Investment Summary

Via external acquisition and integration, Joyson has rapidly grown into a top global supplier of automotive components and parts. Its current products include: The development and manufacturing of 1) intelligent driving systems, 2) car safety systems, 3) new energy vehicle BMS, and 4) high-end automotive functional parts assembly, bringing more room for long-term sustainable development. What's more, the company's result is warming up from 2018Q2. We revised the target price of RMB 29.7 equivalent to 29/25x of 2018/2019's estimated EPS, and assign Accumulate ratings. (Closing price as at 18 July 2018)

Decline Result in 2017 and 2018Q1

In 2017, Joyson reported revenues of RMB26.6 billion, up 43% yoy; net profits attributable to parent company were RMB396 million, down 13% yoy; net losses of RMB490 million were recorded in 2017Q4. The annual EPS was RMB0.42, down 36% yoy, with a dividend paid of RMB0.1 per share. In 2018Q1, the revenue was RMB7 billion, up 7% yoy; net profits attributable to parent company stood at RMB31 million, down 85% yoy; the EPS was RMB0.03.

The Cost of M&A Integration Dragged Down the Results

The Company's results fell short of our expectations, mainly resulting from the non-recurring expenses of the Company's acquisition of Takata, the pressure of climbing gross margin of KSS new products, and American tax reform fees. In 2017, the Company's accumulated unplanned expenses reached as high as RMB910 million, accounting for 90% of the profit before tax, including Takata acquisition expenses confirmed of RMB111 million, additional costs of RMB276 million for mass production of KSS new products, one-off effect of RMB65 million from American tax reform, a yoy increase of RMB330 million in R&D expenses, and the non-recurring expenses of RMB127 million from Mexican factory integration. In the first quarter of 2018, the acquisition of Takata confirmed an expense of RMB200 million again, accounting for 150% of the profit before tax.

Result Rebound in 2018Q2, Expecting to Usher in a Tuning 2018 Year

The Company's gross margin dropped by 2.5 ppts to 16.4% in 2017, but with the ramp-up of new products, the gross margin picked up 3 ppts qoq to 17% in 2018Q1.The period cost ratio was 14.36% (-0.3 ppts) in 2017, and the cost ratio was 15.39% (+2.1 ppts) in the first quarter of 2018, of which the administration expenses grew fast due to integration and acquisition and the rapid increase in R&D investment.

The management forecasts that in H1 2018, the Company will report revenues of RMB22 billion - RMB25 billion, and net profits attributable to parent company will be RMB400 million - RMB500 million, that is, the net profits attributable to parent company will reach RMB370 million - RMB470 million in 2018Q2, hitting a record high. We expect that with the completion of acquisition and promotion of integration of Takata's assets, the scale effect will emerge, the Company's results will get back on track, and the overall gross profit and net profit margin of the Company will recover steadily.

Full Orders Guarantee Long-term Development

In 2017, the amount of the Company's newly-signed orders exceeded RMB38 billion, among which the human-machine interaction (HMI)/vehicle-borne interconnection system/KSS vehicle safety system/BMS/functional component and assembly business obtained new orders of RMB12.6 billion/RMB4 billion/USD2.2 billion/RMB1.2 billion/RMB5.9 billion, respectively. In 2018, the Company obtained orders worth USD21 billion via acquisition of Takata, providing a good guarantee for long-term development.

Investment Thesis

Through the deep-rooted layout in recent years, Joyson's main products have covered four major fields related to driving, namely, vehicle active and passive safety, HMI and connectivity, new energy battery management system (BMS), and auto component. The year of 2017 is an important year in the M&A history of Joyson Electronic. While promoting the integration of KSS, the Company launched a purchase of Takata's target assets in addition to gas generators at USD1,588 million. In April 2018, the consolidation of Takata was fully completed, and the original KSS and Takata business will merge into a new company named Joyson Safety, becoming the second largest vehicle safety system supplier in the world after Autoliv, with annual sales revenues of approximately USD7 billion and market share of nearly 30%. This will completely change the pattern of industrial chain, and it will not only thicken the results in H2 2018, but also bring more room for long-term sustainable development. We revised the target price of RMB 29.7 equivalent to 29/25x of 2018/2019's estimated EPS, and assign Accumulate ratings.

Risk

Operating collision in Joyson's M&A

Worse-than-expected downstream demand

Financials

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