European Auto Suppliers - What are the implications of the China slowdown?
* Reducing global production; UBS interactive model on China now available
We reduce our global production forecasts from +1.7% to +0.7% in '15 and from +3.7% to 2.6% in
'16, mainly driven by China. Given the higher level of inventories in July and longer summer breaks, we
expect no H2 production growth in China. We also anticipate the Domestic OEMs will continue to
outperform the JVs near term. We reduce our FY '16 production forecasts from +7% to +5%, with
domestic +10% and JV up +2%. We introduce our interactive model, which looks at 11 global suppliers
and enables us to gauge the impact of production growth (from each Domestic OEMs and JVs) and
currency on the suppliers' organic growth, customer mix, group sales/profitability. We have built in three
scenarios: UBS base case; downside case (domestic OEMs gain share); upside case (JVs regain share).
* The right "recipe": product mix, domestic OEMs exposure and aftermarket
We identify the best positioned suppliers in China as those with 1) strong product mix contribution/high
content value, 2) higher exposure to domestic OEMs and 3) aftermarket. In our downside case, where
China production grows by "only" 2% next year, we estimate the impact on group EBIT will range from
-1/-3% (Valeo, Conti, Autoliv) to -16% (Faurecia) (vs UBS base case). With share prices declining 15-30%
vs peak and assuming no change in multiples, we would need China production to decline c20% this
year and next to reflect a similar impact at the EBIT level, which seems an overly pessimistic outcome, in
our view.
* FX: mostly naturally hedged; main issue is potential impact on German exports
The RMB depreciation should not have a material impact since suppliers are mostly naturally hedged. We
estimate that a 5% RMB devaluation translates into a -1/-2% impact on sales/profitability. However, the
impact on exports from Germany is more worrying (high content value) since c5% of German
production is exported to China.
* Upgrading Conti to Buy; Valeo remains a Top Pick; Faurecia most at risk
We upgrade Conti to Buy on: 1) earnings visibility and resilience, 2) Tires margin staying at high level for
longer, 3) limited China risk (diluted by Rubber exposure), 4) Best-in-class cash conversion. Valeo's share
price has over-reacted, in our view: business model is resilient, organic growth should remain best-inclass
and there is high FCF potential near term. Faurecia appears most at risk of a China slowdown and
there is limited margin momentum left. Autoliv has limited downside risk to China (lower base, high
exposure to Domestic OEMs) but valuation still high given lack of margin momentum.