Minth: one of those companies that just gets it

by SR on July 17, 2012

Minth annual sales (million RMB)

The exception that proves the rule in China

Very occasionally you visit a company and come out spouting superlatives. The management, products and positioning all click, and it just makes sense. After that it’s a simple question of what price you would be prepared to pay for the stock. Hong Kong-listed Minth is not a company I know well, but based on my one visit and my discussions with management I’d happily put the stock on a list of prospective buys.

The catalyst for this post was an 14 July 2012 article in the Nikkei about Minth joining Nissan’s supplier association, apparently the first Chinese company to be admitted and the second Asian company after South Korean steel supplier Posco in 2005. Is this a big deal? To my mind, no. Minth has been doing a significant amount of business with Japanese auto OEMs for a decade or more. In every important sense the company is already a successful auto parts supplier. While the existence of Minth may be a surprise to the Nikkei, everybody that matters already knows.

Minth 2011 sales by region (as percent total)

What is really interesting about Minth is that it has succeeded where many others have failed. It is not the only Chinese supplier of auto parts to foreign OEMs, but it stands out as being unusually competent. I have been told by more than one foreign OEM that the local suppliers in China are several steps behind the global auto parts suppliers, such as Denso or unlisted Bosch. Minth is an exception and, due to its canny expansion into Mexico and Europe, looks likely to be the first genuinely global Chinese auto parts supplier. Note also the uniformity of margins by region as shown by the charts above and below – profitability is similar in each, which is impressive.

Minth 2011 segment profit by region (as percent total)

Get close to your customers

It’s no big deal for a Chinese company to do well with Chinese customers but at Minth the situation is reversed: I estimate that Chinese clients make up only a few percent of revenues. On the other hand, I would say that Japanese suppliers account for about 55% of Minth’s revenues. That figure was likely a bit lower than 55% in 2011 due to the supply problems caused by the Northern Japan earthquake and the following tsunami, which knocked out auto production in Japan for a few months. However, my guess is that the normal pattern would be Japanese auto OEMs about 55%, US customers about 25%, Europe 15% and Others 5%, a category that includes Chinese OEMs (see the chart below). So really, this is already a global company in terms of its client base.

Minth sales by customer region (estimated)

I do not know the circumstances surrounding the early development of Minth, but what jumps out is the presence over the years of multiple Japanese directors on the board. I suspect that at a time when the Toyota group was looking for allies and partners in China, Minth caught their eye and impressed Toyota enough for them to get closely involved. Minth has joint ventures in China with a number of Japanese companies, including Aisin Seiki and some other unlisted firms. With these people on board, making inroads into Japanese OEMs would have been relatively easy.

Incidentally, we’re talking about senior people, not mid-level engineers lured away from their Japanese companies with promises of extravagant salaries and fat bonuses. Past and present directors include Mikio Natsume, who was a long-time board director of Aisin Seiki, one of the core members of the Toyota group and who also had connections with supplier Exedy. Tokio Kurita spent 30 years at Toyota, eventually becoming president of a subsidiary of Toyota Auto Body. In a slightly career path, Kiyoshi Kawaguchi is the head of Minth Japan and formerly worked at Nissho Iwai and then Sojitz in Hong Kong and Shanghai. These are the kind of high-level contacts you need to build relationships with Japanese customers and Minth has them.

Work that competitive advantage

Why would Japanese OEMs want local suppliers rather than exclusively using Japanese parts suppliers in China? First of all, I do not see price as being a significant issue at this level. Japanese OEMs are jealous of their reputation for quality and all major OEMs place great importance on reliability and safety. Minth would have to equal the price of its competitors – it will get no special treatment – but it is not primarily competing on price. So, again, why bother?

My view is that the Japanese OEMs are using Minth as something as a test case for “real” local procurement. This is a Chinese company with all the local connections to local suppliers that implies in terms of low costs and high margins. The median pretax profit margin at Minth over the most recent five years has been an impressive 27.2%.

Minth annual pretax profit margin (%)

I think, although I do not know for sure, that Minth achieves its low costs by using Chinese suppliers for of its materials and also its production equipment. You can save a lot of money by using a Chinese machine tool and Chinese dies. Sure, the Japanese and Germans are better at the high end, but how often do you need the high end? Still, from the perspective of a Japanese OEM, this use of local materials is a potentially risky approach. Japanese OEMs use parts made in China, but those parts are usually made by global parts suppliers who manufacture the parts locally from materials supplied by global material suppliers.

This approach is safe, but expensive, because the only thing that is significantly cheaper than a part made outside China is labour. Ultimately, if foreign OEMs want to appeal not only to the relatively wealthy middle class of China but also the the up-and-coming workers, then they need to offer lower cost products and to achieve those lower costs they need local procurement. Local design, local engineers, local materials, local parts – and local customers.

Minth annual pretax profit (million RMB

It’s noticeable that Minth’s parts are what you might call “non-core” in the sense that failure in one of the parts would be very unlikely to cause a catastrophic accident. Minth doesn’t make camshafts or gearboxes or steering systems, but body trim and other essentially cosmetic parts. I want to be careful here and stress that I am not saying that Minth makes low-quality parts: Toyota, Honda, Nissan, BMW, Daimler and a bunch of other world-class OEMs think that Minth’s components are good enough to use in their cars. What I am saying is that if you are experimenting with new suppliers, it makes sense to start with non-critical components. You don’t take somebody untested and say “welcome aboard, now go make me a cylinder block”. That’s how accidents happen and how you end up defending yourself on live television in front of a hostile Congressional committee that wants to know why your car supposedly killed somebody. No CEO wants that.

Think big, think long-term

Minth’s ambitions are not limited to China. It claims a domestic market share in its area – body trim etc – of about 35% and believes it can growth that market share by 1 percentage point a year annually. It is probably taking share from local rivals such as Lingyun Industrial but also from competitors from developed markets who have been slow to move overseas. I’m not referring to the big global tier-1 suppliers, who have been in China for years. I’m referring to tier-2 or tier-3 suppliers who have little overseas production.

A good example would be Shiroki, which is a Japanese supplier of parts to companies who make body trim, companies like Toyota Boshoku and Aisin Seiki. Shiroki has only a couple of facilities in China and thus it has very limited geographical coverage. Shiroki’s management has plans for many more facilities over the next five years, but while it is trying to build out, staff and manage facilities, Minth is already there.

And it’s not just China. Minth also have production facilities in the United States and Mexico – I assume this is for Nissan – and they have a design and marketing centre in Germany. Closer to home, Minth operates a factory in Thailand and has a design centre in Yokohama. Clearly management is not content with China alone as a market and it iis building out for the long term. I would expect something in Brazil at some point.

Performance

The only problem I have with Minth is whether the valuations are attractive. That’s something we’ll look at again, but in the meantime I will leave you this chart showing that some investors at least believe the stock is more attractive than most other Hong Kong shares.

Minth share price performance yaer-to-date

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