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Nexteer Automotive Group Limited (1316 HK) – A value stock for a weak market

  • BUY Entry – 8.4 Target – 9.4  Stop Loss – 7.9
  • Nexteer Automotive Group Limited is an investment holding company principally engaged in the development, manufacturing, and provision of steering and driveline systems. Along with subsidiaries, the company operates its business through four segments: the North America segment, Asia Pacific segment, the Europe & South America segment, and the Others segment. The company’s products include electric power steering, hydraulic power steering (HPS), steering columns and intermediate shafts (CISs), driveline systems (DL), advanced driver assistance systems and automated driving (AD) products, among others.
  • Impacted by shortage of automobile chips, the whole vehicle manufacturing industry has slowed down production even as demand for passenger vehicles is rising. The company’s product is one of the key components in a vehicle, and hence, its business is highly correlated to the sector’s prospects.
  • Previously, the company announced the 1H21 results. Revenue grew by 43% YoY to US$1.7bn. Gross profit jumped by 85.5% YoY to US$226.5mn. Profit attributable to equity holders of the company jumped by 6300% YoY to US$83.1mn. 
  • The current price has factored in the less favourable earnings. Although the recovery of the business has slowed due to the headwinds of the auto chip shortage which has resulted in a slower than expected recovery in the overall auto sector, this is transitory rather than permanent. In the coming months, we expect more positive sector news to emerge, such as the resumption of auto production or production target hikes for 2022. It is likely that good news will have more impact on the stock price rather than negative news, given the substantial price correction of its share price. 
  • Updated market consensus of the estimated net profit growth in FY21 and FY22 are 57.0% and 43.6% respectively, which translates to 13.1x and 9.2x forward PE. The current PE is 13.9x. Bloomberg consensus average 12-month target price is HK$13.9.
1316 HK (Source: Bloomberg)