Denso Readies War Chest to Become World’s Top Car Part Supplier
(Bloomberg) -- Japan’s Denso Corp. is gunning for the title of top-selling automotive parts supplier by stoking its electrification push with a bond sale and setting aside hundreds of billions of yen for deals.
Denso, the world’s No. 2 automotive parts supplier in terms of sales, plans to roughly double revenue from electrified parts to 1 trillion yen ($9.1 billion) by fiscal 2025. It aims to double that figure again by fiscal 2030, Chief Financial Officer Yasushi Matsui said in an interview at the company’s headquarters south of Tokyo on Friday.
Matsui sees EV parts as a key value generator, capable of pushing Denso above the current top-selling automotive parts maker, Germany’s Robert Bosch GmbH. “The arena they’ll chase behind us in is electrification,” Matsui said. “After all, we’ve been in that field for a long time.”
Indeed, Denso entered the EV parts arena earlier than many others, making various components for the world’s first mass-produced hybrid passenger car -- Toyota Motor Corp.’s Prius -- since the 1990s. Today, it claims roughly one-third of the market for inverters, a critical part that converts currents from batteries in battery-electric and hybrid cars.
Denso gets about half of its revenue from Toyota, with the rest coming from a range of automakers from Honda Motor Co. to Ford Motor Co. and Stellantis NV. Matsui says two decades of experience making hybrid-car parts for Toyota gives Denso an edge with EV parts today. Some key EV components like inverters can be manufactured on existing hybrid part factory lines, giving Denso a headstart in preparing facilities and building scale, he said.
According to Matsui, over the next five to six years, Denso plans to deploy around 1 trillion yen -- half of which may be spent on shareholder returns like share buybacks, and half on mergers and acquisitions in fields such as electrification.
Possible Bond Sale
The Japanese company is considering a sustainability bond offering that would enable it to raise capital for initiatives that contribute to the environment and society, according to Denso Senior Director Yoshimasa Shinoda. Denso has a relatively high equity ratio that it’s looking to decrease, Matsui said, adding that Denso will also look to sell several smaller businesses such as those tied to gasoline-only cars.
Expectations of growth are creating a certain level of buzz from investors. Denso’s shares have risen more than 70% over the past year, giving the company a market capitalization that rivals Honda and Ford. They touched a record high in June.
SMBC Nikko Securities Inc. reiterated its buy rating and lifted its target price for Denso that month. Hybrid vehicles have higher added-value components than gasoline cars, and Toyota’s focus on shifting to hybrids should “accelerate future earnings growth,” analyst Kazunori Maki said.
Still, in the near term Denso is facing the same headwinds buffeting its top customer. Just as demand skyrockets for cars, rising Covid cases in Southeast Asia and the industry-wide chip shortage are dragging on production. Recently that’s put a damper on Denso’s tear -- its stock has slipped around 2.1% in August.
Not a Dream
The company last month issued a relatively conservative profit forecast of 440 billion yen for the current fiscal year after reporting operating profit for the April-June quarter that exceeded average analyst estimates.
Working risk factors into its outlook proved a prescient move for Denso last Thursday when Toyota shocked the market by announcing that supply-chain snarls will cause it to cut output by around 40% in September. Denso shares tumbled as much as 9.8% the day after Toyota’s statement before erasing much of those losses Monday.
Matsui remains bullish as he sees production at Toyota recovering swiftly, though he forecasts Denso will likely take a profit hit of about 20 billion yen to 30 billion yen next month due to the production cuts. Barring some major and unexpected disturbance over the coming months, there’s a good chance Denso will rise above its previous profit forecast for the current year ending March, Matsui said.
Demand for hybrids -- and cars in general -- is quite strong right now, he said. Compared to its recent outlook for a 440 billion yen profit, “500 billion yen is not a dream.”
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