Johnson Electric
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China / Hong Kong Company Focus Johnson Electric Bloomberg: 179 HK | Reuters: 179.HK DBS Group Research . Equity 22 October 2012 BUY HK$5.10 HSI : 21,698 Quiet evolution prompts re-rating (Initiate Coverage) • BUY Johnson on its evolution from low-end motor Price Target : 12-Month HK$ 6.50 maker into a high value-added auto and industrial Reason for Report : Initiation component supplier Potential Catalyst: Fast growth in Hybrid/ EV car sales Energy saving cooling fan modules for hybrid cars a key DBSV vs Consensus: Expect higher sales growth from CFM products • but net profit slightly below consensus as we are more conservative growth driver on near term margin improvement. High end valuation justified by market gains in higher • Analyst valued products, consistent free cashflow yield and Galant Ng +852 2971 1707 potentially higher dividend payout [email protected] Morphing into a high value-added component supplier 50- Dennis LAM +852 2971 1922 year veteran, Johnson Electric has been long overlooked by a [email protected] market which has historically branded it as a low-end motor manufacturer. We foresee an imminent re-rating once the market recognizes the concerted make-over the company has undertaken Price Relative in recent years, transforming it into a high value-added auto parts HK$ Relative Index supplier, and one of the largest industrial component suppliers in 243 the world. 5.9 223 203 4.9 183 Environmentally-friendly cooling fan modules (CFM) to drive 163 3.9 We think Johnson’s increasingly significant 143 automotive segment. 2.9 123 cooling fan modules (CFM) business (part of the company’s Auto 103 1.9 Products Group (“APG”)) (20% of the total revenue) could 83 0.9 63 comfortably outperform the global auto market growth rate. Hybrid Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 vehicle sales are estimated to grow at a CAGR of 19% in 2011- Johnson Electric (LHS) Relative HSI INDEX (RHS) 2015 (according to Pike Research). This will drive demand for Johnson’s higher end CFM products as Johnson are one of the few Forecasts and Valuation quality suppliers able to supply these to hybrid vehicles. We FY Mar (US$ m) 2012A 2013F 2014F 2015F Turnover 2,141 2,248 2,387 2,555 estimate CFM to constitute over 70% of Johnson’s growth in EBITDA 314 329 340 352 FY13E. Pre-tax Profit 221 239 256 274 Net Profit 187 202 217 232 Higher valuation justified. Johnson has traded between P/E 8x- Net Pft (Pre Ex.) 187 202 217 232 15x over the past 3 years. Although the share has already bounced EPS (US$) 0.05 0.06 0.06 0.06 from its recent lows, we think the stock could yet test the upper EPS (HK$) 0.40 0.44 0.47 0.50 end of this range, as more credence is given to the company’s EPS Gth (%) 4.6 8.3 7.3 6.9 Diluted EPS (HK$) 0.40 0.44 0.47 0.50 steadily improving market position, strength in higher-end auto DPS (HK$) 0.10 0.11 0.12 0.13 components, consistently high FCF yield (c.9%) and higher dividend BV Per Share (HK$) 3.16 3.48 3.84 4.22 payout potential. Johnson’s share has lagged other HKEx listed PE (X) 12.6 11.7 10.9 10.2 industrial stocks despite the company demonstrating similar market P/Cash Flow (X) 7.9 8.8 8.0 7.8 dominance, strong corporate governance and as consistent an P/Free CF (X) 10.2 13.2 11.6 11.0 EV/EBITDA (X) 7.0 6.3 5.6 5.0 operating performance as its peers. We believe this longtime Net Div Yield (%) 2.0 2.1 2.3 2.5 laggard can thus catch up with its peers and we initiate coverage P/Book Value (X) 1.6 1.5 1.3 1.2 with a BUY rating and a TP of HK$6.5 based on a high end 14.5x Net Debt/Equity (X) CASH CASH CASH CASH FY13E P/E. ROAE (%) 13.2 13.2 12.8 12.4 At A Glance Earnings Rev (%): New New New Issued Capital (m shrs) 3,604 Consensus EPS (US$): 0.06 0.06 0.06 Mkt Cap (HK$m/US$m) 18,381 / 2,372 Other Broker Recs: B: 3 S: 1 H: 4 Major Shareholders (%) ICB Industry: Industrials Wang Koo Yik Chun 60.84 ICB Sector: Electronic & Electrical Equipment Free Float (%) 39.16 Principal Business: Providers of motors and motion subsystems Avg Daily V olume (m shrs) 1.9 Source of all data: Company, DBSV, Bloomberg, HKEX In Singapore, this research report or research analyses may only be distributed to Institutional “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, (“DBSVR”), are to contact DBSVR at +65 6535 9688 in respect of any matters arising from Chapter 289 of Singapore. or in connection with this report.” www.dbsvickers.com Refer to important disclosures at the end of this report ed-OY / sa- AH Company Focus Johnson Electric Table of Contents Investment Summary 3 SWOT Analysis 7 Company profile 8 Competitive Strengths 11 Business analysis - Automotive Product Group (APG) 14 Business analysis – Industrial Product Group (IPG) & other businesses 21 Financial – Income Statement 26 Financial –Balance Sheet 29 Financial –Cash Flow 29 Future Opportunities 30 Key Risks 30 Valuation 31 Appendix 38 Mabuchi Motors (6592.JT) 41 Nidec (6594.JT) 42 Bosch (private company) 43 Brose (private company) 44 Page 2 Company Focus Johnson Electric Investment Summary Evolving into a high value-added component supplier. CFM outperforms global auto sales growth Although long regarded as a low-end motor manufacturer, Johnson has undergone something of a ‘quiet revolution’, 40% evolving almost unnoticed by the market in recent years into a high value-added auto parts supplier, and one of the largest 35% component suppliers of industrial products. Testament to the 30% increasing technological content in Johnson’s products and 25% their ability to continuously upgrade product quality, the 20% massive surge in raw material prices over the past 6 years has 15% wreaked very little damage on the company’s consistently 10% healthy gross margins. 5% 0% We believe Johnson has historically been partially a victim of perception, long seen by the market merely as just another FY11 FY12 low-end industrial play. As such, we believe the share price has FY13F FY14F FY15F FY16F FY17F not yet reflected the quiet transformation in the company’s CFM sales growth Hybrid growth products and its rapidly improving fortunes. Global auto sales Source: OICA, Pike Research, DBS Vickers, Company GP margin remains resilient despite rise in copper price We estimate Johnson’s market share at 4.6% and 5.2% for 28 300% the cooling fan market (including non hybrid) in FY11 and FY12. Using history as a guide to the potential impact CFM 27 250% could have on Johnson’s fortunes over the next few years, a 26 200% key driver of Johnson’s revenue over the past two decades was 25 150% the development of Electronic Power Steering (EPS). EPS in turn created huge demand in brush DC motors from the 1990s 24 100% onwards benefitting Johnson and which the market duly 23 50% rewarded at the time. If history is anything to go by, we think the Hybrid/ EV CFM product line could therefore be Johnson’s 22 0% new EPS story over the coming decade. 21 -50% FY06 FY07 FY08 FY09 FY10 FY11 FY12 Johnson's GP margin since FY06 Johnson outperforms the Global auto market Copper price movement since 2005 Source: Bloomberg, Company, DBS Vickers 80% Hybrid vehicles a key driver for growth. 60% A key source of future growth for Johnson is the auto 40% industry’s increasing appetite for higher quality cooling fan modules (“CFM”) used in hybrid vehicles. Johnson is fully 20% exploiting this demand as one of the few suppliers of these motors used in hybrid and electric vehicles. The CFM sub- 0% segment has significantly outperformed the broader market, growing 34% and 17% y-o-y in FY11 and FY12 respectively, -20% against global auto production growth of only 3% y-o-y in 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013E 2011. We expect the CFM business will grow at 18% and 13% 2012E to US$495m and US$557m in FY13E and FY14E respectively, Global Auto Production Growth and will represent more than 70% of Johnson’s growth in Johnson Rev Growth Source: Company, OICA, DBS Vickers FY13E. Page 3 Company Focus Johnson Electric The growing case for a higher dividend payout. Dividend Payout Before the financial crisis, the company used to operate a higher dividend payout ratio of above 50% between FY04- % FY08. Johnson prudently opted to reduce the dividend payout 70 to 25%-30% during FY10-FY12 due to global economic 60 uncertainties. Looking forward, as the market recovers; we believe the company may increase its dividend payout ratio if 50 no major acquisition takes place, supported by a strong net 40 cash position of US$192m in FY12. For a company with such 30 strong and consistent free cashflow yield, we believe this could potentially trigger a re-rating. 20 Premium valuation justified, Initiate with a BUY. 10 Johnson has traded on a P/E of between 8x-15x over the past 3 0 years. Although Johnson’s share price has rebounded from its FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 recent lows, we believe a further re-rating to the high end of FY13F FY14F FY15F the above range would be more than justified.