Recommended logic: (1) As the penetration rate of high-level autonomous driving increases, the shift to wire control is expected to arrive in the first year. 22H1 received the industry's first high-volume wire control steering order, and 23H1 received a new order from SBW. (2) The company's traditional market is the North American market. The Asia-Pacific region has grown rapidly in recent years. The 23H1 Asia Pacific market accounts for 26% of revenue and continues to grow, with new energy orders accounting for close to 100%. (3) As inflationary pressure eased in the second half of the year, chip prices continued to fall (-17% in the first half of the year), and it is expected that the company's profitability will recover.
The Asia-Pacific region is growing at an accelerated pace, and the share of new energy continues to rise. The company is a leading global automotive transformation enterprise, with over 110 years of process accumulation. The North American market is the company's most important market. In '22, the North American market revenue was US$2,247 million, +14.4%, accounting for 58.5%, and EPS products accounted for 20% of the North American market, ranking first; the Asia-Pacific market revenue in '22 was US$965 million, +18.8%, accounting for 25.1%, +1pp over the previous year, up 4pp from 20, and 7pp. Growth was rapid. 23H1 North American market accounted for 57% of revenue, and the Asia-Pacific market accounted for 26 percent of revenue %, continued to grow. 23H1 received a total of US$2.8 billion in orders, of which orders related to electric vehicles accounted for 98% (including pure electricity, plug-in hybrids, and hybrids), and the share of new energy sources continued to rise.
The automobile industry was upgraded, and wire control switched to the first year of mass production. Currently, EPS is in the process of upgrading from C-EPS and P-EPS to DP-EPS and R-EPS, increasing the value of bicycles by 1-2 times. As the penetration rate of L3+ autonomous driving increases, the shift to wire control is expected to arrive in the first year. 22H1 received the industry's first mass production SBW order with the world's leading automaker, which is one of the largest full-life cycle revenue contracts in the company's history; 23H1 received the second SBW order from the world's leading OEMs, demonstrating the company's advanced technical strength. It is estimated that by the year 25, China's transition market size will be 40.8 billion yuan, of which the EPS scale will be 35 billion yuan, the wire control shift will be 5.8 billion yuan, and the compound growth rate in 23-25 will be 263%.
Cost pressure is expected to ease, and profitability has bottomed out and rebounded. The company's gross profit stabilized at 15% + 19 years ago. Due to the outbreak of the epidemic, the company's operations were seriously affected, and profitability declined sharply; due to commodity inflation, increased transportation and logistics costs, increased material procurement prices, and the increase in income tax expenses in the US region in '22, the company's net profit continued to decline in recent years. Since '23, as inflationary pressure has eased, raw material prices have declined, and logistics costs have declined, the company's profitability has been restored. The company is actively developing the domestic supply chain, and profitability is expected to be further improved.
Profit forecasts and investment advice. The company's net profit CAGR for 2023-2025 is expected to be 54%, EPS is 0.03/0.06/0.08 US dollars or 0.25/0.45/0.66 HK$0.25/0.45/0.66, respectively, and corresponding dynamic PE is 14/7/5 times, respectively. The company was given 15 times PE in 24 years, with a target price of HK$6.76, covering the “buy” rating for the first time.
Risk warning: risk of raw material price fluctuations; risk of industry recession; risk of increased market competition; risk of exchange rate fluctuations; risk of strike in North America.