Nexteer’s first SbW project is expected to start mass production for a leading Chinese NEV start-up in 2026, whereas the launch of its SbW programs for two global marques have been postponed till 2028. Hence, despite higher ASP and plumper profitability of SbW than EPS system, we deem the profit release for SbW products may take some time before the prevailing adoption alongside the evolution of L3 and above automated cars. We expect Nexteer’s 2H24 revenue to recover modestly from 1H24, and net profit to recover to c.US$50m thanks to margin recovery and elimination of one-off factors. After a wild rally driven by sector-wide smart-driving hype, we deem its current valuation (17x 2025E P/E) appears departing from its historical normalised P/E valuation range of 8-15x (except 2021-23). With results season coming soon in March, we anticipate investors may return to near-term fundamentals and earnings outlook. Hence, despite lifting our TP to HK$5.30 (equivalent to 16x 2025E P/E and 13x 2026E P/E), we downgrade our rating to HOLD.
　　Key Factors for Rating
　　Nexteer’s first SbW programme is planned for launch next year, but decent earnings contribution takes time. We believe steering-by-wire technology is expected to be adopted for L3 and above automated cars, with Chinese leading NEV makers leading the commercialisation on their next-gen pipelines starting from 2026 whereas global marques continuously delaying the use of SbW technology (post-2028) due to the slower electric migration. As a global vehicle steering system leader, Nexteer by far has secured a string of SbW projects from reputable foreign brands (i.e. VW, GM) and Chinese NEV start-ups, within which the first project is slated to start mass production in 2026. Financially, the ASP of SbW products tag 20%+ higher than regular EPS products with higher profitability. Yet, with reference to the time period of over 10 years for EPS to gain popularity, we reckon it may take time for SbW products to make decent earnings contribution for Nexteer.
　　How U.S. tariffs could affect Nexteer’s North America business: Trump signed executive orders on 1 Feb to impose 25% tariffs on products imported from Mexico and Canada. After a 30-day pause in the new tariff implementation, Trump said the tariffs would go forward and take effect in March. The tariff hikes could lead to a significant increase in COGS for both U.S. carmakers and relevant supply chain, production of which is heavily reliant on Mexico and Canada. According to management, approximately 40-45% of Nexteer's NA sales revenue stem from Mexico plants and being resold into the U.S. market, and therefore are subject to potential tariff hikes. Thus, if the U.S. do impose tariff hike on Mexican imports, it may adversely affect Nexteer and the whole auto supply chain in NA. Thus, we reckon whether US government will eventually increase the tariff hike on Mexico/Canada imports is yet to be seen, which needs to be closely monitored.
　　2H24 Results Preview: We expect 2H24 revenue recovered modestly from 1H24 with full-year revenue on track to meeting the original guidance to see another record high, but we expect the full-year YoY growth rate may still underperform global auto market, primarily due to the demand weakness of NA business. On the positive front, we expect margin to see recovery, especially NA business thanks to its restructuring measures and cost optimisation programmes. Coupled with elimination of several one-off factors (impairment, strike, flood etc.) in 2H23 and 1H24 that dragged the bottom line, we expect net profit to recover to US$50m in 2H24, against US$16m in 1H24 and US$3m in 2H23.
　　2025 Outlook: For 2025, we expect China market to continue leading the company’s overall growth, whereas NA and Europe business may encounter persistent challenges amid the transformation. For China market, Nexteer’s Changshu campus is set to kick off production in early-2025 with capability to deliver several hundred thousand units of steering system units for this year, which potentially translates into tens of millions dollar revenue contribution.
　　Beyond 2025, the company will continue ramping up the production output in Changshu campus towards full-capacity of 2m steering system units with accumulative 40-50% incremental volume contribution on top of current capacity of 4m-5m units. For the NA market, the continued weak demand and the deteriorated customer structure for Nexteer during the electric migration phase could dampen growth prospects in recent years, with management focusing to optimise business structure and recover regional EBITDA margin.
　　For European business, we reckon the key growth driver may count on the mass deliveries of SbW products which have been postponed till 2028.
　　Valuation
　　To reflect weaker-than-expected demand from Europe and NA market, we revised down our revenue forecasts for 2024E-2026E by 1%-5%. Accordingly, we nudged down our net profit forecast by 4%-15% to US$66m/106m/133m, respectively.
　　YTD, Nexteer’s share prices surged nearly 70%, significantly outperforming the overall auto sector and other major HK-listed auto parts Minth and Fuyao, which we reckon is most related to the recent sector-wide smart-driving hype and investors’ interest in SbW commercialisation. Fundamentally speaking, we acknowledge the company’s earnings may have bottomed out in 2023-24, and is poised to recover going forward. Yet, we reckon Nexteer’s earnings recovery process may be slow given its large exposure to NA and European market both of which lack of clear growth driver. For SbW technology, we believe Nexteer will be the major beneficiary of its adoption and popularity along with evolution of vehicle automation, but it still take time for the adoption of new technology to translate into earnings release.
　　Historically, we see extremely high volatility of Nexteer’s P/E multiples since its public listing in 2013. Prior to 2021, its stocks were mostly trading at 8-15x P/E multiples with average forward P/E of 11x. However, over 2021-2023, the P/E multiples went a skyrocket abnormally with huge divergence over deteriorated bottom line. The weakened demand in NA/Europe market amid economy slowdown and the company’s mediocre product offerings that failed to support business growth amid electric transformation together led to the consecutive-miss of net income, which significantly dragged down the EPS metric. Following prolonged valuation de-rating, its P/E multiples returned to the normal level of teens from 2024. Behind the great volatility of P/E multiples, we notice Nexteer’s P/B multiples have continuously derated since 2021, alongside the deteriorating margin and ROE.
　　At present, its shares are trading at 17x 2025E P/E, which appears departing from its historical normalised P/E valuation range of 8-15x (except 2021-23), which is unjustified by fundamentals. With results season coming soon in March, we anticipate investors may return to near-term fundamentals and earnings outlook. Hence, despite lifting our TP to HK$5.30 (equivalent to 16x 2025E P/E and 13x 2026E P/E), we downgrade our rating to HOLD.