Sunday, April 27, 2014

Geely and Chang'An Motors Choose HARMAN for Advanced Infotainment in New Vehicles- 05/02/2014

Topic: Harman International


  1. Sources: Bloomberg, JPMorgan, Earnings call, company 10K,10Q

    Harman incorporated designs, manufactures, and markets audio and electronic systems.
    (Memo: 2013 rev 5.1 billion, operating income 288 million, FCF -47 million, OCF 42 million)
    Segments (% of rev, % of OI)
    Infotainment 53%, 29%. Its customers include the biggest names in the auto industry including BMW, Mercedes, Audi, Toyota, Chrysler, Volkswagen and GM.
    Lifestyle 31%, 44%, offers automotive audio systems for vehicle application and consumer electronics audio solutions. Most recognized brands include JBL, AKG, and Harman/Kardon. Clients include automakers and households
    Professional 16%, 27%, provides an extensive line of loudspeakers, power amplifiers, headphones, microphones etc to the profession audio market. HAR offer complete system solutions for professional installations and users around the world.

    By geography, Germany 35%, US 28%, Other Europe 19%, other 19%

    FCF negative, -47 million
    Uses of CFs
    CapEx, 242% of OCF; dividends payout 100%, net debt payment 295%, 13% share repurchase

    What is going well?
    Luxury vehicle markets is the most penetrated, with about 50% of vehicles having infotainment systems. The penetration level is about 15%-25% in mainstream vehicles.
    - Harman's revenue growth hinges on total number of vehicles and market penetration. In 3Q, net sales increased 32%, sales in China climbed 60%. OI up 63%, and EPS up 41% HAR has expanded its market with high-end German automakers. Meanwhile, it is also winning market share in the main-stream vehicle markets.

    HAR renovated its system design, shifting to a scalable instead of custom approach.
    - This strategic move considerably cuts development cost and production period. Therefore, HAR can expand to more mainstream segments at competitive price and obtain accretive margins.

    What could go wrong?
    Significant customers are those who represent more than 10% or more of HAR's net sales. BMW, Fiat Chrysler, and Audi/Volkswagen combined contribute 41% of revenue in the 9 month period ended in Mar 31st.
    - Revenue sources were concentrated in a few important customers, so HAR is susceptible to customer's threat.

    Price downs: HAR tends to negotiate price at the onset of its contracts. Based on JP Morgan estimates, infotainment price's contraction tend to be 4%, car audio price downs to be 2%. HAR's price reduction is a bit more than industry average of 2%.
    - This case can be attributed to deflationary customer electronic-like infotainment supply chain and pressure from buyers. HAR's profitability hinges on its capability to maintain health margins.

    HAR is aspired to expand its high margin professional division, with the goal of offering customers a complete multimedia package (audio, lighting, and video).

    HAR is a leading provider in a defensible business. Growing vehicle demands and higher infotainment penetration themes bolster opportunities for manufacturers in this industry. HAR expanded its business with more extensive agreements, and its strategy is poised to achieve top-line growth and bottom-line improvement.

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