Expect a better 2H22 after a bumpy 1H
- Anticipate better 2H22 performance on strong EV market and restocking in North America to boost production
- Weak 1H22 expected; supply chain disruptions and pandemic lockdowns affecting product margin recovery
- New product sales, EV opportunities and market recovery to support revenue expansion
- Maintain BUY; HK$7.30 TP based on 14x FY22F PE
What’s new
We hosted an Electric Vehicle Sector Conference Call with Nexteer’s management and we have summarized the Q&A session. Raw material cost pressure and pass-through mechanism and impact on EBITDA were the major concerns of investors.
Q: Does the increase in inflation rate have any impact on the company’s operations?
A: There is significant global impact. In Europe, inflation together with the Russia-Ukraine war and chip shortage have created a weak economic outlook for the region. As for the US, vehicle supply was largely affected by chip shortage and channel inventory remains low, which led to supply and demand imbalance.
The management expects a stronger auto market in 2H22, supported by healthy demand boosted by China’s auto stimulus measures, and more stable supply chain and restocking. US customers are more optimistic on production orders. Based on market estimates, global automobile production could grow by 15-20% this year (with North America at about 20% growth in volume production). Expansion of Nexteer’s customer base should support decent 2H22 growth.
Q: Is Nexteer able to pass through higher raw material cost?
A: In FY21, 65% of total costs was passed on to customers. The target for this year is >60%. Nexteer is in constant negotiations with its customers to pass through more of the increase in raw material electronic components and logistic costs. At times, Nexteer’s customers have been willing to make a one-off compensation payment to cover the sharp rise in costs.
Q: What is Nexteer’s plan for new launches in 2022? What took place in 2Q22?
A: Due to Covid lockdowns in some Chinese cities in 1H22, some new launches in China were delayed to 2H22. In 2H 2022, there will be new models and brand names for the program launch. For full year, at least 30 new programs will be launched globally.
Q: Are there any new investment plans for the China market, especially the NEV segment?
A: We have no plan to build new plants in the near-term. The focus now is to increase the utilization rate, expand the current factory production capacity and improve production line efficiency by increasing the number of production shifts.
In China, Nexteer differentiates itself by being selective in choosing customers, which tends to be the new pure EV players. It plans to expand its electric power steering (EPS) product line as well as to secure more Chinese customers. More affordable or upgraded versions of EPS will be introduced, and customized solutions are also provided, depending on customer demand.
Q: Are there any updates on the business with Tesla?
A: Our business with the global pure EV maker is meaningful. The customer is satisfied with our products and services. This year, we have more opportunities to work with Tesla, on the column business.
Q: Is Nexteer taking on any new projects for advanced driver assistance systems (ADAS)?
A: In late 2021, we launched a new EPS. Our new stowable column will be ready in 2024 for commercialization and steer-by-wire orders should start contributing to revenue by 2025. Currently, Ford F150 and Geely Zeekr 001 have adopted some of our new steering products.
Q: What is the EBITDA and FCF guidance for 2022?
A: Due to the volatile oil and commodity prices in 1H22, product margins were being impacted. The management expect some easing in raw material cost pressure in 2H22 and that could potentially lift the EBITDA margins. As this year’s revenue is expected to return to 2019’s level, FCF is also expected to improve as the company is more careful with the working capital management.
Q: What is your new business target for 2022?
A: In 2021, Nexteer secured about US$6bn worth of new contracts, although it was slightly below budget. This year, the company aims to achieve similar level as 2021. Besides, steer-by-wire contracts will add to the new business, and the potential value could be huge.
Q: What is the Capex guidance for 2022/23?
Nexteer’s capex is largely on investment in tangible assets. Our capex is estimated to be US$140-150m this year, which is slightly higher than FY21’s to support its new program launches.
Q: What is the company dividend policy?
A: Dividend payout ratio will be maintained at 20%
Q: What is Nexteer’s guidance for the next 3-5 years?
A: From 2021-2025, the company targets to achieve 15% annual revenue growth, supported by new programs planned launches and new businesses opportunities, such as steer-by-wire. Although current share of the EV business to total revenue is not significant, but given that 25% of total order backlog is related to the EV business, EV contribution is expected to rise rapidly in the future.
Q: Can you comment on performance of overseas factories?
Currently, we have factories in Poland, Morocco, and Brazil. We are trying to improve EBITDA margin by switching supply chain from Europe and China to Morocco where the production cost is lower. We do expect to see rapid growth in the auto parts market, and we are confident in expanding our market share globally.