Japan auto parts: different OEMs, different results

by SR on August 17, 2012

Japan auto parts results, percent of full-year sales and OP guidance achieved in Q1

Note: This is one of those unavoidably crowded charts that really does look better when it’s bigger. Click on the graphic and a larger image will be displayed.

The difference is clear: Toyota parts good, Honda bad

With Q1 (April-June 2012) results season winding down, I took Q1 results for 40 of Japan’s auto parts stocks and ranked them according to how the percentage of full-year management guidance they achieved in Q1. I did this for sales and operating profit. The result is the chart at the top of the page. The further up the left (y) axis, the higher the percentage of full-year profit guidance generated in Q1. The further to the right the point is, the higher the percentage of full-year revenue guidance generated in Q1. So the higher up the better. We can draw the following conclusions.

  1. Toyota group is the place to be. As shown in the chart, the core Toyota group auto parts companies (marked in red) generally achieved higher percentages of full-year guidance in Q1 than suppliers affiliated with other auto groups or independent suppliers. Three out of the top five were Toyota group companies and of those five companies one is an independent that is there only because it put out very low initial guidance. This bears out our theory that Toyota parts suppliers are the place to be. Three of these have already revised guidance upward (shown by a triangle) and Toyota Boshoku will probably follow at some point.
  2. Avoid Honda suppliers. Honda suppliers have been hit hard by the chaos of the floods in Thailand in late 2011, disruption that continued into the early part of 2012. Just as they recovered from that, many are being hit by slowing demand for motorcycles (and thus parts) in economies such as Brazil and Indonesia, where the Japanese 2-wheeler OEMs dominate the market. As you can see, three Honda suppliers (the green points) have revised down already – shown by an inverted triangle in the chart above – and a fourth (FCC) looks a bit doubtful to me. This is not a hard and fast rule, as Showa did revise up, but it’s a harder and riskier decision than picking a company with primary exposure to Toyota.
  3. Independents require careful stock-picking. Because Toyota is so large relative to other OEMs, many independent suppliers will also be benefiting from the resurgence in production at the world’s largest auto manufacturer, but liquidity tends to be limited. Moreover, the exposure tends to be diluted. Say you are interested in independent supplier Teikoku Piston Ring (TPR). Only about 30% of this company’s revenues come from Toyota, compared to upwards of 60% at (say) Aisin Seiki. Moreover, Aisin Seiki trades about US$30 million per day, whereas TPR is lucky to get US$3 million a day. So you get half the exposure and one-tenth of the liquidity. Another example: your eye may be caught by Nippon Seiki, which is one of the best performers on the y-axis, achieving 43% of its full-year OP guidance in Q1. There are two problem with this stock. First, the company’s original guidance was easy to beat, since management is forecasting that operating profit will decline 40.8% year-on-year in FY3/13. Second, Nippon Seiki trades less than US$200,000 a day. You may get in, but you’ll never get out.
  4. Avoid the bottom-left quadrant. Seasonality is important in the auto industry so we should not assume that full-year results will be roughly equivalent to Q1 results multiplied by 4. Still, if you have achieved only 5%, 10% or even 20% of your operating profit in the first quarter of the year, you will struggle to hit full-year guidance. In the charts both above and below you can see a number of stocks that had a difficult three months. There may be a solid reason for this, but in general you shouldn’t be messing around in this corner of the market unless you have very high conviction in a very specific story. If you’ve struggled in Q1, it’s just more uphill struggle going forward.
  5. Too early for machinery, but waiting. In the point above we mention the importance of not choosing losers that had a weak first quarter. It’s no accident that a number of the stocks in that bottom-left quadrant have substantial non-auto operations. I have highlighted these in the chart. Sumitomo Electric is partly auto, partly technlogy in that it supplies a range of electronic parts and materials. What interests us is that it is the world’s second largest supplier of wire harnesses for automotive use and in Q1 profits from that segment made up 88% of total operating profit, so the automotive industry is the main profit driver. That company, JTEKT, NTN and Toyota Industries all performed significantly worse than “pure” auto parts plays in the Toyota group. Toyota Industries was not that bad in absolute terms, being right at the top edge of the “loser’s quadrant”. Note also the unfortunate Sanden Electric, just to the right of the quadrant, meaning that it did okay with sales but poorly on profits. Sanden is the world’s second largest supplier of compressors for automotive air conditioners but unfortunately its largest customers include the European OEMs Peugeot-Citroen, Volkswagen and Renault. Good luck with that.

Japan auto parts results, percent of full-year sales and OP guidance achieved in Q1

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