The automotive industry in China has seen rapid growth and transformation over recent years, with companies continually adapting to new technologies and consumer demands. One of the industry leaders, Huayu Automotive, has played a significant role in this sector, particularly in the supply of automotive components. However, recent data indicates a deceleration in Huayu's performance, sparking discussions about the future of the company and its competitive stance within the market.
In 2023, Huayu Automotive reported revenues amounting to approximately 168.59 billion yuan (about $24.35 billion), marking a modest year-on-year growth of 6.52%. Nonetheless, the net profit attributable to shareholders barely grew, reaching 7.21 billion yuan (around $1.03 billion), an increase of just 0.15%. The first quarter of 2024 showed continued challenges, as Huayu's revenue only grew by 0.56%, totaling 37.02 billion yuan (about $5.27 billion), while net profit fell by 11.93% to approximately 1.26 billion yuan (around $180 million).
These dwindling returns have prompted a closer examination of Huayu Automotive’s operations, particularly concerning its stock market performance. An analysis of real-time market data revealed that, among 222 publicly listed automotive component companies, Huayu’s dynamic price-to-earnings (P/E) ratio was notably lower than the median of 24.11, standing at a mere 10.06. Such metrics place Huayu within the lower tier of profitability, evident as it ranked ninth from the bottom among 193 profitable companies in the sector. The question thus arises: What is impacting Huayu Automotive's standing?
At the heart of the issue lies a combination of stagnant revenue growth and declining profit margins. Huayu is primarily engaged in the production of automotive components, including seats, lighting, dashboards, airbags, bumpers, and various functional parts such as air conditioning compressors and drive shafts, boasting a substantial market share. Particularly, Huayu has maintained a leading position in automotive seats and lighting within China's automotive sector.
Despite Huayu’s diversification efforts in recent years, more than 46% of its revenue in 2023 continued to stem from its largest stakeholder and customer, SAIC Motor Corporation Limited. This over-reliance on a singular source of income could pose risks as the automotive industry evolves rapidly, particularly with the rise of electrification and intelligent vehicles.
Analyzing Huayu’s financial trajectory over the past five years reveals significant fluctuations. After experiencing negative growth between 2019 and 2020, with revenue dropping by 8.36% and 7.25% respectively, the company had a brief revival from 2021 to 2023, posting growth rates of 4.77%, 13.09%, and 6.52% respectively. However, the first quarter of 2024 again reflected stagnation with a mere 0.56% increase.
Concurrently, Huayu’s profitability has faced challenges. In 2020, the company reached a peak gross margin of 15.23%, which has since declined to 13.32% in 2023, and further dropped to 12.54% in the first quarter of 2024. Examining net profit margins, Huayu's figures peaked in 2018 at 8.03 billion yuan (around $1.16 billion), representing a net margin of 6.65%. However, net margins have dwindled significantly, from 5.91% in 2019 to 4.80% in 2023, with the first quarter of 2024 revealing a net margin falling to 3.87%. This trajectory highlights pressing concerns regarding Huayu's operational efficiency and its ability to adapt to changing market dynamics.
Furthermore, a detailed look at Huayu's product segments suggests that its slip in performance is, in part, attributable to underperforming interior and exterior components. The revenue for these components, which include dashboards, door panels, and seats, was recorded at 113.07 billion yuan (about $16.56 billion) in 2023, with an annual growth of 8.56%. Despite representing 67.07% of overall revenue, the gross margin for these products fell to 12.99%. Huayu's net profit from these segments barely grew, up just 1.85%, indicating limited profit expansion compared to overall sales.
The automotive landscape is becoming increasingly competitive, especially in the key sectors of seating and lighting. As market demands evolve, companies are prioritizing comfort and cost-efficiency in seating solutions. Therefore, newer manufacturing ventures are circumventing established suppliers like Huayu by engaging directly with original equipment manufacturers (OEMs) while forming partnerships with new component suppliers, leading to the emergence of challengers. For instance, Jifeng Co., which focused on headrests and armrests, has recently positioned itself as a supplier for emerging electric vehicle companies such as NIO and Li Auto.
Additionally, in 2019, Jifeng Co. expanded its operations considerably by acquiring the well-established German automotive interior supplier Grammer. Now venturing into passenger seats, the firm anticipates significant sales with nine projects ongoing, forecasted to yield revenues between 56.3 billion to 61 billion yuan (approximately $8.1 to $8.78 billion).
Another major player, Tiangong Intelligent Control, has already established a foothold within Huayu's customer base and is servicing other automotive brands like BAIC, Dongfeng, Chery, and JAC. Their passenger seating revenue reached 473 million yuan (about $67.6 million) in 2023, with new contracts also set with prominent manufacturers like SAIC and several leading New Energy Vehicles (NEVs).
Moreover, challenges are also being faced in the automotive lighting sector due to the rise of intelligent lighting solutions. New entrants such as Xingyu and Kobotda are gaining ground, highlighting the increased competition Huayu encounters in this space. Xingyu, for instance, reported 10.248 billion yuan (around $1.49 billion) in revenues, showcasing a 24.25% increase, while net profits surged by 17.07%, demonstrating robust growth that rivals Huayu's performance.
Similarly, Kobotda recorded impressive figures in 2023, achieving revenue of 4.625 billion yuan (approximately $669 million) with a growth rate of 36.68%, showcasing the scalability and potential of their operations.
In summary, alongside dwindling revenue and profit margins, Huayu is grappling with fierce competition undermining its market dominance. More critically, it appears that Huayu’s transition towards electrification and digital transformation has been considerably slow. While the company did not trail in initiating its shift towards smart and electric vehicle components, the pace at which it has evolved appears to lag behind its competitors.
Since the 2016 annual report, internal goals revolved around fostering an agile product development framework, establishing core technical teams, and addressing the advancements in electric, connected, and intelligent vehicles. Despite making significant strides, such as the development of in-car millimeter-wave radar for autonomous driving, the progress has been underwhelming relative to competitors who are swiftly navigating towards intelligent driving and cockpit solutions.
By 2023, while Huayu's sales of driving motors reached 360,000 units with a growth of 21.48%, its market share continued to decline, dropping outside the top tier for the past four years due to increased competition.
Moving forward, the rapid growth of the NEV market presents both risks and opportunities for Huayu Automotive. The pressing question remains whether the company can successfully pivot towards innovative solutions, restructure its operation to regain competitive footing, and return to a trajectory of high growth.