In 1H24, Nexteer’s revenue slightly missed by flattening YoY to US$2.1bn, while net profit plunged 53.8% YoY to US$16m, below expectations as dragged by non-recurring items including impairment charges on intangible assets (US$38m) and warranty expenses (US$20m) related to customer vehicle recalls. In 1H24, overall gross margin sustained sequential improvement to 10.0%, thanks to robust profitability in Asia Pacific whose profit contribution has surpassed 50% with regional EBITDA margin improving to 17.6% in 1H24. At the earnings call, management conveys confidence in full-year EBITDA margin returning to double-digit level. We revise down our 2024-25E net profit forecasts to US$78m/111m, but we anticipate that some non- recurring factors (impairment and warranty) that weigh on 1H24 earnings may not exist in 2H24, which may lead to substantial earnings recovery. Maintain BUY with lower TP of HK$4.50 (13x 2025E P/E).
Key Factors for Rating
1H24 revenue flattened YoY against unfavourable FX translation loss and extra customer price reduction. In 1H24, Nexteer’s total revenue came at US$2,099m, largely flattlish YoY, but if excluding unfavourable FX translation (US$20.9m) and higher customer price reduction, the company’s adjusted revenue increased by 1% YoY, slightly better than global vehicle output growth. By region, in spite of tight capacity in China, Asia Pacific’s revenue grew 9.3% YoY in 1H24; revenue growth of EMEASA (mainly Europe/Africa/South America) region slowed to 1.4% YoY, as affected by flagging demand in Europe and Brazil flood. The revenue of NA (North America) region missed expectations by declining 6.3% YoY, below the overall market growth of 1.8% as dragged by major US customers’ (mainly Stellantis) underperformance.
Gross margin and EBITDA margin improved YoY, driven by robust profitability in Asia Pacific. In 1H24, gross margin continued sequential improvement to 10.0%, against 9.1% in 1H23 and 8.6% in 2H23, thanks to the deflation of raw material prices and cost saving initiatives. By region, the EBITDA margin of Asia pacific nicely improved to 17.6% in 1H24 from 15% in 1H23, driven by stringent cost control programmes and over-utilisation in Suzhou plants that could more than offset mounting pressures from customer price reduction. Conversely, the EBITDA margin of NA and EMEASA dipped YoY to 7.8% and 2.0%, respectively, as adversely impacted by shrinking volume, unfavourable FX, Brazil flood, etc. As a result, the overall EBITDA margin increased from 8.9% in 1H23 and 7.6% in 2H23 to 9.4% in 1H24, while EBITDA of Asia pacific accounted for over 50% of total revenue, against revenue contribution of 28% in 1H23 .
New business bookings well on track. In 1H24, Nexteer recognised new bookings of US$2.1bn, which contains a significant foundation of incumbency truck programme with the key North America customer. In terms of breakdown, the company quickens customer mix shift towards Chinese OEMs that accumulatively contributed 43% in overall 1H24 bookings, echoing its full- commitment to Chinese customers. By region, APAC region accounted for 46% in total orders, jumping from 30% for the full-year of 2023. By product, the driveline made up 59% in total bookings while EPS generated 41% orders.
Valuation
To reflect weaker demand primarily in NA and Europe market, we nudge down our revenue forecasts for 2024-25 by 5%-6% to US$4.3bn/4.7bn. Given our higher OPEX ratio assumption and effective tax rate projection, we chop down our 2024-25 net income forecasts by 42%/39% to US$78m/111m, respectively.
At the earnings call, management slightly guided down full-year revenue guidance to low-single digit growth (versus mid-single digit at the year beginning), mainly due to weaker demand in NA and Europe market as well as sales underperformance of its key customers in NA market. Even so, the management conveys confidence in full-year EBITDA margin returning to double-digit level, which implies a constant HoH improvement in 2H24 EBITDA margin from 9.4% in 1H24. Moreover, we estimate some non-recurring factors (impairment on intangible assets, warranty expenses, etc.) that weigh on 1H24 net income may not persist in 2H24, which may lead to substantial earnings recovery on both YoY and HoH bases.
We acknowledge that the company may face temporary headwinds during the business transition stage from the customer mix shift as well as product portfolio migration, which could be evidenced by near-term volatility on bottom line. However, we believe the improvement of operational fundamental remains intact given the ongoing well-executed cost savings initiatives, determined NEV transition movement as well as groundbreaking business layout in next-gen smart EV steering-controlled technologies.
Currently its shares are trading at 11.9x 2024E P/E and 0.4x 2024E P/B, which looks undemanding to us factoring into its competitiveness in global steering- by-wire field, abundant new business order wins in NEV players and earnings recovery visibility. Thus, we maintain BUY with lower TP of HK$4.50 by rolling over our valuation multiples to 13x 2025E P/E (previously 13x 2024E P/E).