Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

SC Capital has over 20 years' experience covering the global automotive industry both on the Sell Side (UBS & Morgan Stanley) and Buy Side (Och-Ziff), along with a wealth of industry contacts. 

Current focus is on electric vehicle stocks & their supply chains. Aim is to identify the winners and losers from a long/short perspective. This includes close coverage of legacy automakers as well.  

From time to time. we cover opportunistic events with stocks in the manufacturing sector, food & beverage, healthcare and tech, where we also have coverage experience.

Global Automotive Stocks/EV Focus/Event Driven

Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Equity Bottom-Up

Toray's share price has been weak ever since it announced FY16 results on May 10th, despite both results and FY17 outlook being largely in line with consensus estimates. This was due to the poor performance of the company's Carbon Fiber division, which made up nearly a quarter of Toray's operating profit (OP) in FY15 but fell by 34% YoY in FY16--its first ever decline. Over half of Toray's Carbon Fiber sales come from Boeing, mainly its 787 Dreamliner. This relatively pricey plane uses 35 tons of Toray's carbon fiber, which allows it to have superior mileage and longer-range flights. This made the 787 extremely attractive when the oil price was high.Orders of the 787 have stalled recently due to increased competition and, according to Toray, the lower oil price. While Boeing had guided suppliers to be ready for monthly production of 12 units to grow to 14, possibly by 2018, this quickly changed last year as orders for the 787 began to dry up. Toray had unfortunately already ramped up capacity for 14.Toray's OP has not actually grown in USD-terms over the past five years (FY16 OP in USD was -0.6% versus FY11), but without the Carbon Fiber division, Toray's OP would've been down by 11% in USD terms.Toray's stock is therefore driven by 787 output (see Charts-1 &amp;-2) and here lies the biggest disconnect: most Japanese sellside analysts see 787 production recovering from the 2H of FY17, and have Toray's Carbon Fiber Division OP growing for every year thereafter. Wall Street analysts who cover Boeing, however, are negative on Boeing's 787 orders (most expect Boeing's gross margins to improve as 787 sales decline and 737 sales increase), with most not seeing an increase to 14 per month until after 2020, with price cuts highly likely along the way.Because of the sudden fall in Toray's carbon fiber OP last year and the uncertain outlook ahead, Toray's PER has fallen to only 14.8x versus a 5-year average of 18x (and the average low for each year being 14.9x), while the EV/EBITDA is down to 7.6x versus the 5-year average of 8.8x (average low of 7.7x).Low valuations should be taken with a bag of salt. Sellside analysts in Japan have lofty estimates for Toray's carbon fiber ops in FY17, much higher than the company's targets, which are highly optimistic themselves. This could be cause for a disappointment along the way.

Toray's share price has been weak ever since it announced FY16 results on May 10th, despite both results and FY17 outlook being largely in line with consensus estimates. This was due to the poor performance of the company's Carbon Fiber division, which made up nearly a quarter of Toray's operating profit (OP) in FY15 but fell by 34% YoY in FY16--its first ever decline. Over half of Toray's Carbon Fiber sales come from Boeing, mainly its 787 Dreamliner. This relatively pricey plane uses 35 tons of Toray's carbon fiber, which allows it to have superior mileage and longer-range flights. This made the 787 extremely attractive when the oil price was high.Orders of the 787 have stalled recently due to increased competition and, according to Toray, the lower oil price. While Boeing had guided suppliers to be ready for monthly production of 12 units to grow to 14, possibly by 2018, this quickly changed last year as orders for the 787 began to dry up. Toray had unfortunately already ramped up capacity for 14.Toray's OP has not actually grown in USD-terms over the past five years (FY16 OP in USD was -0.6% versus FY11), but without the Carbon Fiber division, Toray's OP would've been down by 11% in USD terms.Toray's stock is therefore driven by 787 output (see Charts-1 &amp;-2) and here lies the biggest disconnect: most Japanese sellside analysts see 787 production recovering from the 2H of FY17, and have Toray's Carbon Fiber Division OP growing for every year thereafter. Wall Street analysts who cover Boeing, however, are negative on Boeing's 787 orders (most expect Boeing's gross margins to improve as 787 sales decline and 737 sales increase), with most not seeing an increase to 14 per month until after 2020, with price cuts highly likely along the way.Because of the sudden fall in Toray's carbon fiber OP last year and the uncertain outlook ahead, Toray's PER has fallen to only 14.8x versus a 5-year average of 18x (and the average low for each year being 14.9x), while the EV/EBITDA is down to 7.6x versus the 5-year average of 8.8x (average low of 7.7x).Low valuations should be taken with a bag of salt. Sellside analysts in Japan have lofty estimates for Toray's carbon fiber ops in FY17, much higher than the company's targets, which are highly optimistic themselves. This could be cause for a disappointment along the way.

Toray Industries

Toray--Not a Buy Despite Low Valuations