ADAS - who has the credentials to succeed?
Comment of the Day

June 14 2017

Commentary by Eoin Treacy

ADAS - who has the credentials to succeed?

Thanks to a subscriber for this report from Deutsche Bank focusing on auto parts suppliers focusing on autonomous driving. Here is a section: 

Three key drivers of wider ADAS adoption in China
Although there are no regulatory requirements for ADAS adoption, the inclusion of ADAS features will boost scores in China’s official safety rating (C-NCAP) starting 2018. Moreover, we note that local brand OEMs have been adding ADAS features in their new models, probably as a means to compete with similarly priced JV products, which lack those features. Last but not least, in China’s “Made in 2025” master plan, the government highlights new auto technologies as a focus for the country’s technology advancement, along with target ADAS penetration levels for local brands by 2020 and 2025. This gives China a more visible path for ADAS adoption growth than other countries.

We envision a long-term ADAS market of USD24bn
We have performed a proprietary ADAS market size analysis, mainly based on target ADAS levels and penetration across different timeframes. We use the sensor segment as an anchor to derive an overall ADAS demand forecast given the segment’s higher transparency vs. other fragmented ADAS component segments. In summary, we estimate that the Chinese sensor market could reach USD6bn in 2020 (2025E: USD12bn) and the total ADAS market could be worth up to USD12bn (2025E: USD24bn).

A few Chinese companies expected to outshine many others
Currently, major global part suppliers dominate the ADAS market. We can identify at least c.30 Chinese suppliers involved in the space. However, most of these local companies still have too limited an exposure for ADAS to make a difference to their profit and outlook. In this report, we identify six companies that we believe can become meaningful players in various ADAS markets. We value them using forward P/E vs. their growth prospects. Our top Buys are Nexteer and Joyson considering their advanced ADAS knowhow, which can rival global peers’. Sector upside risks include faster-than-expected ADAS adoption and positive scale effects. Downside risks include a slow pick-up in ADAS sales and local players’ inability to compete with foreign suppliers.

Eoin Treacy's view

Here is a link to the full report.

Traditional auto parts manufacturers and retailers are facing an existential challenge because the rise of electric vehicles means demand growth for their products is evaporating. That leaves open potential for wide disparities in performance between companies within the sector with the delineating factor being how well leveraged they are to supplying the kinds of sensors, cameras and motors new technologies require. 

Minth Group broke out of a lengthy range in April 2016 and bounced from the region of the 200-day moving average from early this year. A sustained move below HK$28 would be required to question medium-term scope for additional upside. 

Nexteer Automotive Group remains in a relatively consistent medium-term uptrend and a sustained move below $11 would be required to question medium-term scope for additional upside. 

At the other side of the argument AutoZone has completed a Type-3 top formation and while oversold in the short-term, a sustained move back above the trend mean would be required to question the medium-term downward bias. 

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