ASEKF - Aisin Corporation: A Solid Automotive Play You've Likely Never Heard Of

2023-06-19 05:07:16 ET

Summary

• Aisin Corporation, a Japanese automotive company, has been rated a 'buy' due to its cheap stock and long-term potential.
• The company has experienced revenue growth, particularly in powertrain technologies and chassis and vehicle safety systems, with Toyota Group being its largest customer.
• Despite volatility in profitability and the risks of investing in a foreign company, Aisin Corporation's innovation, market share, and cheap stock make it an attractive investment opportunity.

When it comes to the automotive space, my observation has been that many investors tend to focus on companies that are either based in the US or that have a significant amount of revenue generated from the U.S. market. Given the sheer size of the industry here at home, this is a logical behavior. But there are some opportunities that exist overseas that could make for a great deal of sense for investors to consider. One such firm, one that I have decided to rate a ‘buy’, is Aisin Corporation ( ASEKY ). Based out of Japan, the company services a large number of global automotive companies. Its largest customer, by far, is unsurprisingly Toyota Motor ( TM ). Recently, the overall financial trajectory of the company has been positive. It has experienced some volatility on its bottom line. But when you consider how cheap the stock is and the long-term potential of it, this volatility is likely worth accepting in order to participate in the upside potential the company offers.

A necessary disclosure

Unless stated otherwise, all references to dollar amounts in this article are based on the US dollar and all financial data presented has been converted into US dollars based on the current exchange rate of the dollar to the yen.

A look at Aisin Corporation

For those not familiar with Aisin Corporation, it's worth mentioning that the company is a major automotive supplier based out of Japan. Its primary business centers around products such as powertrain technology, chassis and vehicle safety systems, and more. Some of its offerings include power sliding door systems, sunroof systems, various aftermarket repair and maintenance products, and even car navigation systems. The company even has its own rideshare service called Choisoko that currently operates in over 50 communities in Japan.

Outside of the automotive picture, Aisin Corporation provides customers with a number of other offerings. For instance, it has a portion of its efforts dedicated toward various energy solutions. Its ENE-FARM technology, for instance, generates electricity by extracting hydrogen from gas that can be delivered to households. Another offering, called COREMO, is a system that generates electricity by use of a gas engine. Both of these are energy-saving systems for hot water supply. The company also has, amongst other offerings, a line of bidets. Even though only about 12% of Americans utilize a bidet, 81% of Japanese do .

Outside of the energy solutions side of the company, management also has set aside what it refers to as the ‘New Business and Other’ portion of the firm. This is basically a catch-all of other businesses that the company has established over time. Its offerings here include things like a child presence detection system that it is developing that should help to accurately recognize the presence of a child and notify individuals outside of a vehicle if a child is left alone in said vehicle. Another example that falls under this unit is a real-time speech recognition application called YYProbe that operates as an app. The company’s goal is to utilize this technology to help facilitate communication with individuals who have hearing difficulties. The list goes on.

Even though Aisin Corporation has its hands in a lot of things, there is no denying that the vast majority of its efforts are dedicated to the automotive side of the picture. During its 2023 fiscal year, for instance, 55.7% of the company's revenue came from its powertrain technologies. But this is only part of the overall automotive picture. Including its connected and sharing solutions, automotive activities accounted for 97.2% of the company’s overall revenue last year. That left the energy solutions and all other activities of the company making up the remaining 2.8% of sales. One of the biggest areas of focus for the company on the automotive side is what it refers to as its eAxle offering.

In its third generation, this is an electric drive unit that management says can contribute to a 10% increase in power consumption efficiency for the vehicles it's produced in. It's also about half the overall size of more conventional electric drive units. Of course, this unit on its own has not been launched yet. As of the end of the most recent quarter, it is only at the point of being installed in prototype vehicles for further testing. Between the eAxle and its other solutions, management plans to increase its electric Dr. unit production up to 4.5 million units by 2025. To accomplish this, the company is investing heavily, not only in Japan, but also throughout North America, China, and elsewhere. Cumulative investment in these regions specifically related to powertrain technology, excluding brakes, is expected to total around $1.4 billion by 2025.

Through this type of innovation, management has done well to grow the company in recent years. From 2021 through 2023 , for instance, the company saw its revenue pop from $25.03 billion to $31.26 billion. The greatest growth for the company here came from its powertrain technologies. Revenue expanded from $13.98 billion to $17.41 billion over the same window of time. That's a 24.6% increase in revenue over a three-year window. But this has not been the fastest growing part of the company. Its chassis and vehicle safety systems operations actually saw revenue spike 38% from $4.62 billion to $6.37 billion. Of the overall revenue the company generated last year, 64.6% involved the Toyota Group that Aisin Corporation is a member of. Another 32.6% of attracting new, all of which includes its mobility solutions, can be attributed to other customers that it classifies as OEMs. The largest of these by concentration is Stellantis (STLA), which was responsible for 6.3% of the company's revenue last year.

With the increase in sales has not come an increase in profitability for the most part. Rather, profits and cash flows have been quite volatile. After seeing net income grow from $750 million in 2021 to $1.01 billion in 2022, it then crashed to $267 million in 2023. As you can see in the chart above, other profitability metrics for the company have also been all over the map. In an industry that is highly competitive, global, and that has suffered from both inflationary pressures and supply chain issues, not to mention foreign currency fluctuations, such volatility is not surprising. In fact, it would be surprising if the firm did not see that kind of gyration from year to year.

For the 2024 fiscal year that we are currently in, management is optimistic that sales growth will continue. They believe that overall revenue should come in at about $32.66 billion. Four of its five sales categories are expected to report sales increases during this time. For instance, powertrain revenue is forecast to decline to $18.37 billion this year. Chassis and vehicle safety systems revenue should jump from $6.37 billion to $6.67 billion. Body revenue should grow from about $5.82 billion to $6 billion, while revenue associated with the company’s energy solutions and other activities should climb from $883 million to $944 million.

In terms of profitability, the only thing that management guided was for net income of around $887.5 million on a constant currency basis. If we assume that other profitability metrics will climb at the same rate, that would imply adjusted operating cash flow of $2.29 billion and EBITDA of $3.17 billion. In the chart below, you can see exactly how shares are priced on a forward basis, and you can also see how they are priced using results from 2022 and 2023. With the exception of the price to earnings multiple for the 2023 fiscal year, shares of the company look very cheap no matter which year we prioritize.

Takeaway

Based on the data that's in front of me, I would say that Aisin Corporation makes a straight compelling prospect at this point in time. Investors should obviously be cautious because investing in a foreign company with US dollars adds an extra layer of complexity to the mix. A strengthening dollar would bode poorly for an investment, all other things remaining the same. In the past month, the US dollar has appreciated 3.1% compared to the yen, with that appreciation expanding to 5% if we look at it over the past year. But outside of that, I see little reason to be anything other than optimistic. Shares of the company are cheap, management continues to innovate, and this is a sizable player with a nice chunk of the overall market. All of these factors combined make me feel comfortable in rating the business a ‘buy’ at this time.

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