Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

SC Capital has over 20 years' experience covering the global automotive industry both on the Sell Side (UBS & Morgan Stanley) and Buy Side (Och-Ziff), along with a wealth of industry contacts. 

Current focus is on electric vehicle stocks & their supply chains. Aim is to identify the winners and losers from a long/short perspective. This includes close coverage of legacy automakers as well.  

From time to time. we cover opportunistic events with stocks in the manufacturing sector, food & beverage, healthcare and tech, where we also have coverage experience.

Global Automotive Stocks/EV Focus/Event Driven

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<ul><li>Denso's valuations appear increasingly steep, especially in light of the fact that Denso scores very low in returns on investment and profitability when compared to rivals like Aptiv and Continental, and even unlisted competitors like Robert Bosch.</li><li>The fight for supremacy among these automotive mega-suppliers should further intensify over the next five years due to rising technological needs for EVs, autonomous driving and telematics. Denso appears not only riskier due to its higher exposure to gasoline engine components, but also least attractive as an investment due to lower profitability and return on invested capital (ROIC).</li><li>Make no mistake. Denso is one of the world's most advanced and powerful auto parts suppliers. But it continuously generates the lowest profitability and ROIC among rivals with less exposure to gasoline engine components.  </li><li>This is because Denso has one of the highest R&amp;D budgets in the industry (average of 9% of sales over the past 5 years versus only 8% at rivals, which includes Bosch's high average of nearly 10%). It begins to appear like Denso is merely Toyota Motor's R&amp;D "slave horse" with little to show for it in terms of profitability or improvements in ROIC. </li><li>Denso's return ROIC is perennially low due to its high levels of net cash, but more so because of its cross-shareholdings within the Toyota Group. Added together, Denso's net cash of Y576bn ($5.5bn) and its investment securities (mostly stock in Toyota Motors and other Group companies) of Y1.8tr ($11.6bn) amount to 49% of equity. It's no wonder that ROIC at Denso are lowest among rivals (see table-1 below). It also begs the question of whether Denso should remain listed if it doesn't intend to unwind its massive cross-shareholdings with the Toyota Group. </li><li>Denso is also carrying massive assets for gasoline engine technology (25% of revenues during the 9 months in FY3/18). While it claims to be able to grow its sales of components aimed at EVs by 5x over the next five years if EVs truly become the mainstream form of transportation, its fuel-injection, and other gasoline engine technology could be deemed as "impaired assets" and may need to be written off. </li><li>US rival Aptiv (formerly part of Delphi) did the right thing last year by leaving its powertrain business at Delphi and spinning out all divisions focused on EVs, autonomous driving, and telematics. It now trades at a significant premium to Denso (see table-3 below) and generates higher returns on sales and invested capital. Aptiv's share price has also outperformed Denso's by over 10% this year.</li><li>Denso should see a tailwind from various new model launches from Toyota in FY3/19, but we still see OP of only Y390bn, which is 10% below consensus and down -6% YoY. Its current FY3/19 PER of 15.3x and EV/EBITDA of 6.2x are also near the high of the range seen last year when earnings momentum and global auto demand were in much more benign conditions last fiscal year.  Toyota Boshoku (3116) is our top choice for exposure to Toyota's FY3/19 hefty new model launch schedule. Aptiv is our top choice for a long-term investment in car electrification and autonomous driving. </li></ul>

Denso's valuations appear increasingly steep, especially in light of the fact that Denso scores very low in returns on investment and profitability when compared to rivals like Aptiv and Continental, and even unlisted competitors like Robert Bosch.The fight for supremacy among these automotive mega-suppliers should further intensify over the next five years due to rising technological needs for EVs, autonomous driving and telematics. Denso appears not only riskier due to its higher exposure to gasoline engine components, but also least attractive as an investment due to lower profitability and return on invested capital (ROIC).Make no mistake. Denso is one of the world's most advanced and powerful auto parts suppliers. But it continuously generates the lowest profitability and ROIC among rivals with less exposure to gasoline engine components.  This is because Denso has one of the highest R&amp;D budgets in the industry (average of 9% of sales over the past 5 years versus only 8% at rivals, which includes Bosch's high average of nearly 10%). It begins to appear like Denso is merely Toyota Motor's R&amp;D "slave horse" with little to show for it in terms of profitability or improvements in ROIC. Denso's return ROIC is perennially low due to its high levels of net cash, but more so because of its cross-shareholdings within the Toyota Group. Added together, Denso's net cash of Y576bn ($5.5bn) and its investment securities (mostly stock in Toyota Motors and other Group companies) of Y1.8tr ($11.6bn) amount to 49% of equity. It's no wonder that ROIC at Denso are lowest among rivals (see table-1 below). It also begs the question of whether Denso should remain listed if it doesn't intend to unwind its massive cross-shareholdings with the Toyota Group. Denso is also carrying massive assets for gasoline engine technology (25% of revenues during the 9 months in FY3/18). While it claims to be able to grow its sales of components aimed at EVs by 5x over the next five years if EVs truly become the mainstream form of transportation, its fuel-injection, and other gasoline engine technology could be deemed as "impaired assets" and may need to be written off. US rival Aptiv (formerly part of Delphi) did the right thing last year by leaving its powertrain business at Delphi and spinning out all divisions focused on EVs, autonomous driving, and telematics. It now trades at a significant premium to Denso (see table-3 below) and generates higher returns on sales and invested capital. Aptiv's share price has also outperformed Denso's by over 10% this year.Denso should see a tailwind from various new model launches from Toyota in FY3/19, but we still see OP of only Y390bn, which is 10% below consensus and down -6% YoY. Its current FY3/19 PER of 15.3x and EV/EBITDA of 6.2x are also near the high of the range seen last year when earnings momentum and global auto demand were in much more benign conditions last fiscal year.  Toyota Boshoku (3116) is our top choice for exposure to Toyota's FY3/19 hefty new model launch schedule. Aptiv is our top choice for a long-term investment in car electrification and autonomous driving. 

Denso (6902)--Should the Company Even Be Listed?

Denso Corp

Denso (6902)--Should the Company Even Be Listed?