Core point of view:
Top 10 automotive micro motor suppliers in the world. Founded in 1959, Johnson Electric is deeply involved in the automotive industry. Its automotive product division includes products such as micro motors, cooling fan modules, automotive pumps, and powder metallurgy parts, accounting for 79% of revenue in fiscal year 2020 (April 2019 to March 2020). Meanwhile, the company also extended its core products/technologies to non-automotive fields such as smart homes, medical care, and power tools (Industrial and Commercial Products Division), accounting for 21% of revenue.
The Automotive Products Division will benefit from the gradual release of hybrid electric vehicles and new energy vehicles. As demand in the automotive market heats up (IHS Markit estimates that global light passenger vehicle production will grow 11% in FY2022), we are optimistic that Dechang Electric will benefit from the increase in the penetration rate of oil-electric hybrid vehicles and new energy vehicles, mainly because the demand for electric pumps for hybrid electric vehicles and new energy vehicles is 4 times higher than that for internal combustion engines, and the number of cooling fan modules is also likely to be higher than that of internal combustion engine vehicles. This will drive the total product value content of Johnson Electric to increase in oil-electric hybrid vehicles and new energy vehicles, so the revenue growth rate of the company's automotive product division will continue to outperform the overall growth in light passenger vehicle shipments.
The Ministry of Industrial and Commercial Products is growing steadily under the economic recovery. In the long run, we believe that the Ministry of Industrial and Commercial Products will benefit from trends such as smart homes and big health, such as electric lifting curtains, sweeping robots, and automatic lawnmowers, etc., and big health business opportunities for future population aging and potential demand for telemedicine. The company's goal is that revenue will continue to grow as global GDP recovers under the uncertainty of the general environment after deducting deductions. According to IHS Markit, global GDP will grow by 3-4% in 2021/2022, so we are optimistic that the Business Products Division will benefit at the same time.
Valuation and investment advice. Benefiting from the recovery of the automotive industry and the global economy, we expect Johnson Electric to improve earnings in 2021 and continue to grow positively in '22. The company's current forward price-earnings ratio is 9 times. Compared with the average forward price-earnings ratio (T+1 year) of the past 5 years before the 20-year loss, we believe that there is a certain premium on the company's reasonable valuation during an upward cycle in the automotive industry, and we have obtained a reasonable value of HK$33.44 per share with a profit of 13 times per share in 22 years. For the first time coverage, a “buy” rating is given.
Risk warning. The epidemic is heating up; automobile fuel emission policies are progressing slower than expected; competition among peers.
