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  7. Interpretation of Q1 Financial...

[YesAuto Industry] “Low growth” or even “negative growth” is the current operating status of the auto market, and it may continue in the medium to long term. While the downward pressure on the auto market has impacted front-end sales, it has also been transmitted to the upstream supply chain. It is expected that small and medium-sized enterprises will be the first to bear the pressure, but large-scale parts manufacturers seem to be slightly “difficult.” Recently, some major international component companies have successively released their financial reports for the first quarter of 2019. The overall performance of the “big business” component manufacturers is not satisfactory, and the downward trend is obvious.


Fast reading in 60 seconds:
1. International mainstream parts and components companies, such as Denso, BorgWarner, and Visteon, have shown varying degrees of decline. It can be seen that the major manufacturers are “not having a good life.”
2. The downturn in the vehicle market is the main factor affecting the earnings of parts and components companies, but parts and components companies are also facing complex market challenges such as an uncertain geopolitical environment and rising prices of upstream raw materials.
3. In the medium and long term, parts and components companies have plans to reduce capital expenditures, but they will still increase investment in new technologies.


● “Decline” is the mainstream, but some companies are growing against the trend

In the Q1 financial reports released by some foreign parts and components companies, the common dilemma that many parts and components companies are facing is “the life is not easy.” Even large-scale component suppliers with highly abundant product pedigrees, such as Denso and China, are showing a decline or slowing down.

Denso’s revenue in the first quarter was 1.45 trillion yen, an increase of 3.1% year-on-year, but its operating profit fell 25.9% year-on-year to 72.7 billion yen. In the entire 2018 fiscal year (April 2018-March 2019), Denso's comprehensive profit also fell by 20.6% compared to the previous fiscal year. Another Japanese company, Aisin Seiki, whose first-quarter revenue (1.03 trillion yen) was also the same as the same period last year, but its operating profit fell by 35.2% year-on-year (this year was 44.1 billion yen, last year 68.1 billion yen). Similarly, Continental's overall growth rate has also slowed down. Sales in the first quarter (11.05 billion euros) were also the same as the same period last year, and operating profit also fell by 17%.

In addition, there are some parts and components companies in the first quarter, both in terms of revenue and net profit are “double down.” Lear Corporation of the United States had revenue of US$5.2 billion in the first quarter, a year-on-year decline of 10%; net profit of US$229 million, adjusted net profit of US$253 million, compared with US$354 million and US$345 million in the same period last year. Germany's Anbofu had revenue of US$3.6 billion in the first quarter, down 2% year-on-year; actual net income was US$273 million (not calculated in accordance with US GAAP), compared with US$343 million in the same period last year. Another example is Visteon, whose sales in the first quarter of 2018 were US$814 million, while it fell to US$737 million in the same period in 2019; net income fell from US$65 million to US$14 million. In addition, including BorgWarner is also among the “double down” ranks.

International mainstream component manufacturers' 2019 Q1 financial reports (partial)
enterprise Financial performance
Continental Group Sales of 11.05 billion euros were the same as the previous year; operating profit fell by 17%; adjusted profit before interest and taxes was 884 million euros.
Denso Revenue was 1.45 trillion yen, a year-on-year increase of 3.1%; operating profit was 72.7 billion yen, a year-on-year decrease of 25.9%.
Aisin Seiki Revenue 1.03 trillion yen, the same as the previous year; operating profit 44.1 billion yen, a year-on-year decrease of 35.2%
Anbofu Turnover was US$3.6 billion, a year-on-year decrease of 2%; net income was US$273 million (not calculated in accordance with US GAAP), a year-on-year decrease of 20%.
Lear Revenue was US$5.2 billion, down 10% year-on-year; operating profit was US$378 million, down 23% year-on-year.
BorgWarner Revenue was US$2.566 billion, down 7.84% year-on-year; Net profit was US$160 million, down 28.9% year-on-year.
Visteon Revenue was US$737 million, down 10% year-on-year; Net profit was US$14 million, down 78% year-on-year.
Hyundai Mobis Sales of 8.7378 billion won, a year-on-year increase of 6.6%; operating profit of 493.7 billion won, and current net profit of 485.8 billion won, a year-on-year increase of 9.8% and 4.3% respectively.
Source: Compilation of public information; Tabulation: Auto House Industry Group

Although some companies' revenues have risen and fallen, and downward pressure on profits has risen sharply, some companies have achieved contrarian growth in the first quarter. South Korean parts company Hyundai Mobis has achieved good results. Its sales reached 8.7378 billion won, operating profit was 493.7 billion won, and current net profit was 485.8 billion won. These three dimensions achieved 6.6%, 9.8% and 9.8% respectively. Year-on-year growth of 4.3%. The reason why Hyundai Mobis has a good financial performance is mainly due to the orders from Hyundai Motor and Kia Motors.

● What factors are affecting the company's earnings?

The poor performance of these internationally ranked mainstream component companies in the first quarter is directly related to the global automotive market recession. According to statistics from the American consulting company HIS, in the first quarter of this year, global auto production and sales fell by about 7%, and sales in the three largest auto markets in the world, China, the United States and Europe, also fell.

For example, Abofu's revenue in Asia only increased by 1% in the first quarter, and the Chinese market fell by 12%. It can be said that Abofu's business in the Chinese market “drag” is one of the main reasons for the decline in Abofu's revenue. At the same time, Anbofu also believes that it is affected by factors such as foreign exchange rates and investment in new businesses.

Similarly, Visteon also mentioned in its financial report that the decrease in sales by US$77 million was mainly due to unfavorable automobile production and unfavorable currency factors, while the decline in profits was directly linked to the decline in sales, and the inefficiency of the transfer of the Mexican factory was also inefficient. Brought a certain impact. Lear also attributed the decline in revenue to the market environment in the automotive industry, and the overall macroeconomic environment is not optimistic. Lear also suspended work as planned to reduce production, because Lear's vehicle company customers closed some of the traditional businesses in the past and switched to a new model. Even under downward pressure, Lear acquired Xevo, an automotive software company, for $320 million in the first quarter.

Therefore, in addition to the sluggish demand in the downstream vehicle market, future investment in new businesses, exchange rate factors, and changes in production capacity are all reasons for the “weak” performance of parts and components companies in the first quarter. Under the sluggish market for the complete vehicle market, in order to stimulate consumption, vehicle manufacturers actually pass part of their costs to upstream parts and components companies; in addition, as the market matures, competition among parts and components manufacturers becomes more intense; The impact of fluctuations in the prices of upstream and upstream raw materials. From a global perspective, such as Brexit, Sino-US trade frictions, etc., the global trading system is also affected by political activities. These factors themselves have brought great challenges to the revenue of parts and components companies.

● How do parts companies view the future?

In fact, component companies have long been psychologically prepared for the pressure brought about by changes in the global auto market. In the unstable world economy and geopolitical environment, the performance of the first quarter is also in line with business expectations. Different companies have different plans for this year.

On the one hand, companies will strengthen the expansion of new businesses. Although some new businesses may not make a significant contribution to the current income of the entire company, they may even offset some of the growth brought by old businesses, but in the long run It is still the growth point of the company. Aisin Seiki predicts that sales of automatic transmissions will not increase much this year, but investment and production costs will increase. It can be seen that business pressure will not affect the company's investment in new technologies.

Although BorgWarner was in a “double decline” in the first quarter, Tan Yuesheng, BorgWarner's global vice president and president of China, believes that electrification will be the fastest-growing breakthrough point. The growth rate of BorgWarner's electrification business is also higher than that of the internal combustion engine business, which is also one of the company's next important growth points. Because, according to data from the China Automobile Association, the overall auto market in the first quarter of 2019 fell by 11.3% year-on-year, but the sales of new energy vehicles increased by 109.7%. Anbofu has similar views on this. Anbofu believes that the profit margin challenge may be resolved in the second two quarters of this year, and new businesses including electrification may win strong growth.

In addition, measures such as cost reduction and refined operations are also natural responses of companies in the face of crises. Although the MAHLE Group has not yet released the financial situation for the first quarter, its recent 2018 financial report mentioned that the company's major business sectors have been weak since the fourth quarter of last year. In the cost reduction plan launched by the MAHLE Group this year, it hopes to improve operational efficiency and gradually increase profitability by improving cross-functional cooperation and streamlining processes. Many aspects, including personnel costs, daily expenses, travel, exhibitions and services, are all in the plan. This kind of “cost reduction” is evident.

Similarly, Valeo is also pushing ahead with plans to reduce costs and capital expenditures. Due to the reduction of orders from downstream car companies, forcing Valeo to control capital expenditures, this year will add 100 million euros in cost reductions. The uncertainty of the market has also affected the capital actions of companies. The main task of Continental this year is to implement the reorganization plan announced in 2018, but its powertrain business IPO may be postponed to 2020, and the specifics still depend on it. The operation of the entire market.

Full text summary:

In the past, despite the poor performance of the vehicle market, large-scale auto parts groups have been able to maintain growth against the trend in both operating income and profit levels. After all, these leading companies have a strong ability to withstand pressure. Nowadays, even major parts manufacturers have inevitably ushered in negative growth, which shows that the market pressure is indeed not small. With increasingly cruel competition, industry differentiation becomes more prominent. Who can “suffice” and continue to promote “reforms” can fight for more opportunities for themselves. This is the time to test the “internal strength” of the enterprise. .