APTIV PLC ANALYSIS

Why is the stock down here?

EV Adoption Concerns

After a period of accelerating EV penetration through 2022, the adoption curve has plateaued

Concerns around the consumer’s appetite for BEVs and hybrids due to the EV price premium when compared to ICE vehicle alternatives

Election of President Trump and the end of the $7,500 EV rebate, which will potentially lead to a drop off in EV demand as seen in other countries that pulled EV subsidies

Mix shift to local OEMs away from Multinational OEMs in the Chinese market

Chinese nationalism and advancement of Chinese EVs at lower prices has driven Chinese consumer demand to favor local Chinese OEMs over foreign multinational (FMN) OEMs. This headwind is not unique to APTV

Currently, APTV’s customer mix in China is ~55% local OEMs and ~45% FMN (FMN mix was closer to 80% 3-4 years ago). This is slightly under-indexed vs the ~65% market share local OEMs have in China

From a bookings standpoint for APTV, 60% - 70% of the backlog is with local Chinese OEMs, which means the local Chinese OEM mix will continue to improve going forwards. APTV is actively working with five top Chinese OEMs who are looking to set up production outside of China

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Customer mix headwinds in the North American market

Affordability issues (driven by inflation and higher rates) have pushed consumers to look for cheaper cars, which are primarily produced by Japanese OEMs (J3). APTV has more CPV with the D3 American OEMs vs the J3

This headwind was exacerbated by the UAW strikes in 4Q23, which further reduced D3 production

Over the years, the D3 has shifted their production to SUVs and CUVs and have discontinued the production of smaller sedans (more affordable)

Production cuts at 4 of the top 5 APTV OEM customers

Stellantis and Ford have been dealing with destocking and high inventory in the North America market

Tesla production will be down y-o-y for the first time

Volkswagen has seen weakness across Europe which pushed them to consider shutting down three factories in Germany

Exposure to these OEMs have been a big drag on APTV’s Growth over Market (GOM) in 2024

Thesis

At this point, expectations for APTV are very low (trading at 9x fwd PE and 7.2x fwd EBITDA), and we think a lot of the bad news is already baked into the stock

EV adoption should continue to increase over time and benefit APTV, which has 3x CPV on BEV and 2x on PHEVs

The price gap between EV and ICE will continue to narrow and EVs will become more affordable for the consumer

In 2022, the price gap between the average EV and average ICE was ~$17k. This gap shrunk to ~$2k as of January 2024 according to COX automotive         

This price gap is on an overall basis. On a like for like basis, when we compare a handful of EV models with their ICE counterparts, we think the average price gap is ~$7k - $8k, which was largely covered by the EV credit. The gap is wider on lower end models and smaller with more premium models

Price tends to be the #1 hurdle for the average consumer to get past when considering an EV over an ICE vehicle

Most industry 3rd party research believes that EVs will reach price parity with ICE vehicles some time in the back half of this decade. This will be driven by lower battery costs for an EV which makes up ~40% of the total cost. Battery costs have declined significantly since 2008 and currently cost ~$115 per kwh. Costs need to come down to $100 per kwh for EVs to reach price parity. This next leg down will be driven by lower commodity costs and higher nickel content in battery chemistry

Several <$35K EV models are set to launch over the next 2 years

Consumers will demand EVs long-term, given they are (1) a higher quality/better product and (2) cheaper to operate and maintain

A survey of 3,897 electric car drivers has shown that 85% would never go back to petrol or diesel. The 15% of those that would go back, cite charging infrastructure as the main reason

Maintenance costs for EVs are much cheaper because they don’t require annual oil changes, spark plugs, engine air filter, or power steering fluid

The EV savings grow when you factor in the gas prices. EVs save an extra ~$1,300 annually to “fill the tank”. This means there’s a 6.7 year pay back period when you purchase an EV without the tax credit

US and Europe have put regulations and incentives in place to support the growth of EVs. OEMs have largely bought into this and made substantial investments to hit their long-term EV targets

New US EPA regulation approved March 2024 are a continuation of prior emissions guidelines and extends through the 2027 – 2032 model periods

While slightly more relaxed vs the initial proposal, the approved emissions rules contemplate scenarios where EV & PHEV penetration rates reach 69% - 72% by 2032

The mix between BEV and PHEV shifts in either way between the scenarios, but generally this should be viewed positively for EV adoption

Euro 7, approved Sept 2023 and effective July 2025, will keep Euro 6 emission regulations, particle/matter, as well as battery health

In 2022, the EU passed a law banning the sale of new ICE vehicles by 2035; the UK recently pushed out their target to be in-line with the EU

Trump’s elimination of the $7,500 EV subsidy and “EV mandate” may not stop OEMs from continuing to advance EV sales

EV adoption is more than just consumer preferences, and is being driven by critical stakeholders including OEMs and national security concerns

OEMs view EVs as an existential, must-have product that is necessary to secure their competitiveness long-term. The industry is at a point where a reversal of emissions rules would be detrimental to the auto industry. An OEMs’ planning cycle is much longer compared to an election cycle and it is very difficult to flip flop. When Trump reversed Obama’s car emission standards (SAFE Vehicles Rule in 2020), the OEMs themselves asked for him to not reverse them so dramatically so that they could stay competitive

EVs are becoming computers on wheels and so their production within the US is viewed as a matter of national security. As a result, the US government is incentivized to keep US EV OEMs and their adoption competitive internationally

The state of California sets its own emissions rules, which are more stringent vs the EPA’s. 13 other states follow California’s lead and major OEMs have also agreed to follow California’s standards. April 2024, the U.S. Court of Appeals for the District of Columbia Circuit blocked an attempt by Ohio, Alabama, Texas and other Republican-led states to revoke California’s authority to set standards that are stricter than rules set by the federal government. Several OEMs have sided with California over this decision and recognize the state’s authority in this matter under the Clean Air Act. As a business, you can’t increase and decrease investments based on elections results, you need to invest for the future which is zero-emissions. Therefore, even if Trump reverses EPA emissions rules, California’s own standard will remain and OEMs will continue to invest in EVs across the US to scale and reach profitability

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Today’s vehicles are increasingly adding technological content as the industry works towards full autonomous driving. APTV’s active safety business is well positioned to take advantage of this megatrend

The more basic systems (level 0 and level 1) have ~$300 of content while the more advanced systems (L2+) have ~$1,000. L3 systems see a big jump up to ~$3,000 driven by the need for LIDAR

APTV is focused on the development of L2, L2+ and L3 technologies

Currently, the market is just starting to commercialize L3 technology with Mercedes as the first OEM allowed to sell their L3 vehicle at retail

Google’s Waymo is considered level 4, but this technology is reserved for robo-taxi commercial applications. The amount of LIDAR cameras required for L4 makes the cost too expensive for passenger car consumers (Waymo pays ~$15k - $20k for the hardware they use)

The growth in this segment is driven by higher adoption of autonomous technology and higher content from step up in more advanced systems

Today, only LSD-MSD% of vehicles have L2 or greater ADAS capabilities. APTV expect this % to increase to ~33% by 2030

Additionally, the EU has regulations in place that mandates ADAS features in new registrations starting July 2024, including intelligent speed assist, autonomous emergency braking, driver drowsiness and attention warning, and emergency lane-keeping systems

APTV’s decision to spin off the Electrical Distribution Systems (EDS) business will unlock value for shareholders

New APTV will consist of the Advanced Safety & User Experience (ASUX) and Engineered Components Group (ECG) businesses

Management expects this business to grow revenues over the medium-term at MSD-HSD% and achieve high-teens to low-twenties Adj EBITDA margins over time (vs 18.8% margins currently) resulting in low to mid-teens % EBITDA growth CAGR. This business will likely be investment grade and use its strong cash flow generation to invest in organic and inorganic growth opportunities to further diversify into non-auto end markets

EDS is expected to grow revenues over the mid-term at MSD% and have Adj EBITDA margin in the HSD – LDD% range (vs 9.5% margins currently) growing EBITDA at LDD% CAGR

This business is expected to be strong sub-investment grade and likely will be more levered and a capital return story

We think New APTV’s growth and margin profile is most comparable with TE Connectivity (TEL) which trades at 12.7x LTM EBITDA.

New APTV has more automotive exposure vs TEL and lower margins, offset by higher forecast EBITDA growth over the medium term. We assume this business should trade approximately in line with TEL given historically the legacy combined business traded more or less in line with TEL

EDS is a slower growth, lower margin, heavily auto-end market exposed business. This should benefit from ramping EV penetration over time, but we value this more or less in line with other auto OEM suppliers

Assuming 12.7x LTM EBITDA for New APTV and 5x LTM EBITDA for the EDS business, we think APTV would be worth 59% more today