EVA's 1H23 earnings beat our prior forecast despite lower revenue and GPM, due to higher other income and one-off gains. We expect its Mexico plant to turn profitable in 2H23E, after meeting with management. We expect EVA's FY24E net profit to rise 20% YoY, mainly contributed by its Mexico plant and lower interest expense. Its office automation (OA) equipment business remains resilient during the downturn.
1H23 earnings slightly beat on other income and gains. EVA's 1H23 revenue and gross margin were both below our prior expectation, dragged by Great Wall Motor (2333 HK/601633 CH, BUY), SAIC-GM-Wuling and inventory clearance for Lucid (LCID US, NR) and OA equipment. Its cost reduction efforts resulted in a 1 ppt YoY cut for SG&A ratio in 1H23, despite lower revenue. Its other income tripled YoY in 1H23, due to higher government grants and rental income. EVA also benefited from a one-off gain of reversed provision at previously acquired Futaba Metal Shenzhen (HK$ 14mn) and forex gain (HK$ 28mn).
We expect Mexico plant to turn profitable in 2H23. EVA has re-negotiated with Faurecia and raised price by 5-6% in Mexico from 2023 for five years. We estimate such price hike could lift EVA's auto parts GPM by more than 1 ppt, as Faurecia (including the Tesla Model Y's backseat frame) accounts for 60% of EVA's Mexico revenue and Mexico accounts for 37% of EVA's auto parts revenue (and is still rising). In addition, such 'subsidies' of about HK$ 10mn for 1H23 will be booked in 2H23, as the negotiation was completed in 2H23.
Therefore, we expect EVA's auto parts GPM to widen to 22% in 2H23E and its Mexico plant to turn profitable in 2H23E.
New Tesla orders of about HK$ 120mn per annum from FY25E onwards.
Tesla's (TSLA US, NR) front seat frame contributed about HK$ 60-70mn to EVA's revenue in 1H23, as Tesla's Austin plant's production ramp-up was slower-than-expected. The company targets a revenue of HK$ 150mn (7mn units) from Tesla (as a tier-1 supplier) in FY23E, in line with our forecast for Tesla's North America production. We expect Tesla to contribute about HK$ 240mn to EVA's revenue in FY24E, as the Austin Gigafactory ramps up, and HK$ 380mn in FY25E, as EVA has just secured a new seat frame welding component which could bring about HK$ 120mn per annum from FY25E for five years.
