1H23 Results Preview: Net Profit To Remain Flat hoh At US$70m
Management continues to guide 2023 revenue at US$4.0b, based on order backlog. The prospective revenue growth will be driven by the recovery in global auto production as a result of easing chip shortage and the expansion of the customer base in China’s market. Margins will probably improve from 2H22 through 2H23 with easing chip shortage boosting operational efficiency. We keep 2023-25 EPS estimates at US$0.06/US$0.08/US$0.09 respectively. Maintain BUY. Target price: HK$7.50.
WHAT’S NEW
• Revenue guidance kept at no less than US$4.0b for 2023. Based on the order backlog and tentative orders, management maintains 2023 revenue guidance at a record of not less than US$4.0b (2022: US$3.84b). The prospective growth will be driven by the easing chip shortage and expansion of customer base in China market. Globally, light vehicle sales volume is expected to grow about 5% in 2023 with easing chip shortage removing supply bottlenecks.
• Double-digit revenue growth for the North America segment. The US light vehicle sales volume grew 11.6% yoy in 1H23, and it is expected to grow at 10-12% in 2023. North America is the biggest market for Nexteer, which contributed 59% of total revenue in 2022. Nexteer’s revenue from the North America segment will probably grow in tandem with the overall industry. Upside may come from Nexteer’s potential foray into the supply chain of one of the world’s largest EV companies.
• Revenue growth of the Asia Pacific segment outpaces industry average, due to expansion of customer base. For the Asia Pacific segment, revenue growth will probably outpace the overall industry’s, due to the expansion of customer base from JV-brands to Chinese brands (eg BYD, Geely, Great Wall Motor, Guangzhou Auto, etc.) in China’s market, especially for electric vehicle (EV) projects. For example, Nexteer has started to supply electric powered steering (EPS) to BYD since 2021, and the contribution to total revenue of the Asia Pacific segment spiked from 3% in 2021 to 9% in 2022. Nexteer only supplied half shafts to Geely before 2H21. Since 2H21, Nexteer has started to supply EPS to Geely for Zeekr, and the contribution to total revenue of the Asia Pacific segment surged from 1% in 1H21 to 5% in Dec 22. All in all, Chinese brands jointly contributed half of the Asia Pacific segment’s total revenue in 2022. In addition to domestic sales, Nexteer’s sales to Chinese carmakers will also be driven by their EV exports to overseas markets. In 2023, BYD and Geely will serve as the primary growth drivers for revenue growth of Nexteer’s Asia Pacific segment. Going forward, Nexteer will start to supply EPS to more Chinese carmakers.
• The Europe and South America segment is stabilising despite the extended Ukraine-Russia war. The segment’s revenue will probably grow at mid to low single digits in 2023, driven by the business with Stellantis in Brazil. The Morocco plant will probably turn around in 2023, with growing orders boosting capacity utilisation to above breakeven point.
• Profitability is expected to rise from 2H22 through 2H23, due to declines in raw material prices (eg steel, aluminium) and improving operational efficiency as a result of easing chip shortage. Carmakers and automotive part suppliers do not need to shut down plants frequently due to chip shortage as they did in 2022, which bodes well for operational efficiency along the entire supply chain.
STOCK IMPACT
• We maintain 2023-25 revenue estimates at US$4.25b/US$4.60b/US$5.0b, implying
12%/8%/9% growth.
• We maintain 2023-25 EBITDA margin assumptions at 10-11%, vs 9.5% in 2022.
EARNINGS REVISION
• We maintain 2023-25 net profit forecasts at US$151m/US$200m/US$235m respectively. For 1H23, we estimate net profit at US$70m, vs a net loss of US$11m in 1H22 and net profit of US$69m in 2H22, based on 1H23 revenue of US$2.1b.
VALUATION/RECOMMENDATION
• Maintain BUY and keep target price at HK$7.50 based on 16x 2023F PE, on par with historical mean one-year forward PE.