Underlying fundamentals remain strong
- Global vehicle output projected to improve
- Secured a large order in 4Q21 of c.US$2bn from a US customer
- Future sales to be driven by innovative new products and new customers to ride on rising vehicle electrification rate
- Maintain BUY; HK$14 TP based on 16x FY22F PE
Improving global vehicle market outlook. We believe the worst should be behind us and anticipate supply of critical auto parts and components to gradually recover. Hence, global vehicle output is expected to increase across the major auto markets, benefitting Nexteer’s operations. The release of the underlying pent-up demand and channel restocking are production drivers. Global vehicle market is projected to grow at high single digit in 2022.
New wins to surge; secured a large order in 4Q21. Due to earlier tight supply of auto chips, global OEMs have rescheduled or delayed certain new project launches in 1Q22. Despite the challenging market environment, the company managed to secure a large order of some US$2bn from General Motors in 4Q21 to boost its new order book to about US$3bn (estimate), compared to US$1.7bn secured in 9M21. However, this is slightly below our earlier estimate of US$6bn for the full year.
Innovative products outlook staying strong. The strong sales of full-size trucks in North America (NA) is positive on demand for Nexteer’s high output (REPS) system, especially with the rising truck electrification in NA. Based on new bookings secured in 9M21, some 34% is related to EVs and the proportion could rise as more global automakers shift to electrification.
Besides, securing new accounts opens more growth opportunities for the company, like penetration into the new generation EV makers in China such as NIO, Xpeng and Li Auto. The supply of steering columns to the world’s largest EV maker (Tesla) will commence in 2023, and further expand its customer reach and potential to deepen its supply chain penetration.
Profit margins could remain under pressure in the near-term. While the company is able to pass through 60-70% of the high raw material costs to customers, the pandemic outbreak has resulted in higher other operating expenses, which will be absorbed by the company. Hence, operating margins are expected to remain under pressure in 1H22 before improving in 2H22.