Auto Part Supplier Denso Rakes in Big Money Thanks to EVs

published: 2021-09-08 9:30 | editor: | category: News

Japanese auto part supplier Denso contains a significant market scale and cash flow efficiency, and managed to achieve an apparent growth amidst the transformation of electrification, with a market value that has now surpassed that of major auto brands like Ford and Honda.

Denso is the second largest auto part supplier in the world behind Bosch, and occupies roughly 30% of the global market share in engine parts and air-con parts. Will this traditional supplier be eliminated in the era of EV?

It certainly doesn’t look that way according to its recent revenue performance, as the relevant components of EVs have become critical products for the cash flow of Denso. The patent in inverters, which are most important to EVs, is a strong suit of Denso, since they are used for both HEVs and BEVs. Denso estimates that this product alone will generate JP¥1 trillion each year by 2025.

Denso produced a revenue of JP¥ 4.93 trillion in 2020, which was the equivalent of JP¥155 billion in profitability under a 159% growth despite a slight YoY deterioration. This result infused confidence for the investors of Denso, and led to a historically high share price of JP¥7,790 during June this year.

Based on the share prices this week, Denso has achieved an approximate market share of US$52.5 billion that is an increase of 70% compared to last year, which although is trailing behind the US$55 billion of Ford and US$60 billion of Honda, is signaling that component suppliers are catching up to auto brands in market shares.

Toyota is both a major shareholder and the largest client of Denso, and contributes to nearly half of the latter’s revenue, though both Honda and Stellantis are also on the prolonged client list of Denso.

Denso had refined the deployment of EV parts way earlier compared to other component suppliers, such as Continental or Magna. Toru Iwai, an analyst at Mitsubishi UFJ Morgan Stanley Securities, believes that the sales of component suppliers for HEVs and BEVs are 1.5 times and 1.1 times respectively compared to fossil fuel vehicles, and has raised the target share price of Denso to JP¥10,000.

Denso is relatively optimistic towards the recovery of the market. The company had produced a remarkable level of profits last year, and estimates a 270% growth on its profitability this year, which will rake in JP¥413 billion. Analysts even believe that Denso will arrive at a profit level of JP¥452.7 billion.

The key to the optimistic forecast of the analysts comes from the 8.9% operating cash flow ratio of Denso, which is lower than that of competitors, such as Bosch, Aptiv, and Magna, though these three competitors are also focused on power tools, self-driving technology, and car doors.

Yasushi Matsui, Senior Executive Officer at Denso. (Source: Denso)

In terms of suppliers that focus on the power components of vehicles, the respective operating cash flow of Continental, ZF, and Hyundai Mobis at 7.2%, 5.9%, and 6.5% is still below that of Denso. Denso is a leader in inverters by having developed the product for almost 30 years, and the company currently holds more than 3000 relevant patents. As a core component for HEVs, inverters will also serve as an essential component for BEVs in the future.

A lot of people are talking about the death of traditional auto manufacturers and the supply chain amidst the electrification trend, but Denso had noticed the development a long time ago. “We had to consciously forfeit our relatively matured products, such as engine parts,” commented Yasushi Matsui, a senior executive officer at Denso, who then pointed out that the company maintained a foundation of mutual trust during the transformation process by discussing a sturdy exit from the field of gasoline engine parts that will minimize the financial impact of each other.

 (Cover photo source: Denso)

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