Since the end of April, the Hong Kong stock market has been warm. Between April 22 and May 6, the Hang Seng Index broke out of a 10-day winning streak, setting a record for the longest consecutive rise since 2018. Benefiting from factors such as the Federal Reserve's slowdown in balance sheet reduction and the relatively high valuation of overseas stock markets such as the United States, Japan and India, the return of overseas funds and the increase in southbound funds have promoted the performance of many individual stocks to improve significantly.
Recently, Johnson Electric Holdings (00179) has also recorded a sharp rise for many consecutive days, and its stock price is approaching the high point of half a year ago. On the news side, the company previously released the third quarter results of the 23/24 fiscal year, and the performance of various indicators was relatively positive.
After many years on the market, Johnson Electric's market attention has not been high, but in the field of automotive micromotors, Johnson Electric has become one of the leaders in the global layout. According to HTF statistics, in 2019, Johnson Electric Holdings had a market share of about 7-9% in the field of automotive micromotors, which is a typical case of domestic substitution of auto parts.
At a time when the liquidity of the Hong Kong stock market tends to be loose and the valuation is very cost-effective, is Johnson Electric's value overly undervalued by the market, and can the market continue to rise?
The automotive business grew rapidly in the first three quarters
Founded in 1959, Johnson Electric Group is a large multinational group of companies headquartered in Hong Kong, with a global leadership position in the design, development and manufacture of micromotors and integrated motor systems. Dechang Micromotor products are widely used in consumer and commercial products, including auto parts, household appliances, power tools, commercial equipment and personal care products, multimedia and audio-visual products, etc.
According to the latest disclosed financial report, in the nine months ended December 31, 2023, the company's revenue was $2.871 billion, an increase of 7% year-on-year. During the period, net exchange rate movements related to the US dollar had a slight impact on the Company's turnover, as the impact of the strengthening of the euro was offset by the weakening of the renminbi and the Canadian dollar.
For the nine months ended December 31, 2023, the Automotive Group generated revenue of US$2,422 million, an increase of US$292 million or 14% over the same period in FY22/23 and outpacing the 10% growth rate of global light vehicle production in the same period. Commercial and Commercial Group revenue was US$449 million, a decrease of US$95 million, or 18%, compared to the same period in FY22/23, mainly due to the impact of consumption downgrade and excess inventory.
According to Zhitong Financial APP, benefiting from the transformation of the automotive industry to electrification, the turnover of most product divisions of the automotive product group has increased, of which the most significant growth is thermal management, powder metal parts, engine and transmission oil pumps, brake systems, closure systems, vision systems, and engine and fuel management.
In the automotive business, EMEA recorded the highest year-on-year growth of 19%; Asia-Pacific and the Americas both grew by 12 percent, with an overall growth rate of 14 percent; In the Commercial Products business, EMEA also saw the largest decline of 26%, while Asia Pacific and the Americas both fell 15% and fell 19% overall.
To date, the company has facilities around the world, with Supplier Quality Excellence Awards at its factories in Canada, China and Europe in FY22/23, as well as solar panels installed at manufacturing plants in Hong Kong, Manhole and Nanjing, China, and Murten, Switzerland, to increase the share of renewable energy.
Commenting on the full-year results, Johnson Electric's Chairman and Chief Executive Officer, Dr. Wang Suizhong, said that total revenue in the fourth quarter of the current financial year is expected to be similar to last year, and sales growth is expected to be in the mid-single-digit percentage for the full year.
The automotive industry is under pressure on demand, and business resilience is highlighted
As a leader in auto parts, Johnson Electric's performance is closely related to the prosperity of the downstream automotive industry. From the perspective of the industry, trends such as vehicle electrification, intelligence and overseas production capacity are the factors supporting the long-term sustainable growth of the automotive industry, and in the short term, investors are mainly worried about weak demand and the continuation of the price war in the auto market.
However, judging from the recent performance of listed companies in the auto sector, under the pressure of many unfavorable factors, the sector as a whole still achieved a year-on-year increase in revenue and profit in 2023, while Q1 in 2024 is the off-season for auto consumption, and affected by the holiday and the price war in the auto market, the overall revenue growth rate of the sector has slowed down, but the profitability continues to improve.
Specifically, according to statistics from Dongguan Securities, the automotive industry will achieve operating income of 3,740.824 billion yuan in 2023, a year-on-year increase of 15.60%; the net profit attributable to the parent company was 132.187 billion yuan, a year-on-year increase of 48.14%; In terms of profitability, the overall gross profit margin of the automotive industry was 15.53%, an increase of 1.51pct year-on-year.
In 2024Q1, the automotive industry achieved operating income of 856.909 billion yuan, a year-on-year increase of 8.75% and a month-on-month decrease of 19.09%; the net profit attributable to the parent company was 34.857 billion yuan, an increase of 16.32% year-on-year and 31.26% month-on-month; In terms of profitability, the overall gross profit margin of the automotive industry was 16.19%, an increase of 1.68 pct year-on-year and a decrease of 0.17 pct month-on-month.
The solid performance data reflects the business resilience of the automotive industry, and in terms of specific segments, although the profit pressure of upstream manufacturers will also be partially transmitted to the field of auto parts, the iteration of new energy and intelligent driving technologies, and the successive listing of new models will also promote the prosperity of auto parts.
Auto parts sector, the next market outlet?
For a long time, the auto parts sector is not as good as the automobile manufacturing sector in terms of capital heat and market valuation, and investors often think that parts companies have no right to speak in the industrial chain, and their technology and brand added value are not high.
However, from another point of view, the auto parts market is relatively stable, and when vehicle manufacturers are busy "accelerating involution" in terms of configuration and price, Johnson Electric, as a veteran leader in auto parts, has a more stable operating performance and higher certainty of performance.
According to Zhitong Financial APP, the turn in investor sentiment can be seen from the market changes in the past year. According to statistics, the automobile and passenger car sector (Shenwan) index in the A-share market fell by 4.85% for the whole year, but the auto parts sector (Shenwan) index rose by 9.03% in 2023, and there are many "bull stocks" such as Shenglong shares (603178.SH) and Huami New Materials (836247.BJ) whose stock prices have doubled.
Entering 2024, with the recovery of the automotive industry, the production and sales of automobiles will continue to grow, and the auto parts sector is expected to continue its growth trend with the trend of overseas production capacity and vehicle electrification and intelligence. Futu data shows that since the end of January, the auto parts (BK1041) sector has risen by nearly 50%, of which Wanma Holdings (06928) and China Automotive Interiors (00048) have risen and fallen by about 90% in 60 days, and the 60-day gains of Zhengdao Group (01188) and Yuanzheng Technology (02488) have also reached about 70%.
Judging from Johnson Electric's recent stock price trend, from October 2022 to December 2023, the company's share price has risen from around HK$6.68 all the way to HK$13.08, so the downward trend in Q1 2024 is more similar to the reversal of the previous gains, and it has entered a five-month phased adjustment. Since April 23, the stock price has risen from HK$9.63 to around HK$12, which is more driven by the overall prosperity of the auto parts sector.
However, at present, compared with other listed companies in the same auto parts sector, Johnson Electric's price-to-earnings ratio is almost on average, and the stock price has approached the high point of half a year ago after this rise. In addition, the company's latest earnings announcement did not disclose the net profit performance, which also added a bit of uncertainty to the subsequent stock price trend.
Considering all factors, the company's follow-up trend will be more related to the overall prosperity of the auto parts industry, and at today's price, the possibility of the market encountering phased adjustment is higher. On the news side, it is advisable to pay attention to the risks of the auto parts industry's prosperity is less than expected, and the company's profit indicators are less than expected.