US electric vehicle (EV) maker Tesla Inc’s encouraging results for last quarter and a positive guidance for the near term will benefit the Taiwanese firms in its supply chain, such as Hota Industrial Manufacturing Co (和大) and BizLink Holding Inc (貿聯), analysts said last week.
Hota, which supplies automotive gears and shafts, and BizLink, an EV harness maker, are likely to gain the most from the Palo Alto, California-based company’s third-quarter net income of US$311.5 million, its first quarterly profit in two years, the analysts said.
“We believe the third-quarter outcome and the fourth-quarter guidance are positive for Tesla suppliers. A turnaround in net income, better gross margin and improvement in free cash flow should help relieve market concerns over the pressure of Tesla’s payment to upstream suppliers,” Yuanta Securities Investment Consulting Co (元大投顧) analyst Kenny Chen (陳景文) said in a note on Thursday.
Tesla last week projected that production and deliveries of Model 3 sedans should continue to increase this quarter compared with last quarter, and said the momentum could extend into next year, which would be an important catalyst of revenue growth for related suppliers, Chen said.
Jih Sun Securities Investment Consulting Co (日盛投顧) analyst Linus Shih (史聖國) said he expects Tesla’s total annual production to exceed 300,000 units this year — a figure that could be as high as 500,000 units next year.
“By leaving behind its production bottlenecks and operating losses, Tesla is expected to see its share price stabilize and continue to lead in the global EV market, while sales and valuations of Taiwanese firms in its supply chain should also rise accordingly,” Shih said in a separate note.
Apart from Hota and BizLink, electrical terminal supplier K.S. Terminals Inc (健和興) is among his top picks in light of Tesla’s better prospects, Chen said.
Shih said he also favors QST International Corp (恒耀), which produces and distributes automotive fasteners.
For the first nine months of this year, Hota’s revenue totaled NT$5.45 billion (US$175.77 million), up 7.63 percent from the same period last year, and BizLink’s consolidated sales were NT$15.67 billion, up 49.74 percent from a year earlier, company data showed.
K.S. Terminals’ sales increased 4.18 percent annually to NT$2.62 billion in the first nine months, while QST’s revenue grew 8.09 percent year-on-year to NT$8.21 billion, data showed.
However, due to an overall decrease in institutional holding across Taiwan’s autoparts makers, shares in most suppliers have dropped by a double-digit percentage so far this year, and analysts said investors should be cautious about the overall sector, given the global deterioration of vehicle sales growth, especially China.
“Given concerns about the trade war, our channel checks with Taiwan’s auto parts players suggest lower quarterly revenue growth for manufacturers and possible cuts for components’ average selling prices from the fourth quarter, especially for those with higher revenue exposure to the Chinese market,” Chen said.
It would take time for both traditional vehicle sales growth and market sentiment to recover, as the downturn of traditional auto markets is expected to persist, he said.
In the meantime, investors should avoid firms with high exposure to China, Chen added.
“The electric vehicle theme might be the only bright spot for now, mostly thanks to the Model 3’s faster production speed and market share gains in the overall EV market,” Chen said.
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