126: …yet trades at a discount in x, unless otherwise stated

0%

5%

10%

15%

20%

25%

30%

35%

40%

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13E

20

14E

RO

IC (

%)

ABB Schneider

4

5

6

7

8

9

10

11

12

13

14

Dec-06 Oct-07 Aug-08 Jun-09 Apr-10 Feb-11 Dec-11 Oct-12

EV

/EB

IT (

12

m fo

rwa

rd)

ABB - EV/EBIT (12m fw) Schneider - EV/EBIT (12m fw)

Source: Company data, Credit Suisse estimates Source: Thomson Reuters

Figure 127: ABB trades on 1.2x EV/Sales FY14 while generating a 14% EBITA margin on our estimates.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%S

iem

ens

Mets

o

Ele

ctro

lux

AB

B

Ph

ilips

Als

tom

Sa

ndvik

Atla

s C

opco

SK

F

Schne

ider

Alfra

Lava

l

Le

gra

nd

Schin

dle

r

Assa A

blo

y

Ko

ne

EV/Sales 2014E (%) minus EV/EBITA margin 2014E (%)

More attractive Less attractive

Source: Company data, Credit Suisse research

20 February 2013

ABB (ABBN.VX) 51

Credit Suisse versus consensus estimates Figure 128: Credit Suisse versus consensus forecasts in USD millions, unless otherwise stated; consensus prior to Q412 results

2013E 2013E CS 2014E 2014E CS

Forecast C'sus vs C'sus Forecast C'sus vs C'sus

Orders received 43,995 41,696 5.5% 47,463 43,893 8.1%

Power Products 11,740 11,257 4.3% 12,562 11,819 6.3%

Power Systems 8,183 8,347 -2.0% 8,838 8,786 0.6%

Discrete Automation & Motion 10,481 9,831 6.6% 11,425 10,348 10.4%

Low Voltage Products 8,225 7,691 6.9% 8,883 8,085 9.9%

Process Automation 9,090 8,471 7.3% 9,726 8,902 9.3%

Total Revenue 42,827 41,408 3.4% 45,664 43,480 5.0%

Organic Growth yoy, % 4.1% 6.6%

Power Products 11,279 10,964 2.9% 11,956 11,473 4.2%

Organic Growth yoy, % 3.5% 6.0%

Power Systems 8,456 8,266 2.3% 8,964 8,681 3.3%

Organic Growth yoy, % 5.0% 6.0%

Discrete Automation & Motion 10,193 9,559 6.6% 11,009 10,046 9.6%

Organic Growth yoy, % 6.3% 8.0%

Low Voltage Products 8,017 7,714 3.9% 8,498 8,118 4.7%

Organic Growth yoy, % 4.1% 6.0%

Process Automation 8,606 8,439 2.0% 9,209 8,850 4.1%

Organic Growth yoy, % 3.3% 7.0%

EBIT 5,435 5,019 8.3% 6,158 5,590 10.2%

Operating margin, % 12.7% 12.1% 13.5% 12.9%

Power Products 1,509 1,401 7.7% 1,648 1,483 11.1%

Operating margin, % 13.4% 12.8% 13.8% 12.9%

Power Systems 498 450 10.7% 641 584 9.9%

Operating margin, % 5.9% 5.4% 7.2% 6.7%

Discrete Automation & Motion 1,651 1,503 9.9% 1,816 1,647 10.2%

Operating margin, % 16.2% 15.7% 16.5% 16.4%

Low Voltage Products 1,278 1,145 11.7% 1,467 1,275 15.1%

Operating margin, % 15.9% 14.8% 17.3% 15.7%

Process Automation 1,001 978 2.4% 1,104 1,053 4.8%

Operating margin, % 11.6% 11.6% 12.0% 11.9%

Underlying EBITA 5,691 6,369

Operating margin, % 13.3% 13.9%

Power Products 1,559 1,698

Operating margin, % 13.8% 14.2%

Power Systems 529 672

Operating margin, % 6.3% 7.5%

Discrete Automation & Motion 1,751 1,916

Operating margin, % 17.2% 17.4%

Low Voltage Products 1,343 1,487

Operating margin, % 16.8% 17.5%

Process Automation 1,011 1,114

Operating margin, % 11.7% 12.1%

Net interest (244) (261)

PBT 5,190 5,897

Tax (1,401) (1,592)

Minority (113) (119)

Income from Disc. Op. - 0

Reported net Income 3,675 3,348 9.8% 4,186 3,799 10.2%

CS operating EPS, US$ 1.62 1.53 6.5% 1.83 1.72 6.6% Source: SME consensus, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 52

Multiple comparisons

Figure 129: Multiple comparison Multiple analysis 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Share Price (USD):

Average 23.1 17.3 20.5 22.3 18.8 22.7 22.7 22.7

High 32.7 22.2 23.2 27.5 21.9

Low 9.7 10.9 18.0 16.3 15.4

Year End 15.6 19.7 20.8 18.9 20.5

PE:

Average 14.8 15.2 17.6 14.8 14.4 14.0 12.4 11.4

High 21.0 19.6 20.0 18.3 16.8

Low 6.2 9.6 15.4 10.9 11.8

Year End 10.0 17.4 17.9 12.6 15.7

EV/Sales:

Average 1.5 1.1 1.4 1.4 1.2 1.3 1.2 1.1

High 2.1 1.5 1.6 1.7 1.4

Low 0.6 0.7 1.2 1.0 1.0

Year End 1.0 1.3 1.4 1.2 1.3

EV/EBIT:

Average 11.5 8.9 11.6 11.2 11.8 10.2 8.7 7.8

High 16.3 11.6 13.2 13.8 13.5

Low 4.7 5.3 10.1 8.3 9.9

Year End 7.7 10.2 11.8 9.6 12.7

Recurring EV/EBIT:

Average 10.1 9.3 11.1 10.4 10.6 10.1 8.6 7.8

High 14.4 12.2 12.7 12.8 12.2

Low 4.2 5.6 9.7 7.7 8.9

Year End 6.8 10.8 11.3 8.9 11.5

Recurring EBIT margin 14.8% 12.3% 12.6% 13.3% 11.4% 12.9% 13.6% 13.7%

EV/EBITDA:

Average 10.0 7.6 9.8 9.3 9.1 8.1 7.0 6.3

High 14.2 10.0 11.2 11.4 10.5

Low 4.1 4.6 8.5 6.8 7.6

Year End 6.7 8.8 10.0 7.9 9.9

Dividend Yield

Average 1.8% 2.9% 3.1% 3.1% 3.9% 3.6% 3.8% 4.1%

High 1.3% 2.3% 2.7% 2.5% 3.3%

Low 4.2% 4.6% 3.5% 4.3% 4.7%

Year End 2.6% 2.6% 3.0% 3.7% 3.5%

FCF Yield (based on EV)

Average 5.4% 8.4% 7.8% 5.2% 5.7% 6.9% 7.9% 8.2%

High 3.8% 6.4% 6.8% 4.2% 4.9%

Low 13.1% 13.9% 8.9% 7.0% 6.8%

Year End 8.1% 7.3% 7.6% 6.1% 5.2% Source: Thomson Reuters, Company data, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 53

Divisional analysis ABB: Company description

ABB is a global provider of Power Transmission & Distribution products and Automation technologies to utility and industry

customers. The automation technologies division delivers products and services for industrial control and plant and process

automation across all major industry sectors. The company operates in five divisions:

Discrete Automation & Motion: manufactures a range of LV and MV motors and drives, and production robots. Includes the

newly acquired Baldor operations. Competitors include: Siemens, Rockwell, WEG

Low Voltage Products: manufactures low-voltage circuit breakers, switches, control products, wiring accessories, enclosures

and cable systems to protect people, installations and electronic equipment from electrical overload. Competitors include: Schneider,

Eaton, Siemens, Legrand

Process Automation: provides customers with process automation solutions and instrumentation and manufactures

turbochargers. Competitors include: Emerson, Honeywell, Siemens

Power Products: incorporates ABB’s manufacturing network for transformers, switchgear, circuit breakers and associated

equipment. Competitors include: Siemens, Alstom, Schneider, TBEA, Hyundai Heavy, Cooper.

Power Systems: offers turnkey systems and services for power transmission and distribution grids and power plants, and

manufactures submarine cables. Competitors include: Siemens, Alstom, Toshiba/Mitsubishi, GE.

Figure 130: Sales by division (2012) Figure 131: Sales by underlying EBIT (2012)

Power Products

25%

Power Systems

19%

Discrete Automation

& Motion22%

Low-Voltage

Products15%

Process Automation

19%

Power

Products 25%

Power Systems 8%

Discrete Automation & Motion 30%

Low-Voltage

Products 16%

Process Automation

18%

Source: Company data Source: Company data

Figure 132: Sales by geography (2011) Figure 133: Key management

Europe38%

Asia24%

Americas27% Middle

East & Africa11%

Chairman Hubertus von Grünberg

CEO Joe Hogan

CFO Eric Elzvik

Investor Relations Alanna Abrahamson

Head Office Affolternstrasse 44

P.O. BOX 8131

CH-8050, Zurich

www.abb.com

[email protected]

Tel: +41 43 317 3808

Fax: +41 44 311 9817

Source: Company data Source: Company data

20 February 2013

ABB (ABBN.VX) 54

Discrete Automation & Motion

The Discrete Automation & Motion Division provides a comprehensive range of products

and services, including motors, generators, drives, programmable logic controllers (PLCs),

power electronics and robotics, that help customers improve productivity and save energy.

It also offers complete product life cycle services including energy appraisals and

preventive maintenance services.

ABB has a global presence in the Discrete Automation & Motion market and operates in

more than 50 countries. In 2011, due to the Baldor acquisition, orders from Americas

increased sizably in this division. Since this acquisition, ABB has built its position in the

North American industrial automation market, but from a geographic standpoint, Europe is

the most important region, accounting for 38% of revenues in 2011. However, due to the

financial turbulence in the eurozone, ABB expects demand to grow stronger in emerging

markets such as Asia and South America versus mature markets.

ABB targets growth in its Discrete Automation at 12-15% between 2011 and 2015

compared with 7% globally, which suggests ABB is expecting to gain market share.

Figure 134: Orders by geography (2011) Figure 135: Orders by type (2011)

Europe37%

Asia28%

Americas32%

Middle East & Asia

3%

Products85%

Service15%

Source: Company data Source: Company data

Rising awareness of energy costs and increasing commodity prices, environmental

regulations, rapid industrialisation, and a shortage of skilled labour are the major growth

drivers for the automation division. Its major end markets are Metals & Minerals, Transport,

Oil, Gas, Power Generation, and Discrete Manufacturing.

Figure 136: Sales by geography (2011) Figure 137: End-market split (2011)

Europe 38%

Americas32%

Asia27%

Middle East & Africa

3%

Discrete Manufact.

20%

Power Generation

10%

Buildings5%

Oil & Gas10%

Minerals & Metals25%

Transport10%

Water5%

Other15%

Source: Company data Source: Company data

20 February 2013

ABB (ABBN.VX) 55

ABB’s Discrete Automation & Motion division has a large and fast-growing installed base

of approximately $50bn, which is growing at 10% per annum. Its major competitors are

Emerson, Rockwell Automation, General Electric, Schneider, Siemens and Yaskawa.

Figure 138: Competitive landscape within Discrete Automation & Motion

Discrete Automation Industrial Motion Renewable Power Control and Quality Transport

Fanuc GE/ Converteam Enercon Areva Alstom

Kuka Hyundai GE/ Converteam Eaton Bombardier

Mitsubishi Rockwell PowerOne Emerson Siemens

Siemens Siemens Siemens Friem

Rockwell Schneider SMA GE/ Converteam

Yaskawa Weg Vestas Siemens

Schneider Source: Company data

Discrete Automation & Motion is divided in four separate businesses—Robotics, Motors

and generators, Low Voltage Drives and Power Electronics & Medium Voltage Drives. We

highlighted the sales split in Figure 139. Motors & Generators is the largest market for

ABB, accounting for 46% of sales in 2011.

Figure 139: Sales by business mix (2010) outer circle includes Baldor acquisition

Figure 140: Sales channels

33%

33%

17%

17% 26%

47%

14%

13%

Low Voltage Drives Motors & Generators

Power Electronics & MV Drives Robotics

Distributors/ Wholesalers

20%

OEMs/ System

integrators45%

EPCs5%

Direct20%

ABB internal10%

Source: Company data Source: Company data

The division procures the majority of its revenues from mature markets. However, rapid

industrialisation in emerging markets and the need for improved productivity and energy

efficiency should generate more demand.

Figure 141: Discrete Automation generates the highest share of divisional revenues from mature markets (2011)

65%55% 50% 50% 50%

35%45% 50% 50% 50%

0%

25%

50%

75%

100%

DiscreteAutomation and

Motion

ProcessAutomation

Low Voltage Power Products Power Systems

Mature markets Emerging markets

Source: Company data, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 56

Low Voltage Products

The Low Voltage Products division provides products and systems to protect, control and

measure electrical installations, enclosures, switchboards, electronics and

electromechanical devices for industrial machines, plants and related services. Its offering

also includes intelligent control systems, KNX systems that integrate and automate

buildings’ electrical installations, ventilation systems and security and data communication

networks.

ABB estimates the total market size for Low Voltage Products at $70bn and expects it to

grow by 4% globally. It targets 8–11% growth for its Low Voltage Products division

between 2011 and 2015, via accessing markets in key geographies such as North

America and the BRIC countries, broadening its product scope to include security, lifestyle

and energy efficiency, and developing additional channels to market.

Figure 142: Orders by geography (2011) Figure 143: Orders by type (2011)

Europe55%

Americas9%

Asia28%

MEA8%

Products80%

Service5%

Systems15%

Source: Company data Source: Company data

ABB has a global presence in Low Voltage Products with maximum exposure in Europe

accounting for 56% of divisional sales. The key market drivers for Low Voltage Products

are renewable energy, energy efficiency applications and data centres, and residential and

commercial construction.

Figure 144: Sales by geography (2011) Figure 145: End-market split (2010)

Europe 56%

Americas9%

Asia28%

Middle East & Africa

7%

Utility35%Construction

30%

Oil & Gas5%

Metals & Mining10%

Rail 5% Other

15%

Source: Company data Source: Company data

20 February 2013

ABB (ABBN.VX) 57

ABB’s key competitors in Low Voltage Products are GE, Legrand, Eaton, Schneider and

Siemens. ABB is at an advantage to its competitors in that its products are recognised

based on operational excellence in production, distribution and response time.

Figure 146: Competitive landscape within Low Voltage Products

Wiring Accessories LV systems Enclosures & Rail Control Products LV Breakers and Switches

Legrand Eaton Eaton Phoenix Contact Eaton

Leviton GE Hager Rockwell Mitsubishi

Schneider Schneider Schneider Schneider Schneider

Siemens Siemens Siemens Siemens Source: Company data

The division caters equally to mature and emerging markets and derives 50% of its

revenue from sales through distributors and wholesalers.

Figure 147: Sales by business mix (2011) Figure 148: Sales channels

LV Breakers & Switches

30%

Enclosures & DIN Rails

25%

Control Products

20%

Wiring Accessories

10%

LV Systems15%

Distributors/ Wholesalers

50%OEMs10%

Panel Builders

15%

Contractors10%

End Users5%

ABB internal10%

Source: Company data Source: Company data

Process Automation

The Process Automation division offers fully engineered solutions and products for

process control, safety, instrumentation, plant electrification and energy management. In

2011, it accounted for approximately 24% of ABB’s large orders, with Europe the major

contributor to the order intake.

ABB estimates the market opportunity for the Process Automation division at $120bn and

expects it to grow by 6% globally, versus its target for its own division of 6–9% between

2011 and 2015. It plans to achieve this through continued market and technology

leadership in control platform and instrumentation, increasing its relevance in the oil and

gas industry and increasing domain-specific products in its portfolio to complement its

automation and electrical offering, helping to meet customer-specific needs.

20 February 2013

ABB (ABBN.VX) 58

Figure 149: Orders by geography (2011) Figure 150: Orders by type (2011)

Europe39%

Asia30%

Americas23%

Middle East & Africa

8%

Products25%

Service40%

Systems35%

Source: Company data Source: Company data

The division serves key industries such as oil, gas and petrochemicals, marine, mining

and minerals, metals, pulp and paper. The economic uncertainties of 2011 had limited

effect on the division, as it depends more on large capital expenditure by utility and

industrial customers. In 2011, orders in the Process Automation division were 12% higher

(6% in local currencies), driven by solid orders received in minerals, pulp and paper, turbo

chargers and oil and gas businesses.

Figure 151: Sales by geography (2011) Figure 152: End-market split (2011)

Europe39%

Asia27%

Americas22%

Middle East & Africa

12%

Chemical, Oil & Gas

35%

Metals & Mining25%

Marine15%

Pulp & Paper10%

Power Generation

5%

Other10%

Source: Company data Source: Company data

Its major competitors are Emerson, Honeywell, Invensys, Metso, Siemens and Yokogawa.

Figure 153: Competitive landscape within Process Automation

Oil & Gas Metals & Minerals Marine Pulp & Paper Turbocharging

Emerson FLS Converteam Andritz MAN

Honeywell Emerson Siemens Metso Mitsubishi

Invensys Siemens Wartsilla Siemens

Rockwell SMS

Yokogawa TMEIC Source: Company data

The division’s offerings are sold as separate products and as part of total automation

systems, with the majority of the division’s revenues coming from direct sales to end

users.

20 February 2013

ABB (ABBN.VX) 59

Figure 154: Sales by business mix (2011) Figure 155: Sales channels

Oil & Gas25%

Minerals20%

Pulp & Paper5%

Marine10%

Measurement Products

15%

Turbocharging15%

Performance Services

10%

Direct55%

OEM/ System

Intergrators30%

EPCs15%

Source: Company data Source: Company data

Services form the major revenue component in Process Automation division, with service

orders growing in double digits in 2011.

Figure 156: Process Automation has the highest service

component (2011)

85%

25%

80%90%

55%

35%

15%

85%

30%

15%

40%

5% 10% 15% 15%

0%

25%

50%

75%

100%

DiscreteAutomationand Motion

ProcessAutomation

Low Voltage PowerProducts

PowerSystems

Total

Products Systems Service

Source: Company data

20 February 2013

ABB (ABBN.VX) 60

Figure 157: End-market split of the Global Automation market with an estimated size of $180bn

Figure 158: Business overview with respect to business mix, markets, cycles and industries in %, unless otherwise stated

Discrete Manufacturing

25%

Hybrid Manufacturing

10%

Utilities10%

Mining and Minerals

10%

Oil and Gas20%

Process Manufacturing

25%

Early

Oil & GasProducts

Emerging

Mid

Mining & Minerals

System

Marine

Services

MatureLate

Pulp & Paper

Metals

Chemicals

Power Gen

Others

0

10

20

30

40

50

60

70

80

90

100

Business Mix Markets Cycles Industries

Source: Company data Source: Company data

Power Products

The Power Products division portfolio includes high and medium voltage switchgears,

power, distribution and speciality transformers for power generation, transmission and

distribution. It has geographically balanced global production and an R&D footprint with

presence in more than 100 countries.

ABB estimates the total market size for power products t $60bn, with emerging markets,

driven by infrastructure development, growing faster than mature markets. ABB targets 5–

7% growth in its Power Products between 2011 and 2015, compared with 4% globally;

suggesting it is expecting to gain market share.

Figure 159: Orders by geography (2011) Figure 160: Orders by type (2011)

Europe32%

Asia33%

Americas26%

Middle East & Asia

9%

Products90%

Service10%

Source: Company data Source: Company data

Urbanisation, energy-intensive industries, remote bulk generation from renewables, cost

pressure and aging infrastructure are driving the market for ABB’s Power Products

division. This division primarily serves electric utilities, including gas and water utilities and

industrial and commercial customers. ABB is well positioned in its key geographies of

Europe, the Americas and Asia.

20 February 2013

ABB (ABBN.VX) 61

Figure 161: Sales by geography (2011) Figure 162: End-market split (2011)

Europe34%

Asia30%

Americas27%

Middle East & Asia

9%

Utility Transmissio

n28%

Industries33%

Utility Distribution

26%

Power Generation

13%

Source: Company data Source: Company data

ABB’s major competitors in Power Products division are Alstom, Schneider, Siemens and

Hyundai. It plans to secure market leadership and improve its cost position by expanding

coverage in key markets, strengthening channels to increase penetration, enhancing its

product portfolio to realise growth from megatrends and growing its service business faster

than its core business in order to achieve its 5–7% growth target in 2011–15.

Figure 163: Competitive landscape within Power Products

Transformers Medium Voltage Products High Votage Products

Alstom Schneider Alstom

Hyundai Siemens Siemens

Siemens Source: Company data

The Power Products division is broadly divided in three separate products— Transformers,

High voltage products and Medium voltage products. We show the sales split in Figure

164. Transformer is the largest market for ABB, accounting for 45% of sales in 2011.

Figure 165 shows that direct sales account for the majority of the division’s total sales, with

the remainder from external channel networks such as wholesalers, distributors and

original equipment manufacturers (OEMs).

Figure 164: Sales by business mix (2011) Figure 165: Sales channels

Transformers45%

High Voltage products

25%

Medium Voltage products

30%

Indirect 40%

Direct

60%

Source: Company data Source: Company data

20 February 2013

ABB (ABBN.VX) 62

Power Systems

Power Systems provides systems and solutions for integration of renewables into grid and

network management solutions. Strong political commitment in Europe to increasing the

share of renewables in the energy mix contributed to order growth.

ABB estimates the total market size for Power Systems at $80bn and its growth target for

its division is 7-11% between 2011 and 2015. This compares with 6% growth globally—

suggesting it expects to gain market share. ABB plans to tap into the opportunities in

renewables such as hydro, wind and solar, to expand its software solutions business and

to drive service and consulting growth above the divisional average.

Figure 166: Orders by geography (2011) Figure 167: Order by type (2011)

Europe40%

Asia27%

Americas17%

Middle East & Asia16%

Systems85%

Service15%

Source: Company data Source: Company data

The fundamental market drivers for Power Systems include investments in power

infrastructure in emerging markets, upgrade of aging infrastructure in mature markets,

increasing demand for renewables, energy efficiency and more reliable, flexible and

smarter grids. The key end markets for Power Systems are utilities, industrial and

commercial customers.

Figure 168: Sales by geography (2011) Figure 169: End-market split (2011)

Europe40%

Asia18%

Americas20%

Middle East & Asia22%

Power Generation

20%

Utility distribution

20%Utility

transmission45%

Industry15%

Source: Company data Source: Company data

ABB’s major competitors in Power Systems division are Alstom, Emerson, GE, Nexans

and Siemens.

20 February 2013

ABB (ABBN.VX) 63

Figure 170: Competitive landscape within Power Systems

Grid systems Network Management Substations Power Generation

Alstom Alstom Alstom Alstom

Nexans GE Siemens Emerson

Prymian Siemens GE

Siemens Siemens Source: Company data

The Power system division delivers systems in four areas: Substations, Grid Systems,

Network Management, and Power Generation, with Substations the major contributor to

sales in 2011. Power Systems derives the majority of its sales through direct sales to end

users.

Figure 171: Sales by business mix (2011) Figure 172: Sales channels

Substation35%

Grid System25%

Power System

20%

Network Management

20%

Indirect15%

Direct85%

Source: Company data Source: Company data

In Figure 173 we show further detail about the cyclicality of ABB’s divisions. We conclude

that almost half of ABB’s business is related to late-cyclical end-markets due to its Power

divisions—in particular Power Systems—and also parts of Process Automation. Within

Automation Low Voltage, products fall into the early cycle bracket whereas discrete yet

predominantly Process Automation operates with customers in later cyclical markets. With

the overall business shifting further towards Automation, the end-market exposure

generally moves more to early and mid-cycle end-markets.

Figure 173: Power Systems is the most late cycle business amongst ABB’s five divisions in %, unless otherwise stated

Early Cycle 20%

Mid Cycle 32%

Late Cycle 48%

Construction, early-cycle

industry (GDP)

Industrial production

(machinery, electronics)

Demand for commodities,

industrial capex

Utility (T&D) and industry

capex, renewables

Low-Voltage Products

Discrete Automation and

Motion

Process Automation

Power Products

Power Systems

Share of orders 2011 Key macro drivers

Source: Company data

20 February 2013

ABB (ABBN.VX) 64

Financial statements Figure 174: ABB – Divisional P&L in USD millions, unless otherwise stated

Divisional P&L 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Orders

Power Products 13,627 10,940 9,778 11,068 11,040 11,740 12,562 13,315

Power Systems 7,408 7,830 7,896 9,278 7,973 8,183 8,838 9,545

Discrete Automation & Motion 7,129 4,702 5,862 9,566 9,625 10,481 11,425 12,567

Low-Voltage Products 4,865 4,079 4,686 5,364 6,720 8,225 8,883 9,505

Process Automation 9,244 6,684 7,383 8,726 8,704 9,090 9,726 10,504

Group orders 42,273 34,235 35,605 44,002 44,062 47,720 51,434 55,437

Organic growth 6% -13% 3% 13% 1% 5% 8% 8%

Sales & Organic Growth

Power Products 11,890 11,239 10,199 10,869 10,717 11,279 11,956 12,673

Organic growth 18% -1% -11% 2% 2% 4% 6% 6%

Power Systems 6,912 6,549 6,786 8,101 7,852 8,456 8,964 9,591

Organic growth 16% 1% 2% 14% 2% 5% 6% 7%

Discrete Automation & Motion 6,588 5,405 5,617 8,806 9,405 10,193 11,009 11,669

Organic growth 0% 0% 3% 17% 10% 6% 8% 6%

Low-Voltage Products 4,747 4,071 4,554 5,304 6,638 8,017 8,498 9,008

Organic growth 0% 0% 13% 11% 0% 4% 6% 6%

Process Automation 8,397 7,839 7,432 8,300 8,156 8,606 9,209 9,761

Organic growth 0% 0% -6% 6% 3% 3% 7% 6%

Group sales 34,912 31,795 31,589 37,990 39,336 42,827 45,664 48,486

Organic growth 15% -4% -2% 9% 4% 4% 7% 6%

Operational EBITDA

Power Products 1,854 1,782 1,585 1,747 1,898 2,013

Margin 18.2% 16.4% 14.8% 15.5% 15.9% 15.9%

Power Systems 297 743 290 696 849 956

Margin 4.4% 9.2% 3.7% 8.2% 9.5% 10.0%

Discrete Automation & Motion 1,033 1,664 1,735 1,942 2,130 2,275

Margin 18.4% 18.9% 18.4% 19.1% 19.3% 19.5%

Low-Voltage Products 934 1,059 1,219 1,622 1,825 1,917

Margin 20.5% 20.0% 18.4% 20.2% 21.5% 21.3%

Process Automation 926 1,028 1,003 1,101 1,211 1,293

Margin 12.5% 12.4% 12.3% 12.8% 13.2% 13.3%

Holding -220 -262 -277 -276 -276 -261

Group Underlying EBIT 4,824 6,014 5,555 6,832 7,636 8,193

Margin 15.3% 15.8% 14.1% 16.0% 16.7% 16.9%

Reported EBIT & Margins

Power Products 2,100 1,969 1,629 1,476 1,328 1,509 1,648 1,750

Margin 17.7% 17.5% 16.0% 13.6% 12.4% 13.4% 13.8% 13.8%

Power Systems 592 388 107 548 7 498 641 736

Margin 8.6% 5.9% 1.6% 6.8% 0.1% 5.9% 7.2% 7.7%

Discrete Automation & Motion 1,066 557 918 1,294 1,469 1,651 1,816 1,942

Margin 16.2% 10.3% 16.3% 14.7% 15.6% 16.2% 16.5% 16.6%

Low-Voltage Products 819 519 796 904 856 1,278 1,467 1,538

Margin 17.3% 12.7% 17.5% 17.0% 12.9% 15.9% 17.3% 17.1%

Process Automation 958 643 760 963 912 1,001 1,104 1,181

Margin 11.4% 8.2% 10.2% 11.6% 11.2% 11.6% 12.0% 12.1%

Holding -983 50 -392 -518 -514 -503 -518 -518

Group EBIT 3,594 3,483 3,058 3,704 3,146 4,434 5,054 5,448

Margin 10.3% 11.0% 9.7% 9.7% 8.0% 10.4% 11.1% 11.2% Source: Company data, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 65

Figure 175: ABB – P&L in USD millions, unless otherwise stated

P&L 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Sales 34,912 31,795 31,589 37,990 39,336 42,827 45,664 48,486

Sales Growth 19.6% -8.9% -0.6% 20.3% 3.5% 8.9% 6.6% 6.2%

Cost of Sales -23,972 -22,470 -22,060 -26,556 -27,958 -29,758 -31,423 -33,275

Gross Profit 10,940 9,325 9,529 11,434 11,378 13,069 14,240 15,211

Gross Margin 31.3% 29.3% 30.2% 30.1% 28.9% 30.5% 31.2% 31.4%

S,G&A -4,795 -4,491 -4,615 -5,373 -5,756 -6,007 -6,302 -6,643

% of sales 13.7% 14.1% 14.6% 14.1% 14.6% 14.0% 13.8% 13.7%

R&D -1,027 -1,037 -1,082 -1,371 -1,464 -1,627 -1,781 -1,939

% of sales 2.9% 3.3% 3.4% 3.6% 3.7% 3.8% 3.9% 4.0%

Other Income (Expense) -566 329 -14 -23 -100 0 0 0

Reported EBIT 4,552 4,126 3,818 4,667 4,058 5,435 6,158 6,629

Underlying EBITA 5,343 4,189 4,145 5,230 4,674 5,691 6,374 6,845

Margin 15.3% 13.2% 13.1% 13.8% 11.9% 13.3% 14.0% 14.1%

Net Financial Income -34 -6 -78 -117 -220 -244 -261 -236

CS EBIT 5,163 3,909 3,965 5,050 4,494 5,511 6,194 6,665

Clean PBT 5,129 3,803 3,887 4,933 4,274 5,266 5,933 6,429

PBT 4,518 4,120 3,740 4,550 3,838 5,190 5,897 6,393

Provision for taxes -1,119 -1,001 -1,018 -1,244 -1,030 -1,401 -1,592 -1,726

CS tax adjustment 151 -83 40 113 152 21 10 10

Underlying tax -1,270 -991 -1,058 -1,357 -1,182 -1,422 -1,602 -1,736

Underlying tax rate 25% 26% 27% 28% 27% 27% 27% 27%

Extraordinary Items (post tax) -21 17 10 9 4 0 0 0

Minority -260 -235 -171 -147 -108 -113 -119 -125

Net Income from continuing ops 3,399 3,119 2,722 3,306 2,808 3,789 4,305 4,667

Net Income (Loss) 3,118 2,901 2,561 3,168 2,704 3,675 4,186 4,542

CS Net Income 3,578 2,594 2,668 3,438 2,988 3,731 4,212 4,568

Basic EPS (continuing, USD per share) 1.49 1.37 1.19 1.45 1.22 1.65 1.88 2.03

Diluted EPS (continuing, USD per share) 1.48 1.36 1.19 1.44 1.22 1.65 1.87 2.03

CS EPS (diluted, USD per share) 1.56 1.13 1.16 1.50 1.30 1.62 1.83 1.99

Dividend per share (CHF per share) 0.48 0.51 0.60 0.65 0.68 0.75 0.80 0.86

Weighted Average Shares (m) 2,296 2,288 2,291 2,291 2,295 2,298 2,297 2,297 Source: Company data, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 66

Figure 176: ABB – Balance sheet in USD millions, unless otherwise stated

Balance sheet 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Goodwill 2,817 3,026 4,085 7,269 10,226 10,226 10,226 10,226

Other intangible assets 411 443 701 2,253 3,501 2,994 2,454 1,879

Intangible assets 3,228 3,469 4,786 9,522 13,727 13,220 12,680 12,105

Tangible assets 3,562 4,072 4,356 4,922 5,947 6,419 6,921 7,455

Investments 68 49 19 156 213 213 213 213

Deferred Tax 1,190 1,052 846 318 334 334 334 334

Prepaid pension and other employee benefits 73 112 173 139 71 71 71 71

Other Assets 268 293 347 804 776 776 776 776

Financial assets 445 452 420 0 0 0 0 0

Total Long term assets 8,834 9,499 10,947 15,861 21,068 21,033 20,995 20,954

Inventories 5,306 4,550 4,878 5,737 6,182 6,731 7,176 7,620

Trade accounts and receivables 9,245 9,451 9,970 10,773 11,575 11,778 12,558 13,576

Other receivables 237 236 193 227 311 311 311 311

Deferred taxes 1,020 900 896 932 869 869 869 869

Marketable securities 1,407 2,433 2,713 948 1,606 1,606 1,606 1,606

Cash and cash equivalents 6,399 7,119 5,897 4,819 6,875 8,481 10,336 12,051

Other current assets 733 540 801 351 584 584 584 584

Total current assets 24,347 25,229 25,348 23,787 28,002 30,359 33,440 36,617

Total assets 33,181 34,728 36,295 39,648 49,070 51,392 54,435 57,571

Shareholders equity 11,158 13,790 14,885 15,777 16,906 18,723 20,921 23,336

Minority interests 612 683 573 559 540 526 512 497

Long term financial debt 2,009 2,172 1,139 3,231 7,534 7,534 7,534 7,534

Pension and other employee benefits 1,071 1,179 831 1,487 2,290 2,290 2,290 2,290

Deferred taxes 425 328 411 537 1,260 1,260 1,260 1,260

Other liabilities 1,902 1,997 1,718 1,496 1,566 1,566 1,566 1,566

Total financial debt 5,407 5,676 4,099 6,751 12,650 12,650 12,650 12,650

Trade accounts and payables 4,451 3,853 4,555 4,789 4,992 5,353 5,936 6,303

Other Payable 2,516 2,949 3,256 3,180 3,484 3,665 3,811 3,957

Advances from customers 2,014 1,806 1,764 1,757 1,937 1,963 2,143 2,417

Short term financial debt 354 161 1,043 765 2,537 2,537 2,537 2,537

Provision and other 4,572 3,883 4,119 3,943 3,658 3,608 3,558 3,508

Deferred taxes 528 327 357 305 270 270 270 270

Accrued liabilities 1,569 1,600 1,644 1,822 2,096 2,096 2,096 2,096

Total current liabilities 16,004 14,579 16,738 16,561 18,974 19,492 20,352 21,088

Total liabilities and shareholders equity 33,181 34,728 36,295 39,648 49,070 51,392 54,435 57,571 Source: Company data, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 67

Figure 177: ABB – Cash flow in USD millions, unless otherwise stated

Cash flow 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Net income 3,118 2,901 2,561 3,168 2,704 3,675 4,186 4,542

Minority Interest 261 235 171 147 108 113 119 125

Depreciation + amortisation 661 655 702 995 1,182 1,293 1,378 1,463

Pension & Post retirement benefits 43 -28 -51 -49 -13 0 0 0

Deferred taxes -199 -56 151 -34 64 0 0 0

Net gain from sale of plant property & equipment -49 -15 -39 -47 -26 0 0 0

Income from equity accounted companies -15 2 -3 -4 -1 0 0 0

Others 232 -6 106 111 172 0 0 0

Trade receivables -1,266 256 -407 -731 -310 -203 -780 -1,019

Inventories -800 1,130 -264 -600 61 -549 -446 -444

Trade Payables 522 -718 678 213 -57 361 583 367

Billings in excess of sales 539 295 89 150 152 181 147 146

Provisions 677 -241 -69 -391 -109 -50 -50 -50

Advances from customers 130 -316 -25 47 181 26 180 273

Other assets & liabilities 104 -67 597 637 -329 0 0 0

Net cash provided by operating activities 3,958 4,027 4,197 3,612 3,779 4,849 5,317 5,405

Change in Financing receivables 7 -7 -7 -55 85 0 0 0

Purchases of Marketable securities -3,626 -4,985 -5,621 -2,951 -2,355 0 0 0

Purchases of plant, property & equipment -1,171 -967 -840 -1,021 -1,293 -1,257 -1,340 -1,422

Acquisition of business -653 -209 -2,269 -4,020 -3,694 0 0 0

Proceeds from sale of marketable securities 5,417 3,896 4,904 4,729 1,682 0 0 0

Sale of Plant, property & equipment 94 36 47 57 0 0 0 0

Proceeds of sale of business & equity accounted companies 46 16 83 8 0 0 0 0

Net cash used by investing activities 114 -2,220 -3,703 -3,253 -5,575 -1,257 -1,340 -1,422

Net changes in debt with maturities of 90 days or less -10 -59 52 450 570 0 0 0

Increase in debt 458 586 277 2,580 5,986 0 0 0

Repayment of debt -786 -705 -497 -2,576 -1,104 0 0 0

Issue of shares 49 89 16 105 90 0 0 0

Purchase of treasury shares -621 0 -166 5 0 0 0 0

Dividends paid -1,060 -1,027 -1,112 -1,569 -1,626 -1,858 -1,988 -2,127

Dividend paid to minority share holders -152 -193 -193 -157 -121 -127 -133 -140

Others 3 8 49 -46 -33 0 0 0

Net cash provided (used) by financing activities -2,119 -1,301 -1,574 -1,208 3,762 -1,985 -2,122 -2,267

Effect of exchange rates and others -230 214 -142 -229 90 0 0 0

Net increase (decrease) in cash 1,723 720 -1,222 -1,078 2,056 1,606 1,855 1,715 Source: Company data, Credit Suisse estimates

20 February 2013

ABB (ABBN.VX) 68

Appendix Company targets (2011–15)

Figure 178: ABB—group targets Figure 179: ABB—underlying (macro) assumptions Superscript=CAGR, base year 2010

Group Targets

Organic revenue growth (CAGR) 7-10%

Op EBITDA margin corridor 13-19%

Organic EPS growth (CAGR) 10-15%

Free cash flow conversion Annual avg. >90%

Cash return on invested capital >20% by 2015

Plan assumptions 2011-15

• Global economic slowdown 2011-H1 13, not a deep recession

• World GDP growth 3–4%2, emerging market (EM) growth >2x

mature markets

• Global industrial capex to grow 5–6% p.a., EM capex share growing

to 65% from < 60%

• ABB’s markets to grow 6%2 p.a. over the period

• Price pressure and EM competition are facts of life – continuous

cost savings required

Source: Company data Source: Company data

Figure 180: ABB—divisional targets

Divisions Organic revenue growth (CAGR) Operational EBITDA margin

Power products 5-7% 14-20%

Power systems 7-11% 9-12%

Discrete Automation and Motion 12-15% 16-21%

Low Voltage Products 8-11% 16-22%

Process Automation 6-9% 11-15%

Targets

Source: Company data

20 February 2013

ABB (ABBN.VX) 69

Acquisition history

Figure 181: ABB—acquisition history in USD millions, unless otherwise stated

Company name Date Cost Sales EV/Sales Business division

Gresin Grupo Estudios Industriales, S.A.L. Dec-12 NA NA NA Discrete Automation and Motion

Amarcon BV Sep-12 NA NA NA Process Automation

Newave Energy Holding SA Aug-12 173 NA NA Discrete Automation and Motion

Tropos Networks Inc Jun-12 NA NA NA Power System

Thomas & Betts May-12 3900 2300 1.70 Low Voltage products

Envitech Energy Dec-11 NA NA NA Discrete Automation and Motion

Powercorp Dec-11 NA NA NA Discrete Automation and Motion

Trasfor Group Oct-11 NA 130 NA Power Products

Lorentzen & Wettre Oct-11 119 49 2.43 Process Automation

Mincom Jul-11 NA 200 NA Software business

Epyon B.V. Jul-11 NA NA NA Discrete Automation and Motion

Novatec Solar GmbH Mar-11 NA NA NA Power Systems

Baldor Electric Company Jan-11 4200 1520 2.76 Discrete Automation and Motion

Obvient Strategies Inc Jan-11 NA NA NA Power Systems

Insert Key Solutions Dec-10 NA NA NA Power Systems

K-TEK Jul-10 NA NA NA Process Automation

Ventyx May-10 >1000 NA NA Power Systems

Jokab Safety Apr-10 NA NA NA Low Voltage Products

Sinai Engineering Corporation Oct-09 NA NA NA Power

Comem SpA Jun-09 70 NA NA Power products

Westingcorp Pty Ltd Jun-09 NA NA NA Power products

Ensto Busch-Jaeger Oy Jan-09 NA 55 NA Automation Products

Ber-Mac Electrical and Instrumentation Ltd Dec-08 NA 100 NA Process Automation

Kuhlman Electric Corporation Jul-08 NA 250 NA Power products

Vectek Electronics May-08 NA NA NA Automation Products

PowerTran Company Ltd Oct-07 NA NA NA Power Product

Raffin Electric Company Ltd Aug-06 NA NA NA Power Products

Entrelec Sep-01 431 NA NA Automation Products

Eutech Engineering Solutions Ltd Jan-01 NA 80 NA Automation Products

Cellier Group S. A Sep-00 NA NA NA Automation segment

Energy Interactive Inc. (EI) Aug-00 NA NA NA ABB’s Energy Information Systems business

Umoe ASA Jun-00 NA 300 NA NA

MEGA Transformadores S.A May-00 NA NA NA Power

East Midlands Electricity Contracting Feb-00 NA 60 NA Power products Source: Company data, Credit Suisse research

20 February 2013

ABB (ABBN.VX) 70

ABB’s cost savings programme in detail

Figure 182: ABB—quarterly overview of the cost saving programme until 2011 Quarter Plan Achieved

Q408 $1.3bn cost take-out prgroamme by 2010 -

Half of cost savings to be realised in 2009

EBIT margin target of 11-16% between 2009-11

Focus on Global sourcing, Operational excellence, Footprint, G&A

- reduction in high labour cost components

- 40%+ of total sourcing from EM by 2010

- expand manufacturing and engineering capacity in EM

- all Capex for new capicity only in EM

- more manufacutring employees in EM (already >45%)

Q109 Cost take-out programme expanded to $2bn -

- Robotics production, engineering and research moved to China

Q209 Further focus on G&A (savings in finance, HR, country overheads) $500m+ cost savings

Primary focus on high-cost countries - $50m from 15% lower G&A costs ($300m target)

Footprint: Capacity adjustments and plant closures - $70m from global footprint adjustment ($300m target)

Focus on warranty costs, supplier quality, manufacturing processes - $100m from operat. efficiency improvement ($400m target)

- $300m from global sourcing optimisation ($1bn target)

Q309 $2bn+ cost savings from current programme $1bn cost savings YTD (targeting now $1.3bn in 2009)

Additional measures in place to meet difficult year 2010 if necessary - $80m from lower G&A costs ($300m target)

- $150m from global footprint adjustment ($300m target)

- $200m from operat. efficiency improvement ($400m target)

- $600m from global sourcing optimisation ($1bn target)

Q409 Increased cost savings target to $3bn (from $2bn) $1.5bn cost savings in FY09

Further supply optimisation globally and locally - $100m from lower G&A costs ($330m target)

Hundreds of operational excellence programmes - $300m from global footprint adjustment ($700m target)

- $300m from operat. efficiency improvement ($500m target)

- $800m from global sourcing optimisation ($1.5bn target)

Q110 Continued focus on operational execution with respect to costs $1.8bn+ cost savings (2009-Q110)

Start growth opportunities to leverage improved cost base - $120m from lower G&A costs ($330m target)

- $470m from global footprint adjustment ($700m target)

- $390m from operat. efficiency improvement ($500m target)

- $950m from global sourcing optimisation ($1.5bn target)

Q210 Cost take-out programme 77% complete; continued focus on cost savings $2.3bn cost savings (2009-Q210)

- $170m from lower G&A costs ($330m target)

- $570m from global footprint adjustment ($700m target)

- $490m from operat. efficiency improvement ($500m target)

- $1.1bn from global sourcing optimisation ($1.5bn target)

Q310 $2.65bn cost savings (2009-Q310)

- $220m from lower G&A costs ($330m target)

- $670m from global footprint adjustment ($700m target)

- $570m from operat. efficiency improvement ($500m target)

- $1.22bn from global sourcing optimisation ($1.5bn target)

Q410 Targeting further $1bn in savings in 2011 $3bn cost savings achieved (2009-Q410)

- $300m in global footprint - $250m from lower G&A costs ($330m target)

- $300m in operational excellence - $750m from global footprint adjustment ($700m target)

- $400m in global sourcing - $600m from operat. efficiency improvement ($500m target)

- $1.4bn from global sourcing optimisation ($1.5bn target)

Q111 Speed-up localised Power R&D and design $215m cost savings

Order selectively to secure margins - c.$11m from global footprint adjustment ($300m target)

- c.$75m from operat. efficiency improvement ($300m target)

- c.$129m from global sourcing optimisation ($400m target)

Q211 $480m cost savings YTD

- c.$25m from global footprint adjustment ($300m target)

- c.$178m from operat. efficiency improvement ($300m target)

- c.$277m from global sourcing optimisation ($400m target)

Q311 $750m cost savings YTD

- c.$38m from global footprint adjustment ($300m target)

- c.$300m from operat. efficiency improvement ($300m target)

- c.$412m from global sourcing optimisation ($400m target)

Q411 Launched 2011-15 targets $1.1bn cost savings achieved (2011)

- c.$55m from global footprint adjustment ($300m target)

- c.$440m from operat. efficiency improvement ($300m target)

- c.$605m from global sourcing optimisation ($400m target)

Source: Company data

20 February 2013

ABB (ABBN.VX) 71

Description of companies used in SOTP

Figure 183: Description of companies used in SOTP Competitor Companies Description

DAM

Fanuc ■ Fanuc manufactures factory automation systems & equipments, and robots.

Emerson

■ Emerson is a diversified global technology company. It is engaged in designing and supplying product technology and

delivering engineering services and solutions in a range of industrial, commercial and consumer markets around the world.

■ Emerson Industrial Automation provides motion control systems and components, plastics joining and precision cleaning and

processing equipment, and materials testing equipment and supplies, for numerous and diverse industries worldwide.

GE■ GE has a global infrastructure producing products ranging from light bulbs, fuel cell to technology,cleaner,more efficient jet engines.

■ GE Intelligent Platforms designs, manufactures, and supplies hardware and software products for industrial control and automation.

Omron■ Omron Corporation manufactures automation components, equipment and systems.

■ Omron Industrial Automation division offers various control components and systems for factory automation.

Regal Beloit■ Regal Beloit Corporation offers electric motors and controls, electric generators and controls, and mechanical motion control products.

■ Regal Beloit Mechanical division offers various motion control products.

Rockwell■ Rockwell Automation is a global provider of industrial automation power, control and information solutions.

■ Rockwell Control Systems division offers wide range of machine control solutions.

Schneider

■ Schneider is a France-based company that specializes in electricity distribution and automation management. The

Company has eight divisions and operates in Europe, the United States, the Middle East, Asia and Africa.

■ Schneider Industry division provides various control systems and process automation.

Siemens

■ Siemens is engaged in electronics and electrical engineering. The Company is an integrated technology company with activities in

the fields of industry, energy and healthcare.

■ Siemens Drive technology offers various products like converters, motores etc.

WEG■ Weg is a Brazil-based company principally involved in the production of electric motors.

■ WEG Automation division manufactures industrial electric motors.

Yasakawa

■ Yasakawa Electric Corporation manufactures and markets servomotors, controllers, inverters, and industrial robots. The Company's

products include spindle controllers, computerized numerical control (CNC) systems, and system engineering.

■ Yaskawa Drives & Motion Division provides Industrial Control and Automation products.

LV

GE■ GE has a global infrastructure producing products ranging from light bulbs, fuel cell to technology,cleaner,more efficient jet engines.

■ GE Indutrial Solutions manufactures low voltage switchgears, circuit breakers products.

Legrand■ Legrand is a France-based company that specializes in the design, manufacture and distribution of products and systems for

electrical installations and information networks.

Eaton

■ Eaton is a diversified power management company, engaged in the manufacturing of electrical components & systems;

hydraulics components; aerospace fuel, hydraulics & pneumatic systems & truck & automotive drivetrain & powertrain.

■ Eaton Electrical division provides various low voltage products like circuit breakers, switchgear, UPS systems, power distribution

units,panelboards, loadcenters, motor controls, meters etc.

Hubbell

■ Hubbell manufactures electrical an delectronic products for a broad range of non residential and residential construction, industrial

and utility applications.

■ Hubbell Electrical division provides wide range of electrical and electronic wiring devices, wire management systems and specialized

wiring products.

Schneider■ Schneider Electric is a France-based company that specializes in electricity distribution and automation management.

■ Schneider power division offers various low voltage products and systems.

Siemens

■ Siemens is engaged in electronics and electrical engineering. The Company is an integrated technology company with activities in the

fields of industry, energy and healthcare.

■ Siemens Building Technologies and Powe Grid division manufactures various low voltage products.

Process Automation

Emerson

■ Emerson is a diversified global technology company. It is engaged in designing and supplying product technology and

delivering engineering services and solutions in a range of industrial, commercial and consumer markets around the world.

■ Emerson Process Mgmt provides product technology as well as engineering and project management services for utilities, food and

beverage, pulp and paper, pharmaceuticals and municipal water and wastewater systems.

Honeywell

■ Honeywell is a diversified technology and manufacturing company, serving customers worldwide through its 4 business segments:

Aerospace, Automation and Control Solutions, Specialty Materials and Transportation Systems.

■ Honeywell Automation and Control solutions division provides various enviornmental controls and process solutions to oil & gas and

utilities.

Invensys

■ Invensys develops & applies advanced technologies that enable the world''s manufacturing & energy generating facilities, mainline &

mass transit rail networks.

■ Invensys Control division is a provider various control products for esidential and commercial market.

Metso

■ Metso is a global supplier of technology & services, which helps its customers to process natural resources and recycle materials

into valuable products.

■ Metso Automation provides various automation product and services.

Siemens

■ Siemens is engaged in electronics and electrical engineering. The Company is an integrated technology company with activities in

the fields of industry, energy and healthcare.

■ Siemens Industry automation division manufactures various automation products and provide solutions.

Yokogawa

■ Yokogawa Electric Corporation provides various products based on its measurement, control, and information technologies in Japan,

Asia, Europe, North America, the Middle East, and internationally.

■ Yokogawa Industrial Automation and Control division develops distributed control systems for the monitoring and control of

processes in production facility. Source: Company data, Credit Suisse research

20 February 2013

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Figure 184: Description of companies used in SOTP

Power Product

Alstom

■ Alstom specializes in the manufacture and supply of transport and energy infrastructure. It designs, supplies and maintains a range

of high technology products used for power generation sector and industrial mark.

■ Alstom Grid division makes various high voltage products for transmission of electricity.

Crompton greaves

■ CG is engineering conglomerate and has a diverse portfolio of products, solutions and services ranging from high-end power and

industrial equipments and solutions, to consumer products and home appliances.

■ CG Power System division designs and manufactures wide range of transformers, switch gears, circuit breakers, vacuum

interrupters, network production and control gears.

Eaton

■ Eaton is a diversified power management company, engaged in the manufacturing of electrical components & systems;

hydraulics components; aerospace fuel, hydraulics & pneumatic systems & truck & automotive drivetrain & powertrain.

■ Eaton Electrical division is into electrical distribution and power control product and services.

Schneider

■ Schneider Electric is a France-based company that specializes in electricity distribution and automation management. The Company

has eight divisions and operates in Europe, the United States, the Middle East, Asia and Africa.

■ Schneider Infrastructure division manufactures various products like disconnectors, circuit breakers and transformers.

Hyundai Heavy

■ Hyundai Heavy Industries is the world's largest shipbuilder & among the top 5 manufacturers in other heavy industries. Its mainly

engaged in the ship building business.

■ HHI Electro Electric system division manufactures and supplies various products like transformers, circuit breakers etc.

Siemens

■ Siemens is engaged in electronics and electrical engineering. The Company is an integrated technology company with activities in

the fields of industry, energy and healthcare.

■ Siemens Power Transmission division comprises of high voltage power transmission products.

SPX

■ SPX Corporation is a global, multi-industry manufacturer of highly specialized, engineered solutions. The Company serves three global

markets: infrastructure, process equipment and diagnostic tools.

■ SPX Power and Energy division manufactures various transformers and HAV products for electrical grid.

XD

■ China XIAN group manufactures high and ultra-high voltage AC/DC transmission and distribution equipment and other electrical

products in China.

■ XIAN substation division is into HV products.

Power System

Alstom■ Alstom specializes in the manufacture and supply of transport and energy infrastructure. It designs, supplies and maintains a range

of high technology products used for power generation sector and industrial mark.

■ Alstom Grid division provides integration of renewables into the grid and netwok management solutions.

Emerson

■ Emerson is a diversified global technology company. It is engaged in designing and supplying product technology and

delivering engineering services and solutions in a range of industrial, commercial and consumer markets around the world.

■ Emerson Network Power provides innovative solutions and expertise in areas including AC and DC power and precision cooling

systems, embedded computing and power, integrated racks and enclosures, power switching and controls, monitoring, and

connectivity.

GE

■ GE Smart Grid software and hardware technologies and strategic partnerships provide meters and metering services, AMI, meter

data management, pre-payment Outage Management System (OMS), Interactive Voice Response (IVR) and Geospatial Information

System (GIS).

Nexans■ Nexans produces power transmission and distribution cables, wire rods, copper, fire optic telecommuncation cables.

■ Nexans' Transmission,Distributors and Operators division produces cables and wires for transmisson and distribution of electricity.

Siemens

■ Siemens is engaged in electronics and electrical engineering. The Company is an integrated technology company with activities in

the fields of industry, energy and healthcare.

■ Siemens Power Transmission division offers solutions toward renewable energy, the expansion and interconnection of grid

infrastructures. Source: Company data, Credit Suisse research

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Vendor data—Automation & Power

Figure 185: Factory Automation Brackets showing the company’s division,*=organic

Order Growth (YoY%) Geo Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

Americas

Emerson (IA)* US 9% 45% 40% 30% 27% 12% 2% 3% 3% -7% -6% -6%

Europe

ABB (DA&M)* EU 2% 24% 39% 34% 34% 25% 15% 11% 9% -2% 1% 3%

Krones EU 33% 21% -5% 15% 14% 25% 11% 8% 5% -4% 12%

Kuka EU 23% 12% 52% 22% 60% 55% 20% 20% 52% 15% 0% 20%

Siemens (D)* EU 12% 35% 15% 48% 23% 17% 32% -12% -1% -11% -7% -3%

Siemens (IA)* EU 14% 27% 20% 24% 20% 7% 11% 13% 6% -5% 2% -12%

Asia

Fanuc JP 475% 208% 172% 68% 33% 31% 11% 7% -2% -14% -4% -8%

Mitsubishi Electric (FA) JP 7% 2% -1% 3% 9% -8% -5% 6% 2% 3% 2%

THK JP 185% 243% 140% 61% 25% -9% -29% -29% -23% -11% -6% 5%

Yaskawa JP 120% 198% 58% 12% 15% 12% -8% -8% -2% -16% 0% 12% Source: Company data

Figure 186: Factory Automation Brackets showing the company’s division,*=organic

Sales Change(YoY%) Geo Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

Americas

Danaher (IT)* US 6% 18% 17% 16% 19% 15% 10% 3% 0% 1% 2% 3%

Emerson (IA)* US -12% 19% 25% 23% 30% 18% 15% 2% -1% 3% -1% -6%

GE (Intelligent Platform) US 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

PTC US 3% 8% 11% 4% 11% 13% 20% 18% 12% 10% -5% 2%

Rockwell Automation* US 5% 25% 27% 28% 24% 14% 17% 8% 7% 7% 5% 2%

WEG(Industrial/Elec Equip) BR -22% 4% 44% 32% 32% 26% 7% 28% 27% 27% 20%

Europe

ABB (DA&M)* EU -13% -5% 16% 14% 21% 25% 15% 11% 15% 11% 5% 7%

Dassault Systems* EU 7% 16% 25% 26% 29% 15% 9% 9% 10% 10% 10% 8%

Krones EU 11% 23% 15% -2% 14% 20% 10% 13% 7% -1% 9%

Kuka EU -8% 29% 26% 32% 56% 24% 35% 24% 12% 33% 33% 7%

Schneider (I)* EU 19% 27% 28% 21% 22% 14% 7% 1% -7% -6% -3%

Siemens (D)* EU -17% 3% 6% 15% 20% 18% 26% 5% 8% -1% -1% -5%

Siemens (IA)* EU 4% 19% 16% 20% 19% 19% 14% 4% 9% 0% 1% -3%

Asia

Airtac TW 0% 0% 0% 0% 45% 22% 13% 10% -5% 1% 7% 13%

Fanuc JP 97% 118% 156% 125% 6% 32% 23% 16% 14% 5% -7% -11%

Hiwin TW 204% 141% 145% 126% 95% 92% 76% 42% -22% -13% -21% -34%

Keyence JP 48% 63% 45% 34% 14% 17% 6% 4% 6% 7% 10% 9%

Mitsubishi Electric (FA) JP 31% 60% 52% 37% 27% 25% 13% -1% 6% -4% -6% -6%

Omron (IA) JP 35% 62% 42% 25% 14% 9% 1% -7% -5% -12% -6% 0%

Siasun CH 21% -6% 0% 60% 22% 88% 35% 35% 48% 38% 31%

SMC JP 61% 88% 64% 34% 22% 14% 2% -4% 8% -6% -8%

THK JP 31% 101% 89% 59% 36% 17% 8% -2% -10% -12% -18%

Yaskawa JP -5% 37% 46% 40% 14% 21% 7% -7% -11% -5% -5% 1% Source: Company data

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ABB (ABBN.VX) 74

Figure 187: Process Automation Brackets showing the company’s division,*=organic

Order Growth (YoY%) Geo Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

ABB (PA) * EU -24% 25% 34% 25% 21% 15% 5% 7% -1% 3% -3% 18%

Alfa Laval (Process)* EU -6% 18% 28% 12% 35% 32% 25% -8% 22% 3% -4% 21%

Emerson (PM) * US 6% 11% 24% 26% 18% 13% 16% 15% 17% 19% 5% 2%

GEA (Process) EU 34% 10% 27% 25% 20% 26% 35% 7% 27% -6% 8% 5%

GEA (Farm Tech) EU 7% 15% 21% 18% 25% 12% 22% 13% 18% 13% 5% 8%

GEA (Mechanical Equip) EU -12% 20% 21% 7% 27% 18% 15% 12% 9% 1% 11% 25%

Invensys OM) EU -20% 0% 20% 0% 24% 0% 2% 0% -11% 0% -6%

Metso (Total) EU 31% 50% 37% 28% 35% 73% 36% -12% 4% -40% -21%

Yokogawa (IA & Control) JP 7% 7% 1% 7% 4% 12% 8% -3% 10% -2% 4%

Sales Growth (YoY%) Geo Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

ABB (PA)* EU -15% -12% -1% 4% 6% 9% -1% 10% 6% 5% 3% -3%

Alfa Laval (Process)* EU -23% -8% 1% 0% 18% 11% 23% 25% 8% 9% -4% 2%

Aspen Tech US -36% -46% 8% 17% 15% 38% 19% 34% 17% 22% 40% 16%

Emerson (PM)* US -14% -1% 5% 12% 14% 13% 17% -1% 14% 23% 20% 24%

GEA (Process) EU -5% 6% 19% 28% 17% 29% 19% 23% 24% 4% 7% 4%

GEA (Farm Tech) EU -1% 8% 7% 18% 17% 11% 15% 14% 18% 12% 14% 12%

GEA (Mechanical Equip) EU -22% -3% 15% 19% 23% 20% 6% 19% 13% 5% 16% 9%

Hollysys CN 46% 26% 59% 61% 67% 28% 43% 8% 19% 23% 1%

Honeywell (ACS-Process)* US 9% 11% 11% 2% 9% 8% 5% 3%

IMI Plc UK 0% 3% 0% 12% 0% 12% 3% 11% 6% 6% 3%

Invensys (OM)* UK -12% 0% 7% 0% 17% 0% 21% 0% 5% 0% 7%

Metso (Total) EU -4% 10% 11% 25% 23% 14% 18% 23% 22% 21% 12%

Rockwell Automation (PA) US 0% 0% 0% 0% 0% 0% 25% 22% 23% 15% 18% -2%

Rotork (Controls) UK 0% 5% 0% 8% 0% 9% 0% 19% 0% 11% 0%

SPW (Flow Tech)* US -15% -6% 1% 3% 18% 14% 16% 13% 10% 12% 1%

Yokogawa (IA & Control) JP -8% 0% -2% 6% 2% 8% 3% 7% 8% 10% 6% Source: Company data

Figure 188: Power Grid Equipment Brackets showing the company’s division,*=organic

Order growth (yoy%) Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

ABB (PP)* -26% -11% -7% -5% 15% 4% 6% 8% 11% 5% -6% 0%

ABB (PS)* -30% -19% 13% 40% 5% 11% 9% 21% 3% 25% -15% -24%

Alstom (GRID) -2% 14% -3% 14% 21% -6%

Siemens (PT)* -11% 39% 10% 8% 43% -14% 2% -16% -25% -22% -20% -12%

Book to bill Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

ABB (PP)* 1.04 0.98 0.97 0.87 1.23 1.01 0.99 0.89 1.24 1.07 0.95 0.89

ABB (PS)* 1.27 0.83 1.29 1.26 1.06 0.82 1.40 1.30 1.08 1.01 0.93 1.04

Alstom (GRID) 1.00 0.89 0.86 1.08 1.00 1.01 1.19 0.83 1.14 1.19 1.27

Siemens (PT)* 1.04 1.13 0.98 1.37 1.31 0.99 0.97 1.06 1.05 0.71 0.77 1.00

Sales growth (yoy%) Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

ABB (PP)* -12% -12% -13% -6% -3% 1% 3% 6% 9% 0% 0% 0%

ABB (PS)* -10% 0% 6% 10% 27% 12% 2% 17% 1% 1% 11% -4%

Alstom (GRID) -13% -17% 26% 0% 2% -12%

Cooper (ES&S)* -9% 1% 8% 15% 16% 15% 9% 7% 10% 7% 7%

Crompton Greaves (Power) -5% -2% 7% -1% 14% 4% 12% 34% 2% 11% 1% -12%

Prysmian (Utilities)* -13% 1% 8% 10% 0% 19% 15% 18% -4% -1% 8%

Schneider (Infrastructure)* 1% 9% 7% 10% 2% -3% -2%

Siemens (PT)* -11% -3% 7% 1% 13% -3% 4% 5% -5% 8% 3% -7%

SPX Corp (Transformers) -29% -49% -27% -24% -31% 6% -16% 34% 33% 20% 48%

Valmont (Utility Support Structures) -38% -48% -27% -1% 11% 16% 30% 63% 51% 57% 40%

WEG (GTD) -20% -30% -31% -7% -25% -5% 1% 7% 23% 10% 28% Source: Company data

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PEERs map

Figure 189: ABB – PEERs map

Source: Credit Suisse PEERS

We show in Figure 189 the PEERs map for ABB.

PEERs is a global database that captures unique information about companies within the

Credit Suisse coverage universe based on their relationships with other companies – their

customers, suppliers and competitors. The database is built from our research analysts’

insight regarding these relationships. Credit Suisse covers over 3,000 companies globally.

These companies form the core of the PEERs database, but it also includes relationships

on stocks that are not under coverage.

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ABB (ABBN.VX) 76

Companies Mentioned (Price as of 15-Feb-2013)

Hyundai Heavy Industries (009540.KS, W211,500) Airtac (1590.TW, NT$170.0) Hiwin (2049.TW, NT$228.5) Mori Seiki (6141.OS, ¥959) SMC (6273.T, ¥15,900) Mitsubishi Electric (6503.T, ¥770) Yaskawa Electric Corporation (6506.T, ¥846) Keyence (6861.T, ¥26,200) Fanuc (6954.T, ¥14,840) ABB (ABBN.VX, SFr20.97, OUTPERFORM, TP SFr26.0) Autodesk Inc. (ADSK.OQ, $39.0) Alfa Laval (ALFA.ST, Skr145.4) Alstom (ALSO.PA, €33.4) Assa Abloy (ASSAb.ST, Skr249.3) Atlas Copco (ATCOa.ST, Skr185.8) Dassault Systemes (DAST.PA, €84.06) Danaher Corporation (DHR.N, $61.68) Electrolux (ELUXb.ST, Skr162.0) Emerson (EMR.N, $58.29) Gamesa (GAM.MC, €2.25) General Electric (GE.N, $23.29) Geberit (GEBN.VX, SFr223.2) Honeywell International Inc. (HON.N, $70.11) IMI Plc (IMI.L, 1160.0p) Invensys (ISYS.L, 351.6p) Kennametal Inc. (KMT.N, $41.86) Kone Corporation (KNEBV.HE, €64.7) Legrand SA (LEGD.PA, €33.92) Metso (MEO1V.HE, €33.76) Nexans (NEXS.PA, €39.38) Oracle Corporation (ORCL.OQ, $34.81) Philips (PHG.AS, €21.94) Prysmian (PRY.MI, €15.74) Regal Entertainment Group (RGC.N, $15.33) Rockwell Automation (ROK.N, $90.76) Rotork plc (ROR.L, 2914.0p) Sandvik (SAND.ST, Skr106.1) SAP (SAPG.F, €59.98) Schneider (SCHN.PA, €54.49) Schindler-Holding AG (SCHP.VX, SFr140.8) SGL Carbon SE (SGCG.DE, €32.68) Siemens (SIEGn.DE, €78.11) SKF (SKFb.ST, Skr158.0) SPX (SPW.N, $79.37) Vestas (VWS.CO, Dkr40.22) WEG (WEGE3.SA, R$25.4)

Disclosure Appendix

Important Global Disclosures

The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Price and Rating History for ABB (ABBN.VX)

ABBN.VX Closing Price Target Price

Date (SFr) (SFr) Rating

19-Feb-10 20.79 20.00 U

01-Jun-10 19.28 20.00 N

08-Jun-10 18.76 R

08-Sep-10 20.50 21.00 N

21-Feb-11 22.60 24.00

28-Apr-11 23.86 26.00 O

22-Jul-11 20.10 24.00

09-Aug-11 15.72 19.50

22-Sep-11 15.40 19.00

08-Dec-11 17.10 22.00

30-Jan-12 19.04 R

06-Feb-12 19.96 22.00 O

17-Feb-12 19.32 R

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

N EU T RA L

REST RICT ED

O U T PERFO RM

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ABB (ABBN.VX) 77

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neut rals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating defini tions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (54% banking clients)

Neutral/Hold* 38% (46% banking clients)

Underperform/Sell* 16% (40% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for ABB (ABBN.VX)

Method: We use a combination of SOTP, DCF and HOLT to derive our target price of SFr26. Our SOTP take peers of ABB amongst its five divisions. We have used EV/EBITA mutliples for fiscal year 2013. Our DCF analysis is EVA based and takes a WACC of 9% and terminal growth of 2% into account. Our HOLT analysis derives a fair value of SFr26 based on CS expectations.

Risk: There is risk to our target price if underlying end markets worsen, sizable contracts get lost or economic growth turns out to be weaker than we are currently assuming. In addition, ABB has to deal with emerging market competition particularly from Asian companies which

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ABB (ABBN.VX) 78

has impacted margins within ABB's Power Products business in the past. Furthermore, we believe there is risk to our target price if ABB undertake sizable acquisition at high multiples which could impact their financial position.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (ABBN.VX, PHG.AS, SKFb.ST, ALFA.ST, ATCOa.ST, GEBN.VX, MEO1V.HE, SAND.ST, SCHP.VX, SIEGn.DE, KMT.N, 6273.T, 6861.T, IMI.L, EMR.N, GE.N, HON.N, 009540.KS, SCHN.PA, SGCG.DE, ALSO.PA, GAM.MC, NEXS.PA, ADSK.OQ, ORCL.OQ, SAPG.F, DHR.N, RGC.N, SPW.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (ABBN.VX, PHG.AS, MEO1V.HE, SAND.ST, SCHP.VX, SIEGn.DE, GE.N, 009540.KS, SCHN.PA, ORCL.OQ, RGC.N, SPW.N) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (ABBN.VX, SKFb.ST, ATCOa.ST, GEBN.VX, SCHP.VX, SIEGn.DE, 6273.T, 6861.T, IMI.L, EMR.N, GE.N, HON.N, 009540.KS, SGCG.DE, ALSO.PA, ADSK.OQ, RGC.N) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (ABBN.VX, PHG.AS, SCHP.VX, GE.N, 009540.KS, ORCL.OQ, RGC.N) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (ABBN.VX, PHG.AS, MEO1V.HE, SAND.ST, SCHP.VX, SIEGn.DE, GE.N, 009540.KS, SCHN.PA, ORCL.OQ, RGC.N, SPW.N) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ABBN.VX, PHG.AS, ALFA.ST, MEO1V.HE, SAND.ST, SCHP.VX, SIEGn.DE, KMT.N, 6273.T, IMI.L, EMR.N, GE.N, HON.N, 009540.KS, SCHN.PA, SGCG.DE, GAM.MC, NEXS.PA, 6503.T, ADSK.OQ, ORCL.OQ, SAPG.F, DHR.N, RGC.N, WEGE3.SA, SPW.N) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ABBN.VX, SKFb.ST, ATCOa.ST, GEBN.VX, SCHP.VX, SIEGn.DE, 6273.T, 6861.T, IMI.L, EMR.N, GE.N, HON.N, 009540.KS, SGCG.DE, ALSO.PA, ADSK.OQ, RGC.N) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (KMT.N, EMR.N, ROK.N, GE.N, HON.N, ADSK.OQ, ORCL.OQ, DHR.N, RGC.N, SPW.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (ABBN.VX, PHG.AS, GEBN.VX, SIEGn.DE, 2049.TW, 1590.TW, SCHN.PA, SAPG.F, PRY.MI).

Credit Suisse has a material conflict of interest with the subject company (PHG.AS). Credit Suisse is financial advisor to Philips Electronics NV in the sale of its Lifestyle Entertainment business to Funai Electric Co.

Credit Suisse has a material conflict of interest with the subject company (GAM.MC). Credit Suisse is acting as exclusive financial advisor to Gamesa in the potential sale of 183MW of its project pipeline in Germany to Impax Asset Management.

Credit Suisse has a material conflict of interest with the subject company (SPW.N). Credit Suisse Securities USA LLC acted as financial advisor to SPX Corp in the sale of its Service Solutions business to Robert Bosch GmbBH.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ABBN.VX, PHG.AS, SKFb.ST, ALFA.ST, ATCOa.ST, ELUXb.ST, GEBN.VX, KNEBV.HE, MEO1V.HE, SAND.ST, SCHP.VX, SIEGn.DE, ASSAb.ST, KMT.N, 2049.TW, 1590.TW, 6273.T, 6861.T, 6954.T, IMI.L, EMR.N, ROR.L, ROK.N, GE.N, HON.N, ISYS.L, LEGD.PA, 009540.KS, SCHN.PA, SGCG.DE, ALSO.PA, GAM.MC, NEXS.PA, VWS.CO, 6503.T, ADSK.OQ, DAST.PA, ORCL.OQ, SAPG.F, DHR.N, 6141.OS, RGC.N, WEGE3.SA, 6506.T, SPW.N, PRY.MI) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (ABBN.VX, PHG.AS, SKFb.ST, ALFA.ST, ATCOa.ST, ELUXb.ST, GEBN.VX, MEO1V.HE, SAND.ST, SCHP.VX, SIEGn.DE, ASSAb.ST, IMI.L, ISYS.L, LEGD.PA, SCHN.PA, ALSO.PA, DAST.PA, SAPG.F, 6141.OS).

Credit Suisse has sent extracts of this research report to the subject company (ABBN.VX) prior to publication for the purpose of verifying factual accuracy. Based on information provided by the subject company, factual changes have been made as a result.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

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ABB (ABBN.VX) 79

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (Europe) Limited...................................... Simon Toennessen ; Andre Kukhnin CFA ; Max Yates ; Jonathan Hurn, CFA

Important Credit Suisse HOLT Disclosures

With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report

The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-part data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.

Additional information about the Credit Suisse HOLT methodology is available on request.

The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur.

CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683.

20 February 2013

ABB (ABBN.VX) 80

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