- Global auto market growth driven by strong demand and low inventory
- Chinese auto parts companies ready to leverage on industry’s shift to electrification
- Earnings improvement in sight; sector trading at attractive valuation
- Our picks are Minth (425 HK) and Nexteer (1316 HK)
Global vehicle market is recovering. Strong underlying demand and low inventory are expected to support the global vehicle market recovery. Major auto markets are projected to post better growth this year on improving supply of critical components. Global light vehicle sales rose c.5% in 2021 and projected to expand by 6-7% this year. Global auto OEMs are also accelerating their new model programmes especially in EV development. This should help to drive order flows for the auto parts companies. Global parts companies are spending billions of dollars to develop their business as the car industry switches from combustion engines to electric technology.
Anticipate Chinese auto parts sector ready to gain strength. We expect ongoing improvement in auto chips supply throughout 2022. Logistic bottlenecks easing should improve volume shipment and coupled with stabilising prices of certain commodities in 2022, it should reduce the production cost pressure on the auto parts companies. Chinese auto parts companies have been diversifying their product range and customer reach ahead of the curve in view of the rapid rise in vehicle electrification. They have made inroads into the global EV makers supply chain networks to drive future growth. All these could drive FY21-23 net earnings to achieve CAGR of 20-30%.
Opportunity to ride on upside potential. A timely opportunity to revisit the auto parts sector and benefit from valuation upside potential, led by anticipated improvement in global auto sales and margin expansion. The parts sector is trading at FY22F 11x PE, comparable to the historical 5-year average. Minth’s growing innovative product sales is a major earnings driver, as its early investments are ready to deliver positive results. On the other hand, Nexteer should benefit from its key US customers’ volume surge as they raise production of more affordable vehicles on improving chips supply.