With its long tradition of being one of Europe’s oldest source of exports and employment the auto industry represents an important part of Europe’s economy. However, with new trends arising, will Europe’s car manufacturers be able to retain their position within the industry?
Setting Some Themes
The European auto industry provides jobs for 13.3m people which represent 6.1% of all EU jobs. Out of those 13.3m, 2.5m are employed in direct manufacturing jobs. When comparing to the total amount of manufacturing jobs in the EU (30.3m people, or 13.9% of total EU employment) the auto industry provides 11.3% of all manufacturing jobs in the EU. Furthermore, with 23m motor vehicles produced in 2017 in total, Europe accounts for 23.3% of the total motor vehicle production in the world.
When it comes to growth, the European automotive industry – with the exception of the recession in the early 1990s and the financial crisis in 2009 – has continuously been growing since 1980. However, it only (fully) recovered from the financial crisis in 2017, and recovery still remains fragile. This growth was enhanced by the development and implementation of technical innovations such as fuel-efficient vehicles and alternative powertrains (e.g., hybrid).
Yet, despite the positive trend seen in the past, the centre of production has moved from the westernmost parts of Europe to Turkey and is further shifting towards Asia. This is primarily due to the increasing importance of the Chinese automotive market, which has grown from an annual production of 87k vehicles in 1970 to 28m in 2018.
Car Demand
Number of New Passenger Cars (Units m, T12M)
Source: ACEA, InterCapital Research
When looking at the latest available ACEA market report it is visible that after a long period of strong growth, the number of new passenger car registrations in Europe has started to decline (observed on a YoY basis for each month). Currently, the number of newly registered cars in the EU has declined for seven months straight. However, before this streak started the EU saw a decrease in new passenger car registrations only six times since September 2013, proving that car manufacturing and consumption is one of EU’s most robust and resilient industries. On the other hand, Russia has been showing a remarkable recovery from a long decrease in number of newly registered passenger cars (also when comparing months on a YoY basis). As a result, the number of newly registered passenger cars has been rising continuously (with only one month as an exception) for more than two years.
New passenger cars in EU (monthly basis)
New passenger cars in Russia (monthly basis)
Source: ACEA, InterCapital Research
The Future is Electrified, Autonomous, Shared & Connected
Technological developments and connectivity are an integral part of our lives now, so it is not surprising that these will continue to be the most important trends for the automobile industry. New developments such as 5G and the connection of traffic infrastructure are cementing this. As a result, we are moving towards an environment in which traditional players in the automobile industry are increasing their cooperation with major players in the technology and telecom sectors, as well as government agencies. However, such development also opens the door for new competitors who now appear in the form of tech players, start-ups, and digital/e-commerce companies. In order to successfully adapt to these new technologies, the automobile industry will have to put a higher emphasis on closing the skill gap when it comes to software and electronics engineering skills.
The sharing economy also plays a significant role in this ecosystem, with the growing popularity of carsharing being just one example.
In order to win over the next generation of customers, car manufacturers will have to adopt a truly customer centric approach which focuses on delivering the highest level of security and satisfaction. According to McKinsey, the number of fatal accidents in Europe has been immensely reduced (by over 40%) since 2005. However, their vision assumes the total removal of accidents by 2050 with the use of Advanced driver-assistance systems (ADAS) and autonomous vehicles. Note that the introduction of autonomous vehicles also holds a strong economic potential. The average EU citizen spends 40 minutes of her/his daily time in a car. 100 million people in cars every day equals roughly 65 million hours spent. Assuming that 50% time could be used for efficient working, the shift in commuting could have a macroeconomic impact of roughly EUR 1bn per day in Europe.
The final trend is the introduction of electric vehicles, which has been present for some time now. While China is clearly leading the market in recent years, there has been a 145% increase in new battery electric vehicle registrations in the EU since 2014.
Car Part Manufacturers Trading Multiples
Note that the Croatian car part manufacturer, AD Plastik, will publish their Q1 2019 results tomorrow. In the meantime, we bring you an overview of trading multiples of selected car part manufacturers.
Source: Bloomberg, InterCapital Research
Arena Hospitality Group has announced that it has signed an agreement to purchase 88-room Hotel in the centre of Belgrade for HRK 47m. The completion of the transaction is subject to certain steps and conditions to be fulfilled in this year.
This acquisition of city 88-room hotel expands Arena’s exposure to growing CEE region and to upscale hospitality market segment that will positively influence company’s portfolio. Company had in 2018 66% of revenue realized in Croatia while expansion in city hotel segment abroad will give balance to overall portfolio and ensure higher occupancy.
This acquisition increases Arena’s investments in 2019 to HRK 288m, which besides hotel in Belgrade consist of Arena Kažela Camp (HRK 128m), art’otel berlin kudamm (HRK 53m) and Verudela Beach resort (HRK 60m). Hotel in Belgrade and Verudela Beach resort investments will show impact on revenue in 2020. Together with the investments in Hotel Brioni in the amount of HRK 190m ( expected in 2020) the Group would have invested almost HRK 500m since the public offering done in mid-2017 when it has collected HRK 788.4m. We see this development positive for the share price as the Group is stepping up the pace of investment announced in SPO with the goal to further refurbish its portfolio and expand business into Central Europe. The share price has increased 2.3% on the day of announcement of the acquisition.
Ericsson NT’s Management proposed a dividend of HRK 70.6 per share on Friday. The proposed amount translates into a dividend yield of 6.45%. Ex-date was set on June 18th.
The proposed dividend represents a significant improvement from HRK 32.5 DPS paid out last year, however one should also note that the financial result in 2017 was significantly lower than in 2018.To read more about Ericsson NT’s FY 2018 results click here.
In the past Ericsson NT’s dividend pay-out regularly surpassed the company’s net income due to the high levels of retained earnings and reserves that the company accumulated over the years. During the years preceding 2018 the company was paying out a regular flat dividend in the amount of HRK 20 which was then increased by an additional dividend. For instance, in 2014 (the year when the highest dividend in the observed period was recorded) the company increased the regular dividend of HRK 20 by an additional dividend of HRK 300. The total dividend of HRK 320 for that year was paid out of the surplus recorded in the company’s legal reserves and retained earnings from four previous years (2004, 2010, 2011 and 2012).
Ericsson NT’s Dividend (HRK)
Ericsson NT’s Dividend Yield (%)
Source: InterCapital Research
Valamar released a statement last week in which they announced that the company’s shares were admitted to the Prime Market of the ZSE.
On Friday, the ZSE admitted Valamar into the prime market, which is the most demanding market segment regarding the requirements set before the issuer, especially in relation to transparency. This comes as a result of Valamar’s continuous efforts to improve investor relations coupled with comprehensive reporting of their financial results.
At the moment, Valamar is the fifth company whose shares were admitted into this selected group. To read more about the prime market and how might companies benefit from it, please click here.