Heavy BEV Investments And Weak Demand Will Pressure Returns And Margins

Catalysts

About GS Yuasa

GS Yuasa is a global manufacturer of lead acid and lithium ion batteries for automotive, industrial, aerospace and defense applications.

What are the underlying business or industry changes driving this perspective?

• Heavy capital spending on BEV and hybrid battery capacity, combined with currently weak BEV demand and potential underutilization of the new Shiga factory, risks locking in low returns on invested capital and pressuring free cash flow for an extended period, which may weigh on earnings growth.
• Ongoing shifts in automotive powertrain mix, including slower than expected plug in hybrid and BEV adoption at key customers, could leave GS Yuasa with product and capacity misalignment that limits volume leverage and compresses margins in the mobility segment.
• Rising depreciation and R&D costs linked to large scale lithium ion investments and Honda joint ventures may outpace pricing power in batteries, eroding operating margin just as one off extraordinary gains from asset disposals fade out of net profit.
• Structural weakness and currency volatility in certain overseas automotive battery markets, especially Turkey, could continue to offset strength in ASEAN and Australia, capping consolidated revenue growth and adding earnings volatility.
• Intensifying competition and technology shifts in energy storage systems and industrial lithium ion batteries may dilute GS Yuasa’s share in high growth infrastructure and data center projects, limiting the upside to revenue and constraining long term margin expansion in the social infrastructure business.

Assumptions

This narrative explores a more pessimistic perspective on GS Yuasa compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming GS Yuasa's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts are assuming GS Yuasa's profit margins will remain the same at 5.4% over the next 3 years.
• The bearish analysts expect earnings to reach ¥34.4 billion (and earnings per share of ¥343.0) by about December 2028, up from ¥31.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ¥46.6 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, down from 12.2x today. This future PE is greater than the current PE for the JP Auto Components industry at 9.8x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.94%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Record high revenue and profits across most segments, supported by successful price revisions and volume growth in core businesses such as domestic automotive batteries and industrial power supplies, suggest that sustained top line expansion could continue and support stronger earnings than anticipated, which may underpin the share price through resilient revenue and operating profit.
• Robust structural demand in social infrastructure, including nuclear power plants, data centers, telecommunications and government projects, combined with aging infrastructure driving replacement cycles, indicates a long term growth runway that could lift utilization, pricing power and profitability, thereby supporting revenue growth and net margins.
• The rapid improvement and scaling of automotive lithium ion batteries, particularly for hybrid vehicles supplied to Honda, along with cost reductions, yield improvements and favorable price adjustments, points to a business that is transitioning from drag to driver, which could materially enhance segment earnings and overall operating profit.
• The company’s strong financial position, reflected in a solid equity ratio of 51.8 percent, positive operating cash flow and deliberate capital allocation into BEV and industrial lithium ion capacity aligned with Vision 2035 and the Seventh Mid Term Plan, may enable GS Yuasa to convert heavy investment into long term growth in revenue, earnings and free cash flow.
• Diversification across mobility, social infrastructure and aerospace and defense, with plans to expand capacity in industrial lithium ion and defense related batteries where demand is structurally rising, could reduce regional and product specific volatility, supporting more stable consolidated revenue and smoother net profit growth over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for GS Yuasa is ¥2900.0, which represents up to two standard deviations below the consensus price target of ¥3987.14. This valuation is based on what can be assumed as the expectations of GS Yuasa's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥5200.0, and the most bearish reporting a price target of just ¥2900.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be ¥641.0 billion, earnings will come to ¥34.4 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of ¥3818.0, the analyst price target of ¥2900.0 is 31.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.