March 27, 2017 The Asia Stock Collection Nexteer (1316.HK, Buy)
Upside: 19% Equity Research Steering autonomously
Upcoming technology shift unravels a significant set of opportunities In the last technology shift, Nexteer earned its place as the No. 3 global steering supplier (up 2 places from 2012; out of 7 competitors) gaining significant market share (from 4.8% in 2012 to 12.4% in 2018E). We believe the next major technology shift — largely driven by Advanced Driver Assistance System (ADAS)/Autonomous Vehicle (AV) — is likely to be a game changer for Nexteer. We expect the company to capture market share based on enhanced tech capability and competitive advantage vs. peers, and reach new highs in terms of product ASP/margin/share on increased value creation (i.e., more software/sensor/control). We forecast 20% earnings CAGR over 2018E-2020E. Reiterate Buy.
Belt on: 2018’s the take-off year Yuqian Ding Despite the US$25.6bn backlog (6.7X of FY16E revenue), we forecast +86(10)6627-3327 [email protected] Beijing Gao Hua Securities Company Limited muted 2017E earnings growth (7% yoy) on flat US/China market growth and low new product contribution. While 2017 sees a transition in terms of earnings, we believe it lays a strong foundation for the next cycle and Price 12m Target Price expect the share price to perform as more clarity emerges on: 1) R&D HK$11.78 HK$13.98 milestone of Nexteer-Continental joint venture on integrated wire- Market Cap 12m ADTV based/motion control system in 2H2017E; 2) Engaging with OEMs at an US$3.7bn US$6mn early stage of their tech model development which would further enhance
Nexteer’s product credentials and support its positioning in potential backlog bidding; and 3) Strategic investments/partnerships which the company plans to pursue to improve its product suite/competitiveness in the ADAS/AV space. Curating analyst stock ideas around Asia with a focus on differentiated views, liquidity and We believe valuation is attractive. The stock is currently trading at 10.0X drivers in 2017 addressing eight core issues: 2018E P/E vs global peer average of 12.2X and its historical 12-month 1. 1. Investment thesis forward P/E median at 9.6X. 2. The path forward
Technology/competitive landscape analysis in focus 3. Where we are different It is generally quite challenging to grasp the core of a supplier’s 4. Forecast drivers investment thesis due to the lack of product/volume/ASP clarity and 5. Valuation segment context. For a concentrated segment with relatively high entry 6. Cash flow & balance sheet barriers such as steering, we believe the technology upcycle offers not 7. Risks & pushbacks only ASP/margin expansion potential, but also the opportunity for well positioned players such as Nexteer to gain market share. 8. External share price factors Check out the full series on GS360 portal. In our view, Nexteer is an early mover in the upcoming ADAS/AV cycle and scores well on all critical aspects to capture the opportunity on the back of: 1) leading steering technology, 2) continuous R&D in software/sensor/control, 3) braking-steering integration, 4) being independent as a supplier.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research March 27, 2017 China: Automobiles
Nexteer Automotive Group: Summary financials
Profit model ($ mn) 12/16 12/17E 12/18E 12/19E Balance sheet ($ mn) 12/16 12/17E 12/18E 12/19E
Total revenue 3,842.2 4,141.8 4,746.9 5,508.8 Cash & equivalents 484.5 736.7 1,015.1 1,255.4 Cost of goods sold (3,018.0) (3,245.0) (3,719.0) (4,316.0) Accounts receivable 589.6 635.6 728.5 845.4 SG&A (253.2) (277.1) (317.6) (364.1) Inventory 261.7 281.4 322.6 374.3 R&D (110.8) (119.5) (136.9) (158.9) Other current assets 91.7 91.7 91.7 91.7 Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 1,427.6 1,745.4 2,157.8 2,566.9 EBITDA 571.1 619.7 710.3 828.7 Net PP&E 779.1 851.2 937.9 1,118.1 Depreciation & amortization (162.6) (176.5) (186.0) (205.6) Net intangibles 449.7 366.1 282.5 198.9 EBIT 408.5 443.2 524.3 623.1 Total investments 10.6 13.4 16.7 20.3 Interest income 1.4 1.8 3.0 4.7 Other long-term assets 26.4 26.4 26.4 26.4 Interest expense (31.6) (29.5) (29.5) (29.5) Total assets 2,693.4 3,002.5 3,421.3 3,930.6 Income/(loss) from uncons. subs. 0.0 0.4 0.8 1.2 Others 7.7 (1.2) (1.2) (1.2) Accounts payable 604.5 650.0 744.9 864.5 Pretax profits 386.0 414.6 497.3 598.1 Short-term debt 75.5 75.5 75.5 75.5 Income tax (84.1) (90.3) (108.2) (130.1) Other current liabilities 180.3 184.7 197.4 212.9 Minorities (7.1) (7.7) (8.9) (10.3) Total current liabilities 860.3 910.2 1,017.8 1,152.9 Long-term debt 488.7 488.7 488.7 488.7 Net income pre-preferred dividends 294.7 316.6 380.2 457.7 Other long-term liabilities 253.4 253.4 253.4 253.4 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 742.0 742.0 742.0 742.0 Net income (pre-exceptionals) 294.7 316.6 380.2 457.7 Total liabilities 1,602.3 1,652.2 1,759.9 1,894.9 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 294.7 316.6 380.2 457.7 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 1,059.0 1,312.3 1,616.5 1,982.6 EPS (basic, pre-except) ($) 0.12 0.13 0.15 0.18 Minority interest 32.0 38.0 45.0 53.0 EPS (basic, post-except) ($) 0.12 0.13 0.15 0.18 EPS (diluted, post-except) ($) 0.12 0.13 0.15 0.18 Total liabilities & equity 2,693.4 3,002.5 3,421.3 3,930.6 DPS ($) 0.02 0.03 0.03 0.04 Dividend payout ratio (%) 20.0 20.0 20.0 20.0 BVPS ($) 0.42 0.52 0.65 0.79 Free cash flow yield (%) 10.8 8.2 9.0 8.3
Growth & margins (%) 12/16 12/17E 12/18E 12/19E Ratios 12/16 12/17E 12/18E 12/19E Sales growth 14.3 7.8 14.6 16.1 CROCI (%) 27.1 25.2 26.2 27.1 EBITDA growth 20.8 8.5 14.6 16.7 ROE (%) 31.2 26.7 26.0 25.4 EBIT growth 23.6 8.5 18.3 18.8 ROA (%) 11.4 11.1 11.8 12.5 Net income growth 43.5 7.4 20.1 20.4 ROACE (%) 28.9 29.5 34.3 38.2 EPS growth 43.4 7.2 20.1 20.4 Inventory days 31.2 30.5 29.6 29.5 Gross margin 21.5 21.7 21.7 21.7 Receivables days 55.1 54.0 52.4 52.1 EBITDA margin 14.9 15.0 15.0 15.0 Payable days 70.3 70.6 68.4 68.1 EBIT margin 10.6 10.7 11.0 11.3 Net debt/equity (%) 7.3 (12.8) (27.1) (34.0) Interest cover - EBIT (X) 13.5 15.9 19.8 25.1
Cash flow statement ($ mn) 12/16 12/17E 12/18E 12/19E Valuation 12/16 12/17E 12/18E 12/19E Net income pre-preferred dividends 294.7 316.6 380.2 457.7 D&A add-back 162.6 176.5 186.0 205.6 P/E (analyst) (X) 9.5 12.0 10.0 8.3 Minorities interests add-back 7.1 7.7 8.9 10.3 P/B (X) 2.6 2.9 2.3 1.9 Net (inc)/dec working capital 18.3 (20.2) (39.0) (49.1) EV/EBITDA (X) 5.1 5.9 4.8 3.8 Other operating cash flow 13.9 0.3 0.0 (0.4) EV/GCI (X) 1.5 1.7 1.4 1.2 Cash flow from operations 496.6 481.0 536.0 624.1 Dividend yield (%) 2.1 1.7 2.0 2.4
Capital expenditures (192.1) (165.7) (189.9) (303.0) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others (2.4) (2.4) (2.4) (2.4) Cash flow from investments (194.6) (168.1) (192.3) (305.4)
Dividends paid (common & pref) (41.1) (58.9) (63.3) (76.0) Inc/(dec) in debt 0.0 0.0 0.0 0.0 Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Other financing cash flows (193.4) (1.7) (1.9) (2.3) Cash flow from financing (234.5) (60.6) (65.3) (78.3) Total cash flow 67.6 252.2 278.4 240.3 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
The prices in the report are as of the market close of March 24, 2017, unless stated otherwise.
Goldman Sachs Global Investment Research 2 March 27, 2017 China: Automobiles
Content upgrade/add-on and share gain to drive earnings
Given the high entry barriers and technology-driven nature of the segment, we expect well positioned technology-parts suppliers such as Nexteer to enjoy triple leverage (ASP/margin/market share) in the next technology cycle.
We expect Nexteer’s revenue opportunities over the medium term to be driven by:
Higher ASP on content upgrade (ADAS-featured EPS and SBW)
Market share gain at the expense of other global peers’/OEMs’ in-house capacity on its favorable positioning and leading technological capability.
On profitability, we expect:
Higher margins on increasing software/sensor/motor content in the mix
We forecast 17% earnings CAGR during 2016-2020E, although we expect relatively muted 2017E earnings growth rate at 7% on a high FY16 base and relatively limited conversion gain on close to saturated EPS penetration in the US. However, we expect earnings growth to reaccelerate starting 2018E on increasing upgraded product contribution.
Exhibit 1: We see ASP/margin/market share expansion to fuel earnings growth during 2016E-2020E Net earnings walk, in US$mn
600 96 550
500 56
400 46 57
300 295
200
100
- 2016 earnings Market growth ASP increase Margin expansion Market share gain 2020E earnings
Source: Gao Hua Securities Research.
Suppliers have the key to value creation New automotive innovations are increasingly developed by suppliers rather than OEMs, with increased focus on the design, integration, assembly and distribution of vehicles. Consulting firm Oliver Wyman estimates that suppliers will account for 69% value creation by 2025E from 61% in 2012 (for details, please refer to our report Upward mobility: The rise of global autos: Competitive Positioning in a growing, evolving autos industry, dated May1, 2014). In our view, this trend is being driven by the rising pressure on car manufacturers to build economies of scale and leverage technologies and investments on higher volumes.
Goldman Sachs Global Investment Research 3 March 27, 2017 China: Automobiles
ADAS/AV likely to We estimate that globally ADAS/AV together would represent a US$100bn parts market by create a US$100bn 2025E driven by six enablers: hardware, software, V2V/V2I (Vehicle to Vehicle and Vehicle revenue opportunity to Infrastructure), a favorable regulatory framework, consumer acceptance, and cyber by 2025E security.
Exhibit 2: We forecast 42% CAGR in ADAS/AV related revenue over 2015-25E, making the overall profit pool worth US$96bn for AV suppliers Global ADAS/AV content revenue pool by region and content per vehicle
Source: Conti, Delphi, TRW, Magna, Autoliv, Mobileye, Quanergy, Ibeo, Cohda, Cisco, TomTom, Argus, Security Innovation, Broadcom, Nvidia, GM, Goldman Sachs Global Investment Research.
In ADAS/AV, steering As the automotive industry enters the ADAS/AV cycle (with steering playing a critical remains critical and is actuation role in the vehicle infrastructure), we expect the content to increase in the likely to see content existing EPS (Electric Power Steering) system such as dual core processing, multiple add-up/upgrade sensors, collaboration with braking system, and additional redundancy to enable ADAS features.
Moving forward, when the auto industry moves to the semi and fully autonomous driving stage, we expect further upgrade to Steering By Wire (SBW) system (steering by braking, i.e., steering with braking redundancy). In autonomous driving architecture, steering system needs close collaboration with braking system on increasing requirements of motion control integration, system safety and redundancy, precision, and reliability. As a result, ADAS-featured EPS and SBW are likely to drive higher ASP/margin opportunities for major competitors. We estimate ADAS-featured EPS is likely to enjoy 30% ASP increase from the standard EPS system, and SBW is likely to boost ASP above US$500 (Exhibit 3). Over the past technology cycle from HPS (Hydraulic Power Steering) to EPS, we saw average operating profit margin for the industry increasing to 8.8% in 2016 (from 4.7% in 2012).
Goldman Sachs Global Investment Research 4 March 27, 2017 China: Automobiles
Exhibit 3: ASP increase along with technology evolution Exhibit 4: Margin increase on increasing software/control Steering system by generation ASP, in US$ Operating profit margin, in %
700 12.0% >500 OPM 600 10.0% 500 468 8.0% 400 360 282 6.0% 300 220 4.0% 200
100 57 2.0%
0 0.0% Manual HPS Mid EPS EPS SBW 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E solution (ADAS) Nexteer JTEKT (steering&bearing) ASP NSK(steering&bearing) ZF‐TRW (Chassis Systems) Bosch (Auto parts) TK‐presta (Auto parts)
Source: Company data, Gao Hua Securities Research. Source: Company data, Gao Hua Securities Research.
Nexteer is well positioned to leverage ADAS/AV content opportunity We see Nexteer as having demonstrated strong capability in the ADAS-featured EPS and SBW systems. As in Exhibit 5, Nexteer already has ADAS-featured EPS systems in production. On Jan 9-10, 2017, at the North American International Auto Show, Nexteer debuted two by-wire based technologies, which are capable of SAE (Society of Automotive Engineers) level 3 to 5 automated driving (that is semi to fully autonomous driving).
Nexteer also announced an agreement to form a joint venture with Continental in motion control systems. We see the launch of SBW tech and strategic partnership with Continental as key milestones for commercialization from 2018. With early launch of the next- generation steering solution, Nexteer would be able to engage with OEMs at an early stage of their AV model development and validation, which may further enhance its product credentials and support its positioning in potential backlog bidding, in our view.
Exhibit 5: Nexteer is well prepared to leverage the ADAS/AV cycle, with a strong suite of products Nexteer’s ADAS/AV related technology progress
ADAS/AV features/technologies Development type Levels of Autonomy (NHTSA) Estimated launch time Driver Assist In Production Lane Keeping In‐house Level 1‐2In production Pull Compensation In‐house Level 1‐2In production Park Assist In‐house Level 1‐2In production Stability Control Enhancements In‐house Level 1‐2In production Smooth Road Shake In‐house Level 1‐2In production Variable Effort In‐house Level 1‐2In production Active Damping In‐house Level 1‐2In production Active return In‐house Level 1‐2In production
Patented next gen steering technology Nexteer Steering on DemandTM System In‐house Level 3‐4 2018 Nexteer Quiet WheelTM Steering In‐house Level 3‐4 2018
In development technology Integrated motion control Joint venture with Continental Level 3‐4 2019
Source: Company data, Gao Hua Securities Research.
Nexteer already has a small batch of ADAS-featured EPS products in production; we expect increasing revenue contribution with ADAS penetration. We think consumption upgrade (increasing consumer preference for comfort, safety and smart features) would drive ADAS content adoption over the medium term. Further, we note that the commercial success of top-selling models in 2016 (such as Geely’s NL-3 and GAC’s GS8)’s could be partially attributed to their high ADAS equipment level.
Goldman Sachs Global Investment Research 5 March 27, 2017 China: Automobiles
We expect more ADAS to be introduced in new model launches given intensified competition. We expect the ADAS-featured EPS and SBW products’ revenue mix to increase to 5% in 2018E (vs marginal exposure currently) and further expand to 15% in 2020E. We also forecast net profit margin to expand to 8.0% in 2018E and 8.5% in 2020E on back of increasing new product mix.
Exhibit 6: How is Autonomous measured? Snapshot of the various levels of autonomy according to NHTSA (National Highway Traffic Safety Administration)
Driver attentiveness/road Autonomy level Comment Example monitoring
Driver in complete and sole Could contain driver support systems, but only Level 0 No‐Automation Blind Spot Warning control warnings; driver never cedes control
Function‐specific Driver maintains overall control, One or more specific control functions that Level 1 Adaptive Cruise Control Automation but can cede limited authority operate independent from each other
Driver responsible for monitoring ADAS Combined the roadway and available for At least two primary control functions designed to Adaptive Cruise Control with Level 2 Function control at all times on short work in unison to relieve driver control Lane Centering Automation notice Driver enabled to cede full Vehicle designed to ensure safe operation during Autonomous Driving Limited Self‐ control under certain traffic automated driving mode, but can determine Supporting Multitasking with Level 3 Driving conditions, but is available for when the system is no longer able to support Transition Time Back to Driver Automation occasional control with a automation, i.e., an oncoming construction area When Necessary comfortable transition time Autonomous Driver to provide navigation Driving Vehicle designed to perform all safety‐critical Full Self‐Driving input, but is not expected to be Full Autonomous Driving in Level 4 driving functions and monitor roadway conditions Automation available for control at any time Any Situation for an entire trip. during the trip
Source: NHTSA, Goldman Sachs Global Investment Research
Nexteer doubled its Nexteer to boost market share in the upcoming technology cycle market share during For suppliers, especially in a rather concentrated segment, we see market share reshuffle the past tech upgrade opportunities generally emerging during a technology changeover. As a reference, Nexteer’s market share rose to 10.8% in 2016E (from 4.8% in 2012) during the steering segment technology conversion from HPS to EPS. Since its listing in Oct 2013, Nexteer has grown revenue/earnings by 17%/39% during 2013-2016. Its market cap grew from US$0.8bn to US$3.7bn (as of Mar22, 2017, close).
Why could it happen again this time?
1. Steering is a technology-parts segment, hence highly attractive: Due to the critical nature of the steering system and segment concentration, we view steering as a technology-parts segment. Technology-parts suppliers are well positioned and structurally the most attractive within the auto space. The key growth drivers are: (1) rising ‘supplied’ content per vehicle; (2) market share gains for globalized suppliers; and (3) a shift in value-add innovative content towards suppliers. In addition to strong structural growth, suppliers enjoy relatively strong pricing power (for details, please refer to our report Upward mobility: The rise of global autos: Competitive positioning in a growing, evolving autos industry, dated May 1, 2014).
2. Steering parts have high entry barriers due to increasing tech content and R&D needs: We note that the entry barriers have been increasing over time, and along with upgrades in steering technology have resulted in only a few competitors in the segment. For example, back in the time when HPS was the predominant solution for steering systems, there were more competitors in the segment. During the life cycle of a car model/platform, there used to be several suppliers sharing the steering sourcing. However, when EPS emerged to become the major solution, fewer players had the technological capability and this reduced competition while bidding.
Goldman Sachs Global Investment Research 6 March 27, 2017 China: Automobiles
Also, a technology changeover requires substantial R&D and development investment in production facilities. Consequently, OEMs now have only one steering supplier during the life-cycle of a particular model/platform. The growing entry barriers have driven higher ASP, and increased pricing power over the model lifecycle and a more secure backlog. In addition, with the model cycle refresh/changeover going forward, we believe existing EPS suppliers will be favorably positioned to continue to supply as second-generation development costs are only less than 20% vs. first generation (Exhibit 8).
Exhibit 7: Car product cycle is on average 5-7 years Exhibit 8: EPS suppliers difficult to be switched BMW 5 series life cycle Initial development cost vs. 2nd generation, initial cost indexed as 1X
0.5% 0.5% 1.2X
1X 1.0X
0.4% 0.4% 0.8X
5-Series (2016) 0.6X 0.3% 0.3%
5-Series (2003) 5-Series (2010) 0.4X
0.2% 0.2% 0.2X 0.16X 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 5-Series market share 0.0X Initial development cost Gen 2 development cost
Source: IHS. Source: Company data, Gao Hua Securities Research.
Nexteer scores well 3. Nexteer is the best positioned to win market share: It is difficult to gain share during on all critical aspects an existing EPS cycle, and therefore the next market share reshuffle window which to capture market likely lies with the technology shift from EPS to ADAS-featured EPS and then to SWB, share: 1) steering will be critical. We outline the key criteria for steering suppliers to stay competitive in technology, 2) R&D the potential market share reshuffle during the next tech shift. From this analysis, we in software/sensor/ control, 3) braking- derive our positive view on Nexteer’s market share gains (Exhibit 11). steering integration, Steering technology (ADAS-featured and SBW) capabilities are critical: The 4) independence as a technological capabilities to develop and produce commercially reliable ADAS supplier EPS/SBW systems are critical to assess a company’s market share potential. Nexteer showcased the commercially viable by-wire technology in the US auto show on Jan 17, 2017. And early launch of the next generation technology would help Nexteer engage with OEM clients at an early stage, which could potentially lead to further product improvement and backlog lock-up.
Continuous R&D investment needed in software/sensor/motor: In the ADAS/AV age, the actuation parts such as steering would partly/fully be commanded by computers rather than human, which increases the complexity both mechanically and electronically. More software/sensor/motor and redundancy will be added, and the system requires a series of validations to ensure safety. As shown in Exhibit 10, Nexteer has been investing heavily in R&D vs. peers.
Braking and whole AV architecture know-how: In the AV architecture, steering, braking and throttling may all be operated by wire. The actuation modules such as steering and braking may be more integrated in order to provide smooth and accurate motion control. Both ZF and Bosch have their in-house braking divisions. Nexteer has a strategic partnership with Continental – their nearly mutually exclusive parts coverage also creates strong synergy in developing integrated
Goldman Sachs Global Investment Research 7 March 27, 2017 China: Automobiles
motion control systems. So far, with technology readiness yet to be validated and regulations to be finalized, we do not see a fully autonomous vehicle in mass production. Early engagement with AV projects would put their supplier partner in a favorable position to develop and fine-tune their next generation product in a dynamic way. In 2016, Nexteer became a steering partner for Waymo (i.e. Google’s driverless car division). The project with Google may not be meaningful for near-term revenue/earnings, yet is critical from a strategic perspective as early engagement with a leading AV developer could help Nexteer understand the most advanced requirements for steering systems and build a capable module geared with full autonomous car architecture. Similar projects also include Chevy’s Bolt EV (GM and Lyft’s driverless car project).
Independence as a supplier: Due to supply chain security concerns, OEMs generally prefer independent suppliers, which do not belong or are affiliated to any other OEMs. Nexteer is an independent supplier, thus favored by OEMs in comparison with peers that are affiliated to OEMs.
Exhibit 9: Nexteer is a steering pure play Exhibit 10: R&D as % of sales also high among peers Y axis: steering revenue in US$mn; X axis: steering as % of R&D as % of sales, 2015 total revenue, 2016E
Steering revenue (in US$mn) 10% 8.4% 8,000 8% 7,000 Bosch 6.1% 6% 6,000 4.4% 4.1% 4% 2.9% 5,000 JTEKT 2% 1.1% 4,000 0.7% 0% 3,000 ZF NSK Nexteer ZF
2,000 NSK JTEKT Bosch Showa 1,000 Thyssenkrupp Presta Nexteer Showa Presta
‐ Thyssenkrupp 0% 20% 40% 60% 80% 100% R&D as % of revenue Steering as % of total revenue Note: R&D is on group level
Source: Company data, Gao Hua Securities Research. Source: Company data.
Exhibit 11: Our competitive landscape analysis suggests Nexteer is well positioned Global 7 steering suppliers’ summary Affliation Ticker Company business portfolio Sector (vs. OEM) Braking parts exposure AV project engagement Company ‐ Auto components Machinery/auto Toyota n.a In‐house R&D on steer‐by‐wire JTEKT 6473.T ‐ Bearings systems ‐ Machinery ‐ Auto components Industrial/auto n.a In‐house Uber/Volvo driverless car Bosch private ‐ Home application ‐ Sensor/technology/service
Nexteer 1316.HK Auto components Auto n.a JV with Continental Google driverless car ‐ Auto components Machinery/auto n.a n.a n.a NSK 6471.T ‐ Bearings ‐ Machinery Auto components Auto n.a In‐house (via acquisition of TRW) ZF ProAI jointly developed with ZF private NVIDIA
‐ Diversified industrial (Construction, Industrial Conglomerate n.a n.a Cooperation with AdasWork on Mining, Chemicals, Energy, White goods, autonomous control system Thyssenkrupp Presta private F&B, Aerospace, Shipbuilding, Mechanical engineering etc.) ‐ Auto component ‐ Auto components Auto/Motor n.a n.a n.a Showa 7274.T ‐ Motorcycle components Source: Company data, Gao Hua Securities Research.
Goldman Sachs Global Investment Research 8 March 27, 2017 China: Automobiles
Discount to global peers unjustified; our TP implies 19% upside
We value Nexteer based on P/B-ROE regression against global comparable peers, as we believe this is the most appropriate method due to the following reasons:
For cyclical industries, where returns fluctuate with the cycle, book value provides a more stable reference to company value;
There are limited comparable peers in the H-share supplier space. So we select a portfolio of global/regional comparable peers with similar business, client base, and technology credentials to value Nexteer;
The company is expanding faster than the industry with significant capex and assets (such as new plants under construction and new products under development) sitting on the balance sheet. We think the P/B-ROE method is appropriate to ascertain the value of these assets, which are not operating now but are expected to generate profits in the future.
Accordingly, we derive a 12-month target price of HK$13.98, implying 19% potential upside. Our target price implies 2017E/2018E P/E multiples of 13.2X/11X.
Exhibit 12: Nexteer looks undervalued vs. global peers Exhibit 13: Nexteer enjoys leading ROE among peers 2018E PB vs. avg 2018E-2019E ROE
2018E PB y = 7.575x + 0.6334 ROE quartiling R² = 0.6845 3.00 Ticker Company name 2015 2016E 2017E 2018E 2019E 6471.T NSK 15.2% 14.9% 8.1% 13.4% 13.2% 2.50 Valeo Minth Nexteer 6473.T JTEKT 9.8% 10.5% 7.2% 10.5% 10.5% BorgWarner Autoliv 2.00 Conti CONG.DE Continental 23.3% 20.7% 21.8% 20.0% 18.4% NSK BWA BorgWarner Inc. 19.1% 20.8% 21.4% 21.4% 21.5% 1.50 Weifu A 000581.SZ Weifu A 13.4% 13.3% 14.0% 14.8% 15.1% JTEKT 0425.HK Minth 14.5% 16.4% 18.1% 20.1% 21.5% 1.00 1316.HK Nexteer 27.2% 31.2% 26.7% 26.0% 25.4% 0.50 VLOF.PA Valeo 25.0% 26.5% 21.2% 20.1% 19.6% ALV Autoliv 13.3% 15.9% 15.3% 15.4% 15.7% 0.00 5% 10% 15% 20% 25% 30%
Avg. 2018E‐19E ROE Source: Goldman Sachs Global Investment Research, Gao Hua Securities Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research. Research.
Exhibit 14: Currently trading at 11.3X 12m fwd P/E vs. Exhibit 15: Currently trading at 2.7X 12m fwd P/B vs. median at 9.6X median at 2.5X 12m fwd P/E 12m fwd P/B
14.0X 4.0X 35%
3.5X 12.0X 30%
3.0X 10.0X 25% 2.5X 8.0X 20% Median P/E = 9.6 X 2.0X Median P/B = 2.5 X 6.0X 15% 1.5X 10% 4.0X 1.0X
5% 2.0X 0.5X
0.0X 0% 0.0X Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Oct-13Apr-14Oct-14Apr-15Oct-15Apr-16Oct-16 12m Fwd P/E Median P/E 12m Fwd P/B (LHS) Median P/B ROE (RHS) Source: Datastream, Gao Hua Securities Research. Source: Datastream, Gao Hua Securities Research.
Goldman Sachs Global Investment Research 9 March 27, 2017 China: Automobiles
Nexteer is attractively valued vs. both global and local peers
Exhibit 16: Nexteer is attractively valued vs. global auto parts coverage 2017E PB vs. avg. 2017-19E ROE
10 2017E PB Bosch Ltd. Motherson Sumi 9
8
7
Amara Raja Batteries 6
5
4 Exide Industries Nokian Renkaat 3 Lear Corp. CNH Industrial GKN Valeo Nexteer Cheng Shin Rubber Continental Magna Autoliv Hella KGaA Hueck MinthBorgWarner Inc. 2 Michelin Toyota Boshoku Goodyear Faurecia Denso Johnson ControlsWeifu (A) Aisin Seiki Bridgestone Nemak 1 Sumitomo Huayu Avg. 2017E‐19E ROE Hyundai Mobis 0 5% 10% 15% 20% 25% 30% 35%
Note: Red dots are GH covered supplier stocks; blue dots are GS covered global supplier peer stocks.
Source: Quantum, Gao Hua Securities Research.
Exhibit 17: Nexteer is attractively valued vs. global auto parts coverage 2017E PB vs. avg. 2017-18E ROE
14 2017E PB
Yunyi
12
10
Fulin Precision
8
Wanxiang 6 Jingu Wanfeng
Vie Tuopu DF Electronic HMT 4 Haili AP M&E Dongan JS Forging Longji Xingmin NBTM Shuanglin Broadocean ZYNP Xingyu Yuandong Yinlun Nexteer Hongtu Hejia WKW Minth Tianrun Zongshen Huaxiang 2 Joyson Songz TJ Dies Weifu (A) FAWAY Huayu Avg. 2017E‐18E ROE 0 0% 5% 10% 15% 20% 25% 30% Note: Red dots are GH covered supplier stocks, blue dots are non-covered A share supplier stocks (the forecasts for which are from WIND consensus).
Source: WIND, Gao Hua Securities Research,
Goldman Sachs Global Investment Research 10 March 27, 2017 China: Automobiles
Strong balance sheet and cash flows allow room for acquisitions
With the EPS conversion cycle nearly complete in developed markets such as US and EU (see Exhibit 18), we forecast Nexteer’s capex cycle to be largely over for now, before reaccelerating in 2019. ADAS-featured EPS does not require significant investment in the production line and the increased content is more on the software/sensor side. Software is developed by Nexteer’s own R&D/engineering team. So we do not see capex to expand much during 2017-18E. However, the steering-by-wire product may require a rather significant change in the production line; we forecast capex spending to accelerate from 2019E.
Exhibit 18: EPS conversion cycle is largely over in DM Exhibit 19: EPS capex cycle is over EPS penetration in US/EU and China Capex in US$mn, Capex as % of revenue (RHS)
100% 350 10.0% 9.0% 300 80% 8.0% 250 7.0% 60% 200 6.0% 40% 5.0% 150 4.0% 20% 100 3.0% 2.0% 50 0% 1.0% - - 2007 2008 2009 2010 2011 2012 2013 2014
2015E 2016E 2017E 2018E 2014 2015 2016 2017E 2018E 2019E
US EU China Capex Capex as % of Revenue (RHS)
Source: Company data, Gao Hua Securities Research. Source: Company data, Gao Hua Securities Research.
Balance sheet is strong as Nexteer’s avg. 2017-19E gearing ratio is -27% vs. global peers’ 4% and its historical avg. (2012-2016) at 76%. Nexteer’s FCF is also strong among peers as its avg. 2017E-19E FCF yield is 9% vs. global peers’ avg. at 5%.
We see the strong balance sheet/cash flows likely supporting the company’s technology capability enhancement and potential global partnership/acquisition opportunities.
We see payout ratio less likely to increase as it’s critical for the company to continuously drive its strategic innovation. Given the increasing technology requirements in the ADAS/AV cycle, we think capital allocation to innovation and potential M&A would be key.
Exhibit 20: Gearing lower than peers Exhibit 21: FCF yield is higher than peers Net debt/equity ratio, Nexteer and peers’ avg. FCF yield ratio, Nexteer and peers’ avg.
300% 12%
250% 8% 200% 4% 150% 0% 100% ‐4% 50%
0% ‐8%
‐50% ‐12% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2012 2013 2014 2015 2016E 2017E 2018E 2019E
Nexteer Global peers' avg. Nexteer Global peers' avg.
Source: Company data, Gao Hua Securities Research. Source: Company data, Gao Hua Securities Research.
Goldman Sachs Global Investment Research 11 March 27, 2017 China: Automobiles
Exhibit 22: We expect Nexteer’s payout less likely to Exhibit 23: Nexteer’s payout is relatively lower among increase on continuous investment requirements peers Nexteer dividend payout ratio and dividend yield, 2012-2019E Dividend payout ratio, 2017E
25% 3.0% 50% 40% 40% 36% 36% 2.5% 32% 20% 31% 30% 29% 30% 27% 2.0% 20% 15% 20% 17% 1.5% 10% 10% 1.0% 0% A 5% NSK avg. 0.5% Conti Valeo JTEKT Minth Autoliv Nexteer Weifu auto 0% 0.0% BorgWarner 2013 2014 2015 2016 2017E 2018E 2019E China 2017E dividend yield Dividend payout ratio Dividend yield (RHS)
Source: Company data, Gao Hua Securities Research. Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Goldman Sachs Global Investment Research 12 March 27, 2017 China: Automobiles
Navigating Trump policy impact, growth and technology rollout
In this section, we address the key risks to our view and 12-m target price:
#1: Potential Trump taxes and trade impact analysis The Trump administration has signaled a set of wide-ranging changes across taxes and trade. While the details are still unclear, our economists believe the US tax reform draft this year could include: 1) a destination-based tax with border adjustment (they see a 20% probability), 2) a corporate tax cut (they assume 25% from 35%), 3) 100% capex write-off in the first year, and 4) the repeal of net interest expense deduction (for details, refer to the report What Would the Transition to Destination-Based Taxation Look Like? dated Dec 8, 2016). The process is likely to get into full swing in the US Congress late March or April. Although we do not attempt to predict the outcome of the US tax reform, we see a high likelihood of suppliers with businesses deeply rooted in the US (e.g., US production plants) having an edge vs. those which have net export exposure to the US.
We note that Nexteer’s global revenue is generated from its localized production footprint and has limited export-to-US exposure. With 65% revenue exposure to North America in 2016, Nexteer is one of the most resilient names within our China auto component coverage.
Exhibit 24: Nexteer’s revenue is mainly from NA Exhibit 25: Nexteer’s earnings is also mainly from NA Revenue by region, FY2016 EBITDA margin by region, FY2016 24.0% 19.3% 20.0% 11% 15.8% 16.0% 15.0%
12.0% 23% 8.0% 65% 3.7% 4.0%
0.0% Group level North America Asia Pacific Europe and South America
North America Asia Pacific Europe and South America EBITDA Margin
Source: Company data. Source: Company data.
Exports from the rest of the world to the US are subject to a 2.5% tariff in case of finished vehicles (excluding certain kinds of trucks) and 2.5%-5.7% for auto parts. Since the rest of the 6 global steering peers are non-US companies, in case of a tariff hike, we believe Nexteer is relatively well positioned as its US revenues are largely generated through products produced locally vs. peers’ higher dependence on imports.
Goldman Sachs Global Investment Research 13 March 27, 2017 China: Automobiles
Exhibit 26: North America production is 20% of global Exhibit 27: US tariff on passenger cars is 2.5% Global light vehicle production volume, 2016E Tariffs for autos and auto parts (as of Feb 2017)
Product US Canada Product US Canada Auto Bumper 2.5% 6.0% Passenger Car 2.5% 6.1% Seat belt 2.5% 6.0% 20% Bus 2.0% 6.1% Brake 2.5% 6.0% 29% Truck 25.0% 6.1% Gear Box 2.5% 6.0% Auto Parts Drive shaft 2.5% 6.0% rearview mirror 3.9% 6.0% Wheel 2.5% 6.0% Key 5.7% 6.0% Suspention 2.5% 6.0% 23% Engine 2.5% 2.5%-6.0% Radiator 2.5% 6.0% Engine parts 2.5% 2.5%-6.0% Muffler 2.5% 6.0% 28% Auto air conditioner 2.5% 6.0% Airbag 2.5% 6.0% Distributor 2.5% 6.0% Body 2.5%-4.0% 6.0% Ignition coil 2.5% 6.0% Steering 2.5% 6.0% Wiper 2.5% 6.0% Tire 3.4%-4.0% 7.0% North America Europe China Others Shield beam lamp 2.0% 6.0% EV Li Battery 3.4% 7.0%
Source: Goldman Sachs Global Investment Research. Source: World Tariff.
Before Trump came to power, Nexteer had planned a plant rotation to Mexico for cost optimization purposes. Given the current Trump policy direction, we note that the mgmt may adopt a wait and watch approach. We think potentially lower US tax and supportive capex/interest burden treatment may drive cost optimization/plant rotation in the US. And we also think the potential tariff impact could be partly offset by forex (see Exhibits 28-29).
Our analysis is for illustrative purposes only and we acknowledge that the final outcome could vary depending on the actual legislation and companies’ tax strategies. In addition, we do not take a view on government policy and we note that the final form of implementation for any proposed changes is still widely uncertain.
Exhibit 28: Mexican Peso depreciated by 6% after the US Exhibit 29: Illustration of how a tariff hike can be offset elections by forex Forex trends Destination tax after nominal forex rate
High import Low import High profit Low profit Net importer Net exporter 23 share share margin margin US presidential election (Nov.8) Current law 22 FX (foreign currency per $) 111111 Total sales (USD) 100 100 100 100 100 100 21 US sales (USD) 100 0 100 100 100 100 Foreign sales (foreign currency) 01000000 Total costs (USD) 90 90 90 90 50 98 20 US costs (USD) 45450 902549 Foreign costs (foreign currency) 45 45 90 0 25 49 19 Tax burden at 20% 2 2 2 2 10 0.4 After-tax profit 8 8 8 8 40 1.6 18 Destination-based taxation FX (foreign currency per $) 1.25 1.25 1.25 1.25 1.25 1.25 17 Total sales (USD) 100 80 100 100 100 100 US sales (USD) 100 0 100 100 100 100 16 Foreign sales (foreign currency) 01000000 Total costs (USD) 81 81 72 90 45 88.2 Sep‐16 Oct‐16 Nov‐16 Dec‐16 Jan‐17 Feb‐17 Mar‐17 US costs (USD) 45450 902549 Foreign costs (foreign currency) 45 45 90 0 25 49 MXN/USD Tax burden (20%) 11 -9 20 2 15 10.2 After-tax profit 8 8 8 8 40 1.6
Source: Datastream. Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 14 March 27, 2017 China: Automobiles
Exhibit 30: Summary of tax reform proposals Tax reform proposals relative to current law
Current Law House Republican Blueprint Trump Proposal Domestic corporate rate 35% 20% 15%
Accelerated depreciation with 50% bonus through 100% expensed at time of Allow option of 100% Business expensing 2017, 40% through 2018, investment expensing 30% through 2018
Repeal deductibility for Net interest deductibility Unlimited Repeal deductibility those who expense 15% (repeal deferral 35% (minus foreign tax Foreign income 0% (full territorial system) but allow foreign tax credits) credits) 35% (minus foreign tax 8.75% on cash 3.5% 10% on previously Repatriation credits) otherwise untaxed earnings Deny deduction of import Destination‐basis/border N/A costs, exclude export related N/A adjustment income
Source: Tax Policy Center, Goldman Sachs Global Investment Research.
#2: 2017 muted China and US market growth impact on Nexteer In the US, HPS to EPS conversion cycle is largely over, and before the ADAS-featured EPS kicks-in materially in 2018, we see Nexteer’s 2017E US growth to slow down from FY16. However, we would highlight that Nexteer is more exposed to light truck (pick-up) and SUV/CUV segments. Given the consumer preference on ride height and strong housing project starts, we see SUV/CUV/pick-up segments to outgrow the overall light vehicle market. During the Detroit auto show on Jan 13, 2017, both OEMs and suppliers saw a continued mix shift towards light trucks even though oil/gasoline prices may rise.
Exhibit 31: We see growth of pick-up/SUV/CUV slightly Exhibit 32: Light truck incentives are lower than cars better than overall light vehicle in the US Light truck incentives, % of ASP US light vehicle growth vs. pick-up +SUV/CUV segments
20% 16.0% 14.1% 15% 10% 5% 12.0% 9.8% 10.0% 0% 9.4% ‐5% 8.0% ‐10% ‐15% ‐20% 4.0% ‐25% ‐30% 0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Light truck Light truck Passenger car Passenger car (current) (historical (current) (historical Overall US LV yoy growth Pick‐up + SUV/CUV yoy avg.) avg.)
Source: IHS, Gao Hua Securities Research. Source: IHS, Gao Hua Securities Research.
In China, we see market growth to slow down on govt. subsidy cut and high base in 2017. Nevertheless, the HPS to EPS conversion is only half way through. We still expect double- digit sales growth from China Nexteer on its conversion gain and client base expansion.
Goldman Sachs Global Investment Research 15 March 27, 2017 China: Automobiles
Exhibit 33: Nexteer is more exposed to SUV segments Exhibit 34: HPS to EPS conversion is not over yet China car growth vs. SUV segment EPS penetration
90% 100% 80%
70% 80%
60% 60% 50%
40% 40%
30% 20% 20%
10% 0% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015E 2016E 2017E 2018E 2016E 2017E 2018E 2019E China SUV growth yoy China car market growth yoy US EU China
Source: IHS, Gao Hua Securities Research. Source: Company data, Gao Hua Securities Research.
#3: ADAS/AV commercialization execution/delivery risks With solid momentum in the technology progress and being open to suitable M&A, we see Nexteer as well positioned to face industry challenges. Nevertheless, along with the increasing complexity of autonomous vehicle architecture and actuation systems (including steering, braking and throttling), there may also be potential technology bottlenecks or hurdles. We would keep a close watch/frequently evaluate according to the upcoming milestones such as commercially viable integrated motion control technology (to be delivered by Nexteer-Continental joint venture), ADAS-featured EPS and SBW program, etc.
#4: Competition and peers’ strategy Nexteer is a pure play in the steering segment while the rest of the 6 major global competitors have other business departments as a diversification of their product line. In an extreme case, there is a risk that peers could take a more aggressive pricing stance during new product bidding as they have other business lines to stabilize the short-term profitability fluctuations. However, we see peers less likely to change their strategy in the steering segment significantly in the near term as we expect further tech upgrades to be gradual.
#5: FX risks In our view, Nexteer tends to keep its global business naturally hedged, that is, to increase localization rate in each region of production. However, we see potential FX risks during the period of ramping up, esp. during the strategic business expansion stage.
Goldman Sachs Global Investment Research 16 March 27, 2017 China: Automobiles
Backlog visibility and ADAS/AV milestones to drive share price
Backlog is a key factor to evaluate supplier’s future earnings quality The core of OEM investments is their product cycle, whether the car manufacturers can produce commercially successful cars. We can validate the momentum from high frequency data point such as monthly sales.
For suppliers, it’s relatively difficult to track from high frequency data point perspective. The revenue and earnings estimations are largely determined by backlog booking. Backlog is the accumulated ‘booked yet to be delivered’ revenue over the coming periods. It provides visibility to evaluate a supplier’s mid-to-long revenue potential.
A continuously growing backlog reflects future earnings visibility and quality. Nexteer currently has US$25.6bn backlog (expanded by US$1.6bn from US$24bn in end-Sep 2016), which is about 6.7X its FY16 revenue. We see further backlog expansion may drive Nexteer share price as the market would get more visibility on future growth.
Exhibit 35: Nexteer’s backlog is 6.7X of its FY16 revenue Backlog as of Dec 31, 2016
30.0 US$25.6bn 25.0 US$24bn
20.0 Driveline 15.0 CIS HPS 10.0 EPS
5.0 US$3.8bn
0.0 FY16 Backlog (Sep16) Backlog (Dec16)
Source: Company data.
Technology and positioning likely to drive backlog expansion in tech changeover We see ADAS upgrade and future technology changeover from EPS to SBW likely to drive changes in steering segment’s competitive landscape, as we discussed in the above section.
The competitor (such as Nexteer) which has strong technological capability and active early engagement with OEMs on next generation product development, may enjoy higher backlog expansion opportunities vs. peers, in our view.
We note that the market focuses a lot on backlog expansion/earnings delivery. And we see the ADAS/AV technology shift starting to accelerate. Thus technology capability and competitive positioning are critical to evaluate key competitors’ backlog expansion opportunities over the coming 5-7 years.
Goldman Sachs Global Investment Research 17 March 27, 2017 China: Automobiles
Exhibit 36: We see strong backlog growth, earnings delivery and technology milestones to drive stock price Nexteer market cap performance since listing, in US$mn
4000 30000
3500 25000
3000
20000 2500 New gen tech debut and partnership with Conti 2000 15000 1H16 earnings beat
1500 10000
1000
5000 500
0 0 Oct‐13 Jan‐14 Apr‐14 Jul‐14 Oct‐14 Jan‐15 Apr‐15 Jul‐15 Oct‐15 Jan‐16 Apr‐16 Jul‐16 Oct‐16 Jan‐17
Market Cap (in US$mn) Hang Seng Index (RHS)
Source: Datastream, Gao Hua Securities Research.
We expect key tech milestones/sign of early commercialization to drive stock further Given the solid ADAS/AV progress from OEMs/disruptor/supplier aggregator side, we see more concrete milestones/pioneer project delivery to be critical. For Nexteer, we expect technology milestones such as integrated motion control technology and signs of early commercialization of SBW product to drive stock price further.
In our global automotive report Cars 2025: Vol. 3: Monetizing the rise of Autonomous Vehicles, September 17, 2015, we projected gradual growth on the “consumer” side. Our forecast that semi-autonomous (Level 3 AVs) will be available in the US around 2018 is equivalent to about half a product cycle (meaning cars are already being developed with this capability in mind), and our forecast for full autonomous (Level 4 AVs) in 2025 is about two product cycles away. However, adoption of full autonomous driving could be achieved earlier on the “fleet” side as cities like Amsterdam, Singapore, and Luxembourg are looking to adopt AV much sooner (which could be commercially viable around 2020).
Exhibit 37: We see level 3 semi-autonomous driving to get set around 2020 and level 4 autonomous driving around 2025 Timeline of enablers for the implementation of autonomous driving (US market only)
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Hardware Software Cyber security Societal acceptance
Time frame until scale implementation Level 1‐2Level 3Level 4
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 18 March 27, 2017 China: Automobiles
We note that the potential autonomous driving commercialization could set in earlier than we expect. As summarized in Exhibit 38, on the “fleet” side, Uber is already operating the driverless car service in Pittsburgh and Arizona. On the “consumer” side, Tesla has announced to introduce a full self-driving car by 2018 and a few major OEMs have expressed intent to launch full self-driving cars by 2020/2021.
Exhibit 38: OEMs/Suppliers/Disruptors are racing to develop autonomous vehicles Autonomous driving by company, summary
Launch schedule Company name Type Partnership Acquisition Investment Semi‐autonomous Full autonomous Summary Tesla OEM/disruptor Autonomy on 2018 ‐ Tesla CEO Elon Musk announced in late October 2016 that cars currently in production — highway already which includes the Model S, Model X, and future Model 3 — will be built with new hardware available that will enable them to be fully driverless, pending regulatory approval and further software validation. ‐ Musk has been committed to having a fully self‐driving car ready by 2018 BMW OEM Intel/Mobileye HERE (the former mapping 2021 ‐ BMW will test 40 self‐driving cars on public roads in the second half of 2017. division of Nokia, together with ‐ BMW is also planning to release self‐driving vehicles in China in 2021. Mercedes and Audi) ‐ BMW is committed to releasing an all‐electric car with the autonomous capabilities in late 2021 as part of its Project iNext. By 2025, the Project iNext car will be fully autonomous.
Daimler OEM HERE (the former mapping Autonomy on 2020 ‐ Daimler executives have said the system powering the autonomous truck, dubbed Highway division of Nokia, together with highway already Pilot, may be ready for real‐world application by 2020. BMW and Audi) available Volvo OEM Uber 2017 2020 ‐ Volvo is aiming to make its cars “death proof” by 2020 by rolling out semi‐autonomous features, eventually working up to fully driverless ones. Toyota OEM 2027 ‐ Toyota is pursuing self‐driving cars, but is taking a more conservative approach than other companies. ‐ Toyota is looking to introduce a Level 4 self‐driving car in 10 years as part of its Chauffeur project. Nissan OEM 2020 ‐ Nissan is committed to have a commercially viable autonomous car on the roads by 2020. ‐ Nissan will continue to add driverless capabilities to ProPILOT until it has a fully self‐driving car in 2020.
Ford OEM Velodyne (Lidar 2021 ‐ Ford will roll out a fleet of self‐driving cars as part of a ride‐sharing or ‐hailing service by supplier) 2021.
GM OEM Lyft Cruise Automation (self‐driving Lyft ‐ General Motors has partnered with Lyft to build electric, fully driverless cars that will be car start‐up) available to just about anyone. Audi OEM NVIDIA HERE (the former mapping 2020 ‐ Audi has teamed up with Nvidia to bring fully self‐driving vehicles to the market in 2020. division of Nokia, together with Mercedes and BMW) Honda OEM 2020 ‐ Honda is aiming to produce cars that are completely driverless on highways by 2020.
Hyundai OEM 2020 2030 ‐ Hyundai is aiming to have highway driverless features in its cars by 2020, but won’t have a fully autonomous car ready until 2030. PSA OEM 2020 ‐ PSA is aiming to have fully driverless cars ready by 2020. Bosch Supplier 2026 ‐ Bosch has been working on driverless technology for several years with the goal of releasing fully driverless software within the decade. ‐ Bosch might not plan to build an actual self‐driving vehicle (Focusing on system and sensors) Waymo (Google) Disruptor FCA Increasing testing ‐Google spun out its self‐driving car unit into an independent company, called Waymo, in fleet on road in December 2016. Waymo is now operating under Google’s parent company Alphabet. 2017 ‐Waymo has said it’s not interested in building a car, but in selling the tech to automakers.
Uber Disruptor Volvo Otto (self‐driving truck start‐ Robot taxi service ‐Uber is letting people take a ride in its self‐driving cars in both Pittsburgh and Arizona. up) available in Pittsburgh and Arizona (with engineer on board)
Baidu Disruptor Velodyne (Lidar 2018 ‐ Baidu is aiming to have a commercial model of its driverless car ready by 2018. supplier)
Apple Disruptor ‐ Apple was originally aiming to ship its car in 2019, the Wall Street Journal originally reported in September 2015. ‐ But Bloomberg reported in October 2016 that Apple is prioritizing working on the software for a driverless car rather than building an actual autonomous car from scratch.
Didi Disruptor Uber China ‐ Didi founder and CEO Cheng Wei said in a Bloomberg article that he was hiring data scientists in Silicon Valley to build a self‐driving car.
Source: Company data.
Goldman Sachs Global Investment Research 19 March 27, 2017 China: Automobiles
We see solid regulatory progress and increasing consumer acceptance
In the Detroit auto show during Jan 8-22, 2017, Mark Rosekind, administrator of the NHTSA –the governmental body in-charge of writing and enforcing traffic safety regulations – gave a presentation on regulatory developments in autos. Key takeaways are as follows:
Proactive approach: The NHTSA has overhauled its regulatory approach in the most significant way in 40 years. This new approach should allow the agency to implement dynamic regulations in tandem with new technological advancements, with the goal of innovation velocity and pedestrian protection. Further, it is working to help organically drive the industry to adopt incremental safety features as standard – without the need for a rulemaking process – through the New Car Assessment Program.
V2V proposal: The agency has proposed a rule about vehicle-to-vehicle communication, which will help allow cars to “see around corners,” unlike current sensor arrays. This technology is seen as necessary for connected and autonomous vehicles – not just by NHTSA, but also by industry participants.
Federal AV policy: NHTSA also came out with a detailed policy in 2016 for autonomous vehicles in an effort to set the stage for automotive companies and a regulatory framework. On the former, there is a 15-point Safety Assessment to set clear expectations for manufacturers developing and deploying automated vehicle technologies. On the latter, there is a model state policy that delineates the Federal and State roles in an effort to build a consistent national framework.
On the content adoption front, we see ADAS content (level 1 and 2 autonomous) installation is gaining strong momentum. In 2016 China car market, where in general, the ADAS installation rate is lagging global peers, we saw a clear trend of auto consumption upgrade as consumers preferred more comfortable, smarter and safer functionalities. We also attribute part of the commercial success of select top selling local brands’ models such as Geely’s NL-3 and GAC’s GS8 to their heavy load of ADAS content. We believe this might drive ADAS content adoption in 2017 given intensifying competition and a series of new model launches.
Exhibit 39: Geely NL-3’s content is catching on Mercedes Comparison of select equipment between Geely NL-3 SUV and Mercedes Benz models
Equipment Geely Boyue Mercedes GLC Mercedes C class Electronic Parking Brake Systems √√√ Electronic Stability Program √√√ Lane Departure Warning Systems √√√ Adaptive Cruise Control √√√ Panoramic Camera √√√ GPS Navigator √√√ Park Assist Vision Systems × √√ Blind Spot Monitoring Systems × √√ Panoramic Sunroof √√√
Source: Baidu Search Index.
Goldman Sachs Global Investment Research 20 March 27, 2017 China: Automobiles
Appendix: History, shareholders, case study
Nexteer is a global steering supplier based in the US, owned by China AVIC group (SOE) and listed in Hong Kong.
Nexteer is a steering parts pure play, originated from GM/Delphi Nexteer is a global tier 1 technology parts supplier specializing in steering parts. The company’s history spans a century with relatively complicated acquisitions/corporate restructuring events in the past decade.
The company was founded as Jackson, Church & Wilcox Co. in the US in 1906. It then became the first automotive parts manufacturing division of General Motor (GM) in 1917. GM created Delphi in 1998 and moved its steering operation to Delphi. Delphi was then spun off by GM and became an independent, publicly held corporation in 1999. Delphi filed for Chapter 11 (bankruptcy) to reorganize its US operations in 2005. GM acquired the steering operations from Delphi and renamed it as Nexteer in 2009. Beijing E-Town acquired Nexteer from GM and transferred the acquired interest to PCM in 2010. AVIC acquired 51% of PCM and became Nexteer's controlling shareholder in 2011. The management and technology team has remained stable after AVIC’s acquisition.
Exhibit 40: Nexteer’s top customer is GM… Exhibit 41: …and is predominantly exposed to US and Top customers, 2015 China Geographic revenue split, 2015
10.5% 2% 2.5% 49.0% China: 12% 3.0% GM 66% North America Ford 5.0% FCA China PSA 22% BMW European SGM-Wuling 17.0% RoW Others
13.0%
Source: Company data Source: Company data
Controlling stakeholder AVIC is a strong supporter of China expansion As we discussed in the industry section, the HPS to EPS shift is largely done in developed markets, while we still see penetration opportunities in China.
We believe AVIC, the controlling stakeholder of Nexteer, would be of help to Nexteer to penetrate in China. China local car makers have around 38% market share. Among China’s local OEMs, 65% are currently affiliated brands of auto SOEs. We believe AVIC’s support would help Nexteer penetrate SOE’s own brands.
For the joint ventures (62% of the China’s current car market mix) between China auto SOEs and foreign car makers, we see increasing bargaining power from the joint ventures in business decision-making such as sourcing given the China portion is increasingly substantial in their foreign partner’s profit pool.
Goldman Sachs Global Investment Research 21 March 27, 2017 China: Automobiles
Exhibit 42: China’s local brands have 37.6% market Exhibit 43: …of which, SOEs account for 65% share…
100.0% 100%
90.0% 21.1% 90% 23.3% 23.5% 23.4% 23.4% 21.8% 23.7% 26.0% 25.3% 26.3% 24.0% 80.0% 80% 12.2% 70.0% 13.5% 14.2% 13.7% 12.0% 13.0% 13.8% 12.9% 70% 14.3% 14.2% 13.8% 60.0% 8.3% 10.4% 9.9% 11.1% 10.0% 6.8% 10.3% 8.4% 60% 10.5% 10.0% 9.9% 50.0% 17.2% 50% 27.9% 25.1% 23.6% 17.8% 16.7% 40.0% 23.1% 23.5% 30.4% 22.9% 19.7% 40% 30.0% 66% 65% 30% 60% 60% 57% 55% 61% 20.0% 37.6% 31.1% 31.8% 32.7% 33.4% 29.0% 28.8% 28.2% 25.9% 29.3% 29.5% 20% 10.0% 10% 0.0% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015
Chinese Japanese Korean American European SOE's affliated brand Private
Source: ChinaAutoMarket. Source: ChinaAutoMarket.
Exhibit 44: China contribution is now a substantial portion of profit pool of global car makers 2016E, in thousand units
2016E BMW Mercedes VW PSA Renault FCA Faurecia Hella Valeo Autoliv Continental Net income Group net income 6,342 9,214 8,684 1,714 3,409 2,046 512 377 874 572 2,954
Tax rate 33% 32% 25% 33% - - 31% 25% 18% 33% 28%
China consolidated net income 1,968 1,973 1,879 - - - 184 55 200 109 433 China equity income 502 516 3,151 - - - 0 0 0 0 0 China net income 2,471 2,489 5,030 557 200 86 184 55 200 109 433 as % Group net income 39% 27% 58% 33% 6% 4% 36% 15% 23% 19% 15%
Source: Goldman Sachs Global Investment Research.
Exhibit 45: AVIC’s current group summary
AVIC group Changan Auto’s (unlisted) parentco
Military Civil Aviation IT & software Power & Electronic Electronics Aviation and Energy Equipment defense
General and Materials Environmental Architectural Trade & Capital special Protection Engineering Logistics equipment
Media & IT & Software Transportation Consultancy
Bus Special Vehicle Automobile Auto Parts Shipping Smart Equipment Transportation
Engine Air Thermal Electrical & Security Vehicle Body & Intake System Management Electric product System Structural Parts System
Other parts subsidiaries .... Nexteer
Note: AVIC now owns 23% of Changan Auto’s parentco post 2009 restructuring with CSIG (China South Industries Group)
Source: Company data.
Goldman Sachs Global Investment Research 22 March 27, 2017 China: Automobiles
Case study: Positioning and strategy in technology cycle matters
Stanley case study: Technology changeover and peers’ strategy might reshuffle competitive landscape Both Stanley and Koito are Japanese automotive lighting system suppliers. For the longest time, the industry‘s mainstream solution for lighting systems has been halogen. Stanley is the No. 5 global player but its margin was higher than global No. 1 Koito. However, the industry gradually started adopting LED lighting systems. During the transition, Koito took a more aggressive approach with its LED product vs. Stanley, including pricing discounts. Koito subsequently boosted its market leadership in LED headlamps to 52% in 2013 vs. 26% share in headlamps in 2011. Eventually, Koito managed to boost margins on volume/margin gains driven by product upgrades (i.e. LED). On the contrary, Stanley moved relatively slow during the technology transition and eventually lost its edge in growth momentum and margin.
Exhibit 46: Koito had highest share in headlamps… Exhibit 47: …and also became dominant in LED-HL Headlamp global market share (2011) LED-HL global market share (2013)
Others, 4%
Stanley, Other, 10% Stanley, 6% 10% Koito, 26% Magneti Hella, 17% Marelli, 8%
Valeo - Koito, 52% Ichikoh, 23% Automotive Hella, 24% Lighting, 20%
Source: Company data. Source: Company data.
Exhibit 48: Stanley lags Koito in terms of LED Exhibit 49: Our Japan auto team expects Stanley’s installation ratio margin to remain under pressure LED installation ratio trend at Stanley Electric and Koito Operating margin trend at Stanley Electric (automotive business) and Koito
35% 16% 30% 14% 30% 25% 12% 25% 22% 22% 10% 20% 17% 8%
15% 12% 13% 6% 4% 10% 6% 7% 4% 2% 5% 2% 0.5% 0% 0% 2011/3 2012/3 2013/3 2014/3 2015/3 2016/3E 2017/3E Stanley Koito Stanley Koito
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 23 March 27, 2017 China: Automobiles
Exhibit 50: Supplier valuation summary
Valuation Summary - Global comparable peers Ticker Company name Rating Current Price Market cap EPS% P/E P/B ROE Dividend yield CROCI FCF yield 16-19E USD'mn CAGR 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 6471.T NSK Neutral 1,637.00 7,739 0% 24.1X 14.1X 13.1X 2.0X 1.8X 1.7X 8% 13% 13% 2% 2% 2% 5% 8% 8% 1% 5% 5% 6473.T JTEKT Neutral 1,788.00 5,505 4% 18.5X 12.1X 11.2X 1.3X 1.2X 1.1X 7% 10% 10% 2% 2% 2% 6% 7% 7% 1% 5% 5% CONG.DE Continental Buy 199.65 43,148 11% 11.8X 10.9X 10.3X 2.4X 2.0X 1.8X 22% 20% 18% 2% 3% 3% 12% 12% 12% 5% 7% 8% BWA BorgWarner Inc. Neutral 41.28 8,906 10% 12.1X 10.8X 9.6X 2.5X 2.2X 2.0X 21% 21% 22% 1% 1% 2% 16% 16% 16% 6% 7% 8% 000581.SZ Weifu A Buy 23.53 3,484 16% 12.4X 10.7X 9.3X 1.7X 1.5X 1.3X 14% 15% 15% 2% 3% 2% 16% 17% 17% 4% 1% 3% 0425.HK Minth Neutral 32.25 3,963 23% 16.4X 13.2X 10.8X 2.8X 2.5X 2.2X 18% 20% 22% 2% 3% 4% 20% 22% 23% 3% 4% 4% 1316.HK Nexteer Buy 11.78 3,788 16% 12.0X 10.0X 8.3X 2.9X 2.3X 1.9X 27% 26% 25% 2% 2% 2% 25% 26% 27% 8% 9% 8% VLOF.PA Valeo Sell 59.99 15,257 5% 15.2X 13.8X 12.3X 3.0X 2.6X 2.3X 21% 20% 20% 2% 2% 3% 11% 11% 11% 3% 4% 5% ALV Autoliv Neutral 101.68 8,968 8% 15.1X 13.8X 12.5X 2.2X 2.0X 1.9X 15% 15% 16% 2% 3% 3% 12% 12% 12% 3% 4% 5% Global glass avg. 10% 15.3X 12.2X 10.8X 2.3X 2.0X 1.8X 17% 18% 18% 2% 2% 3% 14% 14% 15% 4% 5% 6%
Valuation Summary - Global suppliers Ticker Company name Rating Current Price Market cap EPS% P/E P/B ROE Dividend yield CROCI FCF yield
16-19E USD'mn CAGR 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 1316.HK Nexteer Buy 11.78 3,788 16% 12.0X 10.0X 8.3X 2.9X 2.3X 1.9X 27% 26% 25% 2% 2% 2% 25% 26% 27% 8% 9% 8% 0425.HK Minth Neutral 32.25 3,963 23% 16.4X 13.2X 10.8X 2.8X 2.5X 2.2X 18% 20% 22% 2% 3% 4% 20% 22% 23% 3% 4% 4% 600741.SS Huayu Neutral 17.44 6,540 5% 9.0X 8.4X 7.8X 1.3X 1.2X 1.1X 15% 15% 15% 6% 6% 7% 18% 17% 16% 4% 5% 7% 000581.SZ Weifu (A) Buy 23.53 3,484 16% 12.4X 10.7X 9.3X 1.7X 1.5X 1.3X 14% 15% 15% 2% 3% 2% 16% 17% 17% 4% 1% 3% China avg. 15% 12.5X 10.6X 9.1X 2.2X 1.9X 1.6X 18% 19% 19% 3% 4% 4% 20% 20% 21% 5% 5% 6% 012330.KS Hyundai Mobis Neutral 247,500 20,849 2% 7.6X 7.5X 7.3X 0.8X 0.7X 0.6X 10% 10% 9% 1% 1% 1% 7% 7% 7% 2% 3% 4% 161390.KS Hankook Tire Buy* 55,400 6,112 5% 7.7X 7.3X 6.9X 1.0X 0.9X 0.8X 14% 13% 12% 1% 1% 1% 12% 12% 12% 8% 11% 15% Korea avg. 3% 7.6X 7.4X 7.1X 0.9X 0.8X 0.7X 12% 11% 11% 1% 1% 1% 10% 9% 10% 5% 7% 10% ALV Autoliv Neutral 101.68 8,968 8% 15.1X 13.8X 12.5X 2.2X 2.0X 1.9X 15% 15% 16% 2% 3% 3% 12% 12% 12% 3% 4% 5% CNHI CNH Industrial Buy* 9.69 13,217 52% 24.5X 15.7X 12.5X 2.7X 2.4X 2.1X 12% 16% 18% 2% 3% 3% 8% 9% 9% 4% 6% 7% CONG.DE Continental Buy 199.65 43,148 11% 11.8X 10.9X 10.3X 2.4X 2.0X 1.8X 22% 20% 18% 2% 3% 3% 12% 12% 12% 5% 7% 8% EPED.PA Faurecia Neutral 42.00 6,226 4% 9.4X 9.0X 9.1X 1.5X 1.4X 1.2X 18% 16% 14% 2% 2% 2% 11% 11% 10% 7% 8% 9% HLE.DE Hella KGaA Hueck Neutral 40.63 4,877 18% 13.3X 11.2X 10.4X 2.1X 1.9X 1.8X 17% 18% 18% 2% 3% 3% 10% 11% 11% 3% 4% 6% MICP.PA Michelin Buy 111.85 21,985 9% 11.7X 10.3X 9.4X 1.7X 1.6X 1.4X 16% 16% 16% 3% 4% 4% 9% 9% 9% 5% 8% 9% NRE1V.HE Nokian Renkaat Neutral 39.14 5,696 10% 19.9X 17.3X 15.9X 3.5X 3.4X 3.2X 18% 20% 21% 4% 4% 4% 18% 19% 19% 2% 4% 5% VLOF.PA Valeo Sell 59.99 15,257 5% 15.2X 13.8X 12.3X 3.0X 2.6X 2.3X 21% 20% 20% 2% 2% 3% 11% 11% 11% 3% 4% 5% Europe avg. 15% 15.1X 12.8X 11.5X 2.4X 2.2X 2.0X 17% 18% 18% 3% 3% 3% 11% 12% 12% 4% 5% 7% 6473.T JTEKT Neutral 1,788.00 5,505 4% 18.5X 12.1X 11.2X 1.3X 1.2X 1.1X 7% 10% 10% 2% 2% 2% 6% 7% 7% 1% 5% 5% 6471.T NSK Neutral 1,637.00 7,739 0% 24.1X 14.1X 13.1X 2.0X 1.8X 1.7X 8% 13% 13% 2% 2% 2% 5% 8% 8% 1% 5% 5% 7259.T Aisin Seiki Neutral 5,490.00 13,931 12% 14.6X 12.1X 11.5X 1.4X 1.2X 1.1X 9% 10% 10% 2% 3% 3% 9% 9% 9% 5% 8% 8% 5108.T Bridgestone Neutral 4,543.00 32,018 15% 11.1X 10.2X 8.9X 1.3X 1.2X 1.1X 12% 12% 13% 3% 4% 4% 10% 9% 10% 6% 8% 9% 6902.T Denso Neutral 5,095.00 36,975 4% 17.8X 16.0X 14.7X 1.1X 1.1X 1.0X 7% 7% 8% 2% 2% 3% 9% 9% 9% 5% 6% 7% 5110.T Sumitomo Rubber Indu Sell 1,885.00 4,453 10% 14.5X 10.7X 8.9X 1.2X 1.1X 1.0X 8% 10% 11% 3% 3% 3% 7% 7% 7% 4% 7% 11% 3116.T Toyota Boshoku Neutral 2,577.00 4,300 124% 11.3X 11.1X 10.9X 2.0X 1.8X 1.6X 20% 17% 15% 2% 2% 2% 12% 12% 11% 11% 9% 9% Japan avg. 24% 16.0X 12.3X 11.3X 1.5X 1.3X 1.2X 10% 12% 12% 2% 3% 3% 8% 9% 9% 5% 7% 8% LEA Lear Corp. Sell 137.90 10,111 5% 8.9X 8.6X 8.4X 2.6X 2.2X 1.9X 32% 28% 24% 1% 2% 2% 31% 28% 26% 10% 10% 9% ADNT Adient Neutral 68.52 6,407 7% 7.7X 7.8X 6.6X 1.3X 1.1X 1.0X 18% 16% 16% 1% 2% 2% 0% 12% 13% 4% 10% 12% MGA Magna Neutral 42.66 16,339 9% 7.5X 6.7X 6.3X 1.8X 1.9X 1.6X 23% 27% 27% 3% 3% 3% 8% 8% 16% 6% 10% 10% BWA BorgWarner Inc. Neutral 41.28 8,906 10% 12.1X 10.8X 9.6X 2.5X 2.2X 2.0X 21% 21% 22% 1% 1% 2% 16% 16% 16% 6% 7% 8% DLPH Delphi Buy 78.90 21,533 8% 12.2X 10.9X 9.9X 7.5X 6.1X 5.0X 66% 61% 55% 2% 2% 2% 25% 24% 22% 6% 7% 8% GT Goodyear Buy 35.94 9,416 20% 8.8X 6.6X 5.2X 1.9X 1.6X 1.3X 22% 26% 26% 1% 1% 1% 13% 14% 14% 7% 13% 18% NEMAKA.MXNemak Neutral 20.74 3,389 9% 9.6X 9.6X 8.9X 1.7X 1.5X 1.3X 17% 16% 16% 3% 3% 3% 16% 14% 14% 6% 5% 5% US avg. 10% 9.5X 8.7X 7.8X 2.8X 2.4X 2.0X 29% 28% 27% 2% 2% 2% 15% 17% 17% 6% 9% 10% * The stock is on regional Conviction List.
Source: Quantum, Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Exhibit 51: Key events to watch
Time Event Potential technology break‐through of the integrated motion control 2017 technology from joint venture with Continental Potential announcement of backlog expansion of ADAS featured EPS 2017‐2018 and SWB systems
2017‐2018 Potential value‐accretive M&A within ADAS/AV scope
2019‐2020 Potential commercialization of SWB system
Source: Company data, Gao Hua Securities Research.
Goldman Sachs Global Investment Research 24 March 27, 2017 China: Automobiles
Exhibit 52: Income statement (USD mn)
Income Statement 2014 2015 2016 2017E 2018E 2019E 2015 2016 2017 1H 2H 1H 2H 1H 2H Total sales/revenues 2,978 3,361 3,842 4,142 4,747 5,509 1,642 1,718 1,924 1,918 2,029 2,112 yoy % 24.8% 12.8% 14.3% 8% 15% 16% 14% 11% 17% 12% 5% 10% - COGS (ex-depreciation) (2,439) (2,673) (3,018) (3,245) (3,719) (4,316) (1,319) (1,354) (1,513) (1,505) (1,590) (1,655) Others ------Total COGS (2,439) (2,673) (3,018) (3,245) (3,719) (4,316) (1,319) (1,354) (1,513) (1,505) (1,590) (1,655) - Gross profit 539 687 824 897 1,028 1,193 323 364 411 413 439 457 yoy % 30% 28% 20% 9% 15% 16% 28% 27% 27% 14% 7% 11% - SG&A (178) (214) (253) (277) (318) (364) (98) (116) (127) (127) (136) (141) Other operating income/(expense) ------Total operating expense (178) (214) (253) (277) (318) (364) (98) (116) (127) (127) (136) (141) EBITDA 361 473 571 620 710 829 225 248 285 287 304 316 yoy % 44% 31% 21% 31% 31% 26% 16% 7% 10% - Depreciation (80) (89) (94) (93) (102) (122) (43) (45) (45) (49) (46) (47) Amortization (39) (53) (69) (84) (84) (84) (25) (28) (32) (37) (41) (43) EBIT (operating profit) 242 331 408 443 524 623 157 174 208 201 217 226 yoy % 37% 36% 24% 9% 18% 27% 45% 33% 15% 5% 13% - Interest income 2 2 1 2 3 5 1 1 1 1 1 1 Interest expense (23) (33) (32) (30) (30) (30) (17) (17) (16) (15) (14) (15) Net interest income/expense (22) (31) (30) (28) (27) (25) (15) (16) (16) (14) (14) (14) Profit/loss on disposal of assets (pre-tax) ------Foreign exchange gain/(loss) (0) (7) 8 - - - (3) (4) 9 (1) - - Net income from associates - - - 0 1 1 - - - - 0 0 Share of results in jointly controlled entities (1) 1 1 - - - 0 1 1 (1) - - Impairment loss of assets ------Other non-operating income/expense (5) (11) (1) (1) (1) (1) (5) (6) (1) 0 (1) (1) Non-operating income/(loss) (28) (47) (22) (29) (27) (25) (22) (25) (7) (16) (14) (15) Pre-tax profit (income before tax) 215 283 386 415 497 598 134 149 201 185 203 211 yoy % 42% 32% 36% 7% 20% 20% 20% 45% 50% 24% 1% 14% - - - Income taxes (51) (73) (84) (90) (108) (130) (35) (38) (48) (36) (44) (46) Minority interest (2) (5) (7) (8) (9) (10) (3) (2) (4) (3) (4) (4) Preferred dividends ------Extraordinary gain/(loss) ------Net income 161 205 295 317 380 458 97 109 149 146 155 161 yoy % 48% 27% 43% 7% 20% 20% 19% 35% 54% 34% 4% 11% - EPS - basic 0.06 0.08 0.12 0.13 0.15 0.18 0.04 0.04 0.06 0.06 0.06 0.06 EPS - fully diluted 0.06 0.08 0.12 0.13 0.15 0.18 0.04 0.04 0.06 0.06 0.06 0.06 Source: Company data, Gao Hua Securities Research.
Exhibit 53: Balance Sheet (USD mn)
Balance Sheet 2014 2015 2016 2017E 2018E 2019E
Cash and equivalents 380 417 484 737 1,015 1,255 Net receivables 525 570 590 636 728 845 Inventory/stocks 226 254 262 281 323 374 Other current assets 94 95 92 92 92 92 Current assets 1,226 1,336 1,428 1,745 2,158 2,567
Gross PP&E/Fixed assets 844 992 1,180 1,345 1,534 1,836 Less accumulated depreciation (218) (307) (401) (494) (596) (718) Net PP&E/Fixed assets 626 685 779 851 938 1,118 Gross intangibles 405 522 633 633 633 633 Accumulated amortization (61) (114) (183) (267) (350) (434) Net intantigibles 344 408 450 366 283 199 Total investments 6 10 11 13 17 20 Other long-term assets 41 18 26 26 26 26 Total assets 2,242 2,457 2,693 3,003 3,421 3,931
Accounts payable 439 559 604 650 745 864 Short-term debt and current portion of long-term debt 97 81 75 75 75 75 Other current liabilities 146 167 180 185 197 213 Current liabilities 682 807 860 910 1,018 1,153
Long-term debt 634 561 489 489 489 489 Other long-term liabilities/creditors 218 235 253 253 253 253 Total long-term liabilities 852 795 742 742 742 742 Total liabilities 1,534 1,602 1,602 1,652 1,760 1,895
Preferred shares ------Common stock 350 288 224 224 224 224 Treasury stock ------Retained earnings 333 540 834 1,088 1,392 1,758 Other common equity ------Total common equity 684 827 1,059 1,312 1,616 1,983 Minority interest (balance sheet) 24 27 32 38 45 53 Total shareholders funds/equity 708 854 1,091 1,350 1,661 2,036 Total liabilities and equity 2,242 2,457 2,693 3,003 3,421 3,931 Source: Company data, Gao Hua Securities Research.
Goldman Sachs Global Investment Research 25 March 27, 2017 China: Automobiles
Exhibit 54: Cash flow statement (USD mn)
Cash Flow Statement 2014 2015 2016 2017E 2018E 2019E
Income pre-preferred share dividends 161 205 295 317 380 458 Minority interest add-back 2 5 7 8 9 10 Depreciation and amortization add-back 119 142 163 176 186 206 Net income from associates and jointly controlled entities 1 (1) (1) (0) (1) (1) Net loss/(gain) on asset sales 5 6 1 1 1 1 (Increase)/decrease in working capital : (112) 36 18 (20) (39) (49) Accounts receivable (197) (61) (20) (46) (93) (117) Inventory (49) (41) (8) (20) (41) (52) Accounts payable 134 138 46 45 95 120 Other operating cash flow items 78 75 14 - - - Cash flow from operations 254 468 497 481 536 624
Capital expenditure (279) (277) (192) (166) (190) (303) (Acquisitions)/divestitures 7 4 - - - - Investments (3) (2) (2) (2) (2) (2) Other investment cash flow items ------Cash flow from investing (276) (276) (195) (168) (192) (305)
Dividends paid (common and preferred) (22) (32) (41) (59) (63) (76) Share repurchase/issue (change In common stock) ------Share repurchase/issue (change In other common equity) Increase/(decrease) in short-term debt ------Increase/(decrease) in long-term debt 143 (91) - - - - Increase/(decrease) in preferred shares ------Change in minority interest - (1) (2) (2) (2) (2) Other financing cash flow items (31) (37) (192) - - - Cash flow from financing 91 (162) (234) (61) (65) (78)
Effect of foreign exchange rate changes (3) 6 - - - -
Total cash flow 66 37 68 252 278 240
Source: Company data, Gao Hua Securities Research.
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Goldman Sachs Global Investment Research 26 March 27, 2017 China: Automobiles
Disclosure Appendix Reg AC We, Yuqian Ding, Yipeng Yang and Longjin Li, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Yuqian Ding: A-Share Autos, China Autos. Yipeng Yang: A-Share Autos, China Autos. A-Share Autos: Anhui Jianghuai Automobile Co., Chongqing Changan Auto (A), FAW Car, Fuyao Glass Industry Group (A), Great Wall Motor Co.(A), Huayu Automotive Systems, SAIC Motor, Weichai Power (A), Weifu High-Technology Group (A). China Autos: Baoxin Auto Group, Brilliance China Automotive, BYD Co., China Harmony New Energy Auto, Dongfeng Motor, Fuyao Glass Industry Group (H), Geely Automobile Holdings, Great Wall Motor Co. (H), Guangzhou Automobile Group, Minth Group, Nexteer Automotive Group, Sinotruk (Hong Kong), Weichai Power (H), Zhengtong Auto Services Holdings, Zhongsheng Group. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Nexteer Automotive Group (HK$11.42) Goldman Sachs had a non-securities services client relationship during the past 12 months with: Nexteer Automotive Group (HK$11.42) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe
Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 54% 14% 64% 60% 51% As of January 1, 2017, Goldman Sachs Global Investment Research had investment ratings on 2,902 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.
Goldman Sachs Global Investment Research 27 March 27, 2017 China: Automobiles
Price target and rating history chart(s)
Nexteer Automotive Group (1316.HK) Stock Price Currency : Hong Kong Dollar Goldman Sachs rating and stock price target history 12.00 29,000 11.00 27,000 10.00 8.98 25,000 9.00 8.00 23,000 21,000 7.00 9.9 6.00 9.33 19,000 5.00 17,000 4.00 15,000 May 17 B F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2014 2015 2016 Index Price Stock Price Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2016. Rating Nov 11, 2016 to N from B Covered by Yuqian Ding, Pric e tar get as of May 17, 2016 Price target at removal Not covered by current analyst Hang Seng Index
The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.
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Goldman Sachs Global Investment Research 28 March 27, 2017 China: Automobiles
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