Johnson Controls has expanded its automotive battery production capacity in China with the inauguration of a new plant in Chongqing City, western China. The company announced Wednesday, June 4, the opening of this new plant, which will produce 6 million auto batteries per year for the China market. We figure this additional production capacity will enable Johnson Controls to increase its gains from the fast growing Chinese auto market, which is the world’s largest with 22 million vehicles produced annually. The company already has one major auto battery plant in Changxing, in eastern China, from where it produces around 8 million batteries per year. With the addition of this new plant, Johnson Controls will likely be able to accelerate growth in its auto battery segment which constituted roughly 15% of its $42.7 billion revenues last fiscal. In terms of profit contribution, though, the company’s auto battery segment constitutes nearly a third of its total operating profits, as margins in this segment are much higher than those in the remaining segments of the company. Thus, we figure sales and profits from this additional battery production capacity in China will drive significant growth in the company’s overall profits in the coming years. In the current fiscal, which ends on September 30, 2014, Johnson Controls anticipates revenues from its auto battery segment to grow by 7-8% annually.
We currently have a stock price estimate of $51 for Johnson Controls, around 5% ahead of its current market price.
Chinese Auto Market Will Drive Long Term Growth At Johnson Controls’s Auto Battery Segment
Johnson Controls entered the Chinese automotive supply market with batteries in 2005. Since then the company has expanded in manifold ways in the country through investments in new plants and joint ventures (JVs). Johnson Controls’s revenues from China, including sales from its non-consolidated JVs, have grown from a mere $2.9 billion in 2009 to over $7.2 billion currently. These figures also include sales from the company’s other segments, namely auto interiors and building efficiency products, the latter of which provides heating, cooling and ventilation systems. Going forward, Johnson Controls expects its strong growth from China to continue and its revenues (including those from non-consolidated JVs) from the country to rise to $12.5 billion by 2018. In our view, this solid growth from China is achievable as both construction spending and automotive production are rising from the country. In the recently concluded March quarter, higher automotive industry production in China was the primary driver of growth in Johnson Controls’s top line. In the quarter, automotive industry production in the country rose by 9% annually – nearly double the rate at which it grew in North America and Europe. Thus, the automotive sector in China is growing strongly and Johnson Controls through expansion in its battery production capacity is seeking to get a larger share of this growth. Currently, the company’s auto battery segment generates more than three-fourth of its sales from the mature and slower growth markets of North America and Europe. But, given the higher growth from China, we figure the geographic-mix in the segment’s revenues will shift in favor of China. The company is currently also building a new corporate headquarters in Shanghai reflecting its long term growth expectation from this market.
Additionally, despite more than two decades of strong growth, the Chinese automotive market has significant growth potential left, in our view. This is explained by the fact that vehicle ownership rates in the country are well below those in the developed markets such as the U.S.. There are currently around 105 vehicles per 1,000 people in China, compared with over 700 in the U.S. and other developed markets such as Australia. Thus, Johnson Controls’s increasing presence in the Chinese auto market will not only help accelerate its growth in the near term, but also position it for steady growth in the long term.
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